<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 2, 1997
REGISTRATION NO. 333-17291
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WASHINGTON MUTUAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
WASHINGTON 6712 91-1653725
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
1201 THIRD AVENUE
SEATTLE, WA 98101
(206) 461-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MARC R. KITTNER
SENIOR VICE PRESIDENT
WASHINGTON MUTUAL, INC.
1201 THIRD AVENUE
SEATTLE, WA 98101
(206) 461-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
FAY L. CHAPMAN JOHN K. HUGHES GREGG A. NOEL
DAVID R. WILSON DEWEY BALLANTINE SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
FOSTER PEPPER & SHEFELMAN 1775 PENNSYLVANIA AVENUE, N.W. 300 SOUTH GRAND AVENUE
1111 THIRD AVENUE WASHINGTON, D.C. 20006 SUITE 3400
SUITE 3400 LOS ANGELES, CA 90071
SEATTLE, WA 98101 (213) 687-5000
(206) 447-4400
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and one to be used in a concurrent offering outside the United
States and Canada (the "International Prospectus"). The two prospectuses are
identical except for the front and back cover pages, the inside front cover
page, and the section entitled "Underwriting." The form of U.S. Prospectus is
included herein and is followed by the alternate pages to be used in the
International Prospectus. Each of the alternate pages for the International
Prospectus included herein is labeled "Alternate Page for International
Prospectus." Final forms of each Prospectus will be filed with the Securities
and Exchange Commission under Rule 424(b).
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION TIME BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 2, 1997
PROSPECTUS
15,085,305 SHARES
[WASHINGTON MUTUAL LOGO]
COMMON STOCK
------------------------
Of the 15,085,305 shares (the "Shares") of common stock, no par value
("Common Stock"), of Washington Mutual, Inc., a Washington corporation
("Washington Mutual" or the "Company"), offered hereby, 14,000,000 Shares are
being offered by the Federal Deposit Insurance Corporation (the "FDIC"), for the
account of the FSLIC Resolution Fund (the "FRF") and 1,085,305 Shares are
offered by certain other stockholders of the Company identified herein
(collectively with the FRF, the "Selling Stockholders"). See "Selling
Stockholders." The FDIC is a government-controlled corporation and
instrumentality of the United States of America that manages the FRF(the FDIC in
its capacity as manager of the FRF is referred to herein as the "FDIC-Manager").
The Shares were issued in connection with a recent transaction pursuant to which
Washington Mutual acquired Keystone Holdings, Inc. ("Keystone Holdings") by
merger, as a result of which the direct and indirect subsidiaries of Keystone
Holdings, including American Savings Bank, F.A. ("ASB"), became subsidiaries of
the Company. See "The Keystone Transaction." The Company will not receive any
proceeds from the sale of the Shares hereunder.
Of the 15,085,305 Shares offered hereby, Shares are being offered
in the United States and Canada by the U.S. Underwriters (the "U.S. Offering")
and Shares are being offered outside the United States and Canada by
the International Managers (the "International Offering" and, together with the
U.S. Offering, the "Offerings"). The initial public offering price and the
aggregate underwriting discount per share are identical for the Offerings. See
"Underwriting."
The Company's Common Stock is traded on the National Market tier of The
Nasdaq Stock Market (the "Nasdaq Stock Market") under the symbol "WAMU." On
December 30, 1996, the last reported sale price of the Common Stock was $43 1/8
per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SHARES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) STOCKHOLDERS(2)
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<S> <C> <C> <C>
Per Share...................... $ $ $
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Total.......................... $ $ $
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Stockholders have severally agreed to indemnify
the several Underwriters (the "Underwriters") against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) Before deduction of expenses payable by the Company estimated to be
$720,000.
The Shares are offered by the several Underwriters, subject to prior sale,
when, as and if issued to and accepted by them, subject to approval of certain
legal matters by counsel for the Underwriters and certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the Shares
will be made in New York, New York, on or about , 1997.
------------------------
MERRILL LYNCH & CO. FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
------------------------
The date of this Prospectus is , 1997
<PAGE> 4
MAP OF THE STATES OF WASHINGTON, OREGON, CALIFORNIA, UTAH, IDAHO, MONTANA,
ARIZONA, COLORADO AND NEVADA AND A TABLE SETTING FORTH THE NUMBERS OF THE
COMPANY'S BRANCHES, LOAN PRODUCTION CENTERS, COMMERCIAL BANK OFFICES AND NUMBER
OF HOUSEHOLDS SERVED.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET'S SMALLCAP
MARKET, THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK
MARKETS' SMALLCAP MARKET, THE NASDAQ NATIONAL MARKET OR OTHERWISE IN ACCORDANCE
WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus or in documents incorporated herein by reference and is not
intended to be complete and is qualified in its entirety by the more detailed
information contained elsewhere in this Prospectus and the other documents
incorporated herein by reference. Unless otherwise indicated, all references
herein to Washington Mutual or the Company refer to the combined entity
including Keystone Holdings on a restated basis as if the respective companies
had been combined for all periods presented.
THE COMPANY
With a history dating back to 1889, Washington Mutual is a regional
financial services company committed to serving consumers and small to mid-sized
businesses throughout the Western United States. Through its subsidiaries, the
Company engages in the following activities:
- MORTGAGE LENDING AND CONSUMER BANKING ACTIVITIES. Through its principal
subsidiaries, Washington Mutual Bank ("WMB"), American Savings Bank,
F.A., and Washington Mutual Bank fsb ("WMBfsb"), at September 30, 1996,
the Company operated 410 financial centers and 94 loan centers offering a
full complement of mortgage lending and consumer banking products and
services. For the nine months ended September 30, 1996, WMB was the
leading originator of first-lien single-family residential loans in
Washington and Oregon, and ASB was the second largest such originator in
California.
- COMMERCIAL BANKING ACTIVITIES. Through the commercial banking division
of WMB, at September 30, 1996, the Company operated 47 full-service
business branches offering a range of commercial banking products and
services to small to mid-sized businesses. WMB commenced its commercial
banking activities through the acquisition of Enterprise Bank of
Bellevue, Washington ("Enterprise") in 1995 and Western Bank of Coos Bay,
Oregon ("Western") in 1996.
- INSURANCE ACTIVITIES. Through WM Life Insurance Co. ("WM Life") and ASB
Insurance Agency, Inc. ("ASB Insurance"), the Company underwrites and
sells annuities and sells a range of life insurance contracts and
selected property and casualty insurance policies.
- BROKERAGE ACTIVITIES. Through ASB Financial Services, Inc. ("ASB
Financial"), Murphey Favre, Inc. ("Murphey Favre") and Composite Research
and Management Co. ("Composite Research"), the Company offers full
service securities brokerage and acts as the investment advisor to and
the distributor of mutual funds.
The Company operates in Washington, California, Oregon, Utah, Idaho,
Montana, Arizona, Colorado and Nevada. These operations constitute one of the
largest banking franchises in the Western United States and serve more than 1.3
million households. At September 30, 1996, the Company had consolidated assets
of $43.7 billion, deposits of $24.0 billion, and stockholders' equity of $2.4
billion.
In December 1996, Washington Mutual consummated the merger of Keystone
Holdings with and into the Company and certain other transactions in connection
therewith (the "Transaction") and thereby acquired ASB. Washington Mutual issued
47,883,333 shares of Common Stock in the Transaction. At September 30, 1996, ASB
had assets of $21.3 billion and deposits of $12.9 billion and operated 158
branches and 63 loan centers, substantially all of which were located in
California.
Washington Mutual intends to continue operating ASB under the name
"American Savings Bank" in ASB's markets and has retained a significant number
of ASB's management team to guide ASB's operations. Washington Mutual intends to
introduce its consumer banking products and approaches throughout ASB's branch
system and to expand ASB's loan origination capabilities.
The principal executive offices of Washington Mutual are located in the
Washington Mutual Tower, 1201 Third Avenue, Suite 1500, Seattle, Washington
98101, and its telephone number is (206) 461-2000.
3
<PAGE> 6
BUSINESS STRATEGY
In 1995, Washington Mutual introduced a revised strategic plan designed to
position the Company to achieve higher levels of profitability and growth.
Elements of this strategic plan include strengthening Washington Mutual's
consumer banking franchise throughout the West; expanding the commercial banking
franchise; managing Washington Mutual's sensitivity to movements in interest
rates; maintaining asset quality; and operating more efficiently.
Acquisitions have played an integral role in Washington Mutual's past
growth and business line expansion. Since 1988, Washington Mutual has acquired
numerous financial institutions and substantial assets, including two commercial
banks, which significantly expanded its geographic reach beyond the state of
Washington. The Company anticipates that acquisitions will continue to be an
important element of its strategic plan in the future. The acquisition of ASB
(the Company's largest acquisition to date) allowed Washington Mutual to expand
into California with a well-capitalized institution with similar business
strategies, strong management and complementary product capabilities. Washington
Mutual believes that the acquisition of ASB satisfies elements of the Company's
strategic plan, including:
- STRENGTHENS CONSUMER BANKING FRANCHISE THROUGHOUT THE WESTERN UNITED
STATES. The acquisition of ASB gave Washington Mutual immediate access
to the consumer banking market in California. ASB has a state-wide
presence in California, which at September 30, 1996, included 158
branches and 63 loan centers, predominantly concentrated in the Los
Angeles and San Francisco areas. In addition, the acquisition of ASB
added more than 575,000 new households to Washington Mutual's customer
base. Although ASB has primarily been a residential mortgage lender, the
Company intends to introduce its consumer banking products into the ASB
system during 1997 and 1998.
- DECREASES WASHINGTON MUTUAL'S SENSITIVITY TO INTEREST RATE
MOVEMENTS. ASB's loan and investment portfolios consist primarily of
adjustable-rate mortgages ("ARMs") and adjustable-rate mortgage-backed
securities ("MBS"). These portfolios complement Washington Mutual's
pre-Transaction portfolios, which contained a much higher percentage of
fixed-rate mortgages. The addition of ASB's loan and investment
portfolios to Washington Mutual's portfolios accelerated the Company's
efforts to restructure its portfolios to reduce the sensitivity of its
results of operations to changes in prevailing interest rates.
BACKGROUND OF THE TRANSACTION
HISTORY OF KEYSTONE HOLDINGS. Keystone Holdings commenced operations in
December 1988 as an indirect holding company for ASB. ASB was formed by Keystone
Holdings Partners L.P. ("KHP") to effect the December 1988 acquisition (the
"1988 Acquisition") of certain assets and liabilities of the failed savings and
loan association subsidiary (the "Failed Association") of Financial Corporation
of America. In connection with the 1988 Acquisition, the Federal Savings and
Loan Insurance Corporation ("FSLIC") received warrants (the "Warrants"), that
represented the right to purchase capital stock of ASB's corporate parent, which
is an intermediary holding company between Keystone Holdings and ASB. In
addition, the 1988 Acquisition had a "good bank/bad bank" structure, with ASB,
the "good bank," acquiring substantially all of the Failed Association's
performing loans and fixed assets and assuming substantially all of its deposit
liabilities. New West Federal Savings and Loan Association ("New West"), the
"bad bank," was formed to acquire the Failed Association's other assets
(including nonperforming loans) and liabilities with a view toward their
liquidation. New West was divested by Keystone Holdings prior to consummation of
the Transaction.
THE TRANSACTION. In the Transaction, the Company issued 47,883,333 shares
of Common Stock as follows: 25,883,333 shares were issued to KHP, the sole
shareholder of Keystone Holdings, which shares were subsequently distributed to
the general and limited partners of KHP (the "KHP Investors"); 14,000,000 shares
were issued to the FRF in exchange for the Warrants; and 8,000,000 shares (the
"Litigation Escrow Shares") were issued to an escrow for the benefit of the KHP
Investors and the FRF (the "Litigation Escrow"). Shares will be released from
the Litigation Escrow to the extent that Washington Mutual receives net cash
proceeds ("Case Proceeds") from certain litigation that Keystone Holdings and
certain of its affiliates were pursuing against the United States, which
litigation became an asset of the Company in the
4
<PAGE> 7
Transaction. See "The Keystone Transaction -- The Litigation Escrow." The
Transaction was treated as a pooling-of-interests for accounting purposes.
At December 20, 1996, Robert M. Bass, the single largest KHP Investor,
beneficially owned 9,478,300 shares of Common Stock, and the contingent right to
receive up to 1,901,276 Litigation Escrow Shares, for an aggregate of 11,379,576
shares of Common Stock (approximately 9.5 percent of the Common Stock then
outstanding). Mr. Bass is not selling any shares of Common Stock in the
Offerings. After the sale of all the Shares offered hereby by the FDIC-Manager
on behalf of the FRF, the FRF will no longer beneficially own any shares of
Common Stock, but will have the contingent right to receive and will
beneficially own 2,808,000 Litigation Escrow Shares. See "Selling Stockholders."
Holders of contingent rights to receive Litigation Escrow Shares will have the
power to direct the Escrow Agent to vote such Litigation Escrow Shares. See "The
Keystone Transaction -- The Litigation Escrow."
As part of the Transaction, Washington Mutual, KHP and the FDIC-Manager
entered into a Registration Rights Agreement (the "Registration Rights
Agreement"), which provides that Washington Mutual will use its best efforts to
register for resale under the Securities Act shares of Common Stock issued in
the Transaction. Pursuant to the Registration Rights Agreement, Washington
Mutual agreed to file the registration statement of which this Prospectus is a
part (together with all exhibits and amendments thereto, the "Registration
Statement") and use its best efforts to cause it to be declared effective by the
Securities and Exchange Commission (the "Commission"). Pursuant to the
Registration Rights Agreement, Washington Mutual has also agreed to file with
the Commission and use its best efforts to cause to become effective as soon as
practicable after nine months from the closing of the Transaction, a shelf
registration statement (the "Initial Shelf Registration") for sale from time to
time of all shares of Common Stock issued in the Transaction that are not sold
hereunder, other than the Litigation Escrow Shares (the "Registrable Common").
Washington Mutual also agreed in the Registration Rights Agreement to file with
the Commission as soon as practicable after distribution of the Litigation
Escrow Shares, and use its best efforts to cause to become effective, an
additional shelf registration statement for the sale of such shares. During the
three-year period following the effectiveness of the Initial Shelf Registration,
persons who hold 15 percent or more of the Registrable Common may require the
Company, an aggregate of four times, to facilitate an underwritten public
offering of the Registrable Common; and each of the KHP Investors and the FRF
(or their transferees) are entitled to notice of any registrations by the
Company of Common Stock for sale under the Securities Act for its own account
(with certain exceptions) and to include their shares therein.
RECENT DEVELOPMENTS
REDEMPTION OF KEYSTONE ENTITIES PREFERRED STOCK AND DEBT SECURITIES. Upon
consummation of the Transaction, the Company redeemed $10.5 million of debt
securities and $80.0 million of nonconvertible preferred stock issued by New
American Capital, Inc. ("New Capital"), a subsidiary of Keystone Holdings.
Washington Mutual has also given the required notices to redeem in January 1997
$354.0 million of additional debt securities issued by New Capital. By redeeming
such equity and debt, management believes it can significantly reduce its
overall cost of funds. See "Management's Discussion and Analysis of Financial
Position and Results of Operations -- Liquidity."
TRANSACTION EXPENSES AND ADDITION TO RESERVE FOR LOAN LOSSES. Washington
Mutual anticipates recording a net after-tax charge of approximately $210
million for Transaction-related expenses, including an addition of $125.0
million to the reserve for loan losses in the fourth quarter of 1996. The
additional reserve for loan losses was provided principally because certain
Washington Mutual credit administration and asset management philosophies and
procedures differed from those of ASB. The balance of the expenses recorded was
related to severance and management payments, payments related to a tax
settlement between Keystone Holdings and the FRF, write-downs of software and
equipment, premiums paid in redemption of New Capital debt securities,
professional fees and investment banking fees. See "The Keystone
Transaction -- Transaction Expenses and Addition to Reserve for Loan Losses."
5
<PAGE> 8
Utah Federal Merger. On November 30, 1996, the Company consummated a
merger of Utah Federal Savings Bank, a federal savings bank ("Utah Federal"),
with and into WMBfsb (the "Utah Federal Merger"). The Company issued 347,176
shares of Common Stock in the Utah Federal Merger. At September 30, 1996, Utah
Federal operated five branches and two loan production offices in Utah and had
assets of $122.2 million, deposits of $106.9 million and stockholders' equity of
$11.9 million.
United Western Merger. On September 6, 1996, Washington Mutual entered
into an agreement to acquire United Western Financial Group, Inc. of Salt Lake
City ("United Western") and its subsidiaries, including United Savings Bank,
Uniwest Service Corporation and Western Mortgage Loan Corporation, for $80.3
million in cash (the "United Western Merger"), subject to certain adjustments.
United Western operates eight branches in Utah, one branch in Idaho and seven
loan production offices. At September 30, 1996, United Western had assets of
$414.9 million, deposits of $294.4 million and stockholders' equity of $53.8
million. The United Western Merger is subject to various conditions, including
the approval of shareholders of United Western and the receipt of all required
regulatory approvals. There can be no assurances when or if the United Western
Merger will be consummated, although the Company expects it to close in January
1997.
Recent Federal Legislation. On September 30, 1996, President Clinton
signed legislation intended in part to recapitalize the Savings Association
Insurance Fund ("SAIF") and to reduce the gap between SAIF premiums and Bank
Insurance Fund ("BIF") premiums. The legislation provided for a special one-time
assessment on SAIF-insured deposits that were held as of March 31, 1995,
including certain deposits acquired after that date. The assessment was designed
to bring the SAIF's reserve ratio to the legally required level of $1.25 for
every $100 in insured deposits. Prior to this legislation, deposits of
Washington Mutual subsidiaries insured through the SAIF were subject to regular
FDIC assessments of 23 cents per $100 per year. Beginning in January 1997,
deposits of well-capitalized institutions insured through the SAIF probably will
be subject to regular FDIC assessments of 6.4 cents per $100 per year, while
deposits of well-capitalized institutions insured through the BIF probably will
be subject to regular FDIC assessments of 1.3 cents per $100 per year.
Washington Mutual's special assessment on deposits held by WMB, ASB and
WMBfsb resulted in a pretax charge of $124.2 million, which was recorded in the
quarter ended September 30, 1996. Based on current levels of deposits,
Washington Mutual estimates that the reduction in the regular assessment on its
SAIF deposits beginning in 1997 should result in annual savings of approximately
$31.2 million.
Redemption of Series D Preferred Stock. On November 30, 1996, the Company
mailed a notice of redemption to holders of its $6.00 Noncumulative Convertible
Perpetual Preferred Stock, Series D (the "Series D Preferred Stock"), for
redemption of the Series D Preferred Stock on December 31, 1996. The Series D
Preferred Stock is redeemable at $103.60 per share or is convertible into 3.8709
common shares per share, or an aggregate of approximately 5.4 million shares of
Common Stock. The Company anticipates that substantially all of the Series D
Preferred Stock will be converted into Common Stock.
6
<PAGE> 9
SUMMARY FINANCIAL DATA
The following table presents summary supplemental financial data for
Washington Mutual. This table is derived from and should be read in conjunction
with the Supplemental Consolidated Financial Statements of Washington Mutual and
the Notes thereto, which are included elsewhere in this Prospectus. The
Transaction was accounted for as a pooling-of-interests. The financial
statements presented herein are designated as "supplemental" because generally
accepted accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. The assets,
liabilities, and results of operations of Keystone Holdings have been recorded
on the books of Washington Mutual at their values as carried on the books of
Keystone Holdings, and no goodwill was created. Washington Mutual supplemental
financial information contained in this Prospectus has been restated as if the
respective companies had been combined for all periods presented. As such, the
information presented herein is not comparable to that reflected in the
Company's annual report on Form 10-K for the year ended December 31, 1995, or
the restated financial statements of the Company contained in the Company's
current report on Form 8-K dated October 18, 1996, as amended. Because of the
significant increase in Washington Mutual's size as a result of the acquisition
early in 1993 of Pacific First Bank, a Federal Savings Bank ("Pacific First")
(which was accounted for by the purchase method), the financial results for the
years ended and as of December 31, 1995, 1994, and 1993, are not generally
comparable to prior periods or dates. The information as of September 30, 1996
and for the nine-month periods ended September 30, 1996 and 1995 is not
necessarily indicative of the operating results for the entire year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
SUPPLEMENTAL FINANCIAL DATA 1996 1995 1995 1994 1993 1992 1991
- -------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income....................... $2,338,585 $2,145,717 $2,916,086 $2,295,413 $2,198,578 $2,170,969 $2,407,639
Interest expense...................... 1,455,202 1,425,089 1,923,436 1,335,358 1,211,896 1,302,489 1,645,630
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income................... 883,383 720,628 992,650 960,055 986,682 868,480 762,009
Provision for loan losses............. 58,138 57,540 74,987 122,009 158,728 158,537 85,807
Other income.......................... 183,822 152,225 208,339 220,794 246,576 174,365 175,806
Other expense......................... 684,542 525,024 700,514 695,517 687,519 561,688 516,348
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes,
extraordinary items, cumulative
effect of change in tax accounting
method, and minority interest....... 324,525 290,289 425,488 363,323 387,011 322,620 335,660
Income taxes.......................... 97,344 77,877 111,906 109,880 96,034 42,462 45,920
Provision (benefit) for payments in
lieu of taxes....................... 14,465 (1,410) 7,887 (824) 14,075 53,980 85,221
Extraordinary items, net of federal
income tax effect(1)................ -- -- -- -- (8,953) (4,638) --
Cumulative effect of change in tax
accounting method................... -- -- -- -- 13,365 60,045 --
Minority interest in income of
consolidated subsidiaries(2)........ (10,504) (12,244) (15,793) (13,992) (13,991) (14,030) (14,095)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............................ $ 202,212 $ 201,578 $ 289,902 $ 240,275 $ 267,323 $ 267,555 $ 190,424
========== ========== ========== ========== ========== ========== ==========
Net income attributable to common
stock............................... $ 188,397 $ 187,640 $ 271,318 $ 221,691 $ 253,764 $ 262,140 $ 185,549
========== ========== ========== ========== ========== ========== ==========
Net income per common share:(3)
Primary............................. $1.68 $1.72 $2.47 $2.09 $2.42 $2.82 $2.20
Fully diluted....................... 1.66 1.69 2.42 2.06 2.36 2.71 2.10
Cash dividends declared per common
share(4)............................ 0.66 0.57 0.77 0.70 0.50 0.33 0.28
Common stock dividend payout
ratio(4)............................ 29.56% 26.52% 25.74% 24.50% 15.98% 15.43% 13.06%
Net interest margin................... 2.89 2.55 2.62 2.90 3.31 3.36 3.14
Efficiency ratio...................... 64.14 60.15 58.33 58.90 55.75 53.86 55.06
Return on average assets.............. 0.63 0.68 0.73 0.69 0.84 1.29 0.99
Return on average stockholders'
equity.............................. 10.59 12.04 13.44 12.66 15.95 21.05 17.84
Return on average common stockholders'
equity.............................. 10.69 12.24 13.73 12.95 16.78 21.05 17.84
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
DECEMBER 31,
SUPPLEMENTAL FINANCIAL SEPTEMBER 30, ------------------------------------------------------------------------
DATA 1996 1995 1994 1993 1992 1991
- ------------------------- ------------ ------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Total assets............. $ 43,711,945 $ 42,026,622 $ 37,481,296 $ 33,614,912 $ 27,678,923 $ 25,531,041
Available-for-sale
securities............. 10,063,100 12,154,725 4,282,160 1,751,905 -- --
Held-to-maturity
securities............. 2,986,296 3,197,720 4,456,031 5,663,635 4,638,473 3,845,573
Loans:
Residential............ 20,977,192 17,303,305 17,766,215 13,828,459 11,734,594 9,745,201
Residential
construction......... 668,976 615,814 549,271 430,215 366,808 342,623
Commercial real
estate............... 3,732,685 3,487,574 4,699,220 4,515,449 3,194,184 2,573,423
Manufactured housing,
second mortgage and
other consumer....... 3,056,982 2,841,854 2,573,327 2,403,169 1,431,834 1,322,917
Commercial............. 295,263 179,568 129,048 131,468 118,717 112,312
Reserve for loan
losses............... (234,341) (235,275) (244,989) (245,062) (179,612) (130,423)
------------ ------------ ------------ ------------ ------------ ------------
Total loans.......... $ 28,496,757 $ 24,192,840 $ 25,472,092 $ 21,063,698 $ 16,666,525 $ 13,966,053
============ ============ ============ ============ ============ ============
Deposits................. $ 23,978,515 $ 24,462,960 $ 23,344,006 $ 23,516,317 $ 20,729,204 $ 19,950,479
Annuities................ 868,438 855,503 799,178 713,383 571,428 433,767
Borrowings............... 15,873,476 13,724,132 11,147,389 6,653,241 4,563,052 3,626,292
Stockholders'
equity(3).............. 2,421,916 2,541,704 1,854,836 1,765,560 1,467,835 1,139,080
Stockholders' equity
ratio.................. 5.54% 6.05% 4.95% 5.25% 5.30% 4.46%
Nonperforming assets as a
percentage of total
assets................. 0.74 0.81 1.12 1.55 2.03 1.68
Reserve for loan losses
as a percentage of:
Nonperforming loans.... 108.33 110.04 87.22 72.74 54.58 45.50
Nonperforming assets... 72.53 69.42 58.52 46.91 31.98 30.37
Fully diluted book value
per common share(3).... $19.61 $20.70 $15.33 $14.84 $12.78 $11.32
Number of common shares
used to calculate fully
diluted book value per
common share(3)........ 117,456,773 117,107,107 113,140,169 110,876,251 109,351,928 100,669,322
Weighted average common
shares(3).............. 117,327,806 115,363,724 111,664,374 110,753,774 103,446,289 96,786,054
</TABLE>
- ---------------
(1) Extraordinary items include the call of subordinated capital notes,
resulting in pretax losses of $2.2 million and $3.1 million during 1993 and
1992, and penalties for prepayment of FHLB advances, resulting in pretax
losses of $10.8 million and $3.6 million during 1993 and 1992.
(2) Reflects earnings on preferred stock issued by New Capital, which was
redeemed by the Company in December 1996.
(3) As computed on a fully diluted basis, including common stock equivalents.
The 8,000,000 Litigation Escrow Shares are reflected in earnings per share
using the treasury stock method. At the effective date of the Transaction,
there was no dilutive effect of the 8,000,000 Litigation Escrow Shares. As a
result, stockholders' equity, book value per share, common shares and
weighted average shares outstanding, and primary and fully diluted earnings
per share were not affected by the issuance of the Litigation Escrow Shares.
The reference price of the Common Stock for purposes of the treasury stock
method is $42.75 per share. The Litigation Escrow Shares generally will be
dilutive to the extent that the market price of the Common Stock exceeds the
reference price.
(4) Dividends include only amounts paid to Washington Mutual shareholders
without consideration of prior business combinations.
8
<PAGE> 11
The following tables set forth other summary financial data for the periods
and as of the dates indicated for each of Washington Mutual and Keystone
Holdings prior to the Transaction on a noncombined basis without giving effect
to the Transaction. The Summary Financial Data for each company on a stand-alone
basis is intended for informational purposes only and is not indicative of the
future financial position or future results of operations of the combined
Company.
WASHINGTON MUTUAL (PRE-TRANSACTION):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- ------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income...................... $1,258,257 $1,163,101 $1,578,960 $1,258,550 $1,081,309
Interest expense..................... 729,739 707,803 960,724 651,871 520,750
---------- ---------- ---------- ---------- ----------
Net interest income.................. 528,518 455,298 618,236 606,679 560,559
Provision for loan losses............ 8,738 8,450 11,150 20,400 35,225
Other income (expense), net.......... (263,103) (225,254) (299,781) (296,798) (242,299)
Income taxes......................... 95,615 76,883 107,504 108,159 98,864
---------- ---------- ---------- ---------- ----------
Net income from continuing
operations......................... 161,062 144,711 199,801 181,322 184,171
Extraordinary items, net of federal
income tax effect............... -- -- -- -- (8,953)
Cumulative effect in change of tax
accounting method............... -- -- -- -- 13,365
---------- ---------- ---------- ---------- ----------
Net income......................... $ 161,062 $ 144,711 $ 199,801 $ 181,322 $ 188,583
========== ========== ========== ========== ==========
Net income attributable to common
stock........................... $ 147,247 $ 130,773 $ 181,217 $ 162,738 $ 175,025
========== ========== ========== ========== ==========
Net interest margin................ 3.30% 2.55% 3.14% 3.65% 4.15%
Efficiency ratio................... 58.84 57.56 56.74 57.27 55.37
Return on average assets........... 0.96 0.95 0.97 1.03 1.31
Return on average stockholders'
equity.......................... 13.04 13.45 13.31 13.77 16.89
Return on average common
stockholders' equity............ 13.39 13.90 13.73 14.30 18.31
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30, 31,
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total assets...................................................... $22,413,697 $22,420,379
Loans............................................................. 14,652,743 13,035,250
Deposits.......................................................... 11,076,868 11,306,436
Borrowings........................................................ 8,578,497 8,332,275
Nonperforming assets as a percentage of total assets.............. 0.46% 0.41%
Reserve for loan losses as a percentage of:
Nonperforming loans............................................. 186.64 209.91
Nonperforming assets............................................ 139.89 153.07
</TABLE>
9
<PAGE> 12
KEYSTONE HOLDINGS (PRE-TRANSACTION):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------- ------------------------------------
1996 1995 1995 1994 1993
---------- --------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income...................... $1,080,328 $ 982,616 $1,337,126 $1,036,863 $1,117,269
Interest expense..................... 725,463 717,286 962,712 683,487 691,146
---------- -------- ---------- ---------- ----------
Net interest income.................. 354,865 265,330 374,414 353,376 426,123
Provision for loan losses............ 49,400 49,090 63,837 101,609 123,503
Other income (expense), net.......... (237,617) (147,545) (192,394) (177,925) (198,644)
Income taxes (benefit)............... 1,729 994 4,402 1,721 (2,830)
Provision (benefit) for payments in
lieu of taxes...................... 14,465 (1,410) 7,887 (824) 14,075
---------- -------- ---------- ---------- ----------
Net income from continuing
operations......................... 51,654 69,111 105,894 72,945 92,731
Minority interest in income of
consolidated subsidiaries(1)....... (24,812) (25,160) (21,092) (22,621) (10,474)
---------- -------- ---------- ---------- ----------
Net income........................... $ 26,842 $ 43,951 $ 84,802 $ 50,324 $ 82,257
========== ======== ========== ========== ==========
Net income attributable to common
stock.............................. $ 26,842 $ 43,951 $ 84,802 $ 50,324 $ 82,257
========== ======== ========== ========== ==========
Net interest margin.................. 2.43% 1.93% 2.02% 2.12% 2.57%
Efficiency ratio..................... 72.24 64.40 59.27 60.33 55.15
Return on average assets........... 0.18 0.30 0.44 0.29 0.48
Return on average stockholder's
equity.......................... 3.98 7.35 15.15 9.04 15.30
Return on average common
stockholder's equity............ 3.98 7.35 15.15 9.04 15.30
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30, 31,
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total assets...................................................... $21,298,248 $19,703,656
Loans............................................................. 13,844,014 11,175,031
Deposits.......................................................... 12,901,647 13,005,029
Borrowings........................................................ 7,294,879 5,391,857
Nonperforming assets as a percentage of total assets.............. 1.03% 1.24%
Reserve for loan losses as a percentage of:
Nonperforming loans............................................. 64.75 78.07
Nonperforming assets............................................ 40.74 46.08
</TABLE>
- ---------------
(1) Reflects earnings on preferred stock issued by New Capital.
10
<PAGE> 13
RISK FACTORS
In addition to all the information in this Prospectus and the documents
incorporated herein by reference, the following risk factors should be
considered carefully in evaluating an investment in the Shares offered hereby.
EXPECTED BENEFITS OF COMBINED BUSINESS MAY NOT BE ACHIEVED
The Company anticipates that substantial benefits will occur as a result of
the Transaction. Whether the anticipated benefits of the Transaction are
ultimately achieved, however, will depend on a number of factors, including the
ability of the Company to capitalize on its combined asset base and strategic
position and its ability to achieve administrative cost savings at projected
levels within projected time frames. The ability of the Company to operate
efficiently, at least in the short term, will be enhanced by its ability to
retain key ASB personnel. There can be no assurance that the expected benefits
of the Transaction relative to the combined business will be achieved.
ECONOMIC CONDITIONS AND REAL ESTATE RISK
Washington Mutual's lending operations are concentrated in Washington,
California and Oregon. The bulk of its assets are loans and securities secured
by residential real estate in those states. As a result, the financial condition
and results of operations of the Company will be subject to general economic
conditions and, in particular, the conditions in the single-family or
multi-family residential real estate markets prevailing in Washington,
California and Oregon. If economic conditions in any one of those states worsen
or if the market for residential real estate in particular declines, the Company
may suffer decreased net income or losses associated with higher default rates
and decreased collateral values on its existing portfolio, and may not be able
to originate the volume of single-family or multi-family residential mortgage
loans or achieve the level of deposits currently anticipated. Approximately
one-half of the Company's loan assets at September 30, 1996 were acquired in the
Transaction and are secured by properties in California. In the early 1990's,
the California economy sustained an economic recession that resulted in declines
in property values and increases in the levels of delinquencies, foreclosures
and losses for many of the state's financial institutions. Though the California
economy generally began to show signs of recovery in 1994 continuing through
1996, certain real estate submarkets in which ASB operates remain weak. No
assurance can be given that levels of delinquencies, foreclosures and losses in
the Company's portfolio of loans and investments secured by properties in
California will continue to decline or that such levels will not increase.
INTEREST RATE RISK
Washington Mutual realizes its income principally from the differential or
spread between the interest earned on loans, investments and other
interest-earning assets and the interest paid on deposits and borrowings. Net
interest spreads are affected by the difference between the repricing
characteristics of interest-earning assets and deposits and borrowings and by
changes in market and contractual interest rates. Washington Mutual generally
will have better financial results in a steep yield curve environment. Loan
volumes and yields, as well as the volume of and rates on investments, deposits
and borrowings, are affected by market interest rates. Generally, Washington
Mutual will experience increased interest rate spreads during periods of
downward interest rate movement and decreased interest rate spreads during
periods of upward interest rate movement. This effect is ameliorated somewhat by
the large percentage of adjustable-rate assets in the Company's loan portfolio.
Nevertheless, the adjustments in the interest rates on the ARMs inherently lag
by a few months changes in the cost of funds. To the extent that interest rates
generally are increasing, the Company's interest rate spread, and thus net
income, will in most cases be negatively affected.
COMPETITION
Washington Mutual faces significant competition both in attracting and
retaining deposits and in making loans in all of its market areas. Its most
direct competition for deposits has historically come from other thrift
institutions, credit unions, and commercial banks doing business in its primary
market areas of Washington,
11
<PAGE> 14
California and Oregon. As with all banking organizations, however, Washington
Mutual has experienced increasing competition from nonbanking sources, including
mutual funds, corporate and governmental debt securities and other investment
alternatives. Washington Mutual's competition for loans comes principally from
other thrift institutions, commercial banks, mortgage banking companies,
consumer finance companies, credit unions, insurance companies and other
institutional lenders. Many of these competitors have more significant financial
resources, larger market share and greater name recognition than the Company.
The existence of such competitors may make it difficult for Washington Mutual to
achieve its financial goals. In addition to the normal competitive factors
described above, Washington Mutual management at the holding company level has
limited operating experience in California, which has a much larger population
with more large financial institution competitors than the states in which WMB
has historically operated. Accordingly, there can be no assurance that the
Company's consumer banking strategy will prove successful in the California
market.
ACQUISITION STRATEGY
The Company intends to continue its growth through the acquisition of
financial institutions. In this regard, Washington Mutual routinely reviews such
acquisition opportunities, but currently has no binding commitments to acquire
any specific business or other material assets, other than United Western.
Washington Mutual cannot predict whether it will be successful in consummating
additional acquisitions or what the consequences of any such acquisition would
be. Acquisitions entail numerous risks, including difficulties in the
integration of operations and systems, the diversion of management's attention
from other business concerns and the potential loss of key employees of any
acquired businesses.
REGULATION
Each of the Company (as a savings and loan holding company), WMB, ASB and
WMBfsb is subject to significant regulation, which has materially affected their
businesses, as well as the businesses of other banking organizations, in the
past and is likely to do so in the future. Statutes and regulations currently
affecting the Company or its subsidiaries may be changed at any time, and the
interpretation of these statutes and regulations by examining authorities is
also subject to change. There can be no assurance that future changes in the
regulations or in their interpretations will not adversely affect the business
of Washington Mutual.
GOVERNMENTAL IMMUNITY OF THE FRF AND FDIC-MANAGER AS SELLING STOCKHOLDER
The doctrine of sovereign immunity, as limited by the Federal Tort Claims
Act, 28 U.S.C. sec.sec. 1346(b) and 2671 et seq., as amended (the "Federal Tort
Claims Act"), provides that claims may not be brought against the United States
of America or any agency or instrumentality thereof unless specifically
permitted by an act of Congress. The Federal Tort Claims Act bars claims for
fraud or misrepresentation, and courts have held, in cases involving the FDIC as
well as other federal agencies and instrumentalities, that the United States may
assert its sovereign immunity against claims brought under the federal
securities laws. Thus, any attempt to assert a claim against the FDIC-Manager or
the FRF alleging a violation of the federal securities laws (including the
Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), resulting from an alleged material misstatement in or material
omission from the Registration Statement or this Prospectus, or any other act or
omission in connection with the Offerings to which this Prospectus relates,
probably would be barred. In addition, Section 2(f)(1) of the Federal Deposit
Insurance Act specifically provides that directors, members, officers and
employees of the FDIC have no liability under the Securities Act with respect to
any claim arising out of or resulting from any alleged act or omission by such
person within the scope of such person's employment in connection with any
transaction involving the disposition of assets (or any interests in assets or
any obligations backed by any assets) by the FDIC. Moreover, the FDIC-Manager
has advised Washington Mutual that the FDIC and its directors, officers, agents,
and employees are exempt from liability for any violation or alleged violation
of the anti-fraud provisions of Section 10(b) of the Exchange Act by virtue of
Section 3(c) thereof. Accordingly, any attempt to assert such a claim against
the directors, members, officers or employees of the FDIC for a violation of the
Securities Act or the Exchange Act resulting from an alleged material
misstatement in or material omission
12
<PAGE> 15
from the Registration Statement or this Prospectus or any other act or omission
in connection with the Offerings of the Shares hereunder probably would be
barred.
FORWARD-LOOKING STATEMENTS MAY NOT PROVE ACCURATE
When used or incorporated by reference in this Prospectus, the words
"anticipate," "estimate," "expect," "project" and similar expressions are
intended to identify forward-looking statements within the meaning of Section
27A of the Securities Act. Such statements are subject to certain risks,
uncertainties and assumptions, including those set forth under "Risk Factors"
and elsewhere in this Prospectus. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, expected
or projected. Several key factors that have a direct bearing on Washington
Mutual's ability to attain its goals are discussed above. These forward-looking
statements speak only as of the date of this Prospectus. The Company expressly
disclaims any obligation or undertaking to publicly release any updates or
revisions to any forward-looking statement contained herein to reflect any
change in the Company's expectation with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.
USE OF PROCEEDS
All of the Shares offered hereby are being offered by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
the Shares.
MARKET PRICES AND DIVIDENDS
Washington Mutual Common Stock is traded on the Nasdaq Stock Market under
the symbol "WAMU." The table below sets forth, for the calendar quarters
indicated, the reported high and low sales prices of the Common Stock as
reported on the Nasdaq Stock Market, and the dividends declared on such stock.
<TABLE>
<CAPTION>
WASHINGTON MUTUAL COMMON STOCK
-------------------------------
HIGH LOW DIVIDENDS
------ ------ ---------
<S> <C> <C> <C> <C>
1994 First Quarter........................................... $25.00 $19.13 $0.16
Second Quarter.......................................... 21.50 18.25 0.17
Third Quarter........................................... 21.63 19.63 0.18
Fourth Quarter.......................................... 20.63 15.75 0.19
1995 First Quarter........................................... 20.75 16.63 0.19
Second Quarter.......................................... 24.75 20.00 0.19
Third Quarter........................................... 26.75 22.50 0.19
Fourth Quarter.......................................... 29.50 24.75 0.20
1996 First Quarter........................................... 32.25 27.63 0.21
Second Quarter.......................................... 30.38 26.13 0.22
Third Quarter........................................... 39.25 28.50 0.23
Fourth Quarter (through December 30, 1996).............. 45.88 36.50 0.24
</TABLE>
On December 30, 1996, there were 15,982 shareholders of record of the
Common Stock.
Dividends may be paid on the Common Stock as and when declared by the
Washington Mutual Board of Directors out of funds legally available for the
payment of dividends. Each quarter, the Washington Mutual Board of Directors
considers the payment of dividends. The factors affecting this determination
include Washington Mutual's long-term interests, current and projected earnings,
adequacy of capitalization, and expected asset and deposit growth, as well as
other financial conditions, legal, regulatory and contractual restrictions, and
tax considerations. See "Description of Washington Mutual Capital
Stock -- Dividend Policy."
13
<PAGE> 16
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at September 30, 1996, restated following the Transaction as if
Washington Mutual and Keystone Holdings had been combined at the date presented.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------
AS
AMOUNT ADJUSTED(1)
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long term debt...................................................... $ 688,268 $ 667,768
Minority interest(2)................................................ 80,000 --
Stockholders' equity:
Capital surplus:
Preferred stock -- no par value -- 10,000,000 shares
authorized;
6,122,400 shares outstanding; 4,722,500 shares outstanding
as adjusted.................................................. 250,158 110,168
Common stock -- no par value -- 350,000,000 shares authorized;
120,037,913 shares outstanding(3); 125,456,773 shares
outstanding as adjusted....................................... 677,958 817,948
Valuation reserve for available-for-sale securities............... (19,570) (19,570)
Retained earnings................................................. 1,513,370 1,303,370
---------- ----------
Total stockholders' equity................................ 2,421,916 2,211,916
---------- ----------
Total capitalization...................................... $3,190,184 $2,879,684
========== ==========
Consolidated capital ratios:
Stockholders' equity.............................................. 5.54% 5.09%
Tangible stockholders' equity..................................... 5.24 4.78
Tangible common stockholders' equity.............................. 4.97 4.51
Book value per fully diluted common share......................... $19.61 $17.83
</TABLE>
- ------------------------
(1) Adjusted to record (i) the approximately $210 million in anticipated
after-tax Transaction related expenses, (ii) the redemption of New Capital's
preferred stock and subordinated notes and (iii) the conversion of all
shares of the Company's Series D Preferred Stock into 5,418,860 shares of
Common Stock. See "Keystone Transaction -- Transaction Expenses and Addition
to Reserve for Loan Losses" and "Management's Discussion and Analysis of
Financial Position and Results of Operations -- Liquidity."
(2) Preferred stock issued by New Capital, which was redeemed by the Company
upon consummation of the Transaction.
(3) Includes the 8,000,000 Litigation Escrow Shares. Washington Mutual is using
the treasury stock method to determine the effect of the 8,000,000
Litigation Escrow Shares upon the Company's financial statements. At the
effective date of the Transaction, there was no dilutive effect of the
8,000,000 Litigation Escrow Shares. As a result, stockholders' equity, book
value per share and primary and fully diluted earnings per share were not
affected by the issuance of the Litigation Escrow Shares. The reference
price of the Litigation Escrow Shares for purposes of the treasury stock
method is $42.75 per share. The Litigation Escrow Shares generally will be
dilutive to the extent that the market price of the Common Stock exceeds the
reference price.
14
<PAGE> 17
THE KEYSTONE TRANSACTION
THE TRANSACTION
On December 20, 1996 (the "Effective Date"), Keystone Holdings merged with
and into Washington Mutual, with Washington Mutual as the surviving corporation.
The separate existence of Keystone Holdings ceased upon the Effective Date and
the direct and indirect subsidiaries of Keystone Holdings, including ASB but
excluding New West, became subsidiaries of Washington Mutual. On the Effective
Date, Washington Mutual also acquired the Warrants.
In the Transaction, Washington Mutual issued 47,883,333 shares of Common
Stock, as follows: 25,883,333 shares to KHP, 14,000,000 shares to the FRF and
8,000,000 shares to the Litigation Escrow for the benefit of KHP and the FRF.
See " -- The Litigation Escrow" below. The shares issued to KHP and the
contingent right to receive the portion of the Litigation Escrow Shares
attributable to KHP were distributed by KHP to the KHP Investors immediately
following consummation of the Transaction.
As an integral part of the Transaction, Washington Mutual, KHP and the
FDIC-Manager entered into the Registration Rights Agreement, pursuant to which
Washington Mutual is required to use its best efforts to register for resale to
the public under the Securities Act certain shares of Common Stock issued in the
Transaction. Pursuant to the Registration Rights Agreement, Washington Mutual
filed the Registration Statement for the sale of the Shares offered hereby.
Pursuant to the Registration Rights Agreement, Washington Mutual has also
agreed to file with the Commission and use its best efforts to cause to become
effective as soon as practicable after nine months from the closing of the
Transaction the Initial Shelf Registration for sale from time to time of all
shares of Registrable Common. Washington Mutual also agreed in the Registration
Rights Agreement to file with the Commission as soon as practicable after
distribution of the Litigation Escrow Shares, and use its best efforts to cause
to become effective an additional shelf registration statement for the sale of
such shares. During the three-year period following the effectiveness of the
Initial Shelf Registration, persons who hold 15 percent or more of the
Registrable Common may require the Company, an aggregate of four times, to
facilitate an underwritten public offering of the Registrable Common, and the
KHP Investors and the FRF are entitled to notice of any registrations by the
Company of Common Stock for sale under the Securities Act for its own account
(with certain exceptions) and to include their shares therein.
TRANSACTION EXPENSES AND ADDITION TO RESERVE FOR LOAN LOSSES
Washington Mutual anticipates recording a net after-tax charge of
approximately $210 million for Transaction expenses, including a $125.0 million
addition to the reserve for loan losses in the fourth quarter of 1996. The
Transaction expenses recorded were related to severance and management payments,
payments related to a tax settlement between Keystone Holdings and the FRF,
write-downs of software and equipment, premiums paid in redemption of New
Capital debt securities, professional fees and investment banking fees. An
additional component of the after-tax charge was a downward adjustment to
Keystone Holdings' deferred tax assets, which will have diminished value to the
combined entity due to limitations provided in the Internal Revenue Code on the
use of acquired net operating loss carryforwards. See "Business -- Taxation of
the Company -- Net Operating Loss Carryforward Deductions."
The addition to the reserve for loan losses was provided principally
because a number of Washington Mutual credit administration and asset management
philosophies and procedures differed from those of ASB. Those differences
consisted principally of the following: (i) Washington Mutual is more proactive
in dealing with emerging credit problems and tends to prefer foreclosure actions
to induce borrowers to correct defaults, whereas ASB was not as proactive and
tended to prefer workouts in lieu of a more aggressive foreclosure stance; and
(ii) ASB considered the risk characteristics of its portfolio of loans secured
by apartment buildings of less than $1.0 million to be similar to the risk
characteristics of its single-family residential portfolio; Washington Mutual,
on the other hand, considers the risk characteristics of that portfolio to be
more closely aligned with its commercial real estate loan portfolio, which tends
to have a higher incidence of loan losses than the single-family residential
portfolio. Washington Mutual is conforming ASB's asset management practices,
administration, philosophies and procedures to those of WMB and WMBfsb. The plan
of realization
15
<PAGE> 18
of troubled loans differed between the companies and therefore resulted in
different levels of loss reserves. The addition to the reserve for loan losses
was to a lesser degree provided because Washington Mutual believed that, while
there has been an increase in the value of residential real estate in certain
California markets, a decline in collateral values for some portions of the
California real estate market occurred in late 1996.
THE LITIGATION ESCROW
KHP, Keystone Holdings and certain of its subsidiaries are plaintiffs in a
lawsuit against the United States (the "Case"). In the Case, among other claims,
plaintiffs allege that as part of the 1988 Acquisition, they entered into a
contract with the FSLIC and the Federal Home Loan Bank Board entitling the
plaintiffs to certain economic benefits, and that the U.S. government breached
that contract, causing damage to the plaintiffs. A number of other savings
institutions have asserted similar types of claims against the U.S. government.
Pursuant to the Agreement for Merger among the Company, Keystone Holdings and
certain of its affiliates (the "Merger Agreement"), the Case became an asset of
Washington Mutual at the Effective Date and the Company will receive any
recovery in the Case. Due to its ownership of the Warrants, the FRF was entitled
to receive an economic benefit from any recovery from the Case. As consideration
for the possible future recovery of Case Proceeds, Washington Mutual issued the
Litigation Escrow Shares to The Bank of New York as escrow agent (the "Escrow
Agent") to be held for the benefit of the KHP Investors and the FRF.
The Litigation Escrow Shares are registered in the name of the Escrow
Agent, who will hold such shares together with any dividends, distributions or
any additional or substitute securities with respect to such shares, as well as
any interest or earnings on such dividends, distributions or additional or
substitute securities (collectively, the "Escrow Fund"). The Escrow Agent will
vote the Litigation Escrow Shares in accordance with instructions received from
each of the KHP Investors and the FDIC-Manager with respect to their respective
interests in the Litigation Escrow Shares (64.9 percent for KHP Investors and
35.1 percent for the FDIC-Manager). The Escrow Agent will hold the Escrow Fund
until the earlier of the date that is the sixth anniversary of the Effective
Date or until the entire Escrow Fund has been released from the Litigation
Escrow (the "Escrow Expiration Date"). In general, the Escrow Expiration Date
will be automatically extended to 10 years from the Effective Date if, prior to
the sixth anniversary of the Effective Date, there has been any judgment or
final settlement in the Case granted or entered in favor of Washington Mutual or
any of its subsidiaries. The Escrow Expiration Date may be extended further if
Case Proceeds are paid in installments. In the event that Washington Mutual
receives any Case Proceeds on or before the Escrow Expiration Date, the Escrow
Agent will make distributions of all or a portion of the Escrow Fund, 64.9
percent to the KHP Investors and 35.1 percent to the FRF. The number of
Litigation Escrow Shares to be distributed will be calculated based on a formula
in the Merger Agreement. The Escrow Agent may make more than one distribution
out of the Escrow Fund if Case Proceeds are received in two or more
installments. In general, if no Case Proceeds have been received, beginning on
the last day of the full calendar month immediately following the sixth
anniversary of the Effective Date and on the last day of every succeeding month,
the Escrow Agent will return to Washington Mutual for cancellation a number of
shares equal to 1.25 percent of the number of Litigation Escrow Shares, together
with any dividends and distributions received on such shares and any interest or
earnings on such dividends. At the Escrow Expiration Date, any remaining
Litigation Escrow Shares, together with any amounts in the Escrow Fund, will be
returned to Washington Mutual.
The ultimate outcome of the Case is uncertain, and there can be no
assurance that any recovery in the Case will result in Case Proceeds that exceed
the value of the Litigation Escrow Shares plus costs and expenses. Generally,
Washington Mutual will not benefit financially from the Case unless Case
Proceeds exceed such an amount and, in negotiating the Transaction, Washington
Mutual ascribed no value to the possibility that the Case Proceeds would exceed
such amount. As a result, it is uncertain what, if any, effect recovery in the
Case will have on the financial position of Washington Mutual.
16
<PAGE> 19
SELECTED FINANCIAL DATA
The following table presents selected financial data for Washington Mutual.
This table is derived from and should be read in conjunction with the
Supplemental Consolidated Financial Statements of Washington Mutual and the
notes thereto, which are included elsewhere in this Prospectus. The Transaction
was accounted for as a pooling-of-interests. The financial statements presented
herein are designated as "supplemental" because generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consummation. The assets, liabilities, and results of
operations of Keystone Holdings have been recorded on the books of Washington
Mutual at their values as carried on the books of Keystone Holdings, and no
goodwill was created. Washington Mutual supplemental financial information
contained in this Prospectus has been restated as if the respective companies
had been combined for all periods presented. As such, the information presented
herein is not comparable to that reflected in the Company's annual report on
Form 10-K for the year ended December 31, 1995, or the restated financial
statements of the Company contained in the Company's current report on Form 8-K
dated October 18, 1996, as amended. Because of the significant increase in
Washington Mutual's size as a result of the acquisition early in 1993 of Pacific
First (which was accounted for by the purchase method), the financial results
for the years ended and as of December 31, 1995, 1994, and 1993, are not
generally comparable to prior periods or dates. The information as of September
30, 1996 and for the nine-month periods ended September 30, 1996 and 1995 is not
necessarily indicative of the operating results for the entire year.
17
<PAGE> 20
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL FINANCIAL DATA
Interest income...................... $2,338,585 $2,145,717 $2,916,086 $2,295,413 $2,198,578 $2,170,969 $2,407,639
Interest expense..................... 1,455,202 1,425,089 1,923,436 1,335,358 1,211,896 1,302,489 1,645,630
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income.................. 883,383 720,628 992,650 960,055 986,682 868,480 762,009
Provision for loan losses............ 58,138 57,540 74,987 122,009 158,728 158,537 85,807
Other income......................... 183,822 152,225 208,339 220,794 246,576 174,365 175,806
Other expense........................ 684,542 525,024 700,514 695,517 687,519 561,688 516,348
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes,
extraordinary items, cumulative
effect of change in
tax accounting method, and minority
interest........................... 324,525 290,289 425,488 363,323 387,011 322,620 335,660
Income taxes......................... 97,344 77,877 111,906 109,880 96,034 42,462 45,920
Provision (benefit) for payments in
lieu of taxes...................... 14,465 (1,410) 7,887 (824) 14,075 53,980 85,221
Extraordinary items, net of federal
income tax effect(1)............... -- -- -- -- (8,953) (4,638) --
Cumulative effect of change in tax
accounting method.................. -- -- -- -- 13,365 60,045 --
Minority interest in income of
consolidated subsidiaries(2)....... (10,504) (12,244) (15,793) (13,992) (13,991) (14,030) (14,095)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........................... $ 202,212 $ 201,578 $ 289,902 $ 240,275 $ 267,323 $ 267,555 $ 190,424
========= ========= ========= ========= ========= ========= =========
Net income attributable to
common stock....................... $ 188,397 $ 187,640 $ 271,318 $ 221,691 $ 253,764 $ 262,140 $ 185,549
========= ========= ========= ========= ========= ========= =========
Net income per common share(3)
Primary............................ $1.68 $1.72 $2.47 $2.09 $2.42 $2.82 $2.20
Fully diluted...................... 1.66 1.69 2.42 2.06 2.36 2.71 2.10
Cash dividends declared per common
share(4)........................... 0.66 0.57 0.77 0.70 0.50 0.33 0.28
Common stock dividend payout
ratio(4)........................... 29.56% 26.52% 25.74% 24.50% 15.98% 15.43% 13.06%
Net interest margin.................. 2.89 2.55 2.62 2.90 3.31 3.36 3.14
Efficiency ratio..................... 64.14 60.15 58.33 58.90 55.75 53.86 55.06
Return on average assets............. 0.63 0.68 0.73 0.69 0.84 1.29 0.99
Return on average stockholders'
equity............................. 10.59 12.04 13.44 12.66 15.95 21.05 17.84
Return on average common
stockholders' equity............... 10.69 12.24 13.73 12.95 16.78 21.05 17.84
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
------------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL FINANCIAL DATA
Total assets........................ $43,711,945 $42,026,622 $37,481,296 $33,614,912 $27,678,923 $25,531,041
Available-for-sale securities....... 10,063,100 12,154,725 4,282,160 1,751,905 -- --
Held-to-maturity securities......... 2,986,296 3,197,720 4,456,031 5,663,635 4,638,473 3,845,573
Loans:
Residential....................... 20,977,192 17,303,305 17,766,215 13,828,459 11,734,594 9,745,201
Residential construction.......... 668,976 615,814 549,271 430,215 366,808 342,623
Commercial real estate............ 3,732,685 3,487,574 4,699,220 4,515,449 3,194,184 2,573,423
Manufactured housing, second 3,056,982 2,841,854 2,573,327 2,403,169 1,431,834 1,322,917
mortgage and other consumer.....
Commercial........................ 295,263 179,568 129,048 131,468 118,717 112,312
Reserve for loan losses........... (234,341) (235,275) (244,989) (245,062) (179,612) (130,423)
------------- ----------- ----------- ----------- ----------- -----------
Total loans................. $28,496,757 $24,192,840 $25,472,092 $21,063,698 $16,666,525 $13,966,053
================= ========== ========== ========== ========== ==========
Deposits............................ $23,978,515 $24,462,960 $23,344,006 $23,516,317 $20,729,204 $19,950,479
Annuities........................... 868,438 855,503 799,178 713,383 571,428 433,767
Borrowings.......................... 15,873,476 13,724,132 11,147,389 6,653,241 4,563,052 3,626,292
Stockholders' equity(3)............. 2,421,916 2,541,704 1,854,836 1,765,560 1,467,835 1,139,080
Stockholders' equity ratio.......... 5.54% 6.05% 4.95% 5.25% 5.30% 4.46%
Nonperforming assets as a percentage 0.74 0.81 1.12 1.55 2.03 1.68
of total assets...................
Reserve for loan losses as a
percentage of:
Nonperforming loans............... 108.33 110.04 87.22 72.74 54.58 45.50
Nonperforming assets.............. 72.53 69.42 58.52 46.91 31.98 30.37
Fully diluted book value per common $19.61 $20.70 $15.33 $14.84 $12.78 $11.32
share(3)..........................
Number of common shares used to 117,456,773 117,107,107 113,140,169 110,876,251 109,351,928 100,669,322
calculate fully diluted book value
per common share(3)...............
Weighted average common shares(3)... 117,327,806 115,363,724 111,664,374 110,753,774 103,446,289 96,786,054
</TABLE>
- ---------------
(1) Extraordinary items include the call of subordinated capital notes,
resulting in pretax losses of $2.2 million and $3.1 million during 1993 and
1992, and penalties for prepayment of FHLB advances, resulting in pretax
losses of $10.8 million and $3.6 million during 1993 and 1992.
(2) Reflects earnings on preferred stock issued by New Capital, which was
redeemed by the Company in December 1996.
(3) As computed on a fully-diluted basis, including common stock equivalents.
The 8,000,000 Litigation Escrow Shares are reflected in earnings per share
using the treasury stock method. At the effective date of the Transaction,
there was no dilutive effect of the 8,000,000 Litigation Escrow Shares. As a
result, stockholders' equity, book value per share, common shares and
weighted average shares outstanding, and primary and fully diluted earnings
per share were not affected by the issuance of the Litigation Escrow Shares.
The reference price of the Litigation Escrow Shares for purposes of the
treasury stock method is $42.75 per share. The Litigation Escrow Shares
generally will be dilutive to the extent that the market price of the Common
Stock exceeds the reference price.
(4) Dividends include only amounts paid to Washington Mutual shareholders
without consideration of prior business combinations.
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL POSITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Supplemental Consolidated Financial Statements and Notes thereto presented
elsewhere in this Prospectus.
GENERAL
Washington Mutual is a regional financial services company committed to
serving consumers and small to mid-sized businesses throughout the Western
United States. The Company's banking subsidiaries accept deposits from the
general public, make residential and consumer loans, and engage in certain
commercial banking activities. Washington Mutual also underwrites and sells
annuities, sells other insurance products, offers full service securities
brokerage, and acts as the investment advisor to and the distributor of mutual
funds.
THE KEYSTONE ACQUISITION. In December 1996, Keystone Holdings merged with
and into Washington Mutual and all of its subsidiaries, including ASB, became
subsidiaries of the Company. ASB will remain an operating subsidiary of the
Company. The Transaction was accounted for as a pooling-of-interests. The
financial information presented herein has been restated as if the respective
companies had been combined for all periods presented. Accordingly, unless
otherwise noted, all references to Washington Mutual or the Company refer to the
combined entity including Keystone Holdings.
The Company anticipates that it will consolidate certain head office
functions and back office operations of ASB. The Company anticipates achieving
cost savings from such consolidations of between $30 million and $50 million
(pretax) in 1998 depending upon the amount of growth in ASB's residential
lending and other consumer banking activities and additional growth, if any, in
the Company's California operations.
OTHER ACQUISITION ACTIVITY. During the first half of 1993, Washington
Mutual merged with Pioneer Savings Bank ("Pioneer") and acquired a substantial
portion of the assets of Pacific First. As a result of acquiring Pacific First,
the Company became substantially larger, with significant operations both in
Oregon and Washington. In 1994 and 1995, Washington Mutual continued to expand
its operations through business combinations with other financial institutions
with locations in Washington, Utah and Montana.
During 1995, Washington Mutual took steps to diversify its operations into
commercial banking. In August 1995, the Company acquired Enterprise and in
January 1996, acquired Western, a commercial bank with branch operations
throughout Oregon. Each of these transactions was accounted for as a pooling-of-
interests. See "Business -- Business Combinations."
RECENT FEDERAL LEGISLATION. On September 30, 1996, President Clinton
signed legislation intended in part to recapitalize the SAIF and to reduce the
gap between SAIF premiums and BIF premiums. The legislation provided for a
special one-time assessment on SAIF-insured deposits that were held as of March
31, 1995, including certain deposits acquired after that date. The assessment
was designed to bring the SAIF's reserve ratio to the legally required level of
$1.25 for every $100 in insured deposits. Prior to this legislation, deposits of
Washington Mutual subsidiaries insured through the SAIF were subject to regular
FDIC assessments of 23 cents per $100 per year. Beginning in January 1997,
deposits of well-capitalized institutions insured through the SAIF probably will
be subject to regular FDIC assessments of 6.4 cents per $100 per year, while
deposits of well-capitalized institutions insured through the BIF probably will
be subject to regular FDIC assessments of 1.3 cents per $100 per year.
Washington Mutual's special assessment on deposits held by WMB, ASB and
WMBfsb resulted in a pretax charge of $124.2 million, which was taken in the
quarter ended September 30, 1996. Based on current levels of deposits,
Washington Mutual estimates that the reduction in the regular assessment on its
SAIF deposits beginning in 1997 should result in annual savings of approximately
$31 million.
20
<PAGE> 23
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1995. Net income for the nine months ended September 30, 1996 was
$202.2 million or $1.66 per fully diluted share, compared with $201.6 million or
$1.69 per fully diluted share for the nine months ended September 30, 1995. Net
income was reduced by a pretax charge of $124.2 million representing the
Company's portion of the one-time assessment paid by savings institutions and
banks to recapitalize the SAIF. For the nine months ended September 30, 1996,
the Company's return on average assets ("ROA") and return on average common
stockholders' equity ("ROCE") were 0.63 percent and 10.69 percent, compared with
0.68 percent and 12.24 percent for the same period in 1995. Excluding the
one-time nonrecurring SAIF assessment, net income, net income per fully diluted
share, ROA and ROCE would have been $288.0 million, $2.39, 0.94 percent and
15.40 percent, respectively, for the nine months ended September 30, 1996.
Net Interest Income. The Company's net interest income of $883.4 million
for the nine months ended September 30, 1996 increased from $720.6 million for
the same period a year earlier. The 1996 increase reflected the effect of two
primary factors. First, average interest earning assets of $40.7 billion for the
nine months ended September 30, 1996 increased eight percent from the same
period in 1995. Second, the net interest margin (which measures the Company's
annualized net interest income as a percentage of average interest-earning
assets) rose to 2.89 percent for the nine months ended September 30, 1996 from
2.55 percent for the same period in 1995.
To a certain extent, the Company's net interest margin is affected by
changes in the yield curve. Banks generally have better financial results in a
steep yield curve environment. At September 30, 1996, the difference between the
yield on a three-month treasury bill and a 30-year bond was 187 basis points
compared with only 119 basis points a year earlier. This increased differential
helped increase the Company's net interest margin. Rising interest rates in the
first nine months of 1995 had a negative effect on the margin due to the lag in
repricing of the Company's ARMs, particularly its ARMs indexed to the Cost of
Funds Index of the Eleventh District Federal Home Loan Bank (San Francisco)
("COFI"). In the first nine months of 1996, short-term interest rates, the main
component of COFI, declined slightly with the result that the repricing lag
provided a slight benefit to the margin.
The net interest spread rose to 2.76 percent for the nine months ended
September 30, 1996 from 2.42 percent for the same period in 1995. (The net
interest spread is the difference between the Company's yield on
interest-earning assets and its cost of funds.) Although long-term interest
rates were generally higher during 1996 when compared with 1995, the Company's
combined yield on loans and investments rose only six basis points to 7.66
percent for the nine months ended September 30, 1996, compared with 7.60 percent
for the same period in 1995. As part of a strategy initiated in late 1995 and
continued in 1996 to restructure the Company's asset base, the Company purchased
adjustable-rate assets while selling fixed-rate assets. See "-- Interest Rate
Risk Management." The disposition of these higher yield fixed-rate assets and
inclusion of more adjustable-rate assets partially offset the increased yields
resulting from higher market interest rates. The decrease in market short-term
interest rates during 1996 led to a decline in the Company's cost of funds to
4.90 percent for the nine months ended September 30, 1996, from 5.18 percent for
the same period in 1995. In addition to the favorable interest rate environment,
the Company's cost of funds was positively affected by a change in its deposit
mix. Maturing time deposit accounts were replaced, in part, with lower
interest-cost money market and checking accounts. An increase in market
short-term interest rates would make it difficult to maintain the current levels
for the net interest margin, net interest spread and net interest income.
Other Income. Other income increased by 21 percent to $183.8 million for
the nine months ended September 30, 1996, from $152.2 million for the same
period in 1995.
21
<PAGE> 24
Other income consisted of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Depositor fees................................................. $ 76,309 $ 55,361
Loan servicing fees............................................ 31,769 21,050
Other service fees............................................. 38,640 36,685
Other operating income......................................... 25,804 22,289
Gain (loss) on sale of loans, inclusive of write-downs......... 15,223 (2,117)
Gain (loss) on sale of other assets, inclusive of (3,923) 726
write-downs..................................................
Loss on sale of covered assets................................. -- (37,399)
Effect of FDIC assistance payment.............................. -- 55,630
-------- --------
Total other income................................... $183,822 $152,225
======== ========
</TABLE>
Depositor fees increased 38 percent to $76.3 million for the nine months
ended September 30, 1996 from $55.4 million during the same period in 1995. The
increase was primarily the result of a revised fee structure on checks drawn on
nonsufficient funds and overdraft fees combined with an aggressive marketing
campaign that substantially increased the number of checking accounts. The
growth in depositor fees has been tempered somewhat by an increase in the amount
of transaction-related losses incurred by the Company resulting from the
increased number of checking accounts. Transaction-related losses (included in
other operating expense) totaled $8.3 million for the nine months ended
September 30, 1996, compared with $6.0 million for the same period in 1995.
Management closely monitors the amount of losses incurred to assure the
profitability of its deposit products.
Loan servicing fees were $31.8 million for the nine months ended September
30, 1996, a 51 percent increase from $21.1 million during the same period in
1995. The average balance of loans serviced for others for the nine months ended
September 30, 1996 increased 47 percent from the same period in 1995 due
primarily to loan securitizations. Also contributing to the 1996 increase was
$1.4 million of additional loan servicing fees booked in September 1996
resulting from a change related to the loan servicing system. Loans serviced for
others totaled $23.9 billion at September 30, 1996.
Loan servicing fees consisted of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Loan servicing income.......................................... $ 54,851 $ 37,670
Amortization of mortgage servicing rights...................... (23,082) (16,620)
-------- --------
Loan servicing fees.................................. $ 31,769 $ 21,050
======== ========
</TABLE>
Other service fees, principally generated by the Company's nonbanking
subsidiaries, were $38.6 million for the nine months ended September 30, 1996,
compared with $36.7 million for the same period in 1995.
Gains on the sale of loans were $15.2 million for the nine months ended
September 30, 1996, compared with a loss of $2.1 million for the same period in
1995. The gains in the 1996 period resulted from the sale of fixed-rate loans as
part of the Company's program of selling fixed-rate loan production with the
objective of reducing the effect of future movements in interest rates.
In addition, on January 1, 1996, WMB and WMBfsb adopted Statement of
Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights,
which had been adopted by ASB on January 1, 1995. SFAS No. 122 eliminates the
distinction between servicing rights that are purchased and those that are
retained upon the sale or securitization of loans. The statement requires
mortgage servicers to record the servicing rights on loans as separate assets,
no matter what their origin. Banks that sell or securitize
22
<PAGE> 25
loans and retain the servicing rights are required to allocate the total cost of
the loans between servicing rights and principal balance.
During the first nine months of 1996, the Company capitalized $26.5 million
of mortgage servicing rights as a result of SFAS No. 122. Capitalizing the
mortgage servicing rights on loans originated for sale effectively reduces the
Company's cost basis in the loans and leads to higher gains on sale. As a
result, gains on the sale of loans were $13.9 million more for the nine months
ended September 30, 1996 than would have been recognized under prior accounting
policies.
Mortgage servicing rights, net of amortization and the valuation allowance
were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Balance, beginning of period................................... $104,495 $ 70,911
Additions.................................................... 57,602 50,614
Amortization................................................. (23,082) (16,620)
Valuation allowance.......................................... (530) (700)
-------- --------
Balance, end of period......................................... $138,485 $104,205
======== ========
</TABLE>
The Company records its valuation allowance for mortgage servicing rights
as an offset against gains on the sale of loans.
Losses on the sale of other assets were $3.9 million for the nine months
ended September 30, 1996, compared with gains of $726,000 for the same period in
1995. The net loss in the first nine months of 1996 consisted primarily of
securities transaction losses of $7.8 million partially offset by the
recognition of a $4.1 million previously deferred gain on the March 1995 sale of
Mutual Travel, Inc. ("Mutual Travel"), the Company's travel agency subsidiary.
The losses on the sale of securities during 1996 were incurred in connection
with the Company's strategy to reduce its exposure to movements in interest
rates. See "-- Net Interest Income" and "-- Interest Rate Risk Management."
A sale of "covered assets" occurred during the nine months ended September
30, 1995. "Covered assets" are assets as to which ASB was entitled to government
assistance as part of the 1988 Acquisition. See "-- For the Three Years Ended
December 31, 1995 -- Other Income." There was no comparable transaction in 1996.
Other Expense. Other expense for the nine months ended September 30, 1996
totaled $684.5 million (inclusive of the one-time SAIF recapitalization
assessment of $124.2 million) compared with $525.0 million during the same
period in 1995. The efficiency ratio, one commonly accepted measure of a bank's
operating efficiency, is the ratio of its operating expenses to revenues (net
interest income and other income). The Company's efficiency ratio, excluding the
nonrecurring SAIF recapitalization assessment, was 52.5 percent for the nine
months ended September 30, 1996 compared with 60.2 percent for the same period
in 1995. The effect of increases in other expense during the first nine months
of 1996 (exclusive of the SAIF recapitalization assessment) was offset by
substantial increases in net interest income and other income for the same
period.
23
<PAGE> 26
Other expense consisted of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Salaries and employee benefits................................. $250,106 $233,785
Occupancy and equipment........................................ 88,592 82,665
Regulatory assessments......................................... 36,533 41,124
SAIF recapitalization assessment............................... 124,193 --
Data processing fees........................................... 28,766 24,527
Other operating expense........................................ 127,062 113,623
Amortization of goodwill and other intangible assets........... 20,881 21,337
Real estate owned operations, inclusive of write-downs......... 8,409 7,963
-------- --------
Total other expense.................................. $684,542 $525,024
======== ========
</TABLE>
Salaries and employee benefits increased to $250.1 million for the nine
months ended September 30, 1996 from $233.8 million for the same period in 1995
due primarily to increases in staffing levels in commercial banking, financial
centers and loan administration. Full-time equivalent employees were 8,214 at
September 30, 1996, up from 7,854 at September 30, 1995. The increase in
full-time equivalent employees was moderated by the sale of the Company's item
processing operation and outsourcing in the information systems and property
management departments during 1996.
Occupancy and equipment expense increased to $88.6 million for the nine
months ended September 30, 1996, compared with $82.7 million for the same period
in 1995. This increase was primarily due to the growth in the number of
financial centers, an expansion of head office facilities and technology
upgrades.
Regulatory assessments (excluding the one-time SAIF recapitalization
assessment) decreased to $36.5 million for the nine months ended September 30,
1996, compared with $41.1 million for the same period in 1995, reflecting a
reduction in the assessment rate on the portion of the Company's deposits
insured through the BIF.
Other operating expense (including data processing fees) increased 12.8
percent to $155.8 million for the nine months ended September 30, 1996, compared
with $138.2 million for the same period in 1995. Increases in 1996 were due in
part to higher telecommunications expenses, professional fees associated with
process reengineering projects and acquisition-related charges.
Taxation. The provision for income taxes was $97.3 million for the nine
months ended September 30, 1996 compared to $77.9 million for the same period in
1995, representing an effective tax rate of 30 percent compared to a 27 percent
effective tax rate for the same period in the prior year. See "-- For the Three
Years Ended December 31, 1995 -- Taxation" for a discussion of the variance from
normal corporate tax rates.
With respect to Keystone Holdings, the provision for payments in lieu of
taxes was $14.5 million, compared with a benefit of $1.4 million for the same
period in 1995. The change in payments in lieu of taxes was primarily a result
of deductions taken in 1995 that were not taken for the same period in 1996. See
"Business -- Tax Related Agreements -- Assistance Agreement."
In August 1996, Keystone Holdings amended prior year federal tax returns to
reduce tax bad debt deductions and to make other amendments. As a result, the
net operating loss carryforwards were reduced by approximately $756 million. In
September 1996, ASB amended prior year state tax returns to reduce tax bad debt
deductions. The result was to decrease state net operating loss carryforwards by
approximately $545 million. The decrease in the gross deferred tax asset as a
result of the amendments that reduced the federal and state net operating loss
carryforwards was offset by an equal decrease in the valuation allowance to the
deferred tax asset.
24
<PAGE> 27
FOR THE THREE YEARS ENDED DECEMBER 31, 1995. Washington Mutual's 1995 net
income of $289.9 million increased from $240.3 million in 1994 and $267.3
million in 1993. Fully diluted earnings per share were $2.42 in 1995, compared
with $2.06 in 1994 and $2.36 in 1993. Washington Mutual's ROA for 1995 equaled
0.73 percent, up from 0.69 percent in 1994 and down from 0.84 percent in 1993.
Its ROCE for 1995 was 13.73 percent, up from 12.95 percent in 1994 and down from
16.78 percent in 1993. During 1993, Washington Mutual operated in a highly
favorable interest rate environment. However, an increase of approximately 250
basis points in short-term market interest rates in 1994 led to a compression of
the net interest margin and a corresponding pressure on net interest income in
1994 and 1995. Certain short-term interest rates decreased 25 basis points in
mid-1995 and again in December 1995, resulting in an improved operating
environment for the Company over 1994.
Net Interest Income. Net interest income of $992.7 million for 1995
increased from $960.1 million in 1994, which in turn was 3 percent lower than
the $986.7 million earned during 1993. The growth in net interest income in 1995
was due primarily to an increase in average interest-earning assets. Although
average interest-earning assets increased 14 percent during 1995, a decline in
the net interest margin limited the increase in net interest income. A
significant portion of the Company's ARMs are indexed to COFI. In both 1995 and
1994, the net interest margin was negatively affected by the lag between COFI
and changes in the repricing of the Company's interest-bearing liabilities.
The increase in market interest rates during 1994 had a negative effect on
the net interest margin during much of 1995. The net interest margin for 1995 of
2.62 percent declined from 2.90 percent in 1994 and 3.31 percent in 1993. See
"-- Interest Rate Risk Management" and "Supplemental Consolidated Financial
Statements -- Note 18: Interest Rate Risk Management."
The lower market interest rates during 1993 resulted in a significant
portion of the Company's loans being refinanced and mortgage-backed securities
being prepaid, as borrowers sought to lower their interest rates. The result was
a decline in the yield on interest-earning assets to 6.93 percent in 1994 from
7.37 percent in 1993. In general, the costs of deposits and borrowings were also
lower in 1994, compared with 1993. However, due to an increase in the level and
cost of certain borrowings, the Company's overall cost of funds of 4.11 percent
during 1994 was virtually unchanged from 4.12 percent during 1993. The full
effect of the rise in short-term rates that began in late 1994 was felt in 1995
(mitigated somewhat by a subsequent lowering of short-term rates mid-year)
increasing the cost of funds during 1995 to 5.17 percent. The yield on
interest-earning assets during 1995 increased to only 7.70 percent because
long-term interest rates did not increase as much as short-term rates. The
Company also was not in a position to take full advantage of the increase in
long-term interest rates because a sizable portion of its earning assets were
fixed rate. The net interest spread declined to 2.53 percent for 1995 from 2.82
percent in 1994 and 3.25 percent in 1993.
25
<PAGE> 28
The following table sets forth information regarding the Company's
consolidated average statements of financial condition, together with the total
dollar amounts of interest income and expense and the weighted average interest
rates for the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994 YEAR ENDED DECEMBER 31, 1993
--------------------------------- --------------------------------- ---------------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME AVERAGE INCOME AVERAGE INCOME
BALANCE(1) RATE OR EXPENSE BALANCE(2) RATE OR EXPENSE BALANCE(2) RATE OR EXPENSE
----------- ----- ---------- ----------- ----- ---------- ----------- ----- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments........... $11,260,051 7.06% $ 795,444 $ 8,790,748 5.64% $ 495,556 $ 5,955,132 6.35% $ 378,084
New West Note(3)...... 723,800 8.13 58,841 2,346,753 6.01 141,039 3,894,221 6.19 241,014
Loans(4).............. 25,877,673 7.97 2,061,801 21,987,836 7.54 1,658,818 19,998,871 7.90 1,579,480
----------- ---- -------- ---------- ---- -------- ---------- ---- --------
Total
interest-earning
assets.......... 37,861,524 7.70 2,916,086 33,125,337 6.93 2,295,413 29,848,224 7.37 2,198,578
Other assets.......... 1,841,038 -- -- 1,744,338 -- -- 1,732,053 -- --
----------- ---- -------- ---------- ---- -------- ---------- ---- --------
Total assets...... $39,702,562 -- -- $34,869,675 -- -- $31,580,277 -- --
=========== ==== ======== ========== ==== ======== ========== ==== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Checking accounts... $ 2,389,793 1.20 $ 28,672 $ 2,424,250 1.22 29,530 $ 2,308,229 1.47 $ 34,019
Savings and money
market
accounts.......... 6,648,539 3.94 261,958 6,107,997 2.74 167,091 6,174,860 2.82 174,437
Time deposits....... 15,242,445 5.54 844,188 14,557,602 4.51 656,045 14,600,232 4.52 659,722
----------- ---- -------- ---------- ---- -------- ---------- ---- --------
Total
deposits.... 24,280,777 4.67 1,134,818 23,089,849 3.69 852,666 23,083,321 3.76 868,178
Borrowings:
Annuities........... 801,129 5.58 44,716 734,969 4.51 33,143 629,636 5.92 37,258
Federal funds
purchased......... 305,468 5.30 16,188 -- -- -- -- -- --
Securities sold
under agreements
to
repurchase........ 7,749,929 6.23 482,698 4,328,894 4.68 202,677 2,176,260 3.62 78,853
Advances from the
FHLB.............. 3,482,200 5.81 202,422 3,962,913 5.38 213,259 3,148,089 6.18 194,631
Other
interest-bearing
liabilities....... 558,320 7.63 42,594 397,307 8.46 33,613 403,942 8.16 32,976
----------- ---- -------- ---------- ---- -------- ---------- ---- --------
Total
borrowings... 12,897,046 6.11 788,618 9,424,083 5.12 482,692 6,357,927 5.41 343,718
----------- ---- -------- ---------- ---- -------- ---------- ---- --------
Total
interest-bearing
liabilities..... 37,177,823 5.17 1,923,436 32,513,932 4.11 1,335,358 29,441,248 4.12 1,211,896
Other liabilities..... 367,702 -- -- 458,350 -- -- 463,052 -- --
----------- ---- -------- ---------- ---- -------- ---------- ---- --------
Total
liabilities..... 37,545,525 -- -- 32,972,282 -- -- 29,904,300 -- --
Stockholders'
equity.............. 2,157,037 -- -- 1,897,393 -- -- 1,675,977 -- --
----------- ---- -------- ---------- ---- -------- ---------- ---- --------
Total liabilities
and
stockholders'
equity.......... $39,702,562 -- -- $34,869,675 -- -- $31,580,277 -- --
=========== ==== ======== ========== ==== ======== ========== ==== ========
Net interest spread
and net interest
income.............. 2.53% $ 992,650 2.82% $ 960,055 3.25% $ 986,682
=========== ==== ======== ========== ==== ======== ========== ==== ========
Net interest margin... 2.62% 2.90% 3.31%
</TABLE>
- ---------------
(1) Average balances were calculated on a monthly basis. Due to the relative
consistency of the Company's asset and liability balances during 1995, the
average balances calculated on a monthly basis approximate the average
balances calculated on a daily basis and were representative of the
Company's operations in 1995.
(2) Average balances were calculated on a daily basis for Keystone Holdings
balances and were calculated on a monthly basis for Washington Mutual. Due
to the relative consistency of the Company's asset and liability balances
during 1994 and 1993, the average balances calculated on a monthly basis
approximate the average balances calculated on a daily basis and were
representative of the Company's operations in 1994 and 1993.
(3) See "Supplemental Consolidated Financial Statements -- Note 8: Note
Receivable."
(4) Nonaccruing loans were included in the average loan amounts outstanding.
26
<PAGE> 29
The following table presents certain information regarding changes in
interest income and interest expense of the Company during the periods
indicated. The dollar amounts of interest income and interest expense fluctuate
depending upon the changes in the respective interest rates and upon changes in
the respective amounts (volume) of the Company's interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to: (i) changes in volume (changes in average outstanding balances multiplied by
the prior period's rate) and (ii) changes in rate (changes in average interest
rate multipled by the prior period's rate). Changes in rate/volume (changes in
rate times the change in volume) are allocated proportionately to the changes in
volume and the changes in rate.
<TABLE>
<CAPTION>
1995 VS. 1994 1994 VS. 1993
----------------------------------------- -----------------------------------------
INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE
TO TO
------------------------- TOTAL ------------------------- TOTAL
VOLUME(1) RATE CHANGE VOLUME(2) RATE CHANGE
-------- -------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Investments................... $157,735 $142,153 $299,888 $153,638 $ (36,166) $117,472
New West Note................. (167,731) 85,533 (82,198) (93,190) (6,785) (99,975)
Loans(3)...................... 305,959 97,024 402,983 144,295 (64,957) 79,338
-------- -------- ------- -------- --------- --------
Total interest income..... 295,963 324,710 620,673 204,743 (107,908) 96,835
INTEREST EXPENSE
Deposits:
Checking accounts........... (417) (441) (858) 1,831 (6,320) (4,489)
Savings and money market
accounts.................. 15,877 78,990 94,867 (1,874) (5,472) (7,346)
Time deposits............... 32,067 156,076 188,143 (1,924) (1,753) (3,677)
-------- -------- ------- -------- --------- --------
Total deposit expense..... 47,527 234,625 282,152 (1,967) (13,545) (15,512)
Borrowings:
Annuities................... 3,178 8,395 11,573 9,745 (13,860) (4,115)
Federal funds purchased..... 16,188 -- 16,188 -- -- --
Securities sold under
agreements
to repurchase............. 197,482 82,539 280,021 95,589 28,235 123,824
Advances from the FHLB...... (31,996) 21,159 (10,837) 37,304 (18,676) 18,628
Other....................... 11,855 (2,874) 8,981 (525) 1,162 637
-------- -------- ------- -------- --------- --------
Total borrowing expense... 196,707 109,219 305,926 142,113 (3,139) 138,974
-------- -------- ------- -------- --------- --------
Total interest expense.... 244,234 343,844 588,078 140,146 (16,684) 123,462
-------- -------- ------- -------- --------- --------
Net interest income........... $ 51,729 $(19,134) $ 32,595 $ 64,597 $ (91,224) $(26,627)
======== ======== ======= ======== ========= ========
</TABLE>
- ---------------
(1) Average balances in 1995 were calculated on a monthly basis. Due to the
relative consistency of the Company's asset and liability balances during
1995, the average balances calculated on a monthly basis approximate the
average balances calculated on a daily basis and were representative of the
Company's operations in 1995.
(2) Average balances were calculated on a daily basis.
(3) Nonaccruing loans were included in the average loan amounts outstanding.
Other Income. Other income was $208.3 million in 1995, down from $220.8
million in 1994 and $246.6 million in 1993. Other income has declined in each of
the years presented, primarily due to one-time gains that were recorded in 1993
and to a lesser extent in 1994. Other income in 1993 included $75.1 million in
gain on the sales of loans and other assets. The significant level of gain on
sales of assets during 1993 largely resulted from asset restructurings to
accommodate the acquisition of Pacific First. In addition, a large number of
loans were sold during 1993 as a result of high 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.
27
<PAGE> 30
Other income consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Depositor fees..................................... $ 79,017 $ 45,255 $ 39,872
Loan servicing fees................................ 29,315 23,247 20,569
Other service fees................................. 49,679 65,248 71,921
Other operating income............................. 31,035 39,630 39,082
Gain on sale of loans, inclusive of write-downs.... 1,717 23,488 25,266
Gain (loss) on sale of other assets, inclusive of
write-downs...................................... (655) 23,926 49,866
Loss on sale of covered assets..................... (37,399) -- --
Effect of FDIC assistance payment.................. 55,630 -- --
-------- -------- --------
Total other income............................... $208,339 $220,794 $246,576
======== ======== ========
</TABLE>
Depositor fees of $79.0 million in 1995 increased substantially from fees
of $45.3 million in 1994 and $39.9 million in 1993. The increase in depositor
fees reflected substantial account growth coupled with a revised fee structure
for certain deposit services. The primary component of this growth was
noninterest-bearing checking accounts, considered the core accounts of consumer
banking. Checking accounts are an attractive means of providing low-cost
deposits, producing added fee income and generating opportunities to sell the
Company's other products and services.
Loan servicing fees were $29.3 million in 1995, up from $23.2 million in
1994. The balance of mortgage servicing rights also increased during this period
to $104.5 million at December 31, 1995, from $70.9 million a year earlier. This
higher level of loan servicing fees recognized and capitalized servicing rights
both reflected an increase in the amount of loans serviced for others and the
implementation of SFAS No. 122 in 1995 by ASB. The portfolio of loans serviced
for others increased to $21.4 billion at December 31, 1995, from $15.3 billion
at the end of 1994 as a result of the purchase of servicing rights on $4.2
billion of loans and the securitization and sale of residential loans. During
1994, the Company purchased the rights to service $3.9 billion of ARMs and sold
servicing rights relating to $1.9 billion of its fixed-rate loan portfolio.
Loan servicing fees consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loan servicing income.............................. $ 53,155 $ 43,665 $ 47,652
Amortization of mortgage servicing rights.......... (23,840) (20,418) (27,083)
-------- -------- --------
Loan servicing fees.............................. $ 29,315 $ 23,247 $ 20,569
======== ======== ========
</TABLE>
Mortgage servicing rights, net of amortization and the valuation allowance,
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year......................... $ 70,911 $ 66,031 $ 77,945
Additions........................................ 58,306 38,385 21,446
Sales............................................ -- (13,087) --
Amortization..................................... (23,840) (20,418) (27,083)
Valuation allowance.............................. (882) -- (6,277)
-------- -------- --------
Balance, end of year............................... $104,495 $ 70,911 $ 66,031
======== ======== ========
</TABLE>
The principal components of other service fees consist of service fees
generated by the Company's nonbanking subsidiaries. Nonbanking service fees
totaled $24.8 million in 1995, down from $37.9 million in
28
<PAGE> 31
1994 and $43.1 million in 1993, primarily due to declining sales of securities
products and the March 1995 sale of Mutual Travel. Due to the drop in nonbanking
service fees, other service fees in 1995 totaled $49.7 million, compared with
$65.2 million in 1994 and $71.9 million in 1993.
The gain on sale of loans, inclusive of write-downs on mortgage servicing
rights, totaled $1.7 million in 1995, compared with $23.5 million in 1994 and
$25.3 million in 1993. During 1994, a $25.0 million gain was realized on the
sale of the Company's credit card portfolio with a book value of $151.9 million.
Except as noted above, sales activity in 1995 and 1994 was minimal as Washington
Mutual retained or securitized most of its loan production. During 1993, gains
of $31.4 million were earned on a sales volume of $1.8 billion, but prepayment
activity required a write-down of mortgage servicing rights of $6.1 million.
During 1995, the net loss of $655,000 on the sale of other assets,
inclusive of write-downs, was primarily due to an $8.4 million write-down
recorded due to credit quality deterioration on certain MBS partially offset by
gains generated through the sale of fixed-rate MBS. Included in gains on the
sale of other assets in 1994 of $23.9 million was the recognition of a $20.4
million gain on the sale of mortgage servicing rights related to the sale of
$1.9 billion of loans serviced for others. Adjustments to Washington Mutual's
balance sheet to accommodate the acquisition of Pacific First were responsible
for approximately half of the $49.9 million in gains on the sale of other assets
during 1993. During this restructuring, Washington Mutual primarily sold MBS to
reduce the preacquisition size of its balance sheet. The balance of the 1993
gain included a $23.0 million gain resulting from a transaction among ASB, New
West and their affiliates and the FDIC and the Resolution Trust Corporation (the
"RTC"), which served to modify a number of the credit support and other
arrangements that had been put in place at the time of the 1988 Acquisition.
Other income for the year ended December 31, 1995 included $18.2 million,
net, related to the sale of certain assets by ASB. These assets, single-family
residential loans, were acquired by ASB in the 1988 Acquisition and were
designated by relevant agreements as covered assets. The loss on the sale of the
covered assets was offset by a payment received during the same year from the
FRF representing compensation, under the terms of the 1988 Acquisition, for the
remaining value of such covered assets computed in accordance with the
Assistance Agreement (as defined below).
Other Expense. Total other expense of $700.5 million in 1995 increased
slightly, compared with $695.5 million in 1994 and $687.5 million in 1993.
Between 1993 and 1994, WMB's expenses increased by $20.4 million due to
increased operations and number of financial centers. Partially offsetting this
increase were efficiency measures taken at ASB, which reduced its operating
expenses by $12.4 million. Washington Mutual's efficiency ratio was 58.3 percent
for 1995 versus 58.9 percent for 1994 and 55.7 percent for 1993. The increase in
the efficiency ratio from 1993 to 1994 was a result of a decrease in net
interest income.
Other expense consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salaries and employee benefits..................... $313,304 $315,424 $316,929
Occupancy and equipment............................ 111,381 102,403 106,419
Regulatory assessments............................. 54,909 54,887 52,444
Data processing fees............................... 36,538 33,862 35,613
Other operating expense............................ 145,394 146,463 132,178
Amortization of goodwill and other intangible
assets........................................... 28,306 29,076 24,690
Real estate owned operations, inclusive of
write-downs...................................... 10,682 13,402 19,246
-------- -------- --------
Total other expense.............................. $700,514 $695,517 $687,519
======== ======== ========
</TABLE>
At year-end 1995, the Company had full-time equivalent employees of 7,903,
virtually unchanged from 7,915 at the end of 1994, and from 7,889 at the end of
1993.
The increase in occupancy and equipment expense to $111.4 million in 1995
from $102.4 million in 1994 and $106.4 million in 1993 was primarily due to the
growth in the number of financial centers, an expansion of
29
<PAGE> 32
head office facilities and technology upgrades. The decrease between 1993 and
1994 resulted from efficiency measures at ASB, which more than offset general
increases at the rest of the Company.
Regulatory assessments totaled $54.9 million in both 1995 and 1994,
compared with $52.4 million in 1993. Although total deposits outstanding
increased in 1995, the increase in deposit balances was offset by a reduction in
the premium rate for BIF-insured deposits. The expense increase in 1994 was
primarily the result of the increase in total deposits outstanding.
Other operating expense (including data processing fees) increased to
$181.9 million in 1995 from $180.3 million (inclusive of a $5.0 million expense
for a legal settlement) in 1994 and $167.8 million in 1993. See "-- Nonbanking
Subsidiary Operations." Other operating expenses tend to rise with the increased
size of the Company.
Goodwill and other intangible assets have resulted from business
combinations accounted for as purchase transactions. Goodwill and other
intangible assets are amortized using the straight-line method over the period
that is expected to be benefited. The acquisition of Pacific First in the second
quarter of 1993 was the most significant of such business combinations and
resulted in the creation of $178.2 million in goodwill and other intangible
assets to be amortized over 10 years. The amortization of goodwill and other
intangible assets was $28.3 million in 1995, compared with $29.1 million in 1994
and $24.7 million in 1993.
The reduction in expense from real estate owned ("REO") operations is
generally attributable to a decline in the provision for REO losses, which were
$10.5 million, $15.5 million and $26.9 million in 1995, 1994, and 1993,
respectively. See "-- Asset Quality -- Provision for Loan Losses and Reserve for
Loan Losses."
Extraordinary Items. In 1993, Washington Mutual redeemed for cash all
$40.0 million in principal of its 10.50 percent subordinated capital notes due
March 15, 1999 for an after-tax charge of $1.6 million. Also during 1993,
Washington Mutual prepaid advances from the Federal Home Loan Bank ("FHLB") of
Seattle totaling $432.6 million for an after-tax charge of $7.4 million.
Taxation. Income taxes include federal income taxes and applicable state
income taxes. See "Business -- Taxation."
As a result of the Budget Act, which was signed into law on August 10,
1993, the corporate tax rate increased to 35 percent effective January 1, 1993.
Washington Mutual was also required under the Budget Act to report certain
securities and other assets at fair market value effective January 1, 1993. This
rule, however, has not had a material effect on the income tax provision of the
Company.
In connection with the 1988 Acquisition, the Internal Revenue Service
entered into a closing agreement (the "Closing Agreement") with respect to the
federal income tax consequences of the 1988 Acquisition and certain aspects of
the taxation of Keystone Holdings and certain of its affiliates. The Closing
Agreement contains provisions that are intended to ensure that losses generated
by New West would be available to offset income of ASB for federal income tax
purposes. In connection with the 1988 Acquisition, Keystone Holdings and certain
of its affiliates entered into a number of continuing agreements with the
predecessor to the FRF, which agreements were designed, in part, to provide that
over time 75 percent of most of the federal income tax savings and 19.5 percent
of most of the California tax savings (in each case computed in accordance with
specific provisions contained in the Assistance Agreement between Keystone
Holdings and the predecessors to the FRF (the "Assistance Agreement") in
connection with the 1988 Acquisition) would be paid by Keystone Holdings to New
West for the benefit of the FRF. The provision for such payments is reflected in
the financial statements as "payments in lieu of taxes." See
"Business -- Tax-Related Agreements -- Assistance Agreement." Due to the above
arrangements, the Company's effective tax rate (including payments in lieu of
taxes) for the three years ended December 31, 1995 has ranged from approximately
28 percent to 30 percent, compared to a normal corporate tax rate of 35 percent.
In February 1992, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 109, Accounting for Income Taxes, which changed the accounting
principles governing accounting for income taxes. The statement requires the use
of the liability method in accounting for income taxes and eliminates on
30
<PAGE> 33
a prospective basis the former exception from the provision of deferred income
taxes on thrift bad debt reserves. The change was implemented in 1992 for ASB
and during the first quarter of 1993 for Washington Mutual (without regard to
ASB). The change resulted in an after-tax cumulative positive adjustment to
earnings of $60.0 million in 1992 and $13.4 million in 1993.
NONBANKING SUBSIDIARY OPERATIONS. For a description of the Company's
principal nonbanking subsidiaries, see "Business -- Washington Mutual's
Operating Subsidiaries."
Nonbanking subsidiary results of operations were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- ---------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
WM Life Insurance Co........................... $11,832 $10,912 $14,292 $12,482 $ 9,900
ASB Financial Services, Inc.................... 10,027 7,850 10,599 11,245 14,089
Composite Research & Management Co............. 2,516 2,095 2,967 2,854 2,539
ASB Insurance Agency, Inc...................... 1,438 441 1,100 -- --
Murphey Favre, Inc............................. 561 442 437 (2,249) 4,334
Mutual Travel, Inc............................. -- 229 229 1,178 1,266
Other.......................................... 4,478 (654) (644) (23) 39
------- ------- ------- ------- -------
Net income before amortization of goodwill and
other intangible assets, elimination of
intercompany transactions, and income
taxes........................................ 30,852 21,315 28,980 25,487 32,167
Amortization of goodwill and other intangible
assets....................................... 105 749 932 1,501 1,874
------- ------- ------- ------- -------
Net income before elimination of intercompany
transactions and income taxes................ $30,747 $20,566 $28,048 $23,986 $30,293
======= ======= ======= ======= =======
</TABLE>
Nine Months Ended September 30, 1996 Compared With Nine Months Ended
September 30, 1995. Operating income (net income before amortization of goodwill
and other intangible assets, elimination of intercompany transactions and income
taxes) for the nine months ended September 30, 1996 was $30.9 million, compared
with $21.3 million for the same period in 1995.
WM Life improved its pretax operating income to $11.8 million for the first
nine months of 1996, from $10.9 million in the same period of 1995. Most of the
increase in WM Life pretax operating income was due to higher net interest
income resulting from growth in net interest-earning assets.
ASB Financial had pretax operating income of $10.0 million for the nine
months ended September 30, 1996, an increase of 27 percent, compared with $7.9
million for the same period last year, primarily as a result of greater
securities sales.
Composite Research's pretax operating income improved slightly to $2.5
million during for the first nine months of 1996 from $2.1 million during the
same period in 1995. At September 30, 1996, Composite Research's assets under
management totaled $1.3 billion.
Pretax operating income for ASB Insurance for the nine months ended
September 30, 1996 totaled $1.4 million, compared with $441,000 for the same
period in 1995. ASB Insurance began operations in 1995.
Murphey Favre posted pretax operating income of $561,000 for the first nine
months of 1996, compared with $442,000 during the same period in 1995. During
1996, Murphey Favre recorded a $1.7 million charge resulting from a legal
settlement with residents of Montana related to the sale by Murphey Favre
between 1987 and 1990 of bonds issued by Homestead Savings of Millbrae,
California.
The results of operations during the first nine months of 1996 for other
nonbanking subsidiaries included the recognition of a previously deferred gain
of $4.1 million on the 1995 sale of Mutual Travel.
For the Three Years Ended December 31, 1995. Operating income was $29.0
million in 1995, compared with $25.5 million in 1994 and $32.2 million in 1993.
31
<PAGE> 34
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.
Higher sales commissions and salaries expense, related to higher securities
commission revenues, resulted in a decrease in pretax operating income at ASB
Financial in 1995 from $11.2 million in 1994 to $10.6 million in 1995. 1994
pretax operating income was reduced from the 1993 levels of $14.1 million
primarily as a result of declining securities commission revenue.
Composite Research's financial performance has remained steady during the
past three years, with pretax operating income rising slightly to $3.0 million
in 1995 from $2.9 million in 1994 and $2.5 million in 1993. Assets of the
Composite Group of mutual funds, managed by Composite Research, were $1.3
billion at December 31, 1995, $1.1 billion at year-end 1994 and $1.3 billion at
December 31, 1993. Although there has been a net outflow of investor funds, the
differences in asset balances are primarily due to fluctuations in market
valuation of the mutual fund assets.
In 1995, its first year of operations, pretax operating income for ASB
Insurance totaled $1.1 million.
Lower sales reduced pretax operating income for Murphey Favre to $437,000
in 1995. The pretax net loss of $2.2 million in 1994 resulted primarily from the
$5.0 million expense of a legal settlement related to the sale by Murphey Favre
between 1987 and 1990 of bonds issued by Homestead Savings of Millbrae,
California. Murphey Favre earned $4.3 million on a pretax basis during 1993.
The 1994 pretax operating income of Mutual Travel was $1.2 million,
compared with $1.3 million in 1993. In March 1995, Washington Mutual sold Mutual
Travel to a company whose principal shareholders were Mutual Travel's management
team. The sales price resulted in a pretax gain of $4.1 million, which was
recognized in 1996.
REVIEW OF FINANCIAL POSITION
ASSETS. At September 30, 1996, the Company's assets were $43.7 billion, an
increase of 4 percent from $42.0 billion at December 31, 1995. During 1995,
total assets grew $4.5 billion to end the year at $42.0 billion. At December 31,
1994, total assets were $37.5 billion, an increase of $3.9 billion from December
31, 1993. Most of the growth during 1994, 1995 and 1996 resulted from retaining
originated loans (either as part of the loan portfolio or as MBS). Growth in
assets is limited by management's decision to maintain all of its banks at a
"well-capitalized" level.
INVESTMENT ACTIVITIES. Washington Mutual's investment portfolio at
September 30, 1996 was carried at $13.1 billion, a 15 percent decrease from the
December 31, 1995 balance of $15.4 billion. During the first nine months of
1996, the Company continued the restructuring of its investment portfolio by
selling fixed-rate securities and replacing them with adjustable-rate
securities. This portfolio restructuring was intended to reduce Washington
Mutual's sensitivity to changes in market interest rates. As noted above,
however, the portfolio restructuring also contributed to a decline in the yield
on interest-earning investment securities. See "-- Net Interest Income."
At September 30, 1996, the Company's investment portfolio included $10.1
billion of available-for-sale securities, $3.0 billion of held-to-maturity
securities (with a fair value of $3.0 billion), and $2.2 million of trading
account securities. MBS constituted $11.6 billion or 89 percent of the total
investment portfolio.
The Company's investment portfolio increased 77 percent to $15.4 billion at
December 31, 1995 from $8.7 billion a year, primarily due to the Company's
retention of $6.6 billion of loans which it securitized. Also in 1995, as in
1994, Washington Mutual leveraged its capital through purchases of investment
securities. These purchases were funded mostly through borrowings. By leveraging
the balance sheet through the use of these wholesale activities, Washington
Mutual generated additional net interest income.
32
<PAGE> 35
At December 31, 1995, the Company's investment portfolio included $12.2
billion of available-for-sale securities, $3.2 billion of held-to-maturity
securities (with a fair value of $3.3 billion), and $238,000 of trading account
securities. During 1995, the FASB issued a report entitled A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities, Questions and Answers which allowed companies a one-time
reassessment and related reclassification from the held-to-maturity category to
the available-for-sale category without adverse accounting consequences for the
remainder of the portfolio. Pursuant to the FASB report, Washington Mutual
reclassified $4.9 billion of its held-to-maturity securities into the
available-for-sale category on December 1, 1995. Of the securities transferred,
over half were fixed-rate securities. During 1994, there were no transfers
between the available-for-sale and held-to-maturity portfolios, nor were there
any sales from the held-to-maturity portfolio. See "Business -- Asset and
Liability Management."
LOANS. Total loans outstanding, including loans held for sale, at
September 30, 1996 were $28.5 billion, up from $24.2 billion at December 30,
1995 and $25.5 billion at year-end 1994. Changes in the loan balances are
primarily driven by originations of new loans, prepayments of existing loans,
scheduled repayments of principal, and loan securitizations.
Loans originated by product line consisted of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1996 1995 1995 1994 1993
----------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate:
Residential (1-4 family units):
Fixed rate........................ $ 2,772,973 $1,363,634 $2,365,603 $1,040,035 $3,972,550
Adjustable-rate................... 4,557,338 3,233,001 4,455,740 5,288,231 3,173,748
Residential construction............ 973,432 674,208 935,827 1,034,176 847,217
Apartment buildings................. 352,811 245,495 348,942 618,201 674,672
Other commercial real estate........ 183,416 115,701 166,987 136,749 164,435
----------- ---------- ---------- ---------- ----------
Total real estate loans...... 8,839,970 5,632,039 8,273,099 8,117,392 8,832,622
Consumer:
Second mortgage and other
consumer.......................... 689,425 539,318 722,871 776,176 768,666
Manufactured housing................ 251,678 207,047 274,115 277,358 210,819
----------- ---------- ---------- ---------- ----------
Total consumer loans......... 941,103 746,365 996,986 1,053,534 979,485
Commercial business................... 258,634 119,784 167,830 128,539 103,722
----------- ---------- ---------- ---------- ----------
Total loans originated....... $10,039,707 $6,498,188 $9,437,915 $9,299,465 $9,915,829
=========== ========== ========== ========== ==========
Residential refinances to total
residential originations............ 40.83% 38.09% 42.14% 48.31% 76.68%
</TABLE>
In 1993 and early 1994, the Company's originations included significant
refinancing activity that was generated by low market interest rates. Higher
interest rates in 1994 curtailed refinancing activity for the year and resulted
in an increase in residential adjustable-rate originations compared to
residential fixed-rate originations. As a consequence of higher interest rates,
total lending volumes in 1994 were below those in 1993. Refinancings increased
again during the second half of 1995 as market interest rates declined. The
decline in apartment building originations from 1994 to 1995 was due to a
management decision at ASB to reduce lending volumes in that product line.
DEPOSITS. Total deposits decreased to $24.0 billion at September 30, 1996
from $24.5 billion at December 31, 1995. Time deposits at WMB were allowed to
run off because management chose not to be as aggressive in the repricing of
time deposits. Partially offsetting the $795.8 million decline in time deposits
were increases in the level of money market and checking accounts. Both of these
products have the benefit of lower interest costs. Total deposits increased to
$24.5 billion at December 31, 1995, from $23.3 billion at December 31, 1994.
33
<PAGE> 36
While the vast majority of deposits are retail in nature, the Company does
engage in certain wholesale activities -- primarily accepting time deposits from
political subdivisions and public agencies. The Company considers wholesale
deposits to be an alternative borrowing source rather than a customer
relationship, and as such, their levels are determined by management's decisions
as to the most economic funding sources.
The following table sets forth information relating to deposit flows, total
deposits and the weighted average interest rate on deposit accounts:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------- -------------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Decrease due to deposit outflow... $(1,283,490) $ (592,633) $ (432,942) $(1,236,514) $(1,912,765)
Increase due to acquired
deposits........................ -- 417,078 417,078 211,537 3,831,700
Increase due to interest
credited........................ 799,045 842,413 1,134,818 852,666 868,178
----------- ----------- ----------- ----------- -----------
Increase (decrease) in total
deposits...................... $ (484,445) $ 666,858 $ 1,118,954 $ (172,311) $ 2,787,113
=========== =========== =========== =========== ===========
Total deposits at end of period... $23,978,515 $24,010,864 $24,462,960 $23,344,006 $23,516,317
Weighted average rate for the
period.......................... 4.43% 4.67% 4.69% 3.69% 3.76%
</TABLE>
BORROWINGS. Washington Mutual's borrowings primarily take the form of
federal funds purchased, securities sold under agreements to repurchase and
advances from the FHLB of Seattle and San Francisco. These borrowing sources
totaled $1.0 billion, $8.6 billion and $5.5 billion, respectively, at September
30, 1996, compared with $433.4 million, $8.0 billion and $4.7 billion,
respectively, at year-end 1995. At December 31, 1994, the Company had $6.6
billion of securities sold under agreements to repurchase, $4.1 billion of
advances from the FHLB of Seattle and San Francisco and no federal funds
purchased. See "Business -- Sources of Funds -- Borrowings and Annuities."
ASSET QUALITY
PROVISION FOR LOAN LOSSES AND RESERVE FOR LOAN LOSSES.
Nine Months Ended September 30, 1996 Compared With Nine Months Ended
September 30, 1995. The provision for loan losses is based upon management's
estimate of the amount necessary to maintain adequate reserves for losses
inherent in the Company's loan portfolio. The estimate of inherent losses is
developed by considering a number of factors, including matters pertinent to the
underlying quality of the loan portfolio and management's policies, practices
and intentions with respect to credit administration and asset management. The
provision for loan losses for the nine months ended September 30, 1996 was $58.1
million, which was substantially unchanged from $57.5 million for the same
period in 1995, primarily reflecting the fact that the dollar amounts of
nonperforming loans were substantially the same in both periods. The balance of
the reserve for loan losses was $234.3 million at September 30, 1996, virtually
unchanged from $235.3 million at December 31, 1995. Reserves charged off, net of
recoveries, totaled $59.1 million for the nine months ended September 30, 1996,
compared with $69.3 million for the same period in 1995.
34
<PAGE> 37
Changes in the reserve for loan losses were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
---------------------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance, beginning of period..................................... $235,275 $244,989
Provision for loan losses........................................ 58,138 57,540
Reserves added through business combinations..................... -- 5,372
Reserves charged-off:
Residential.................................................... (40,387) (42,670)
Residential construction....................................... (14) (112)
Commercial real estate......................................... (17,636) (26,163)
Manufactured housing, second mortgage and other consumer....... (6,583) (5,906)
Commercial business............................................ (296) (283)
-------- --------
(64,916) (75,134)
Reserves recovered:
Residential.................................................... 3,323 1,763
Residential construction....................................... -- 47
Commercial real estate......................................... 1,886 3,093
Manufactured housing, second mortgage and other consumer....... 580 715
Commercial business............................................ 55 255
-------- --------
5,844 5,873
-------- --------
Balance, end of period........................................... $234,341 $238,640
======== ========
Net charge-offs as a percentage of average loans................. 0.22% 0.27%
Reserve for loan losses as a percentage of:
Nonperforming loans............................................ 108.33 119.89
Nonperforming assets........................................... 72.53 71.68
</TABLE>
As part of the process of determining the adequacy of the reserve for loan
losses, management reviews its loan portfolio for specific weaknesses. A portion
of the reserve is then allocated to reflect the identified loss exposure. The
September 30, 1996 analysis of residential construction, commercial real estate
and commercial business loans resulted in an allocation of $23.5 million of the
reserve. At December 31, 1995, the Company had allocated reserves of $16.6
million. The remaining reserve of $210.8 million at September 30, 1996 was
unallocated and available for potential losses from any of the Company's loans.
An analysis of the reserve for loan losses was as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Allocated reserves:
Commercial real estate................................... $ 21,682 $ 16,488
Residential construction................................. 193 158
Commercial business...................................... 1,672 --
-------------- -------------
23,547 16,646
Unallocated reserves....................................... 210,794 218,629
------------- -------------
Total reserve for loan losses......................... $234,341 $ 235,275
============== =============
</TABLE>
A reserve for REO losses is maintained for any subsequent decline in the
value of foreclosed property. The reserve for REO losses was $6.6 million at
September 30, 1996, compared with $10.1 million at December 31, 1995. The level
is based upon a routine review of the REO portfolio and the strength of national
and local economies.
35
<PAGE> 38
The Company recorded a $125.0 million addition to the reserve for loan
losses at the Effective Date. The additional reserve for loan losses was
provided principally because a number of Washington Mutual's credit
administration and asset management philosophies and procedures differed from
those of ASB. Those differences consisted principally of the following: (i)
Washington Mutual is more proactive in dealing with emerging credit problems and
tends to prefer foreclosure actions to induce borrowers to correct defaults,
whereas ASB was not as proactive and tended to prefer workouts in lieu of a more
aggressive foreclosure stance; and (ii) ASB considered the risk characteristics
of its portfolio of loans secured by apartment buildings of less than $1.0
million to be similar to its single-family residential portfolio; Washington
Mutual, on the other hand, considers the risk characteristics of that portfolio
to be more closely aligned with its commercial real estate loan portfolio, which
tends to have a higher incidence of loan losses than the single-family
residential portfolio. Washington Mutual is conforming ASB's asset management
practices, administration, philosophies and procedures to those of WMB and
WMBfsb. The plan of realization of troubled loans differed between the companies
and therefore resulted in different levels of loss reserves. The addition to the
reserve for loan losses was to a lesser degree provided because Washington
Mutual believed that, while there had been an increase in the value of
residential real estate in certain California markets, a decline in collateral
values for some portions of the California real estate market occurred in late
1996. Management of the Company has individually reviewed ASB's large performing
and nonperforming loans and performed a review of its other loan portfolios and
is developing appropriate strategies for such credits. As a result, Washington
Mutual expects that approximately one-third of the additional $125.0 million
provision will be allocated to loans in the commercial real estate loan
portfolio. The remainder is attributed to ASB's apartment building loans with
balances under $1.0 million and to various residential loan portfolios, for
which specific reserve allocations will not be recorded.
For the Five Years Ended December 31, 1995. The provision for loan losses
during 1995 was $75.0 million, compared with $122.0 million in 1994 and $158.7
million in 1993. The 1995 provision reflected a decline in the level of
nonperforming assets, particularly California residential and apartment building
real estate loans. The 1994 provision reflected a significant decline in the
levels of certain nonperforming assets, but was increased from levels otherwise
indicated by $12.5 million related to losses resulting from the Northridge,
California earthquake in January 1994
The provision for loan losses of $158.7 million during 1993 was virtually
unchanged from 1992's level of $158.5 million, but up significantly from $85.8
million during 1991. During 1991, California's general economic indicators,
including employment, consumer confidence and the value of residential real
estate, began to deteriorate. These trends continued through 1992 and 1993. In
response to these trends, the Company increased its reserve for loan losses
through the provision for loan losses during those years and tightened
underwriting standards at ASB. Management believes that the stricter
underwriting standards initiated at ASB in the latter part of 1991 and 1992 have
helped to alleviate the level of loan delinquencies, despite the recessionary
conditions that existed in California. The delinquency experience of loans
originated by ASB subsequent to 1992 has been significantly less than that of
those originated prior to 1992. Management believes that the high rate of
delinquencies in prior years' originations can be attributed to a limited
documentation program offered by ASB during 1989 and 1990 as well as the general
decline in the value of residential real estate that resulted in the
deterioration of many borrowers' equity. The loan loss provision in 1992 and
1993 was also affected by the increase in the size of the loan portfolio, and in
1993, caution about the quality of the loans acquired from Pacific First.
Integral to determining the level of the provision for loan losses in any
given year is an analysis of actual loss experience and plans for problem loan
administration and resolution. Loan charge-offs, net of recoveries for 1995,
totaled $90.1 million, which was less than the level of net charge-offs of
$123.0 million in 1994, $139.3 million in 1993, and $114.7 million in 1992. The
downward trend in residential delinquencies over the past two years resulted in
reduced charge-offs and declines in the overall provision for loan losses during
1995. Charge-offs on loans secured by commercial real estate were relatively
higher in 1995 than in prior years. Although charge-offs have increased,
commercial real estate delinquencies as a percentage of the total commercial
real estate loan portfolio have declined significantly, contributing to the
lower overall provision for loan losses. At year-end 1992, commercial credits,
which consisted primarily of high-yield bonds, declined to
36
<PAGE> 39
$14.0 million from $22.2 million at the end of the previous year. This decline
was mostly due to $6.6 million in sales during the year. However, by the end of
1992, nonperforming assets in this portfolio had increased to $8.5 million from
$360,000 one year earlier. This increase in nonperforming credits was
anticipated by management and was considered in the 1991 analysis of the reserve
for loan losses. During 1991, a major portion of net charge-offs were the result
of losses on commercial credits. The Company's exposure to commercial credits
has declined significantly in recent years.
Changes in the reserve for loan losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year.................. $244,989 $245,062 $179,612 $130,423 $ 94,523
Provision for loan losses................... 74,987 122,009 158,728 158,537 85,807
Reserves added through business
combinations.............................. 5,372 921 46,000 5,321 573
Reserves charged-off:
Residential............................... (57,147) (89,637) (93,799) (77,815) (14,074)
Residential construction.................. (125) (190) (297) (937) (139)
Commercial real estate.................... (33,149) (26,835) (26,967) (19,377) (7,624)
Manufactured housing, second mortgage and
other consumer......................... (6,888) (10,544) (16,964) (17,017) (13,055)
Commercial business/credits............... (813) (2,065) (3,065) (1,321) (18,544)
-------- -------- -------- -------- --------
Total reserves charged off........ (98,122) (129,271) (141,092) (116,467) (53,436)
Reserves recovered:
Residential............................... 2,393 2,522 45 17 36
Residential construction.................. 47 -- -- -- 314
Commercial real estate.................... 4,426 2,186 889 571 598
Manufactured housing, second mortgage and
other consumer......................... 701 1,117 768 313 315
Commercial business/credits............... 482 443 112 897 1,693
-------- -------- -------- -------- --------
Total reserves recovered.......... 8,049 6,268 1,814 1,798 2,956
-------- -------- -------- -------- --------
Balance, end of year........................ $235,275 $244,989 $245,062 $179,612 $130,423
======== ======== ======== ======== ========
Net charge-offs as a percentage of average
loans..................................... 0.35% 0.56% 0.70% 0.69% 0.34%
</TABLE>
As part of the process of determining the adequacy of the reserve for loan
losses, management reviews the loan portfolio for specific weaknesses. A portion
of the reserve is then allocated to reflect the identified loss exposure.
Residential real estate and consumer loans are not individually analyzed for
impairment and loss exposure because of the significant number of loans and
their relatively small individual balances. Residential construction, commercial
real estate and commercial business loans with balances over $1.0 million were
evaluated individually for impairment, which resulted in an allocation of $16.6
million of the reserve for loan losses at year-end 1995, compared with an
allocation of $21.4 million a year earlier. Contributing to the decline was a
reduction in the level of allocated reserves related to commercial real estate
in California.
Unallocated reserves are established for loss exposure that may exist in
the remainder of the loan portfolio but has yet to be identified. In determining
the adequacy of unallocated reserves, management considers changes in the size
and composition of the loan portfolio, actual historical loan loss experience,
and current and anticipated economic conditions.
37
<PAGE> 40
An analysis of the reserve for loan losses was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allocated reserves:
Commercial real estate.................... $ 16,488 $ 20,025 $ 22,833 $ 22,496 $ 5,736
Residential construction.................. 158 1,327 1,503 1,219 1,901
Commercial business/credits............... -- -- 1,718 5,597 10,064
-------- -------- -------- -------- --------
Total allocated reserves.......... 16,646 21,352 26,054 29,312 17,701
Unallocated reserves........................ 218,629 223,637 219,008 150,300 112,722
-------- -------- -------- -------- --------
Total loan loss reserves.......... $235,275 $244,989 $245,062 $179,612 $130,423
======== ======== ======== ======== ========
Total reserve for loan losses as a
percentage of:
Nonperforming loans.................... 110.04% 87.22% 72.74% 54.58% 45.60%
Nonperforming assets................... 69.42 58.52 46.91 31.98 30.37
</TABLE>
CLASSIFIED ASSETS The following table sets forth the Company's classified
assets, which consist of nonaccrual loans, loans under foreclosure, REO and
performing loans (including substandard troubled debt restructurings) and
securities that exhibit credit quality weaknesses. When and if loans sold on a
recourse basis are nonperforming, they are included in nonaccrual loans. See
"Supplemental Consolidated Financial Statements -- Note 1: Summary of
Significant Accounting Policies."
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
1996 1995 1994
------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans and loans under foreclosure................. $ 216,325 $213,802 $280,899
REO.......................................................... 106,748 125,101 137,767
-------- -------- --------
Total nonperforming assets......................... 323,073 338,903 418,666
Troubled debt restructurings (classified as substandard)..... 87,239 85,483 54,583
Other classified assets...................................... 133,257 129,264 169,004
-------- -------- --------
Total classified assets............................ $ 543,569 $553,650 $642,253
======== ======== ========
</TABLE>
Nonperforming assets decreased to 0.74 percent of total assets at September
30, 1996 or $323.1 million, compared with $338.9 million or 0.81 percent of
total assets at December 31, 1995. Nonperforming assets decreased 19 percent to
$338.9 million at the end of 1995, from $418.7 million at the end of 1994. At
September 30, 1996, nonperforming assets in California accounted for 71 percent
of total nonperforming assets, down from 75 percent and 83 percent at the ends
of 1995 and 1994. The decline in residential nonperforming loans from 1993
through 1995 is largely a result of a tightening of underwriting standards at
ASB beginning in mid-1991. Declining market rents and occupancy rates in certain
areas of Los Angeles that were negatively affected by the economic environment
during the three years ended December 31, 1995, as well as the Los Angeles riots
in 1992 and the Northridge earthquake in January 1994, contributed to higher
charge-offs in the apartment loan portfolio in 1994 and 1995, thereby reducing
the level of nonperforming apartment loans. See " -- Provision for Loan Losses
and Reserve for Loan Losses."
38
<PAGE> 41
Nonperforming assets and troubled debt restructurings consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------------------------------------
1996 1995 1994 1993 1992 1991
------------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans and loans under
foreclosure
Real estate loans:
Residential................ $ 163,521 $158,040 $172,136 $233,618 $253,888 $232,460
Residential construction... 7,512 9,550 4,640 8,527 5,856 14,583
Apartment buildings........ 12,558 23,300 70,944 53,474 37,059 5,734
Other commercial real
estate................... 17,780 12,663 23,549 20,516 14,883 22,501
-------- -------- -------- -------- -------- --------
Total real estate
loans................. 201,371 203,553 271,269 316,135 311,686 275,278
Second mortgage and other
consumer loans................ 8,972 7,502 6,969 14,783 7,218 8,192
Manufactured housing loans...... 5,033 1,923 1,643 2,207 1,571 1,680
Commercial business
loans/credits................. 949 824 1,018 3,785 8,580 867
-------- -------- -------- -------- -------- --------
Total nonperforming
loans.................... 216,325 213,802 280,899 336,910 329,055 286,017
REO, net of REO reserves........ 106,748 125,101 137,767 185,492 232,568 143,385
-------- -------- -------- -------- -------- --------
Total nonperforming
assets................... $ 323,073 $338,903 $418,666 $522,402 $561,623 $429,402
======== ======== ======== ======== ======== ========
Troubled debt restructurings.... $ 95,053 $ 90,623 $ 54,583 $ 68,670 $104,538 $ 9,131
Nonperforming assets as a
percentage of total assets.... 0.74% 0.81% 1.12% 1.55% 2.03% 1.68%
</TABLE>
Nonperforming assets by geographic concentration were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------------------------------
OTHER
CALIFORNIA WASHINGTON OREGON UTAH STATES TOTAL
-------- ---------- ------- ------ ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential......................... $122,110 $ 29,889 $ 3,933 $ 680 $ 6,909 $163,521
Residential construction............ -- 5,410 1,778 324 -- 7,512
Apartment buildings................. 12,558 -- -- -- -- 12,558
Other commercial real estate........ 10,265 4,382 499 -- 2,634 17,780
-------- ------- ------- ------ ------- --------
Total real estate loans.......... 144,933 39,681 6,210 1,004 9,543 201,371
Second mortgage and other consumer
loans............................... 1,679 3,522 1,689 29 2,053 8,972
Manufactured housing loans............ -- 2,135 1,111 115 1,672 5,033
Commercial business loans............. -- 16 750 -- 183 949
-------- ------- ------- ------ ------- --------
Total nonperforming loans........ 146,612 45,354 9,760 1,148 13,451 216,325
REO................................... 88,833 22,652 779 -- 1,120 113,384
REO reserves.......................... (6,636)
-------- ------- ------- ------ ------- --------
Total nonperforming assets....... $235,445 $ 68,006 $10,539 $1,148 $14,571 $323,073
======== ======= ======= ====== ======= ========
Nonperforming assets by state as a
percentage of total nonperforming
assets.............................. 71% 21% 3% -- 5% 100%
</TABLE>
IMPAIRED LOANS. On January 1, 1995, the Company adopted SFAS No. 114,
Accounting by Creditors for Impairment of a Loan. It is applicable to all loans
except large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment. Loans collectively evaluated for impairment include
residential real estate and consumer loans because of the significant number of
loans and their relatively small balances. All residential construction,
commercial real estate and commercial business loans over $1.0 million are
individually evaluated for impairment. Factors involved in determining
impairment include, but are not
39
<PAGE> 42
limited to, the financial condition of the borrower, the value of the underlying
collateral, and current economic conditions. SFAS No. 114 also applies to all
loans that are restructured in a troubled debt restructuring, subsequent to the
adoption of SFAS No. 114, as defined by SFAS No. 15. A troubled debt
restructuring is a restructuring in which the creditor grants a concession to
the borrower that it would not otherwise consider. At September 30, 1996, the
Company had $95.1 million of restructured loans of which $72.8 million, though
performing, were considered to be impaired. Troubled debt restructurings that
were not considered to be impaired were restructured prior to 1995 and have been
performing according to the terms of the restructure.
A loan is impaired when it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. SFAS No. 114 requires that impairment of loans be measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. The Company bases the measurement of loan impairment on the fair
value of the loan's underlying collateral. The amount by which the recorded
investment in the loan exceeds the value of the impaired loan's collateral is
included in the Company's allocated reserve for loan losses. Any portion of an
impaired loan classified as loss under regulatory guidelines is charged off.
At September 30, 1996, loans totaling $195.3 million were impaired, of
which $122.8 million had allocated reserves of $21.6 million. The remaining
$72.5 million were either nonperforming or previously written down and had no
reserves allocated to them. Of the $195.3 million of impaired loans, $36.2
million were on nonaccrual status or under foreclosure. The average balance of
impaired loans during 1996 was $189.8 million and the Company recognized $14.7
million of related interest income. Interest income is normally recognized on an
accrual basis; however, if the impaired loan is nonperforming, interest income
is then recorded on the receipt of cash.
Impaired loans and the related allocated reserve for loan losses were as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------------------
GROSS LOAN AMOUNT NET LOAN ALLOCATED
AMOUNT CHARGED-OFF AMOUNT RESERVES
---------- ----------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonaccrual loans and loans under foreclosure:
With allocated reserves........................... $ 26,853 $ 3,782 $ 23,071 $ 4,553
Without allocated reserves........................ 13,100 -- 13,100 --
-------- ------ -------- -------
39,953 3,782 36,171 4,553
Troubled debt restructurings:
With allocated reserves........................... 23,607 -- 23,607 3,605
Without allocated reserves........................ 50,197 971 49,226 --
-------- ------ -------- -------
73,804 971 72,833 3,605
Other impaired loans:
With allocated reserves........................... 76,392 290 76,102 13,454
Without allocated reserves........................ 15,016 4,844 10,172 --
-------- ------ -------- -------
91,408 5,134 86,274 13,454
-------- ------ -------- -------
Total impaired loans.............................. $205,165 $ 9,887 $195,278 $21,612
======== ====== ======== =======
</TABLE>
At December 31, 1995, loans totaling $169.1 million were impaired, of which
$91.7 million had allocated reserves of $16.6 million. The remaining $77.4
million were either nonperforming or previously written down, and had no
reserves allocated to them. Of the $169.1 million of impaired loans, $26.7
million were on nonaccrual status or under foreclosure, and $142.3 million
(including $57.1 million of troubled debt restructurings) were performing but
judged to be impaired. See "-- Asset Quality -- Classified Assets" and
"Supplemental Consolidated Financial Statements -- Note 6: Loans."
40
<PAGE> 43
Impaired loans and the related allocated reserve for loan losses were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------
GROSS LOAN AMOUNT NET LOAN ALLOCATED
AMOUNT CHARGED-OFF AMOUNT RESERVES
---------- ----------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonaccrual loans and loans under foreclosure:
With allocated reserves........................... $ 9,853 $ 1,224 $ 8,629 $ 2,192
Without allocated reserves........................ 19,226 1,113 18,113 --
-------- ------ -------- ------
29,079 2,337 26,742 2,192
Troubled debt restructurings:
With allocated reserves........................... 16,917 -- 16,917 3,115
Without allocated reserves........................ 40,733 516 40,217 --
-------- ------ -------- ------
57,650 516 57,134 3,115
Other impaired loans:
With allocated reserves........................... 66,161 33 66,128 11,339
Without allocated reserves........................ 25,665 6,600 19,065 --
-------- ------ -------- ------
91,826 6,633 85,193 11,339
-------- ------ -------- ------
Total impaired loans........................... $178,555 $ 9,486 $169,069 $16,646
======== ====== ======== ======
</TABLE>
INTEREST RATE RISK MANAGEMENT
Washington Mutual engages in a comprehensive asset and liability management
program that attempts to reduce the risk of significant decreases in net
interest income caused by interest rate changes. One of the Company's strategies
to reduce the effect of future movements in interest rates is to increase the
percentage of adjustable-rate assets in its portfolio. During the first nine
months of 1996, the Company securitized and then sold the majority of the
fixed-rate loans it originated, while retaining nearly all of its
adjustable-rate loan production. The Company retained the servicing rights to
the loans that were sold. In addition, as part of the restructuring strategy
initiated in late 1995, the Company purchased adjustable-rate assets and sold
fixed-rate mortgage-backed securities.
A conventional measure of interest rate sensitivity for thrift institutions
is the one-year gap, which is calculated by dividing the difference between
assets maturing or repricing within one year and total liabilities maturing or
repricing within one year by total assets. The Company's assets and liabilities
that mature or reprice within one year were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Interest-sensitive assets.................................... $ 29,885 $ 27,733
Derivative instruments designated against assets............. 1,750 1,825
Interest-sensitive liabilities............................... (33,858) (31,471)
Derivative instruments designated against liabilities........ 1,799 832
-------- --------
Net liability sensitivity.................................... $ (424) $ (1,081)
======== ========
One-year gap................................................. (0.97)% (2.57)%
</TABLE>
The implementation of strategies to reduce interest rate risk, however,
generally has the negative effect of lowering current period earnings. The
Company monitors its interest rate sensitivity and attempts to reduce the risk
of a significant decrease in net interest income caused by a change in interest
rates; nevertheless, rising interest rates or a flat yield curve adversely
affect the Company's operations. Management tries to balance these two factors
in administering its interest rate risk program.
As part of the asset and liability management program, the Company actively
manages the asset and liability maturities and at various times uses derivative
instruments, such as interest rate exchange agreements
41
<PAGE> 44
and interest rate cap agreements, to reduce the negative effect that rising
rates could have on net interest income. Derivative instruments, if not used
appropriately, can subject a company to unintended financial exposure.
Management, in conjunction with the Company's Board of Directors, has
established strict policies and guidelines for the use of derivative
instruments. Moreover, Washington Mutual has used these instruments for many
years to mitigate interest rate risk. Under no circumstances are these
instruments used as techniques to generate earnings by speculating on the
movements of interest rates, nor does the Company act as a dealer of these
instruments. See "Supplemental Consolidated Financial Statements -- Note 18:
Interest Rate Risk Management."
At the end of 1995, Washington Mutual's one-year gap was a negative 2.57
percent, compared to a positive 7.76 percent at the end of 1994. While the
one-year gap at December 31, 1995 on a consolidated basis is fairly neutral, the
level of interest sensitivity is not the same throughout the organization. WMB's
one-year gap was a negative 13.3 percent at the end of 1995 due in large part to
the preference of its customers for fixed-rate loan products. Management can
compensate for this preference by selling fixed-rate loans, purchasing
adjustable-rate assets, and strategically using hedging instruments, all of
which were done during 1995. Since the vast majority of interest-earning assets
at ASB are COFI ARM products, however, its one-year gap at the end of 1995 was a
positive 9.6 percent.
At September 30, 1996, interest-sensitive assets of $29.9 billion and
interest-sensitive liabilities of $33.9 billion were scheduled to mature or
reprice within one year. At September 30, 1996, the Company's one-year gap was a
negative 0.97 percent. The Company's interest rate sensitivity has decreased
with the sale of WMB's fixed-rate MBS undertaken in 1996 and the retention of
ARMs originated by ASB. It still, however, suffers from some short-term
volatility of net income because of the effect of COFI lag. Management hopes to
reduce this short-term volatility in part by increasing production of non-COFI
adjustable-rate products and short-term fixed-rate products such as consumer
loans. At September 30, 1996, the Company had entered into interest rate
exchange agreements and interest rate cap agreements with notional values of
$14.8 billion. Without these instruments, the Company's one-year gap at
September 30, 1996, would have been a negative 9.0 percent as opposed to a
negative 0.97 percent. See "Supplemental Consolidated Financial Statements --
Note 18: Interest Rate Risk Management" for a discussion of the use of
derivative instruments.
42
<PAGE> 45
Interest sensitivity analysis by maturity or repricing period for
Washington Mutual at December 31, 1995 was as follows:
<TABLE>
<CAPTION>
WITHIN WITHIN AFTER ONE AFTER TWO AFTER FIVE
0-3 4-12 BUT WITHIN BUT WITHIN BUT WITHIN AFTER
MONTHS MONTHS TWO YEARS FIVE YEARS 10 YEARS 10 YEARS TOTAL
------- ------- ---------- ---------- ---------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets:
Cash, cash equivalents, and trading
account securities(1).............. $ 1,061 $ -- $ -- $ -- $ -- $ -- $ 1,061
Available-for-sale securities(2)..... 5,284 2,457 396 1,260 1,248 1,263 11,908
Held-to-maturity securities.......... 3,025 3 1 32 66 71 3,198
Loans(3):
Real estate loans.................. 11,733 2,817 1,410 2,592 1,513 1,368 21,433
Manufactured housing, second
mortgage and other consumer...... 593 638 499 744 336 81 2,891
Commercial business................ 94 28 13 24 16 5 180
------- ------- ---------- ---------- ---------- -------- -------
Total loans................... 12,420 3,483 1,922 3,360 1,865 1,454 24,504
------- ------- ---------- ---------- ---------- -------- -------
Total interest-securities
assets...................... 21,790 5,943 2,319 4,652 3,179 2,788 40,671
Derivative instruments affecting
interest rate sensitivity:
Interest rate exchange agreements:
Designated against
available-for-sale securities.... 775 (75) (200) (500) -- -- --
Interest rate cap agreements:
Designated against
available-for-sale securities.... 1,975 (850) (875) (250) -- -- --
------- ------- ---------- ---------- ---------- -------- -------
Total effect of derivative
instruments................. 2,750 (925) (1,075) (750) -- -- --
------- ------- ---------- ---------- ---------- -------- -------
Total interest-sensitive
assets...................... 24,540 5,018 1,244 3,902 3,179 2,788 40,671
Interest-sensitive liabilities:
Deposits(4).......................... 9,799 9,895 3,017 1,495 90 159 24,455
Borrowings and other liabilities..... 10,870 907 1,165 1,473 151 14 14,580
------- ------- ---------- ---------- ---------- -------- -------
Total interest-sensitive
liabilities................. 20,669 10,802 4,182 2,968 241 173 39,035
Derivative instruments affecting rate
sensitivity:
Interest rate exchange agreements:
Designated against deposits and
short-term borrowings............ (663) (159) 485 337 -- -- --
Interest rate cap agreements:
Designated against deposits and
short-term borrowings......... (10) -- 10 -- -- -- --
------- ------- ---------- ---------- ---------- -------- -------
Total effect of derivative
instruments................. (673) (159) 495 337 -- -- --
------- ------- ---------- ---------- ---------- -------- -------
Total interest-sensitive
liabilities................. 19,996 10,643 4,677 3,305 241 173 39,035
------- ------- ---------- ---------- ---------- -------- -------
Net asset (liability)
sensitivity................. $ 4,544 $(5,625) $ (3,433) $ 597 $ 2,938 $ 2,615 $ 1,636
======== ======== ========= ========= ========= ======== ========
Cumulative net (liability) asset
sensitivity.......................... $ 4,544 $(1,081)
Cumulative net (liability) asset
sensitivity as a percentage of total
assets............................... 10.81% (2.57)%
</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 0-3 months."
43
<PAGE> 46
While the one-year gap helps provide some information about a financial
institution's interest sensitivity, it does not predict the trend of future
earnings. For this reason, Washington Mutual uses financial modeling to forecast
earnings under different interest rate projections. Although this modeling is
very helpful in managing interest rate risk, it does require significant
assumptions for the projection of loan prepayment rates, loan origination
volumes and liability funding sources that may prove to be inaccurate.
Effective January 1, 1994, Washington Mutual adopted, as required, SFAS No.
115. This statement requires investment and equity securities to be segregated
into three categories: trading, held-to-maturity and available-for-sale.
The available-for-sale portfolio is maintained as a source of investment
income as well as potential liquidity should it be necessary for the Company to
raise cash or reduce its asset size. Because the available-for-sale portfolio is
required to be carried at fair value, its carrying value fluctuates with changes
in market factors, primarily interest rates. This portfolio is substantially
composed of MBS, of which approximately 70 percent have adjustable rates and the
remainder have fixed rates. In an attempt to modify the interest flows on these
securities as well as protect against market value changes, certain interest
rate exchange agreements and interest rate cap agreements have been designated
to the available-for-sale portfolio. The effect of such agreements in a rising
interest rate environment is to shorten the effective repricing period of the
underlying assets. Specifically, as short-term interest rates increase, the
overall yield of the portfolio rises. However, the yield is constrained by
periodic and lifetime interest rate adjustment limits or caps on the underlying
adjustable-rate assets and also by the very nature of the fixed-rate assets in
the portfolio. The Company, therefore, seeks to shorten the repricing period by
entering into interest rate cap agreements that are intended to provide an
additional layer of interest rate protection against the effect of the periodic
and lifetime interest rate adjustment limits or caps and fixed-rate securities
in the portfolio. Through the use of specific interest rate cap agreement
provisions, management attempts to reduce the repricing ceiling of the portfolio
and to effectively shorten the repricing period. Thus, the Company has a degree
of interest rate protection when interest rates increase because the interest
rate cap agreements provide a mechanism for repricing the investment portfolio
generally on pace with current market rates. In a similar way, interest rate
exchange agreements are utilized to provide protection in an increasing rate
environment, but also result in sensitivity in a downward market. There can be
no assurance that interest rate exchange agreements and interest rate cap
agreements will provide the Company with protection in all scenarios or to the
full extent of the Company's exposure.
The following table presents the effect interest rate exchange agreements
and interest rate cap agreements would have had on the repricing period of
securities in the available-for-sale portfolio in an increasing interest rate
environment (up 200 basis points) for the period the derivatives are
outstanding:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------
AFTER ONE
REPRICE WITHIN BUT WITHIN AFTER
ONE YEAR TWO YEARS TWO YEARS TOTAL
-------------- ---------- --------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Principal amount of securities............ $ 7,741 $396 $ 3,771 $11,908
Effect of derivative instruments.......... 3,715 -- (3,715) --
-------- ---- ------- -------
Principal amount of securities after
effect of derivative instruments..... $ 11,456 $396 $ 56 $11,908
======== ==== ======= =======
</TABLE>
44
<PAGE> 47
The following table presents the effect interest rate exchange agreements
and interest rate cap agreements would have had on the repricing period of
securities in the available-for-sale portfolio in a decreasing interest rate
environment (down 200 basis points) for the period the derivatives are
outstanding:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------
AFTER ONE
REPRICE WITHIN BUT WITHIN AFTER
ONE YEAR TWO YEARS TWO YEARS TOTAL
-------------- ---------- --------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Principal amount of securities............ $ 7,741 $396 $ 3,771 $11,908
Effect of derivative instruments.......... 1,165 -- (1,165) --
-------- ---- ------- -------
Principal amount of securities after
effect of derivative instruments..... $ 8,906 $396 $ 2,606 $11,908
======== ==== ======== =======
</TABLE>
LIQUIDITY
Liquidity management focuses on the need to meet both short-term funding
requirements and long-term growth objectives. The long-term growth objectives of
the Company are to attract and retain stable consumer deposit relationships and
to maintain stable sources of wholesale funds. Because the low interest rate
environment of recent years inhibited consumer deposits, Washington Mutual has
supported its growth through business combinations with other financial
institutions and by increasing its use of wholesale borrowings. Should the
Company not be able to increase deposits either internally or through
acquisitions, its ability to grow would be dependent upon, and to a certain
extent limited by, its borrowing capacity.
Washington Mutual monitors its ability to meet short-term cash requirements
using guidelines established by its Board of Directors. The operating liquidity
ratio is used to ensure that normal short-term secured borrowing capacity is
sufficient to satisfy unanticipated cash needs. The volatile dependency ratio
measures the degree to which the Company depends on wholesale funds maturing
within one year weighted by the dependability of the source. At September 30,
1996, the Company had substantial liquidity compared with its established
guidelines.
The Company also computes ratios promulgated by the FDIC to monitor the
liquidity position of WMB. The regulatory liquidity ratio measures WMB's ability
to use liquid assets to meet unusual cash demands. The regulatory dependency
ratio measures WMB's reliance upon potentially volatile liabilities to fund
long-term assets. WMB manages both ratios to remain within the acceptable ranges
and, at September 30, 1996, met the established FDIC guidelines.
Regulations promulgated by the Office of Thrift Supervision (the "OTS")
require that ASB and WMBfsb maintain for each calendar month an average daily
balance of liquid assets at least equal to 5.00 percent of the prior month's
average daily balance of net withdrawable deposits plus borrowings due within
one year. At September 30, 1996, ASB's liquid assets consisted of currency, cash
in banks, short-term investments in federal funds and bankers acceptances. Also
included were MBS with maturities of five years or less. ASB's liquidity ratio
was 6.23 percent, 5.29 percent and 5.04 percent at September 30, 1996, December
31, 1995 and December 31, 1994, respectively.
Washington Mutual's major sources of funds are the collection of loan
principal and interest payments, attracting deposits, and borrowing from the
FHLB of Seattle and San Francisco and elsewhere. In addition, Washington Mutual
is able to generate funds through the sale of loans and investment securities
available for sale. The Company uses these funds primarily to originate loans
and maintain its investment portfolio. See "Supplemental Consolidated Financial
Statements -- Consolidated Statements of Cash Flows."
At September 30, 1996, the Company's banking subsidiaries were able to
borrow an additional $10.8 billion through the use of collateralized borrowings
using unpledged mortgage-backed securities and other wholesale sources. The
ability of the Company's banking subsidiaries to make dividends to the Company
is influenced by legal, regulatory and economic restrictions.
45
<PAGE> 48
In November 1996, Washington Mutual received commitments for $200.0 million
of Revolving Credit Facilities with two tranches (the "Facilities"): a $100.0
million 364-day facility and a $100.0 million 4-year facility. Chase Manhattan
Bank will act as Administrative Agent for the Facilities. Proceeds of the
Facilities were used for funding needs at the closing of the Transaction,
including redemption of the New Capital securities, and are available for
general corporate purposes, including providing capital at a subsidiary level.
CAPITAL REQUIREMENTS
At September 30, 1996, Washington Mutual's banking subsidiaries exceeded
all current regulatory capital requirements and were classified as
well-capitalized institutions, the highest regulatory standard.
The regulatory capital ratios of WMB, WMBfsb and ASB and minimum regulatory
requirements for a well-capitalized institution were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------- WELL-CAPITALIZED
WMB WMBFSB ASB MINIMUM
----- ------ ------ ----------------
<S> <C> <C> <C> <C>
FDIC capital ratios:
Leverage...................................... 5.63% --% --% 5.00%
Tier 1 risk-based............................. 10.19 -- -- 6.00
Total risk-based.............................. 10.99 -- -- 10.00
OTS capital ratios:
Tangible...................................... -- 6.75 5.21 1.50
Leverage...................................... -- 6.75 5.22 5.00
Risk-based.................................... -- 11.42 10.46 10.00
</TABLE>
WM Life is subject to risk-based capital requirements developed by the
National Association of Insurance Commissions. This measure uses four major
categories of risk to calculate an appropriate level of capital to support an
insurance company's overall business operations. The four risk categories are
asset risk, insurance risk, interest rate risk and business risk. At December
31, 1995, WM Life's capital was 672 percent of its required regulatory
risk-based level.
The Company's securities subsidiaries are also subject to capital
requirements. At December 31, 1995, all of Washington Mutual's securities
subsidiaries were in compliance with their applicable capital requirements.
46
<PAGE> 49
BUSINESS
THE COMPANY
With a history dating back to 1889, Washington Mutual is a regional
financial services company committed to serving consumers and small to mid-sized
businesses throughout the Western United States. Through its subsidiaries, the
Company engages in the following activities:
- - MORTGAGE LENDING AND CONSUMER BANKING ACTIVITIES. Through its principal
subsidiaries, Washington Mutual Bank, American Savings Bank, F.A., and
Washington Mutual Bank fsb, at September 30, 1996, the Company operated 410
financial centers and 94 loan centers offering a full complement of mortgage
lending and consumer banking products and services. For the nine months ended
September 30, 1996, WMB was the leading originator of first-lien single-family
residential loans in Washington and Oregon, and ASB was the second largest in
California.
- - COMMERCIAL BANKING ACTIVITIES. Through the commercial banking division of
WMB, at September 30, 1996, the Company operated 47 full-service business
branches offering a range of commercial banking products and services to small
to midsized businesses. WMB commenced its commercial banking activities
through the acquisition of Enterprise in 1995 and Western in 1996.
- - INSURANCE ACTIVITIES. Through WM Life Insurance Co. and ASB Insurance Agency,
Inc., the Company underwrites and sells annuities and sells a range of life
insurance contracts, and selected property and casualty insurance policies.
- - BROKERAGE ACTIVITIES. Through ASB Financial Services, Inc., Murphey Favre,
Inc. and Composite Research and Management Co., the Company offers full
service securities brokerage and acts as the investment advisor to and the
distributor of mutual funds.
The Company operates in Washington, California, Oregon, Utah, Idaho,
Montana, Arizona, Colorado and Nevada. These operations constitute one of the
largest banking franchises in the Western United States and serve more than 1.3
million households. At September 30, 1996, the Company had consolidated assets
of $43.7 billion, deposits of $24.0 billion, and stockholders' equity of $2.4
billion.
In December 1996, Washington Mutual consummated the merger of Keystone
Holdings with and into the Company and certain other transactions in connection
therewith and thereby acquired ASB. Washington Mutual issued 47,883,333 shares
of Common Stock in the Transaction. At September 30, 1996, ASB had assets of
$21.3 billion and deposits of $12.9 billion and operated 158 branches and 63
loan centers, substantially all of which were located in California.
Washington Mutual intends to continue operating ASB under the name
"American Savings Bank" in ASB's markets and has retained a significant number
of ASB's management team to guide ASB's operations. Washington Mutual intends to
introduce its consumer banking products and approaches throughout ASB's branch
system and to expand ASB's loan origination capabilities.
THE REORGANIZATION
Washington Mutual was formed in August 1994 by its predecessor, Washington
Mutual Savings Bank ("WMSB"), a former Washington state-chartered savings bank,
for the purpose of serving as a holding company in the reorganization of WMSB
into a holding company structure (the "Reorganization"). The Reorganization was
completed in November 1994 through the merger of WMSB into WMB, with WMB as the
surviving entity. As a result of the Reorganization, Washington Mutual became
the parent company of the companies of which WMSB was, prior to the
Reorganization, the parent company.
As a result of the Reorganization, all common and preferred shareholders of
WMSB became shareholders of Washington Mutual on a one-for-one basis with
substantially the same relative rights, privileges and preferences. Except as
noted otherwise, references in this Prospectus to "Washington Mutual" or the
"Company" refer to both (i) Washington Mutual, Inc. and its consolidated
subsidiaries after the consumma-
47
<PAGE> 50
tion of the Reorganization; and (ii) WMSB and its consolidated subsidiaries
prior to the consummation of the Reorganization.
BUSINESS STRATEGY
In 1995, Washington Mutual revised its strategic plan to position the
Company for higher levels of future profitability and growth. The main elements
of this strategic plan are:
- - Strengthen the Company's consumer banking franchise throughout the West. The
Company focuses on increasing the number of households served within its
market areas and the scope of its customer relationships. Washington Mutual
primarily attracts new customers by offering competitive consumer-oriented
deposit products, including "Free Checking" and money market accounts. The
Company actively markets to its customers residential mortgages and a variety
of higher margin consumer loan products, including manufactured housing loans,
home equity loans and lines of credit, automobile and boat loans, student
loans, and unsecured consumer loans, as well as investment products, including
mutual funds and annuities. To further its penetration within its principal
markets, Washington Mutual delivers its products through several alternative
distribution channels that allow it to target sub-markets within its franchise
area. These alternative delivery channels complement the Company's
freestanding financial center network and include in-store financial centers,
loan centers, interactive banking kiosks, and telephone banking operations.
The Company plans to strengthen its franchise through the continued
introduction of its consumer products to all of its market areas, targeted de
novo branch openings, and selected in-market acquisitions.
- - Expand the commercial banking franchise. The Company is developing and
growing a commercial banking presence in Washington, Oregon, and Idaho. The
commercial banking division of WMB, which operates primarily as "Western
Bank," focuses on serving the needs of small to mid-sized businesses and
offers a full range of commercial banking products, including business
checking accounts and secured and unsecured loans. The lending activities of
the commercial banking division generally provide higher margins than the
Company's residential mortgage lending activities. The Company plans to expand
its commercial banking activities within its existing market areas and
eventually to other parts of the Company's franchise.
- - Decrease sensitivity to interest rate movements. The Company intends to
decrease the sensitivity of its net interest income to movements in market
interest rates. Through purchases and sales of loans and mortgage-backed
securities and the retention of internally originated ARMs, the Company has
decreased the percentage of fixed-rate assets and increased the percentage of
adjustable-rate assets in its loan and investment portfolios in order to more
closely match its liability base. The acquisition of ASB with its portfolio of
adjustable-rate loans has furthered this strategy.
- - Maintain asset quality. Management is committed to maintaining a conservative
credit culture even as it pursues growth and diversification opportunities in
new markets and product areas. The Company has targeted a nonperforming assets
to total assets ratio of one percent or less as a credit quality policy
objective.
- - Operate more efficiently. The Company has a long-term target of reducing to
50 percent or lower its ratio of operating expenses to revenues. To that end,
the Company has undergone an extensive process reengineering review and
introduced a number of initiatives to manage expense levels and improve
productivity, including the consolidation and outsourcing of certain back
office functions and the development of new banking systems and software
applications.
The Company historically has used acquisitions of other financial
institutions to further its strategic plan. Since 1988, the Company has
completed 16 acquisitions, two of which were commercial banks, which have
expanded the Company's geographic service area beyond the state of Washington.
The Company anticipates that acquisitions will continue to be an important
element of its strategic plan in the future.
WASHINGTON MUTUAL'S OPERATING SUBSIDIARIES
WASHINGTON MUTUAL BANK. WMB's principal business is providing a broad
range of financial services, primarily to consumers. These services include
accepting deposits from the general public and making residential mortgage
loans, consumer loans and limited types of commercial real estate loans,
primarily loans
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secured by multi-family properties. Beginning in the latter half of 1995, WMB,
through its mergers with Enterprise and Western, diversified its traditional
activities into commercial banking.
At September 30, 1996, WMB had assets of $20.4 billion, deposits of $11.0
billion and operated 226 financial centers, of which 155 were in Washington and
71 were in Oregon; 27 loan centers, of which 19 were in Washington and eight
were in Oregon; and 47 full-service business branches, of which one was in
Washington and 46 were in Oregon. WMB operates under Title 32 (Mutual Savings
Banks) of the Revised Code of Washington. Its deposits are insured by the FDIC
through the BIF and the SAIF.
AMERICAN SAVINGS BANK, F.A. ASB's principal business is accepting deposits
from the general public and making residential mortgage loans and loans secured
by multi-family properties. At September 30, 1996, ASB had assets of $21.3
billion, deposits of $12.9 billion and operated 158 branches in California and
63 loan offices in California and Arizona. In November 1996, ASB opened two loan
offices in Colorado and one in Nevada. ASB's deposits are insured by the FDIC
through the SAIF.
WASHINGTON MUTUAL BANK FSB. WMBfsb's principal business includes accepting
deposits from the general public and making residential loans, consumer loans
and limited types of commercial real estate loans, primarily loans secured by
multi-family properties. At September 30, 1996, WMBfsb had assets of $889.7
million, deposits of $323.4 million, and operated 26 financial centers, of which
16 were in Utah, seven were in Idaho, two were in Montana and one was in Oregon,
and operated one loan center in Idaho and one in Utah. On November 30, 1996,
WMBfsb acquired Utah Federal, which at September 30, 1996, operated five
branches and two loan production offices in Utah and had assets of $122.2
million, deposits of $106.9 million and stockholders' equity of $11.9 million.
WMBfsb's deposits are insured by the FDIC through the SAIF.
WM LIFE INSURANCE COMPANY. WM Life, an Arizona-domiciled life insurance
company, is licensed under state law to issue annuities in seven states. In
addition, WM Life owns Empire Life Insurance Co. ("Empire"), which is currently
licensed under state law to issue annuities in 28 states. WM Life currently
issues fixed and variable flexible premium deferred annuities, single premium
fixed deferred annuities and single premium immediate annuities. Empire
currently issues fixed flexible premium deferred annuities and single premium
immediate annuities. Both companies conduct business through licensed
independent agents. The majority of such agents are employees of affiliates of
the Company and operate in WMB's financial centers. Annuities presently are
issued primarily in Washington and Oregon. At September 30, 1996, WM Life had
assets of $1.1 billion.
ASB INSURANCE AGENCY, INC . ASB Insurance is a registered insurance broker
that offers a wide array of products, including life and property and casualty
insurance and annuities, in California.
ASB FINANCIAL SERVICES, INC. ASB Financial is a registered broker-dealer
that distributes a broad array of mutual funds in California. ASB Financial
representatives are available for consultation regularly or by appointment in
many of ASB's branches.
COMPOSITE RESEARCH & MANAGEMENT CO. Composite Research is a registered
investment advisor. Composite Research is the investment advisor of eight mutual
funds. At September 30, 1996, Composite Research had a total of $1.3 billion in
funds under management in the eight mutual funds.
MURPHEY FAVRE, INC. Murphey Favre is a registered broker-dealer that
offers a broad range of securities brokerage services, including distribution of
mutual funds in Washington, Oregon, Idaho, Utah and Montana. Murphey Favre has
seven free-standing offices, and Murphey Favre representatives are available for
consultation regularly or by appointment in many of WMB's financial centers.
LENDING ACTIVITIES
GENERAL. The Company's lending activities are carried on through its
banking subsidiaries, WMB, ASB and WMBfsb. At September 30, 1996, the Company's
total loan portfolio (carried at historical cost) of $28.7 billion (exclusive of
reserve for loan losses) included $21.0 billion in mortgage loans secured by
first liens on 1 to 4 family residential properties; $669.0 million in
residential construction loans; $3.7 billion in mortgage loans secured by
commercial real estate such as apartment buildings, office buildings,
warehouses, shopping
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centers and medical office buildings; $3.1 billion in consumer loans; and $295.3
million in commercial business loans. For a discussion of the fair value of the
loan portfolio, see "Supplemental Consolidated Financial Statements -- Note 30:
Fair Value of Financial Instruments."
Washington state law gives state-chartered savings banks such as WMB broad
lending powers, subject to certain statutory restrictions on total investment in
different types of loans. WMB may make loans secured by residential and
commercial real estate, secured and unsecured consumer loans, and secured and
unsecured commercial loans. ASB and WMBfsb have somewhat narrower lending
authority, but can make loans secured by residential and commercial real estate,
certain secured and unsecured consumer loans, and a limited amount of secured
and unsecured commercial loans.
In originating loans, the Company must compete directly with other savings
banks, savings and loan associations, commercial banks, credit unions, mortgage
companies and life insurance companies (primarily in the commercial real estate
area) and indirectly with government-sponsored entities ("GSEs") such as the
Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC"), or the Government National Mortgage Association ("GNMA").
In addition, the Company's lending activities are heavily influenced by economic
trends affecting the availability of funds and by general interest rate levels
as well as by competitive factors such as the lower cost structure of less
regulated originators and the influence of government-sponsored entities in
establishing rates. The condition of the construction industry and the demand
for housing also directly affect residential lending volumes.
In addition to interest earned on loans, the Company receives fees for
originating loans and for providing loan commitments. The Company also charges
fees for loan modifications, late payments, changes of property ownership and
other miscellaneous services. Fees received in connection with loan originations
are deferred and amortized into interest income over the life of the loan. The
Company also receives fees for servicing loans for others.
The Company's loans, exclusive of reserve for loan losses, consisted of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------- ---------------------- ----------------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
----------- ------ ----------- ------ ----------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate
Residential:
Fixed rate loans............ $15,792,060 55.0% $12,717,134 52.0% $12,773,458 49.7%
Adjustable rate loans....... 5,185,132 18.0 4,586,171 18.8 4,992,757 19.4
Residential construction
loans....................... 668,976 2.3 615,814 2.5 549,271 2.1
Apartment buildings........... 2,473,925 8.6 2,310,344 9.5 3,497,582 13.6
Other commercial real estate
loans....................... 1,258,760 4.4 1,177,230 4.8 1,201,638 4.7
----------- ------ ----------- ------ ----------- ------
Total real estate
loans................ 25,378,853 88.3 21,406,693 87.6 23,014,706 89.5
Second mortgage and other
consumer loans................ 2,078,073 7.3 1,974,673 8.1 1,841,613 7.2
Manufactured housing loans...... 978,909 3.4 867,181 3.6 731,714 2.8
Commercial business loans....... 295,263 1.0 179,568 0.7 129,048 0.5
----------- ------ ----------- ------ ----------- ------
Total loans............ $28,731,098 100.0% $24,428,115 100.0% $25,717,081 100.0%
=========== ====== =========== ====== =========== ======
</TABLE>
Residential loans comprised 64.9, 69.7 and 69.1 percent of total loans at
December 31, 1993, 1992 and 1991, respectively. Residential construction loans
comprised 2.0, 2.2 and 2.4 percent of total loans at December 31, 1993, 1992 and
1991, respectively. Commercial real estate loans comprised 21.2, 19.0 and 18.3
percent of total loans at December 31, 1993, 1992 and 1991, respectively.
Manufactured housing, second mortgage and other consumer loans and commercial
business loans comprised 11.3 and 0.6; 8.4 and 0.7; and 9.4 and 0.8 percent of
total loans at December 31, 1993, 1992 and 1991, respectively.
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At September 30, 1996, loans, exclusive of reserve for loan losses, by
geographic concentration were as follows:
<TABLE>
<CAPTION>
OTHER
CALIFORNIA WASHINGTON OREGON UTAH STATES TOTAL
----------- ---------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential............ $12,214,647 $6,245,015 $1,695,022 $230,860 $ 591,648 $20,977,192
Residential
construction......... -- 355,498 247,639 44,582 21,257 668,976
Apartment buildings.... 1,551,243 556,446 249,233 57,098 59,905 2,473,925
Other commercial real
estate............... 358,789 406,153 357,548 30,847 105,423 1,258,760
----------- ---------- ---------- -------- ---------- ----------
Total real
estate
loans......... 14,124,679 7,563,112 2,549,442 363,387 778,233 25,378,853
Second mortgage and other
consumer............... 89,994 1,131,229 529,647 23,693 303,510 2,078,073
Manufactured housing..... 106,569 443,534 219,935 31,663 177,208 978,909
Commercial business...... -- 108,065 185,944 104 1,150 295,263
----------- ---------- ---------- -------- ---------- ----------
Total loans..... $14,321,242 $9,245,940 $3,484,968 $418,847 $1,260,101 $28,731,098
=========== ========== ========== ======== ========== ==========
Loans by geographic
concentration as a
percentage of total
loans.................. 50% 32% 12% 1% 5% 100%
</TABLE>
RESIDENTIAL LOANS.
General. Primarily as a result of recent business combinations, the size
of the Company's residential loan portfolio has increased dramatically. The bulk
of the Company's residential loan portfolio is focused in California, Washington
and Oregon.
All of the Company's residential mortgage lending is subject to
nondiscriminatory underwriting standards, and most is subject to loan
origination and documentation procedures acceptable to the secondary market. All
loans are subject to underwriting review and approval by various levels of
Company personnel, depending on the size of the loan.
The Company requires title insurance on all first liens on real property
securing loans and also requires that fire and casualty insurance be maintained
on properties in an amount at least equal to the total of the Company's loan
amount plus all prior liens on the property or the replacement cost of the
property, whichever is less.
Mortgage insurance currently is required on all residential real estate
loans originated at a loan-to-value ratio of 90 percent or above. Any exceptions
must be reported to the board of directors of the subsidiary bank issuing the
credit. At September 30, 1996, six percent of the Company's residential real
estate loan portfolio had loan-to-value ratios of 90 percent or above at
origination and were without mortgage insurance.
Under federal regulations, a real estate loan may not exceed 100 percent of
the appraised value of the property at the time of origination. In addition,
savings associations are required by regulation to adopt written policies that
establish appropriate limits and standards for real estate loans and to consider
certain regulatory guidelines in establishing these policies. These guidelines
specify that savings associations should not originate any commercial,
multi-family or nonowner-occupied 1 to 4 family mortgage loan with an initial
loan-to-value ratio in excess of 85 percent. The guidelines further provide that
savings associations should not originate any owner-occupied 1 to 4 family
mortgage loan with a loan-to-value ratio that equals or exceeds 90 percent at
origination, unless such loan is protected by an appropriate credit enhancement
in the form of either mortgage insurance or readily marketable collateral. These
real estate lending guidelines recognize that it may be appropriate for a
savings association to originate mortgage loans with loan-to-value ratios
exceeding these specified levels, provided that the aggregate amount of all
loans in excess of these limits does not exceed a specified level of such
association's total capital and such loans are identified in the association's
records and reported at least quarterly to its board of directors.
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WMB and WMBfsb Residential Lending. WMB makes available to borrowers in
Washington and Oregon a full range of residential loans, including FHA-insured
and VA-guaranteed loans, conventional fixed-rate loans for terms of five, 15 or
30 years, and ARMs. WMBfsb makes the same loan products available to customers
in Utah, Montana and Idaho.
ARMs are advantageous to the Company because adjustable-rate loans better
match the Company's natural liability base. However, WMB's and WMBfsb's ability
to originate ARMs in lieu of fixed-rate loans has varied in response to changes
in market interest rates. Between 1992 and 1993, ARMs constituted less than 25
percent of WMB's residential loan originations, reflecting continuing lower
market interest rates. When interest rates rose in 1994, ARMs totaled 62 percent
of WMB's residential loan originations. However, interest rates declined in
mid-1995 and, as a result, ARMs totaled 32 percent of WMB's and 28 percent of
WMBfsb's residential loan originations during 1995. For the nine months ended
September 30, 1996, ARMs accounted for 35 percent of WMB's and 33 percent of
WMBfsb's residential loan originations.
Under WMB's and WMBfsb's current ARM programs, the borrower may choose
among loans that have the initial interest rate fixed for one, three or five
years before the adjustments begin. Currently, such ARMs are indexed to the
one-year Constant Maturity Treasury Index and have annual caps of two percent.
Under most options, the borrower may elect, between the 6th and the 60th months,
to convert to a fixed-rate loan payable over the remainder of the original term.
There is no conversion fee, and the fixed interest rate is indexed to the
then-current required net yield for loans sold to FNMA.
The majority of WMB's and WMBfsb's loan originations satisfy all
requirements to make them saleable in the secondary market. In the first nine
months of 1996, WMB and WMBfsb securitized and sold $785.7 million of its
fixed-rate loans, but did not sell any ARMs. See "-- Loan Securitization."
WMB and WMBfsb originate loans through all of their branches as well as
through home loan centers and loan representatives located in real estate
brokers' offices. In addition, a small portion of their originations comes
through loan brokers. WMB was the leading originator of first lien residential
mortgage loans in both Washington and Oregon for the nine months ended September
30, 1996.
ASB Residential Lending. ASB offers an array of mortgage products to
customers in California, Arizona, Nevada and Colorado. The primary products are
COFI ARMs that adjust monthly with maturities up to a maximum of 40 years;
mortgages that have a fixed initial rate for up to five years and then reprice
monthly at a set margin over COFI until maturity ("Flex-5 Loans") and fixed-rate
15-, 20- and 30-year mortgages. For the nine months ended September 30, 1996,
substantially all of ASB's 1996 ARM residential loan originations were indexed
to COFI.
As interest rates increased in the latter part of 1994 and the first half
of 1995, the rates on COFI ARMs rose and the difference between those rates and
the rates on fixed rate loans narrowed. As a result, the origination volume of
fixed-rate loans at ASB increased, while the origination volume on
adjustable-rate loans stabilized. The same conditions also made the Flex-5 loans
more popular. Nevertheless, because ASB sells virtually all of its fixed-rate
product on the secondary market, its portfolio is comprised almost entirely of
ARMs. At September 30, 1996, ASB's gross loan balance consisted of 97 percent
ARMs and 3 percent fixed-rate loans. The majority of the ARMs adjust monthly to
a predetermined margin over COFI.
The monthly payments on substantially all of ASB's ARMs adjust annually
with the adjustment limited to 7.5 percent per year (except at the end of each
five-year interval during the life of the loan, when the payment may be adjusted
by more than 7.5 percent to assure that the loan will amortize over the
remaining term). These protections for borrowers can result in monthly payments
that are greater or less than the amount necessary to amortize a loan by its
maturity at the interest rate in effect in any particular month. In the event
that a monthly payment is not sufficient to pay the interest accruing on the
loan, the shortage is added to the principal balance and is repaid through
future monthly payments. This is referred to as negative amortization. The
portion of outstanding loan principal arising from negative amortization was
$26.5 million at September 30, 1996.
The majority of ASB's fixed-rate loan originations are salable in the
secondary market either through FNMA or, in the case of loans with balances
larger than the FNMA/FHLMC limit for conforming loans
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("Jumbo loans"), to private investors. For the nine months ended September 30,
1996, all of such originations (12 percent of total originations) have been
sold. The remainder of ASB's originations, approximately 88 percent of the total
for the nine months ended September 30, 1996, are intended for ASB's portfolio.
These loans are almost entirely COFI ARMs.
One of the primary market segments in which ASB originates loans for its
portfolio is that group of borrowers who are creditworthy, but who are unable
for one reason or another to provide some of the documentation required to meet
agency secondary market rules. These loans are referred to as low documentation
(or alternative documentation) loans. Through September 30, 1996, approximately
47 percent of ASB's 1996 portfolio originations consisted of low documentation
loans. The documentation that is omitted generally relates to the credit or
employment history of the borrower and not to the value of the collateral. All
low documentation loans are fully supported by appraisals and title insurance.
In addition, the maximum loan-to-value ratio on low documentation loans is 80
percent and the required ratio decreases as the amount of the loan increases.
The average loan-to-value ratio on all low documentation loans originated in the
nine months ended September, 30, 1996 is 68 percent. Low documentation loans are
generally priced at a premium to FNMA or FHLMC conforming loans.
The delinquency experience on low documentation loans originated by ASB in
1994, 1995 and 1996 is comparable to the experience on ASB's COFI ARM portfolio
as a whole. The delinquency experience on ASB's portfolio as a whole has
historically been higher than the delinquency experience at WMB and WMBfsb.
ASB does not originate residential mortgage loans in its branches. All
direct originations (54.3 percent of total residential originations for the nine
months ended September 30, 1996) are through its 63 loan centers. In addition,
ASB indirectly originates loans through independent mortgage brokers throughout
the state of California. Indirect originations accounted for 45.7 percent of
total residential loan originations for the nine months ended September 30,
1996.
ASB's wholesale mortgage broker distribution channel was established in
1991 to serve geographic regions not covered by residential loan centers.
Initially the participating brokers were primarily in northern California but in
1993 the program was expanded to the rest of the state. Participation grew
through 1994 and 1995 and it has become a significant element of ASB's overall
lending strategy, including in its more recently opened loan production offices
in Arizona, Colorado and Nevada. To monitor credit quality, ASB conducts
extensive due diligence and reviews the stability and credit experience of each
broker prior to accepting any loan packages. Loan production from the wholesale
channel is subjected to the same underwriting standards as loan production from
the residential loan centers. All underwriting decisions are made by ASB
personnel.
ASB was the second largest originator of first lien residential mortgage
loans in California for the nine months ended September 30, 1996.
RESIDENTIAL CONSTRUCTION LOANS. WMB and WMBfsb provide financing for two
different categories of residential construction loans. A custom construction
loan is made to the intended occupant of a house to finance its construction.
Speculative construction loans are made to borrowers who are in the business of
building homes for resale. Speculative construction loans are made either on a
house-by-house basis or, in certain circumstances, through a collateralized,
limited line of credit. Speculative construction lending involves somewhat more
risk than custom construction loans and involves different underwriting
considerations. All construction loans require approval by various levels of
Company personnel, depending on the size of the loan. Construction loans for
nonconforming residential properties (properties other than single-family
detached houses) are subject to more stringent approval requirements than loans
for conforming properties.
Residential construction loans are an integral part of WMB's overall
lending program. Construction loans are of short duration, generally 12 to 18
months, and have adjustable rates, so they are an important element in the
Company's interest rate sensitivity management. Speculative construction loans
are generally priced at a higher spread than are permanent residential loans.
In addition, the residential construction loan program provides a source of
permanent loans. Most custom construction loans have provisions for conversion
to permanent loan status upon completion of construction.
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<PAGE> 56
Speculative construction loan builders are a good source of referrals when their
buyers need financing. WMB has a program under which it waives certain closing
fees for borrowers who are buying homes for which WMB provided construction
financing.
At September 30, 1996, 57 percent of the residential construction portfolio
was custom construction loans and 43 percent was speculative construction loans.
The demand for residential construction loans is sensitive to the same factors
as the market for residential loans generally. Lower market interest rates help
to improve the market for houses generally and this, in turn, stimulates new
construction. As a result, originations of residential construction loans in the
first nine months of 1996 totaled $973.4 million, an increase of 44 percent from
$674.2 million for the first nine months of 1995.
ASB has never originated any residential construction loans.
COMMERCIAL REAL ESTATE LOANS.
General. Commercial real estate lending generally entails greater risks
than residential mortgage lending. Commercial real estate loans typically
involve large loan balances concentrated with single borrowers or groups of
related borrowers. In addition, the payment experience on loans secured by
income-producing properties usually depends on the successful operation of the
related real estate project and thus may be subject, to a greater extent, to
adverse conditions in the real estate market or in the economy generally. In
recent years, commercial real estate values in many areas of the country have
substantially declined, particularly in California, as a result of excess supply
and weak economies.
In all commercial real estate lending, the Company considers the location,
marketability and overall attractiveness of the project. Washington Mutual's
current underwriting guidelines for commercial real estate loans require an
economic analysis of each property with regard to the annual revenue and
expenses, debt service coverage and fair value to determine the maximum loan
amount. Commercial real estate loans require approval at various levels of
Company personnel, depending on the size of the loan.
WMB and WMBfsb Commercial Real Estate Lending. The Boards of Directors of
both WMB and WMBfsb have adopted lending policies that generally limit future
commercial real estate loan originations to Washington, Oregon, Idaho, Utah,
Montana and contiguous states. WMB's existing commercial real estate loan
portfolio is principally concentrated in Washington, Oregon and California.
WMBfsb's commercial real estate loan portfolio is concentrated in Utah and
Montana.
During the past few years, WMB focused its commercial real estate lending
on small to mid-sized apartment lending (loans of $2.5 million or less). The
focus on apartment lending has been altered by the Company's diversification
into commercial banking. Both the Enterprise and Western commercial real estate
portfolios consisted of predominantly nonresidential commercial real estate.
However, the relatively small size of both Enterprise and Western before they
merged with WMB placed constraints on the size and to some extent the type of
loans they could make. For example, the individual loan size limitations made
meaningful participation in office building and urban retail loans impossible.
With the added flexibility provided by WMB's size, the size and the type of
commercial real estate loans that WMB will be able to make will change; this
will generally increase the risk characteristics of the commercial loan
portfolio.
ASB Commercial Real Estate Lending. ASB's commercial real estate portfolio
is concentrated in California. Due to ASB's past desire to remain a "traditional
thrift lender," management historically did not emphasize commercial loan
originations other than for apartment properties. No commercial loans, other
than apartment loans, have been originated by ASB since 1994, at which time such
commercial loans represented approximately 1 percent of total loan originations
by principal balance. Because of credit weaknesses in the small to mid-sized
apartment house market in California, in 1994, ASB tightened its underwriting of
apartment property loans. Due to tightened underwriting standards, apartment
loan originations have declined as a percentage of the total from 10.9 percent
in 1994 to 5.3 percent in 1995 and 4.7 percent for the first nine months of
1996. From time to time, ASB originates mobile-home loans and refinances its
existing commercial loans.
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Under OTS regulations, a savings association may invest in commercial real
estate loans up to 400 percent of its total risk-based capital. ASB was in
compliance with this limitation at September 30, 1996. The amount of apartment
lending and residential lending is not limited by federal regulation.
Commercial Real Estate Portfolio Management. In order to monitor its
commercial real estate loan portfolio, the Company periodically (i) inspects
real estate collateral based on the loan risk classification, the loan size and
the location of the collateral; (ii) analyzes the economic condition of markets
in which the Company has a geographic concentration; and (iii) reviews operating
statements and rent rolls, updated financial and tax statements of borrowers,
evidence of insurance coverage and evidence that real estate taxes have been
paid. These procedures are designed to analyze the economic viability of the
property and to determine whether or not the debt service coverage and
loan-to-value ratios remain consistent with the Company's underwriting policies.
It is the intention of management to perform a continual review of the
commercial real estate loan portfolio in light of the condition of the real
estate market. Based upon the above procedures, the Company classifies loans
that fall below underwriting standards into various risk or watch categories.
LOAN SECURITIZATION. The Company from time to time, depending on its asset
and liability management strategy, converts a portion of its loan portfolio into
either FHLMC participation certificates, GNMA mortgage-backed securities or FNMA
conventional mortgage-backed securities, (collectively "GSE MBS"). This
securitization of its loans provides the Company with increased liquidity both
because the mortgage securities are more readily marketable than the underlying
loans and because they can be used as collateral for borrowing.
WMB has historically securitized its fixed-rate loan production with the
intent to sell those MBS in the secondary market and, from time to time,
securitizes other loans and retains the resulting MBS as investment securities.
ASB generally securitizes substantially all of its fixed-rate production for
potential sale in the secondary market. Loans securitized through GSEs for sale
in the secondary market are sold without recourse and become obligations of the
applicable GSE. Generally, the servicing of the loans is retained by the Company
with the servicing fee income fixed by the relevant GSE.
In 1995 and 1996, the Company securitized loans with FHLMC and FNMA under
programs in which the owner of the MBS has recourse against the originator of
the loans rather than the GSE. These MBS are generally saleable in the secondary
market and can be used as collateral for borrowings and to meet regulatory
liquidity requirements. Generally, however, MBS created under this program are
retained by the originator, and the Company has retained the majority of MBS
created under these programs. In 1995, ASB created a real estate mortgage
investment conduit (a "REMIC") by means of which it securitized a pool of loans
consisting of $1.2 billion in apartment loans and $200.0 million of its Flex-5
Loans. To date, ASB has not sold any portion of this REMIC and the entire amount
is still owned by ASB with full recourse. The Company has, however, sold
securitized loans with recourse. At September 30, 1996, the Company's total
recourse obligation with respect to securitized loans was $6.9 billion, of which
$989.1 million represented the retained recourse obligation for securitized
loans which had been sold.
When MBS composed of loans originated by the Company's banking subsidiaries
are owned by such banking subsidiaries, they are serviced in the same manner as
any other loan in the loan portfolio. In addition, when loans sold with recourse
become nonperforming, the loans and the associated collateral properties are
included in the Company's total nonperforming assets.
MANUFACTURED HOUSING, SECOND MORTGAGE AND OTHER CONSUMER LOANS. WMB and
WMBfsb offer consumer loan programs in Washington, Oregon, Utah, Idaho and
Montana that include: (i) manufactured housing loans; (ii) second mortgage loans
for a variety of purposes, including purchase, renovation, or remodeling of
property, and for uses unrelated to the security; (iii) loans for the purchase
of automobiles, pleasure boats and recreational vehicles; (iv) student loans;
and (v) loans for general household purposes, including loans made under
Washington Mutual's secured line of credit programs. Consumer loans, in addition
to being an important part of the Company's orientation toward consumer
financial services, promote greater net interest income stability because of
their somewhat shorter maturities and faster prepayment characteristics. The
size of the consumer loan portfolio has grown in recent years. It is
management's intention
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to introduce these products into ASB's service area. Lending in this area may
involve special risks, including decreases in the value of collateral and
transaction costs associated with foreclosure and repossession.
Consumer loans generally are secured loans and are made based on an
evaluation of the collateral and the borrower's creditworthiness, including such
factors as income, other indebtedness and credit history. Secured consumer loan
amounts typically do not exceed 80 percent of the value of the collateral, less
the outstanding balance of any first-mortgage loan. Manufactured housing loans
do not exceed 90 percent of the value of the collateral plus taxes and other
costs. Additional limitations may be based on the customer's income, credit
history and other factors showing creditworthiness, and lines of credit are
subject to periodic review, revision and, when deemed appropriate by the
Company, cancellation as a result of changes in the borrower's financial
circumstances.
As a result of the acquisition of Pacific First, the amount of loans in the
Company's portfolio that were for the purchase of recreational vehicles,
pleasure boats and automobiles increased. While Washington Mutual is authorized
to make these loans, they have not been a significant part of the Company's
consumer loan business in recent years. At September 30, 1996, the Company's
portfolio included $74.5 million of recreational vehicle loans, $42.2 million of
boat loans and $70.2 million of automobile loans. The other acquisitions
completed from 1993 through 1996 did not have a material effect on the Company's
consumer loan portfolio.
ASB has originated various types of consumer loans that are generally
unsecured lines of credit and loans that are secured by personal property. These
loans have historically been provided as a service to ASB's existing customers
and have not represented a significant portion of its business. In the first
quarter of 1994, ASB discontinued its credit card operations and sold its entire
credit card portfolio for a gain of $25.0 million.
COMMERCIAL BUSINESS LOANS. The Company's commercial business loans are
mainly loans to small to mid-sized businesses and to individuals, secured by a
variety of business and personal assets, real estate and equipment or are in
some cases unsecured. They are originated through WMB's commercial banking
division, which at September 30, 1996, accounted for $1.1 billion of WMB's
assets.
The commercial banking division offers a full range of commercial banking
products and services through 47 free standing, full service commercial banking
branches, supplemented by ten business banking centers located near or in WMB
financial centers.
ASSET QUALITY
GENERAL. Washington Mutual reviews its assets for weakness on a regular
basis. Reserves are maintained for assets classified as substandard or doubtful.
Any portion of an asset classified as loss is immediately written off.
Washington Mutual's comprehensive process for identifying impaired assets,
classifying assets and asset review is performed on a quarterly basis. The
objective of the review process is to identify any trends and determine the
levels of loss exposure to evaluate the need for an adjustment to the reserve
accounts.
The principal measures of asset problems are the levels of nonaccrual
loans, loans under foreclosure and REO (nonperforming assets or "NPAs"), levels
of impaired loans, the size of the provision for loan losses, loan charge-offs
and the size of the write-downs in the value of REO. See "Management's
Discussion and Analysis of Financial Position and Results of Operations -- Asset
Quality -- Classified Assets."
Management ceases to accrue interest income on any loan that becomes 90
days or more delinquent and reserves all interest accrued up to that time. In
addition, when circumstances indicate concern as to the future collectibility of
the principal of a commercial real estate loan, management stops accruing
interest on the loan, whether or not it has reached the 90-day delinquency
point. Thereafter, interest income is accrued only if and when, in management's
opinion, projected cash proceeds are deemed sufficient to repay both principal
and interest. All loans on which interest is not being accrued are referred to
as loans on nonaccrual status.
Nonperforming loans include loans on which payment is 90 days or more
delinquent and loans that are under foreclosure (a category that includes
properties for which decrees of foreclosure have been granted but that are held
under sheriffs' certificates pending expiration of the borrowers' redemption
rights).
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<PAGE> 59
REO. Real estate that served as security for a defaulted loan and becomes
REO is recorded on the Company's books at the lower of the outstanding loan
balance (net of any reserves charged off) or fair value, the determination of
which takes into account the effect of sales and financing concessions that may
be required to market the property. If management's estimate of fair value at
the time a property becomes REO is less than the loan balance, the loan is
written down at that time by a charge to the reserve for loan losses.
The REO reserve provides for losses that may result from unforeseen market
changes in the REO portfolio and declines in fair values of properties
subsequent to their initial transfer to REO.
REO properties are analyzed periodically to determine the adequacy of the
REO reserve. Any adjustment in the reserve that results from such evaluations is
charged to the results of REO operations in the period in which it is
identified. Personal property that has been repossessed is recorded at the lower
of the outstanding loan balance (net of any charge-offs) or fair value at the
time the property was repossessed. See "Management's Discussion and Analysis of
Financial Position and Results of Operations -- Asset Quality" for further
discussion.
PROVISION FOR LOAN LOSSES AND RESERVE FOR LOAN LOSSES. Loan loss reserves
are based upon management's continuing analysis of pertinent factors underlying
the quality of the loan portfolio. These factors include changes in the size and
composition of the loan portfolio, historical loan loss experience,
industry-wide loss experience, current and anticipated economic conditions and
detailed analysis of individual loans and credits for which full collectibility
may not be assured, as well as management's policies, practices and intentions
with respect to credit administration and asset management.
As part of the process of determining the adequacy of the reserve for loan
losses, management reviews the Company's loan portfolio for specific weaknesses.
Residential construction, commercial real estate and commercial business loans
that are above the thresholds described above or are delinquent are evaluated
individually for impairment. This detailed analysis includes techniques to
estimate the fair value of loan collateral and the existence of potential
alternative sources of repayment. When available information confirms that
specific loans or portions thereof are uncollectible, those amounts are
charged-off against the reserve for loan losses. The existence of some or all of
the following criteria will generally confirm that a loss or impairment has
incurred: the loan is significantly delinquent and the borrower has not
evidenced the ability or intent to bring the loan current; the Company has no
recourse to the borrower, or if it does, the borrower has insufficient assets to
pay the debt; or the fair value of the loan collateral is significantly below
the current loan balance, and there is little or no near-term prospect for
improvement.
Unallocated reserves are established for loss exposure that may exist in
the remainder of the loan portfolio but has not yet been identified. In
determining the adequacy of unallocated reserves, management considers changes
in the size and composition of the loan portfolio, actual historical loan loss
experience, and current and anticipated economic conditions.
The Company recorded an additional $125.0 million to the reserve for loan
losses at the Effective Date. The additional reserve for loan losses was
provided principally because a number of credit administration and asset
management philosophies and procedures of WMB differed from those of ASB. The
Company is conforming ASB's administration, philosophies and procedures to those
of WMB and WMBfsb. The additional reserve for loan losses was to a lesser degree
provided because the Company believed that while there had been an increase in
the value of residential real estate in certain California markets, a decline in
collateral values in some portions of the California real estate market occurred
in late 1996.
It is possible that the provision for loan losses may, in the future,
change as a percentage of total loans. The reserve for loan losses is maintained
at a level sufficient to provide for estimated loan losses based on evaluating
known and inherent risks in the loan portfolio. See "Management's Discussion and
Analysis of Financial Position and Results of Operations -- Asset
Quality -- Provision for Loan Losses and Reserve for Loan Losses."
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<PAGE> 60
INVESTING ACTIVITIES
GENERAL. Washington Mutual has authority under state law to make any
investment, but may be subject to certain restrictions imposed by the Home
Owners' Loan Act ("HOLA"). Under Washington state law, WMB has authority to make
any investment deemed prudent by its board of directors, and may invest in
commercial paper, corporate bonds, mutual fund shares, debt and equity
securities issued by creditworthy entities and interests in real estate located
inside or outside of Washington state. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), however, prohibits a state bank (such as
WMB) from making or retaining equity investments that are not permissible for a
national bank, subject to certain exceptions.
ASB and WMBfsb have authority to make investments specified by HOLA and
applicable regulations, including the purchase of governmental obligations,
investment-grade commercial paper, and investment-grade corporate debt
securities. Under the laws of the states of Arizona and Washington,
respectively, WM Life and Empire have broad authority to make investments in
debt and equity securities subject to applicable reserve requirements and
risk-based capital requirements.
Effective January 1, 1994, Washington Mutual adopted, as required, SFAS No.
115. This statement required investment and equity securities to be segregated
into three categories: "trading" securities, "held-to-maturity" securities and
"available-for-sale" securities. As a result of SFAS No. 115, at September 30,
1996, a net unrealized loss (on an after-tax basis) of $19.6 million associated
with available-for-sale securities was included as a separate component of
stockholder's equity. At September 30, 1996, the Company's investment portfolio
included $3.0 billion of held-to-maturity securities (with a fair value of $3.0
billion), $10.1 billion of available-for-sale securities and $2.2 million of
trading account securities. At September 30, 1996, MBS accounted for $11.6
billion or 89 percent of the total investment portfolio.
The Company's investment portfolio by investment type at carrying value
consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- -----------------------------------------
1996 1995 1994 1993
------------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities:
U.S. government and agency
obligations........................ $ 210,865 $ 345,510 $ 565,025 $ 459,664
Corporate debt obligations............ 538,163 607,926 617,548 550,608
Municipal obligations................. 105,730 92,508 80,762 73,360
Equity securities..................... 617,484 525,153 387,997 347,167
------------ ------------ ---------- ----------
1,472,242 1,571,097 1,651,332 1,430,799
Mortgage-backed securities:
U.S. government agency................ 10,714,973 12,561,748 6,113,146 4,984,828
Private issue......................... 859,300 1,222,270 913,941 1,014,843
------------ ------------ ---------- ----------
11,574,273 13,784,018 7,027,087 5,999,671
Derivative instruments:
Interest rate exchange agreements..... 507 (11,847) 18,654 --
Interest rate cap agreements.......... 4,525 9,415 41,690 --
------------ ------------ ---------- ----------
5,032 (2,432) 60,344 --
------------ ------------ ---------- ----------
Total investment portfolio......... $ 13,051,547 $15,352,683 $8,738,763 $7,430,470
============ ============ ========== ==========
</TABLE>
For a discussion of the stated maturities of the Company's investment
portfolio at December 31, 1995, see Notes 4 and 5 to the Supplemental
Consolidated Financial Statements.
The risk of loss upon default of the borrower is generally greater for
corporate debt securities than for real estate loans. In addition, investments
by the Company in debt or equity securities of an issuer are generally much
larger than investments in any particular real estate loan, resulting in a
greater effect on the Company in
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<PAGE> 61
the event of default or decline in market value. The Company regularly analyzes
these securities for impairment of value and makes adjustments in their
carrying value or yield as appropriate.
Historically, the yield on private-issue MBS, collateralized mortgage
obligations, and purchased loan pools has exceeded the yield on GSE MBS because
they expose the Company to certain risks that are not inherent in GSE MBS, such
as credit risk and liquidity risk. These assets are not guaranteed by the U.S.
government or one of its agencies because the loan size, underwriting or
underlying collateral of these assets often does not meet set industry
standards. Consequently, there is a higher potential of loss of the principal
investment. Additionally, the Company may not be able to sell such assets in
certain market conditions as the number of interested buyers may be limited at
that time. Furthermore, the complex structure of certain collateralized mortgage
obligations in the Company's portfolio increases the difficulty in assessing the
portfolio's risk and its fair value. Examples of some of the more complex
structures include certain collateralized mortgage obligations where the Company
holds subordinated tranches, certain collateralized mortgage obligations that
have been resecuritized, and certain securities that contain a significant
number of Jumbo loans.
In an effort to reduce these risks, beginning in 1995, the Company has
performed credit reviews on each individual security or loan pool prior to
purchase. Such a review includes consideration of the collateral
characteristics, borrower payment histories and information concerning loan
delinquencies and losses of the underlying collateral. After a security is
purchased, similar information is monitored on a periodic basis. Furthermore,
the Company has established internal guidelines limiting the geographic
concentration of the underlying collateral.
At September 30, 1996, the Company held $859.3 million of private-issue
MBS. Of that amount, 29 percent were the highest investment grade (AAA), 57
percent were rated investment grade (AA or A), 8 percent were rated lowest
investment grade (BBB) and 6 percent were rated below investment grade (BB or
below). The Company's policy is not to purchase securities that are below
investment grade. The below investment grade securities in the Company's
portfolio at September 30, 1996 were the result of downgrades of such securities
by the rating agencies. During 1995, the Company realized $8.4 million of losses
on certain securities in the below investment grade portfolio due to credit
quality deterioration.
SOURCES OF FUNDS
DEPOSITS. At September 30, 1996, WMB accepted deposits at 273 financial
centers in Washington and Oregon, ASB accepted deposits at 158 branches in
California, and WMBfsb accepted deposits at 26 financial centers in Utah, Idaho,
Montana and Oregon. The Company's banking subsidiaries compete with other
financial institutions in attracting savings deposits. Competition from
commercial banks has been particularly strong due to their extensive branch
systems. In addition, there is strong competition for customer dollars from
credit unions, mutual funds and nonbank corporations, such as securities
brokerage companies and other diversified companies, some of which have
nationwide networks of offices.
In recent years, deposit growth has resulted almost exclusively from
business combinations. At September 30, 1996, the Company's deposits totaled
$24.0 billion. During 1993, the acquisition of Pacific First and the merger with
Pioneer added $3.8 billion and $659.5 million in deposits, respectively.
Additional business combinations during 1994 and 1995 added $211.5 million and
$417.1 million in deposits, respectively. The merger with ASB added $12.9
billion in deposits. ASB itself had grown deposits through acquisition, with
$4.0 billion in acquired deposits over its less than eight year life. Without
the addition of the acquired deposits, the Company's deposits would have
decreased from December 31, 1993 to September 30, 1996.
The Company offers traditional passbook and statement savings accounts as
well as checking accounts. In addition, the Company offers money market deposit
accounts ("MMDAs") with higher minimum balances that offer higher yields.
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<PAGE> 62
The Company's deposits consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------
1996 1995 1994
------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Checking accounts:
Interest bearing.......................... $ 2,037,577 $ 2,111,124 $ 2,342,407
Noninterest bearing....................... 797,717 665,205 499,282
------------ ------------ ------------
2,835,294 2,776,329 2,841,689
Savings accounts............................ 1,719,506 1,905,659 2,224,784
MMDAs....................................... 5,106,381 4,667,884 3,502,981
Time deposit accounts
Due within one year....................... 12,244,657 12,696,186 10,496,491
After one but within two years............ 999,017 1,410,809 2,780,944
After two but within three years.......... 592,354 409,580 765,219
After three but within four years......... 378,757 243,541 293,167
After four but within five years.......... 79,280 258,415 293,522
After five years.......................... 23,269 94,557 145,209
------------ ------------ ------------
14,317,334 15,113,088 14,774,552
------------ ------------ ------------
Total deposits......................... $ 23,978,515 $24,462,960 $23,344,006
============ ============ ============
</TABLE>
WMB's and WMBfsb's Deposits. WMB and WMBfsb offer a broad range of deposit
products and at September 30, 1996 had a total of $11.1 billion in deposits,
$5.3 billion of which were time deposits, $4.2 billion of which were MMDAs and
savings accounts; and $1.6 billion of which were checking accounts. The most
popular time deposit is a product called Investor's Choice, which is a time
deposit with maturities available from one to 120 months in any one of three
deposit size categories. Interest rates on Investor's Choice time deposits
generally increase with increased maturity and amount. Less than 50 percent of
deposits at September 30, 1996 were time deposits and of those, only $1.1
billion or 22 percent of total time deposits had original maturities longer than
one year.
Since 1995, WMB and WMBfsb have been heavily promoting a "Free Checking"
account. This account has helped to reduce the overall cost of funds by
increasing the percentage of deposits that are noninterest-bearing. At September
30, 1996, $702.0 million or 45 percent of WMB's and WMBfsb's total checking
accounts did not bear interest.
WMB and WMBfsb have also actively promoted MMDAs because, while a somewhat
volatile source of deposits, they have the advantage of being variable-rate
liabilities. At September 30, 1996, WMB and WMBfsb had an aggregate of $3.3
billion in MMDAs and only $973.0 million in regular savings accounts.
Wholesale deposits, primarily time deposits, are sold to political
subdivisions and public agencies. The Company considers wholesale deposits to be
a borrowing source rather than a customer relationship.
ASB's Deposits. Like WMB and WMBfsb, ASB's deposit liabilities are
primarily short term. Of ASB's total deposits of $12.9 billion at September 30,
1996, only $940.0 million was in time deposits with original maturities of
longer than one year.
Like WMB and WMBfsb, ASB has also promoted a checking account, in its case
"Mileage Checking." Mileage Checking is, unlike Free Checking, an
interest-bearing checking account product. At September 30, 1996, ASB had total
interest-bearing checking deposits of $1.2 billion. Management of the Company
hopes to reduce ASB's cost of funds in the future by introducing Free Checking
in ASB's markets. Management also hopes to interest more of ASB's depositors in
MMDAs, which currently account for only 14 percent of ASB's deposits.
Borrowings and Annuities. The Company uses borrowings, in addition to
deposit acquisitions, as an integral part of funding its growth. In addition to
the borrowings discussed below, at September 30, 1996, the
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<PAGE> 63
Company was in a position to obtain an additional $10.8 billion, primarily
through the use of collateralized borrowings and deposits of public funds using
unpledged mortgage-backed securities and other wholesale borrowing sources. See
"Management's Discussion and Analysis of Financial Position and Results of
Operation -- Liquidity."
Borrowings include the sale of securities subject to repurchase agreements,
the purchase of federal funds, the issuance of mortgage-backed bonds or notes,
capital notes and other types of debt securities, and funds obtained as advances
from the FHLB of Seattle and the FHLB of San Francisco. The Company also has
access to the Federal Reserve Bank's discount window. Under Washington state
law, WMB may borrow up to 30 percent of total assets, but sales of securities
subject to agreements to repurchase are not deemed borrowings under such law,
and borrowings from federal, state or municipal governments, agencies or
instrumentalities thereof also are not subject to the 30 percent limit.
The following table shows the Company's borrowings:
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER 31,
30, ---------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Annuities........................................... $ 868,438 $ 855,503 $ 799,178
Federal funds purchased............................. 1,030,500 433,420 --
Securities sold under agreements to repurchase...... 8,615,157 7,984,756 6,637,346
Advances from the FHLB.............................. 5,539,551 4,715,739 4,128,977
New Capital borrowings.............................. 364,500 364,500 300,500
Other............................................... 323,768 225,717 80,566
----------- ----------- -----------
Total borrowings............................... $16,741,914 $14,579,635 $11,946,567
=========== =========== ===========
</TABLE>
The Company actively engages in repurchase agreements with authorized
broker-dealers and major customers selling U.S. government and corporate
securities and MBS under agreements to repurchase them or similar securities at
a future date. At September 30, 1996, the Company had $8.6 billion of such
borrowings.
WMB, WMBfsb and WM Life are members of the FHLB of Seattle and ASB is a
member of the FHLB of San Francisco. As members, each company maintains a credit
line that is a percentage of its total regulatory assets, subject to
collateralization requirements. At year-end 1995, WMB, ASB, WMBfsb, and WM Life
had credit lines of 17 percent, 14 percent, 19 percent and 45 percent,
respectively, of total regulatory assets. At September 30, 1996, advances under
these credit lines totaled $5.5 billion and were secured in aggregate by grants
of security interests in all FHLB stock owned, deposits with the FHLB, and
certain mortgage loans and deeds of trust and securities of the U.S. government
and agencies thereof.
In August 1995, the Company filed a shelf registration statement with the
Commission for the Offerings, on a delayed or continuous basis, of up to $250.0
million of debt securities, of which $100.0 million remains available.
In November 1996, Washington Mutual received commitments for $200.0 million
of Revolving Credit Facilities with two tranches: a $100.0 million 364-day
facility and a $100.0 million 4-year facility. Chase Manhattan Bank has agreed
to act as Administrative Agent for the Facilities. Proceeds of the Facilities
were used for funding needs at the closing of the Transaction, including
redemption of the New Capital securities, and are available for general
corporate purposes, including providing capital at a subsidiary level.
WM Life and Empire issue fixed annuity contracts through licensed agents
who are employees of subsidiaries of the Company and operate in WMB financial
centers. Currently, annuities are issued primarily in Washington and Oregon. At
September 30, 1996, the policy value of such contracts was $806.6 million. WM
Life also issues variable annuity contracts. At September 30, 1996, the policy
value of such contracts was $61.8 million. All annuity contracts impose a
contractual surrender charge in the event of a customer's withdrawal of funds
within a certain number of years (in the case of most of WM Life's fixed annuity
contracts, five years) from the date the annuity contract was issued.
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<PAGE> 64
In December 1996, the Company redeemed $20.5 million of debt securities of
New Capital, and intends to redeem the remaining $344 million of New Capital
debt securities in early 1997.
ASSET AND LIABILITY MANAGEMENT
The long-run profitability of the Company depends not only on the success
of the services it offers to its customers and the quality of its loans and
investments, but also the extent to which its earnings are unaffected by changes
in interest rates. The Company's asset and liability management strategy
attempts to reduce the risk of a significant decrease in net interest income
caused by interest rate changes without unduly penalizing current earnings.
WMB and WMBfsb, as is true of many financial institutions, have had a
mismatch between the maturity of its assets and liabilities. Their customers
generally prefer short-term deposits (see "Sources of Funds -- Deposits") and
many of them also prefer long-term fixed-rate loans. This mismatch is not a
problem when interest rates are stable or declining. However, with a rise in
short-term interest rates, as was experienced throughout most of 1994, the
interest paid on deposits and other short-term borrowings increases much more
quickly than the interest earned on loans and investments. The result for WMB
and WMBfsb was a reduction in their net interest spread and corresponding
pressure on net interest income in both 1994 and 1995. One means of reducing the
effect of interest rate volatility on net interest income is to shorten asset
durations. In recent years, WMB and WMBfsb have attempted to do this by
emphasizing ARMs and short-term consumer loan programs. At September 30, 1996,
the portion of WMB's and WMBfsb's residential loans and MBS that were
adjustable-rate was approximately 45 percent. ASB does not suffer from the same
asset liability mismatch as WMB and WMBfsb because the majority of its assets
are COFI ARMs which reprice monthly. In times of rising interest rates, however,
the Company is negatively affected by an inherent timing difference between the
repricing of its ARM assets and its liabilities. The effect of this timing
difference, or "lag," will be favorable during a period of declining interest
rates and unfavorable in a rising interest rate environment. Although the effect
of this lag generally balances out over the life of a loan, it can produce
shortterm volatility in the Company's net interest income during periods of
interest rate movement.
The lifetime interest rate caps which the Company offers to its ARM
borrowers introduce another element of interest rate risk to the Company. In
periods of high interest rates, it is possible for the index to exceed the rate
on the lifetime interest rate caps offered to customers. When determined
appropriate by management, the Company hedges this risk by purchasing COFI- and
LIBOR-based interest rate cap and floor agreements.
Over half of the $4.9 billion of securities reclassified from Washington
Mutual's held-to-maturity category to its available-for sale category in 1995
were fixed-rate MBS. The reclassification gave the Company the flexibility to
dispose of a portion of such securities over time and replace them with
adjustable-rate assets as part of its interest rate risk management program.
During the first nine months of 1996, the Company securitized and then sold a
substantial portion of the fixed-rate loans it originated, while retaining
nearly all of its adjustable-rate loan production. The Company retained the
servicing rights to the loans that were sold. In addition, as part of the
restructuring strategy initiated in late 1995, the Company purchased
adjustable-rate assets and sold fixed-rate mortgage-backed assets.
In the future, it is anticipated that a portion of the remaining fixed-rate
securities may be replaced with adjustable-rate GSE MBS, adjustable-rate
private-issue MBS, collateralized mortgage obligations, and purchased loan pools
as well as new originations of ARMs, as the fixed-rate securities pay down or
are sold as market conditions permit. During periods of moderate to high market
interest rates, originations of ARMs have been well received by customers.
During periods of low market interest rates, however, customers have preferred
fixed-rate mortgage loans. This portfolio restructuring strategy is intended to
reduce the Company's interest rate sensitivity while simultaneously protecting
its yield. As the Company substitutes adjustable-rate assets for fixed-rate
assets, its sensitivity to future changes in interest rates decreases, because,
unlike fixed-rate securities, interest rates on adjustable-rate assets change,
within certain periodic and lifetime cap restraints, with corresponding changes
in market rates. However, substituting adjustable-rate assets for fixed-rate
assets can have two disadvantages. First, adjustable-rate assets, when compared
with similar fixed-rate
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<PAGE> 65
assets, carry additional credit risk in an increasing interest rate environment.
As these assets reprice upward, the borrower's creditworthiness may become
impaired. Second, the holding of adjustable-rate assets will decrease the
overall portfolio yield in a stable or declining interest rate environment.
Accordingly, the Company plans to replace some of its fixed-rate MBS with
private-issue MBS, collateralized mortgage obligations, and purchased loan pools
to minimize the decline in portfolio yield.
Another way to reduce the effect of the volatility of interest rates is to
lengthen liability durations, which is difficult because of depositors'
preferences for liquidity. This was apparent from the fact that at September 30,
1996, the Company's MMDAs accounted for $5.1 billion or 21 percent of total
deposits and time deposits with maturities less than one year totaled $12.2
billion or 51 percent of total deposits.
At September 30, 1996, interest-sensitive assets of $29.9 billion and
interest-sensitive liabilities of $33.9 billion were scheduled to mature or
reprice within one year. At September 30, 1996, the Company's one-year gap was a
negative 0.97 percent. The Company's interest rate sensitivity has decreased
with the sale of WMB's fixed-rate MBS undertaken in 1996 and the retention of
ARMs originated by ASB. It still, however, suffers from some short-term
volatility of net income because of the effect of COFI lag. Management hopes to
reduce this short-term volatility in part by increasing production of non-COFI
adjustable-rate products and short-term fixed-rate products such as consumer
loans. In addition to managing the terms of its actual assets and liabilities,
the Company uses derivative instruments, such as interest rate exchange
agreements and interest rate cap agreements, to mitigate interest rate risk. At
September 30, 1996, the Company had entered into interest rate exchange
agreements and interest rate cap agreements with notional values of $14.8
billion. Without these instruments, the Company's one-year gap at September 30,
1996, would have been a negative 9.0 percent as opposed to a negative 0.97
percent. See "Supplemental Consolidated Financial Statements -- Note 18:
Interest Rate Risk Management" for a discussion of the use of derivative
instruments.
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<PAGE> 66
BUSINESS COMBINATIONS
Most of the Company's growth since 1988 has occurred as a result of banking
business combinations. These institutions were generally combined with the
Company's federally chartered banking subsidiaries, primarily for regulatory
reasons.
The following table summarizes Washington Mutual's business combinations
since April 1988:
<TABLE>
<CAPTION>
NUMBER
ACQUISITION NAME DATE ACQUIRED LOANS DEPOSITS ASSETS OF LOCATIONS
- ----------------------------------------- --------------- --------- --------- --------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Columbia Federal Savings Bank and
Shoreline Savings Bank................. April 29, 1988 $ 551.0 $ 555.0 $ 752.6 26
Old Stone Bank(1)........................ June 1, 1990 229.5 292.6 294.0 7
Frontier Federal Savings
Association(2)......................... June 30, 1990 -- 95.6 -- 6
Williamsburg Federal Savings Bank(2)..... Sept. 14, 1990 -- 44.3 -- 3
Vancouver Federal Savings Bank........... July 31, 1991 200.1 253.4 260.7 7
CrossLand Savings, FSB(2)................ Nov. 8, 1991 -- 185.4 -- 15
Sound Savings and Loan Association....... Jan. 1, 1992 16.8 20.5 23.5 1
World Savings and Loan Association(2).... March 6, 1992 -- 37.8 -- 2
Great Northwest Bank..................... April 1, 1992 603.2 586.4 710.4 17
Pioneer Federal Savings Bank............. March 1, 1993 624.5 659.5 926.5 17
Pacific First............................ April 9, 1993 3,770.7 3,831.7 5,861.3 129
Far West Federal Savings Bank(2)......... April 15, 1994 -- 42.2 -- 3
Summit Savings Bank...................... Nov. 14, 1994 127.5 169.3 188.1 4
Olympus Bank, a Federal Savings Bank..... April 28, 1995 237.8 278.6 391.4 11
Enterprise Bank.......................... Aug. 31, 1995 92.8 138.5 153.8 1
Western Bank............................. Jan. 31, 1996 500.8 696.4 776.3 42
Utah Federal Savings Bank(3)............. Nov. 30, 1996 87.5 106.9 122.2 5
American Savings Bank(3)................. Dec. 20, 1996 13,844.0 12,902.0 21,298.2 221
United Western Financial Group(3)........ (4) 217.9 294.4 414.9 9
</TABLE>
- ---------------
(1) This was an acquisition of selected assets and liabilities.
(2) The acquisition was of branches and deposits only. The only assets acquired
were branch facilities or loans collateralized by acquired savings deposits.
(3) Information given at September 30, 1996.
(4) The acquisition is expected to close in January 1997.
See "Supplemental Consolidated Financial Statements -- Note 2: Business
Combinations" for a discussion of the accounting treatment of certain of the
acquisitions.
EMPLOYEES
The number of full-time equivalent employees at the Company increased from
7,915 at December 31, 1995 to 8,214 at September 30, 1996. The Company believes
that it has been successful in attracting quality employees and believes its
employee relations are excellent.
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TAXATION OF THE COMPANY
GENERAL. For federal income tax purposes, the Company reports its income
and expenses using the accrual method of tax accounting and uses the calendar
year as its tax year. Except for the interest expense rules pertaining to
certain tax exempt income applicable to banks and the recently repealed bad debt
reserve deduction, the Company is subject to federal income tax, under existing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), in
generally the same manner as other corporations.
TAX BAD DEBT RESERVE RECAPTURE. The recently enacted "Small Business Job
Protection Act of 1996" (the "Job Protection Act") requires that qualified
thrift institutions, such as WMB, WMBfsb and ASB, generally recapture for
federal income tax purposes that portion of the balance of their tax bad debt
reserves that exceeds the December 31, 1987 balance, with certain adjustments.
Such recaptured amounts are to be generally taken into ordinary income ratably
over a six year period beginning in 1996, or as late as 1998 if certain
conditions are met. Accordingly, Washington Mutual will have to pay an
additional approximately $4.2 million (based upon current federal income tax
rates) in federal income taxes each year of the six-year period due to the Job
Protection Act. As required by the Merger Agreement, Keystone Holdings filed
amended federal income tax returns with the IRS for 1992 and 1993 in order to
reduce the tax bad debt reserve recapture amount that ASB would otherwise incur
due to the Job Protection Act.
The Job Protection Act also repeals the reserve method of accounting for
tax bad debt deductions and, thus, requires thrifts to calculate the tax bad
debt deduction based on actual current loan losses.
NET OPERATING LOSS CARRYFORWARD DEDUCTIONS. Due to Section 382 of the
Code, most of the value of the net operating loss carryforward deductions of
Keystone Holdings and its subsidiaries will be eliminated due to the
Transaction. Accordingly, the future tax savings attributable to such net
operating loss carryforward deductions (other than amounts used to offset bad
debt reserve deduction recapture described above for ASB) will be greatly
reduced. Further, the actual savings due to such reduced net operating loss
carryforward deductions will be even further reduced due to a provision in the
Assistance Agreement generally requiring that approximately 75 percent of most
of the federal tax savings resulting from such net operating loss carryforwards
be paid to the FRF.
STATE INCOME TAXATION. The state of Washington does not currently have a
corporate income tax. A business and occupation tax based on percentage of gross
receipts is assessed on businesses. Currently, interest received on loans
secured by first mortgages or deeds of trust on residential properties is not
subject to such tax. However, it is possible that legislation will be introduced
that would repeal or limit this exemption.
The states of California, Oregon, Utah, Idaho, Montana, Colorado and Nevada
have corporate income taxes, which are imposed on companies doing business in
those states. The Company's substantial operations in California and Oregon will
result in substantial corporate income tax expenses in such states. As the
Company's operations in the remaining states increase, the corporate income
taxes will have an increasing effect on Company's results of operations or
financial condition.
If and to the extent the Company carries on activities in other states, the
Company may in certain circumstances be subject to tax in such states.
TAX-RELATED AGREEMENTS
CLOSING AGREEMENTS. In connection with the 1988 Acquisition, the Internal
Revenue Service entered into the Closing Agreement with respect to the federal
income tax consequences of the 1988 Acquisition and certain aspects of the
taxation of Keystone Holdings and certain of its affiliates. The Closing
Agreement contains provisions that are intended to ensure that losses generated
by New West would be available to offset income of ASB for federal income tax
purposes. To accomplish this, the Closing Agreement provides, among other
things, that: (a) the 1988 Acquisition was a tax-free reorganization, (b) the
tax attributes of the Failed Association, including net operating losses and tax
bad debt reserves, carried over to ASB, (c) as long as ASB
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qualified as a domestic building and loan association and New West was its
nominee, any assistance received or accrued from the FRF would be excluded from
gross income, and (d) as long as certain conditions (the "nominee conditions")
existed, New West would be a nominee for ASB with the result that all of New
West's income, deductions, gains and losses would be treated as ASB's income,
deductions, gains and losses.
The California Franchise Tax Board issued an opinion letter with provisions
substantially similar to the Closing Agreement; thus, New West's losses
similarly should be available to offset ASB's income for California franchise
tax purposes. In 1993, California enacted legislation reducing the net operating
loss carryforward period to 10 years from 15 years for losses incurred prior to
1994 related to assets acquired in a tax-free reorganization such as that used
in the 1988 Acquisition. No adverse effect is expected from this legislative
change.
Federal legislation enacted in 1993 retroactively disallowed certain losses
and bad debt deductions relating to assets acquired in a federally assisted
transaction. This legislation reduced Keystone Holdings' federal net operating
loss carryforward by approximately $445 million. The federal net operating loss
carryforwards available to Keystone Holdings at December 31, 1995 total
approximately $3.2 billion. See "-- Taxation of the Company -- Net Operating
Loss Carryforward Deductions."
On October 24, 1995, New West and ASB ceased to meet the nominee
conditions. Accordingly, the tax benefits generated by any future losses of New
West may not offset ASB's taxable income.
ASSISTANCE AGREEMENT. The Assistance Agreement between Keystone Holdings
and it subsidiaries is designed, in part, to provide that over time, 75 percent
of most of the federal tax savings and 19.5 percent of most of the California
tax savings (in each case computed in accordance with specific provisions
contained in the Assistance Agreement) attributable to the utilization of any
current losses or tax loss carryforwards of New West are paid ultimately to the
FRF. The provision for such payments is reflected in the financial statements as
"Payments in Lieu of Taxes."
TAX SETTLEMENT AGREEMENT. The Tax Settlement Agreement, which was a
condition to closing the Transaction, resolved certain disputes that arose
between Keystone Holdings and certain of its affiliates and the FDIC-Manager
regarding interpretations of provisions in the Assistance Agreement pertaining
to the general requirement that approximately 75 percent of the federal income
tax savings attributable to New West be paid to the FRF. The Tax Settlement
Agreement required Keystone Holdings to pay $10.5 million to the FRF upon the
closing of the Transaction, in addition to any other undisputed amounts owed.
TAX SHARING AGREEMENT. Under the Tax Sharing Agreement entered into by
Keystone Holdings and its subsidiaries, ASB and its parent are required to pay
to Keystone Holdings an amount equal to the federal income tax liability that
such corporations would have had if they had filed a separate consolidated
federal income tax return, except that such separate federal income tax
liability is to be calculated excluding certain significant deductions
(including NOL carryforwards attributable to New West) and with certain other
adjustments and including as an add-back, for years ending before 1995 the
agreed upon amortization of the excess of tax basis over value of the assets
acquired by ASB in the 1988 Acquisition. A similar concept applies in
determining the amount of the tax sharing payment related to the California
franchise tax that ASB must pay to Keystone Holdings. See Note 21, "Payments in
Lieu of Taxes," in the Notes to the Supplemental Consolidated Financial
Statements.
ENVIRONMENTAL REGULATION
The Company's business and properties are subject to federal and state laws
and regulations governing environmental matters, including the regulation of
hazardous substances and wastes. For example, under the federal Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and similar
state laws, owners and operators of contaminated properties may be liable for
the costs of cleaning up hazardous substances without regard to whether such
persons actually caused the contamination. Such laws may affect the Company both
as an owner of properties used in or held for its business, and as a secured
lender of property that is found to contain hazardous substances or wastes. With
respect to a property owned by the Company, the Company has been notified that
it may be liable for certain investigatory and other costs related
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to groundwater contamination allegedly caused by dry cleaners purported to have
operated at the property prior to the Company's ownership. The Company believes
it has meritorious defenses in this matter and plans to vigorously defend
against any liability therefor. There can be no assurance, however, that the
Company will not incur liability for this matter or that any such liability will
not be material.
Further, although CERCLA exempts holders of security interests, the
exemption may not be available if a secured party engages in the management of
its borrower or the collateral property in a manner deemed beyond the protection
of the secured party's interest. Recent federal and state legislation, as well
as guidance issued by the United States Environmental Protection Agency and a
number of court decisions, have provided assurance to lenders regarding the
activities they may undertake and remain within CERCLA's secured party
exemption. However, these assurances are not absolute and generally will not
protect a lender or fiduciary that participates or otherwise involves itself in
the management of its borrower, particularly in foreclosure proceedings. As a
result, CERCLA and similar state statutes may affect the Company's decision
whether to foreclose on property that is found to be contaminated. It is the
Company's general policy to obtain an environmental assessment prior to
foreclosure of commercial property. The existence of hazardous substances or
wastes on such property may cause the Company to elect not to foreclose on the
property, thereby limiting, and in some instances precluding, the Company from
realizing on such loans.
SELLING STOCKHOLDERS
The Selling Stockholders consist of the FRF and certain KHP Investors all
of whom received shares of Common Stock in the Transaction. The following table
sets forth the number of Shares beneficially owned and being offered by each
Selling Stockholder specified.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO NUMBER OF OWNED AFTER THE
SELLING STOCKHOLDERS THE OFFERINGS(1) SHARES OFFERED OFFERINGS(1)
- ------------------------------------- ------------------- -------------- -------------------
<S> <C> <C> <C>
FSLIC Resolution Fund(2)............. 14,000,000 14,000,000 0
Andrew E. Furer(3)................... 520,656 520,656 0
William E. Oberndorf(4).............. 328,465 100,000 228,465
Barry R. Jackson(4).................. 157,802 50,000 107,802
William P. Hallman, Jr.(4)(5)(6)..... 78,777 38,777 40,000
KHI Associates, L.P.(4)(6)........... 349,726 36,223 313,503
26 Savings Associates, L.P.(4)(6).... 156,142 18,910 137,232
President and Fellows of Harvard
College(7)......................... 320,739 320,739 0
---------- ---------- -------
Total...................... 15,912,307 15,085,305 827,002
========== ========== =======
</TABLE>
- ---------------
(1) Does not include each Selling Stockholder's contingent right to receive its
pro rata interest in the 8,000,000 Litigation Escrow Shares. Upon
consummation of the Offerings, none of the Selling Stockholders will own in
excess of one percent of the Company's outstanding Common Stock.
(2) The Shares being offered by the FRF were acquired by the FRF pursuant to the
Warrant Exchange Agreement as part of the Transaction. See
"Summary -- Background of the Transaction." The FRF had held the Warrants
since 1989, when certain assets and liabilities of the FSLIC, including the
Warrants that the FSLIC received as part of the 1988 Acquisition, were
transferred to the FRF, pursuant to federal legislation. The FSLIC (and
after the FSLIC was abolished, the FRF) has, pursuant to contractual
agreements entered into the time of the 1988 Acquisition, as such agreements
have been amended from to time, provided a variety of forms of financial
assistance to ASB and certain of its affiliates. See "Summary -- Background
of the Transaction" and "Business -- Tax-related Agreements." As
government-controlled entities of the United States of America, the FRF and
the FDIC-Manager benefit from certain governmental immunities from actions
under the federal securities laws. See "Risk Factors -- Governmental
Immunity of the FRF and FDIC-Manager as Selling Stockholder." At the time of
completion of the Offerings, the FRF will not hold, in any capacity, any
other securities of the Company,
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<PAGE> 70
other than the FRF's contingent right to receive a portion of the Litigation
Escrow Shares. See "The Keystone Transaction -- The Litigation Escrow." Mr.
William Longbrake, the Company's Executive Vice President and Chief
Financial Officer, served as Chief Financial Officer and Deputy to the
Chairman for Financial Policy at the FDIC from February 1995 through
September 1996.
(3) Mr. Furer is a limited partner of KHP and received the Shares held by him
and being offered hereunder upon the distribution of such shares by KHP upon
consummation of the Transaction. See "The Keystone Transaction -- The
Transaction." For different periods during the three-year period prior to
the date of the Offerings to which this Prospectus relates, Mr. Furer was a
director of Keystone Holdings, New American Holdings, Inc., New Capital,
N.A. Capital Holdings, Inc. ("NACH" and which three companies are
intermediate holding companies between Keystone Holdings and ASB), ASB,
American Real Estate Group, ("AREG"), and New West and was Chairman of the
Audit Committee of the board of directors of each of ASB, New West, and
AREG. Mr. Furer resigned as a director and as a member of the Audit
Committee of AREG on February 15, 1994; resigned as a director and as a
member of the Audit Committee of New West on April 22, 1994; and resigned
all other directorships referred to above (and as a member of the Audit
Committee of ASB) on July 18, 1996. Mr. Furer is, and for the three-year
period prior to the date of the Offerings, Mr. Furer has been, a Managing
Partner of Castine Partners, which assisted in the organization and
execution of the 1988 Acquisition and monitored this investment on behalf of
KHP. At the time of completion of the Offerings, Mr. Furer will not hold, in
any capacity, any other securities of the Company, other than his contingent
right to receive a portion of the Litigation Escrow Shares. See "The
Keystone Transaction -- The Litigation Escrow."
(4) Such person or entity is a limited partner of KHP and received the Shares
held by them and being offered hereunder upon the distribution of such
Shares by KHP upon consummation of the Transaction. See "The Keystone
Transaction -- The Transaction."
(5) Mr. Hallman is a director in Kelly, Hart & Hallman, a professional
corporation ("KHH"), which served as special counsel to KHP and Keystone
Holdings and its subsidiaries in connection with the Transaction and has
been or will be paid fees and reimbursed expenses for such services. During
the three-year period prior to the Offerings, KHH has from time to time
served as outside counsel to KHP and its subsidiaries and has been paid fees
and reimbursed expenses for such services.
(6) The general partner of such partnership is a limited partnership, the
general partner of which is a trust, the sole trustee of which is William P.
Hallman, Jr. As sole trustee of the trust that is the general partner of the
limited partnership that is the general partner of KHI Associates, L.P.
("KHIA") and 26 Savings Associates, L.P. ("SA"), Mr. Hallman has voting and
investment power with respect to the Shares owned by KHIA and SA and may be
deemed to be the beneficial owner of such Shares. Mr. Hallman disclaims
beneficial ownership as to Shares held by KHIA or SA. Robert M. Bass is a
limited partner in KHIA and SA, but neither KHIA nor SA is disposing of any
Shares in the Offering attributable to his respective partnership interests
therein.
(7) The President and Fellows of Harvard College received such shares pursuant
to a transaction entered into with Mr. Furer.
DESCRIPTION OF WASHINGTON MUTUAL CAPITAL STOCK
Washington Mutual is authorized by its Restated Articles of Incorporation
(the "Articles") to issue up to 350,000,000 shares of no par value Common Stock
and up to 10,000,000 shares of preferred stock, no par value. At December 30,
1996, there were issued and outstanding 125,285,150 shares of Common Stock,
2,752,500 shares of 9.12% Noncumulative Perpetual Preferred Stock, Series C (the
"Series C Preferred"); 184,919 shares of $6.00 Noncumulative Convertible
Perpetual Preferred Stock, Series D (the "Series D Preferred"); and 1,970,000
shares of 7.60% Noncumulative Perpetual Preferred Stock, Series E (the "Series E
Preferred"). Collectively, the Series C Preferred, Series D Preferred and Series
E Preferred are referred to as the "Preferred Stock."
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<PAGE> 71
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held by
such holder on all matters voted upon by holders of Common Stock. Shareholders
are not permitted to cumulate their votes for the election of directors.
In the unlikely event of liquidation, dissolution or winding up of
Washington Mutual, holders of Common Stock will be entitled to share ratably in
any remaining assets of Washington Mutual, in cash or in kind, after payment or
provision for payment of all liabilities and the liquidation preference of any
outstanding Preferred Stock.
Holders of Common Stock are not entitled to preemptive rights with respect
to any additional shares that may be issued.
The authorized but unissued and unreserved shares of Common Stock will be
available for general corporate purposes, including but not limited to possible
issuance in exchange for capital notes, as stock dividends or stock splits, upon
conversion of preferred stock in future mergers or acquisitions, under a cash
dividend reinvestment plan, for employee benefit plans, or in a future
underwritten or other public offering. Except as required to approve the
transactions in which the additional authorized shares of Common Stock would be
issued, no shareholder approval will be required for the issuance of these
shares.
PREFERRED STOCK
Each series of Preferred Stock is prior to Common Stock as to dividends and
payments upon liquidation, dissolution or winding up, but does not confer
general voting rights.
The Series C Preferred has a liquidation preference of $25.00 per share
plus dividends accrued and unpaid for the then-current dividend period, and is
not convertible into any other Washington Mutual securities. Dividends on the
Series C Preferred, if and when declared by the Washington Mutual Board of
Directors, or a duly authorized committee thereof, are noncumulative, are
payable quarterly and are set at an annual rate of $2.28 per share. On or after
December 31, 1997, Washington Mutual may at its option redeem the Series C
Preferred.
The Series D Preferred has a liquidation preference of $100.00 per share
plus dividends accrued and unpaid for the then-current dividend period, and is
convertible into shares of Common Stock. Dividends on the Series D Preferred, if
and when declared by the Washington Mutual Board of Directors, or a duly
authorized committee thereof, are noncumulative, are payable quarterly and are
set at an annual rate of $6.00 per share. On or after December 31, 1996
Washington Mutual may at its option redeem the Series D Preferred. On November
30, 1996, the Company mailed a notice of redemption to holders of the Series D
Preferred Stock notifying them that the Series D Preferred Stock will be
redeemed on December 31, 1996. The Company anticipates that substantially all of
the Series D Preferred Stock will be converted into approximately 5.4 million
shares of Common Stock.
The Series E Preferred has a liquidation preference of $25.00 per share
plus dividends accrued and unpaid for the then-current dividend period, and is
not convertible into any other Washington Mutual securities. Dividends on the
Series E Preferred, if and when declared by the Washington Mutual Board of
Directors, or a duly authorized committee thereof, are noncumulative, are
payable quarterly and are set at an annual rate of $1.90 per share. On or after
September 15, 1998, Washington Mutual may at its option redeem the Series E
Preferred.
DIVIDEND POLICY
Dividends may be paid on the Common Stock as and when declared by the
Washington Mutual Board of Directors (the "Board of Directors") out of funds
legally available for the payment of dividends. Each quarter,
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<PAGE> 72
the Board of Directors considers the payment of dividends. The factors affecting
this determination include Washington Mutual's long-term interests, current and
projected earnings, adequacy of capitalization, expected asset and deposit
growth as well as other financial conditions, legal, regulatory and contractual
restrictions, and tax considerations.
According to Washington law, Washington Mutual dividends may be paid only
if, after giving effect to the dividend, Washington Mutual will be able to pay
its debts as they become due in the ordinary course of business and Washington
Mutual's total assets will not be less than the sum of its total liabilities
plus the amount that would be needed, if Washington Mutual were to be dissolved
at the time of the dividend, to satisfy the preferential rights of persons whose
right to payment is superior to those receiving the dividend. Washington
Mutual's ability to pay dividends is also dependent on the ability of WMB, and
ASB, and WMBfsb and other subsidiary operations to pay dividends to Washington
Mutual.
The three series of outstanding Preferred Stock rank prior to the Common
Stock and to all other classes and series of equity securities of Washington
Mutual, other than any classes or series of equity securities of Washington
Mutual ranking on a parity with the Preferred Stock.
The rights of holders of Preferred Stock to receive dividends is
noncumulative. Accordingly, if the Board of Directors fails to declare a
dividend on any dividend payment date, the holders of Preferred Stock will have
no right to receive a dividend in respect of the dividend period ending on such
dividend payment date and Washington Mutual will have no obligation to pay the
dividend accrued for such period, whether or not dividends are declared payable
on any future dividend payment dates.
Full dividends on Preferred Stock must be declared and paid or set apart
for payment for the most recent dividend period ended before (i) any dividend
(other than in Common Stock) on stock junior to the Preferred Stock ("Junior
Stock") may be declared or paid or set aside for payment or other distribution
made upon the Common Stock or on any other Junior Stock or (ii) Junior Stock is
redeemed (or any moneys are paid to or made available for a sinking fund for the
redemption of any share of any such stock) or any Junior Stock or stock on a
parity with Preferred Stock is purchased or otherwise acquired by Washington
Mutual for any consideration except by conversion into or exchange for Junior
Stock.
The Board of Directors may issue preferred stock that is entitled to such
dividend rights as the Board of Directors may determine, including priority over
Common Stock in the payment of dividends.
CERTAIN ANTI-TAKEOVER PROVISIONS IN WASHINGTON MUTUAL'S ARTICLES AND BYLAWS
The Articles and bylaws of Washington Mutual currently contain provisions
that may assist the Board of Directors in resisting, or enabling the Board of
Directors to resist, a takeover attempt it does not consider beneficial to
Washington Mutual. These provisions are designed to inhibit hostile takeovers
and encourage potential acquirers to negotiate with the Board of Directors. The
possible effect of these provisions may be to delay, defer, or prevent a change
in control of Washington Mutual.
AUTHORITY TO ISSUE PREFERRED STOCK. The Board of Directors is authorized
to issue preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions, including dividend rights, conversion
rights, voting rights, rights and terms of redemption, redemption price or
prices, liquidation preferences and the number of shares constituting any series
or the designation of such series, without any further vote or action by the
shareholders. Washington Mutual has no present plans to issue any additional
shares of preferred stock.
NO CUMULATIVE VOTING. The Articles do not provide for cumulative voting.
As a result, to be ensured of representation on the Board of Directors, a
shareholder must control the votes of a majority of the shares present and
voting at a shareholders' meeting at which a quorum is present. In addition, the
Articles provide that a transaction is not void or voidable solely by virtue of
the interested status of a director in such a transaction, if the relationship
is known or disclosed and a sufficient number of disinterested directors, at a
meeting at which a quorum is present, approve the transaction.
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<PAGE> 73
CLASSIFIED BOARD OF DIRECTORS. Article IV of the Articles provides that
the Board of Directors is to be divided into three classes as nearly equal in
number as possible. A classified board of directors could make it more difficult
for Washington Mutual shareholders, including those holding a majority of the
outstanding Common Stock, to force an immediate change in the composition of the
majority of the Board of Directors.
APPROVAL OF MERGERS, CONSOLIDATIONS, SALE OF SUBSTANTIALLY ALL ASSETS AND
DISSOLUTION. Article IX of Washington Mutual's Articles provides that if,
pursuant to the Washington Business Corporation Act, Washington Mutual's
shareholders are required to approve a merger and if two-thirds of the Board of
Directors vote to recommend the merger to the Washington Mutual shareholders,
then the merger may be approved by a vote of the Washington Mutual shareholders
holding a majority of the outstanding voting shares.
In addition, Article XI of the Articles prohibits, except under specified
circumstances, Washington Mutual (or any subsidiary of Washington Mutual) from
engaging in certain significant business transactions with a "Major Stockholder"
(defined as a person who, without the prior approval of the Board of Directors,
acquires beneficial ownership of five percent or more of the votes held by the
holders of the outstanding shares of Washington Mutual's voting stock).
Prohibited transactions include, among others, any merger with, disposition of
assets to, acquisition by Washington Mutual of the assets of, issuance of
securities of Washington Mutual to, or acquisition by Washington Mutual of
securities of a Major Stockholder, or any reclassification of the voting stock
of Washington Mutual or of any subsidiary beneficially owned by a Major
Stockholder, or any partial or complete liquidation, spin off, slit off or split
up of Washington Mutual or any subsidiary. The above prohibitions do not apply,
in general, if the specific transaction is approved by a supermajority vote of
either the Board of Directors or the holders of voting stock owned other than by
any Major Stockholder. The Articles also provide that during the time a Major
Stockholder exists, Washington Mutual may voluntarily dissolve only upon the
unanimous consent of its stockholders or an affirmative vote of at least
two-thirds of its directors and the holders of at least two-thirds of both the
shares entitled to vote on such a dissolution and of each class of shares
entitled to vote on such a dissolution as a class, if any. Amendments to this
Article XI require the affirmative vote of 95% of Washington Mutual shareholders
holding voting stock beneficially owned by shareholders other than any Major
Stockholder.
SHAREHOLDER RIGHTS PLAN. In October 1990, WMSB's board of directors
adopted a shareholder rights plan and declared a dividend of one right for each
outstanding share of common stock of WMSB to stockholders of record on October
31, 1990. The Company has assumed the shareholder rights plan. The rights have
certain anti-takeover effects and are intended to discourage coercive or unfair
takeover tactics and to encourage any potential acquirer to negotiate a price
fair to all stockholders. The rights may cause substantial dilution to an
acquiring party that attempts to acquire the Company on terms not approved by
the Board 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.
The rights are not exercisable until the tenth day after a party acquires
beneficial ownership of 20 percent or more of outstanding Common Stock or
commences or publicly announces for the first time a tender offer to do so. Each
right entitles the holder to purchase one share of Common Stock for an exercise
price that is currently $26.67 per share. In the event, among certain other
specified events, that an acquiring party thereafter gains control of 30 percent
or more of the Common Stock, any rights held by that party will be void and, for
the next 60 days, all other holders of rights can receive that number of shares
of Common Stock having a market value of two times the exercise price of the
right. The rights, which expire on October 16, 2000, may be redeemed by the
Company for $0.0044 per right prior to being exercisable. Until a right is
exercised, the holder of that right will have no rights as a shareholder of the
Company, including, without limitation, the right to vote or to receive
dividends.
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES PURCHASERS
The following is a general discussion of certain United States Federal tax
consequences of the acquisition, ownership, and disposition of Common Stock by a
holder that, for United States Federal income tax purposes, is not a "United
States person" (as defined below) (a "Non-United States Holder"). This
discussion is based upon the United States Federal tax law now in effect, which
is subject to change, possibly retroactively. This discussion does not consider
any specific facts or circumstances that may apply to a particular Non-United
States Holder. Prospective investors are urged to consult their tax advisors
regarding the United States Federal tax consequences of acquiring, holding, and
disposing of Common Stock, as well as any tax consequences that may arise under
the laws of any foreign state, local, or other taxing jurisdiction.
For purposes of this discussion, a "United States person" means (i) a
citizen or resident of the United States, (ii) a corporation, partnership, or
other entity created or organized in the United States or under the laws of the
United States or of any political subdivision thereof, (iii) an estate whose
income is includible in gross income for United States Federal income tax
purposes regardless of its source, or (iv) a trust whose administration is
subject to the primary supervision of a United States court and which has one or
more United States fiduciaries who have the authority to control all substantial
decisions of the trust.
It is important that each prospective Non-United States Holder understand
that all words and phrases in this tax discussion are used in accordance with
United States interpretations, which may vary materially from interpretations
used by other countries.
DIVIDENDS
Dividends paid to a Non-United States Holder will generally be subject to
withholding of United States Federal income tax at the rate of 30% unless the
dividend is effectively connected with the conduct of a trade or business within
the United States by the Non-United States Holder, in which case the dividend
will be subject to the United States Federal income tax imposed on net income on
the same basis that applies to United States persons generally (and, with
respect to corporate holders and under certain circumstances, the branch profits
tax). Non-United States Holders should consult any applicable income tax
treaties that may provide for a lower rate of withholding or other rules
different from those described above. A Non-United States Holder may be required
to satisfy certain certification requirements in order to claim treaty benefits
or otherwise claim a reduction of or exemption from withholding under the
foregoing rules.
GAIN ON DISPOSITION
A Non-United States Holder will generally not be subject to United States
Federal income tax on gain recognized on a sale or other disposition of Common
Stock unless (i) the gain is effectively connected with the conduct of a trade
or business within the United States by the Non-United States Holder or (ii) in
the case of an individual who holds the Common Stock as a capital asset, such
holder is present in the United States for 183 or more days in the taxable year
and certain other requirements are met. Gain that is effectively connected with
the conduct of a trade or business within the United States by the Non-United
States Holder will be subject to the United States Federal income tax imposed on
net income on the same basis that applies to United States persons generally
(and, with respect to corporate holders and under certain circumstances, the
branch profits tax) but will not be subject to withholding. Non-United States
Holders should consult applicable income tax treaties that may provide for
different rules. The Company believes that it is not currently, and is not
likely to become, a United States real property holding corporation for United
States Federal income tax purposes.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by an individual who is not a
citizen or resident (as specially defined for United States Federal estate tax
purposes) of the United States on the date of death will be included in such
individual's estate for United States Federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.
72
<PAGE> 75
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the United States Internal Revenue
Service and to each Non-United States Holder the amount of dividends paid to,
and the tax withheld with respect to, such holder, regardless of whether any tax
has been actually withheld. This information may also be made available to the
tax authorities of a country in which the Non-United States Holder resides.
Under temporary United States Treasury regulations, United States
information reporting requirements and backup withholding tax will generally not
apply to dividends paid on the Common Stock to a Non-United States Holder at an
address outside the United States. Payments by a United States office of a
broker of the proceeds of a sale of the Common Stock is subject to both backup
withholding at a rate of 31% and information reporting unless the holder
certifies its Non-United States Holder status under penalties of perjury or
otherwise establishes an exemption. Information reporting requirements (but not
backup withholding) will also apply to payments of the proceeds of sales of the
Common Stock by foreign offices of United States brokers, or foreign brokers
with certain types of relationships to the United States, unless the broker has
documentary evidence in its records that the holder is a Non-United States
Holder and certain other conditions are met, or the holder otherwise establishes
an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-United
States Holder's United States Federal income tax liability, provided that
certain required information is furnished to the United States Internal Revenue
Service.
These information reporting and backup withholding rules are under review
by the United States Treasury and their application to the Common Stock could be
changed by future regulations. The United States Internal Revenue Service has
recently issued proposed Treasury regulations concerning these rules which are
presently proposed to be effective for payments made after December 31, 1997.
Prospective investors should consult their tax advisors concerning the potential
adoption of such proposed Treasury regulations and the potential effect on their
ownership and disposition of the Common Stock.
73
<PAGE> 76
UNDERWRITING
Subject to the terms and conditions set forth in a U.S. purchase agreement
(the "U.S. Purchase Agreement") between the Company and each of the underwriters
named below (the "U.S. Underwriters", for whom Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Friedman, Billings, Ramsey & Co., Inc. are acting as
representatives (the "U.S. Representatives")), and concurrently with the sale of
shares of Common Stock to certain underwriters outside the United
States (the "International Managers" and together with the U.S. Underwriters,
the "Underwriters"), the Company has agreed to sell to each of the U.S.
Underwriters, and each of the U.S. Underwriters has severally agreed to
purchase, the aggregate number of shares of Common Stock set forth opposite its
name below:
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
------------------------------------------------------------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................
Friedman, Billings, Ramsey & Co., Inc....................................
-----------
Total..........................................................
===========
</TABLE>
The Company has also entered into a purchase agreement (the "International
Purchase Agreement") with the International Managers. Subject to the terms and
conditions set forth in the International Purchase Agreement, and concurrently
with the sale of shares of Common Stock to the U.S. Underwriters, the
Company has agreed to sell to the International Managers, and the International
Managers have severally agreed to purchase, an aggregate of shares of
Common Stock. The initial public offering price per share of the Common Stock
and the underwriting discount per share of the Common Stock are identical under
the U.S. Purchase Agreement and the International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such Purchase Agreement if any such shares of Common Stock being sold
pursuant to each such Purchase Agreement are purchased. Under certain
circumstances, the commitments of non-defaulting U.S. Underwriters or
International Managers may be increased.
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement,
sales may be made between the U.S. Underwriters and the International Managers
of such number of shares of Common Stock as may be mutually agreed. The price of
any share of Common Stock so sold shall be the initial public offering price,
less an amount not greater than the selling concession. Under the terms of the
Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom they sell
shares of Common Stock will not offer to sell or sell shares of Common Stock to
persons who are non-United States or non-Canadian persons or to persons they
believe intend to resell to persons who are non-United States or non-Canadian
persons, and the International Managers and any dealer to whom they sell shares
of Common Stock will not offer to sell or sell shares of Common Stock to United
States or Canadian persons or to persons they believe intend to resell to United
States or Canadian persons, except, in each case, for transactions pursuant to
the Intersyndicate Agreement.
The U.S. Representatives have advised the Company that the U.S.
Underwriters propose initially to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus, and to certain dealers (who may include U.S. Underwriters) at such
price less a concession not in excess of $ per share of Common Stock. The
U.S. Underwriters may allow, and such dealers may reallow, a discount not in
excess of $ per share of Common Stock to certain other dealers. After
the initial public offering, the public offering price, concession and discount
may be changed.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, or to contribute to payments the Underwriters may be
required to make in respect thereof.
74
<PAGE> 77
The Company has agreed that it will not, with certain exceptions, offer,
sell or otherwise dispose of any shares of Common Stock for a period of 60 days
from the date of this Prospectus without the prior written consent of Merrill
Lynch, Pierce, Fenner & Smith Incorporated. This prohibition will not affect
shares of Common Stock issued by the Company pursuant to acquisitions, employee
or director benefit plans, any dividend reimbursement plan, or the conversion or
exercise of securities convertible into or exercisable for Common Stock.
Merrill Lynch, Pierce, Fenner & Smith Incorporated renders various
financial advisory services to the Company from time to time.
ERISA MATTERS
Washington Mutual and certain of its subsidiaries and affiliates, including
WMB, ASB, Murphey Favre, Composite Research and WM Life, may be considered
"parties in interest" within the meaning of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or "disqualified persons" within the
meaning of Section 4975 of the Code, with respect to many employee benefit plans
and individual retirement accounts ("IRAs"), including without limitation by
reason of providing trust custodial services, annuity products, investment
advice or brokerage services to such plans and IRAs. Prohibited transactions
within the meaning of ERISA or the Code may occur if, for example, the Shares
are acquired by an employee benefit plan or IRA or an entity (such as an
insurance company general account) deemed to be investing assets of an employee
benefit plan, unless such Shares are acquired pursuant to an exemption from the
prohibited transaction rules. Any such plan or entity proposing to invest in the
Shares should consult with its legal counsel.
EXPERTS
The Supplemental Consolidated Financial Statements of the Company, as of
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995, included in this Prospectus and Registration Statement have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein. Insofar as the report of Deloitte & Touche LLP relates
to the amounts included for Keystone Holdings Inc. and subsidiaries for 1995,
1994, and 1993 it is based solely on the report of other auditors. The
consolidated financial statements of Keystone Holdings and subsidiaries for
1995, 1994 and 1993, incorporated herein by reference from the Proxy Statement
dated November 12, 1996 have been audited by KPMG Peat Marwick LLP, independent
auditors, as stated in their report also incorporated herein by reference. The
consolidated financial statements of the Company incorporated in this Prospectus
by reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, as amended by Form 8-K dated October 18, 1996, Form 8-K/A
dated October 23, 1996, and Form 8-K/A dated October 25, 1996 also have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports, which are incorporated herein by reference. Such financial statements
of the Company and Keystone Holdings are included herein or incorporated by
reference in reliance upon the respective reports of such firms given upon their
authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby has been
passed upon by Foster Pepper & Shefelman, counsel to Washington Mutual. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles,
California. As of December 20, 1996, individual members of Foster Pepper &
Shefelman owned an aggregate of 43,953 shares of Common Stock, 160 shares of
Series C Preferred and 100 shares of Series D Preferred.
75
<PAGE> 78
AVAILABLE INFORMATION
Washington Mutual is subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports, proxy statements and
other information with the Commission. The reports, proxy statements and other
information filed by Washington Mutual with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional Offices at Seven World Trade Center (13th Floor), New York, New York
10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, at
prescribed rates. The Commission also maintains a Web site that contains copies
of reports, proxy and information statements and other information regarding
registrants that file electronically, including the Company, with the Commission
at http://www.sec.gov. In addition, material filed by Washington Mutual can be
inspected at the offices of the National Association of Securities Dealers,
Inc., Report Section, 1735 K Street N.W., Washington, D.C. 20006. In accordance
with the rules and regulations of the Commission, this Prospectus does not
contain certain information contained in the Registration Statement the Company
has filed with the Commission to which reference is hereby made for further
information. Statements in this Prospectus regarding the contents of any
contract or other document are not necessarily complete; with respect to each
such contract or document, reference is made to the copy of such document filed
with the Commission for a more complete description of the matter involved, and
each statement shall be deemed to be qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Washington Mutual
pursuant to the Exchange Act are incorporated by reference in this Prospectus:
1. Annual Report on Form 10-K for the year ended December 31, 1995;
2. Quarterly Reports on Form 10-Q, as amended, for each of the quarterly
periods ended March 31, 1996, June 30, 1996 and September 30, 1996;
3. Current Report on Form 8-K dated March 15, 1996;
4. Item 2 of Current Report on Form 8-K dated July 22, 1996;
5. Current Report on Form 8-K dated October 18, 1996, as amended by Form
8-K/A dated October 23, 1996, as amended by Form 8-K/A dated October 25,
1996; and
6. Appendix B, pages B-1 through B-54, of the Company's definitive proxy
statement dated November 12, 1996.
All documents and reports filed by Washington Mutual pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of offering of the Shares shall be deemed to be
incorporated by reference in this Prospectus and to be part hereof from the date
of filing of such documents or reports. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document that also
is or is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
This Prospectus incorporates documents by reference that are not presented
herein or delivered herewith. These documents (other than exhibits to such
documents unless such exhibits are specifically incorporated by reference) are
available upon request to each person to whom a copy of this Prospectus is
delivered, without charge, upon request to the Company at Investor Relations,
Washington Mutual, Inc., Washington Mutual Tower, 1201 Third Avenue, 12th Floor,
Seattle, Washington 98101 (telephone number (206) 461-3187).
76
<PAGE> 79
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS OF
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1996 AND
1995
Supplemental Consolidated Statements of Income for the nine months ended September
30, 1996 and 1995................................................................ F-2
Supplemental Consolidated Statements of Financial Position as of September 30, 1996
and December 31, 1995............................................................ F-3
Supplemental Consolidated Statement of Stockholders' Equity for the nine months
ended September 30, 1996 and 1995................................................ F-4
Supplemental Consolidated Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995...................................................... F-5
Notes to Supplemental Consolidated Financial Statements............................. F-7
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995, 1994 AND 1993
Independent Auditors' Report........................................................ F-9
Supplemental Consolidated Statements of Income for the years ended December 31,
1995, 1994 and 1993.............................................................. F-10
Supplemental Consolidated Statements of Financial Position as of
December 31, 1995 and 1994....................................................... F-12
Supplemental Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993................................................. F-13
Supplemental Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993.............................................................. F-14
Notes to Supplemental Consolidated Financial Statements............................. F-16
</TABLE>
F-1
<PAGE> 80
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER SHARE
AMOUNTS)
(UNAUDITED)
<S> <C> <C>
INTEREST INCOME
Loans............................................................... $1,557,650 $1,525,432
Available-for-sale securities....................................... 607,748 252,896
Held-to-maturity securities......................................... 171,164 308,308
Notes receivable.................................................... -- 56,650
Cash equivalents.................................................... 2,023 2,431
---------- ----------
Total interest income............................................. 2,338,585 2,145,717
INTEREST EXPENSE
Deposits............................................................ 799,045 842,413
Borrowings.......................................................... 656,157 582,676
---------- ----------
Total interest expense............................................ 1,455,202 1,425,089
---------- ----------
Net interest income............................................ 883,383 720,628
Provision for loan losses........................................... 58,138 57,540
---------- ----------
Net interest income after provision for loan losses............ 825,245 663,088
OTHER INCOME
Depositor fees...................................................... 76,309 55,361
Loan servicing fees................................................. 31,769 21,050
Other service fees.................................................. 38,640 36,685
Other operating income.............................................. 25,804 22,289
Gain on sale of loans, inclusive of write-downs..................... 15,223 (2,117)
Gain (loss) on sale of other assets, inclusive of write-downs....... (3,923) 726
Loss on sale of covered assets...................................... -- (37,399)
Federal Deposit Insurance Corporation ("FDIC") assistance on covered
assets............................................................ -- 55,630
---------- ----------
Total other income................................................ 183,822 152,225
OTHER EXPENSE
Salaries and employee benefits...................................... 250,106 233,785
Occupancy and equipment............................................. 88,592 82,665
Regulatory assessments.............................................. 36,533 41,124
SAIF recapitalization assessment.................................... 124,193 --
Data processing fees................................................ 28,766 24,527
Other operating expense............................................. 127,062 113,623
Amortization of goodwill and other intangible assets................ 20,881 21,337
Real estate owned ("REO") operations, inclusive of write-downs...... 8,409 7,963
---------- ----------
Total other expense............................................... 684,542 525,024
---------- ----------
Income before income taxes and minority interest............... 324,525 290,289
Income taxes........................................................ 97,344 77,877
Provision (benefit) for payments in lieu of taxes................... 14,465 (1,410)
---------- ----------
Income before minority interest................................ 212,716 213,822
Minority interest in earnings of consolidated subsidiaries.......... (10,504) (12,244)
---------- ----------
Net Income.......................................................... $ 202,212 $ 201,578
========== ==========
Net Income Attributable to Common Stock............................. $ 188,397 $ 187,640
========== ==========
Per share amounts -- primary
Net Income.......................................................... $1.68 $1.72
========== ==========
Per share amounts -- fully diluted
Net Income.......................................................... $1.66 $1.69
========== ==========
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-2
<PAGE> 81
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30, 31,
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents......................................... $ 657,640 $ 983,833
Trading account securities........................................ 2,151 238
Available-for-sale securities, amortized cost $10,092,075 and
$11,919,009..................................................... 10,063,100 12,154,725
Held-to-maturity securities, fair value $3,030,168 and
$3,262,850...................................................... 2,986,296 3,197,720
Loans, net of allowance for loan losses........................... 28,336,065 24,109,136
Loans held for sale............................................... 160,692 83,704
REO............................................................... 106,748 125,101
Premises and equipment............................................ 463,513 452,743
Goodwill and other intangible assets.............................. 140,300 161,127
Other assets...................................................... 795,440 758,295
----------- -----------
Total assets............................................ $43,711,945 $42,026,622
=========== ===========
LIABILITIES
Deposits:
Checking accounts............................................... $ 2,835,294 $ 2,776,329
Savings and money market accounts............................... 6,825,887 6,573,543
Time deposit accounts........................................... 14,317,334 15,113,088
----------- -----------
Total deposits.......................................... 23,978,515 24,462,960
Annuities......................................................... 868,438 855,503
Federal funds purchased........................................... 1,030,500 433,420
Securities sold under agreements to repurchase.................... 8,615,157 7,984,756
Advances from the Federal Home Loan Bank ("FHLB")................. 5,539,551 4,715,739
Other borrowings.................................................. 688,268 590,217
Other liabilities................................................. 489,600 362,323
----------- -----------
Total liabilities....................................... 41,210,029 39,404,918
Minority interest................................................. 80,000 80,000
STOCKHOLDERS' EQUITY
Preferred stock, no par value: 10,000,000 shares
authorized -- 6,122,400 and 6,122,500 shares issued and
outstanding..................................................... -- --
Common stock, no par value: 350,000,000 shares
authorized -- 120,037,913 and 119,687,860 shares issued and
outstanding..................................................... -- --
Capital surplus................................................... 928,116 920,406
Valuation reserve for available-for-sale ("AFS") securities....... (19,570) 188,715
Retained earnings................................................. 1,513,370 1,432,583
----------- -----------
Total stockholders' equity.............................. 2,421,916 2,541,704
----------- -----------
Total liabilities, minority interest and stockholders'
equity............................................... $43,711,945 $42,026,622
=========== ===========
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-3
<PAGE> 82
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF SHARES CAPITAL VALUATION
------------------- SURPLUS RESERVE TOTAL
PREFERRED COMMON CAPITAL OFFSET AGAINST RETAINED FOR AFS STOCKHOLDERS'
STOCK STOCK SURPLUS NOTE RECEIVABLE EARNINGS SECURITIES EQUITY
--------- ------- -------- --------------- ---------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995......... 6,123 111,688 $920,406 $ -- $1,432,583 $ 188,715 $2,541,704
Net income........................... -- -- -- 202,212 -- 202,212
Cash dividends on preferred stock.... -- -- -- -- (13,814) -- (13,814)
Cash dividends on common stock....... -- -- -- -- (107,611) -- (107,611)
Common stock issued through stock
options and employee stock plans... -- 350 7,711 -- -- -- 7,711
Adjustment in valuation reserve for
available-for-sale securities...... -- -- -- -- -- (208,285) (208,285)
Conversion of preferred stock to
common stock....................... (1) -- (1) -- -- -- (1)
----- ------- -------- --------- ---------- -------- ----------
Balance at September 30, 1996
(unaudited)........................ 6,122 112,038 $928,116 $ -- $1,513,370 $ (19,570) $2,421,916
===== ======= ======== ========= ========== ======== ==========
Balance at December 31, 1994......... 6,200 107,720 $890,344 $(167,000) $1,192,741 $ (61,249) $1,854,836
Net income........................... -- -- -- -- 201,578 -- 201,578
Cash dividends on preferred stock.... -- -- -- -- (13,938) -- (13,938)
Cash dividends on common stock....... -- -- -- -- (43,874) -- (43,874)
Common stock issued through stock
options and employee stock plans... -- 388 6,038 -- -- -- 6,038
Adjustment in valuation reserve for
available-for-sale securities...... -- -- -- -- -- 101,803 101,803
Immaterial business combination
accounted for as a
pooling-of-interests............... -- 3,429 23,562 -- 26,645 9 50,216
----- ------- -------- --------- ---------- -------- ----------
Balance at September 30, 1995
(unaudited)........................ 6,200 111,537 $919,944 $(167,000) $1,363,152 $ 40,563 $2,156,659
===== ======= ======== ========= ========== ======== ==========
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-4
<PAGE> 83
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................ $ 202,212 $ 201,578
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses....................................... 58,138 57,540
(Gain) loss on sale of loans.................................... (15,223) 2,117
Loss (gain) on sale of other assets............................. 3,923 (726)
Loss on sale of covered assets.................................. -- 37,399
Effect of FDIC assistance on covered assets..................... -- (55,630)
REO operations, inclusive of write-downs........................ 8,409 7,963
Depreciation and amortization................................... 63,448 44,752
FHLB stock dividend............................................. (22,187) (18,867)
(Increase) in trading account securities........................ (722) (1,330)
Origination of loans, held for sale............................. (1,534,225) (452,177)
Proceeds on sale of loans, held for sale........................ 1,631,365 812,774
(Increase) in interest receivable............................... (17,501) (49,898)
(Increase) decrease in interest payable......................... (1,953) 39,064
Increase in income taxes payable................................ 8,430 27,887
Decrease (increase) in other assets............................. 69,020 (57,186)
Increase in payable to FSLIC Resolution Fund ("FRF")............ 31,117 --
Increase in other liabilities................................... 150,508 15,182
----------- -----------
Net cash provided by operating activities.................... 634,759 610,442
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities........................ (1,569,122) (1,341,521)
Principal payments and maturities of available-for-sale
securities...................................................... 1,101,438 421,038
Sales of available-for-sale securities............................ 3,082,344 815,023
Purchases of held-to-maturity securities.......................... (3,963,691) (529,535)
Principal payments and maturities of held-to-maturity
securities...................................................... 4,172,020 628,088
Sales of loans.................................................... 61,335 19,391
Principal payments on loans....................................... 3,012,042 1,981,642
Origination and purchases of loans................................ (8,462,376) (5,753,939)
New West Note, payments received.................................. -- 1,176,763
Sales of REO...................................................... 115,376 109,422
Other REO operations.............................................. (16,023) (2,247)
Proceeds from sales of premises and equipment..................... 1,648 2,868
Purchase of premises and equipment................................ (49,157) (87,738)
Purchase of mortgage servicing rights............................. (13,704) (38,433)
Cash acquired through acquisitions................................ -- 69,348
----------- -----------
Net cash (used) by investing activities...................... (2,527,870) (2,529,830)
</TABLE>
F-5
<PAGE> 84
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in deposits................................... $ (482,475) $ 954,257
Increase in annuities............................................. 12,935 51,120
Increase (decrease) in federal funds purchased.................... 597,080 (50,000)
Increase in securities sold under short-term agreements to
repurchase...................................................... (751,998) 1,414,334
Proceeds from securities sold under long-term agreements to
repurchase...................................................... 2,497,407 1,666,557
Repurchase of securities sold under long-term agreements to
repurchase...................................................... (1,115,008) (355,151)
Proceeds from FHLB advances....................................... 8,160,050 1,445,084
Repayments of FHLB advances....................................... (7,335,114) (3,200,553)
Proceeds from other borrowings.................................... 99,172 322,867
Repayments of other borrowings.................................... (192) (111,129)
Issuance of common stock through stock options and employee stock
plans........................................................... 7,711 6,037
Increase in payable to affiliate.................................. (1,225) --
Cash dividends paid............................................... (121,425) (57,812)
----------- -----------
Net cash provided by financing activities.................... 1,566,918 2,085,611
----------- -----------
(Decrease) increase in cash and cash equivalents............. (326,193) 166,223
Cash and cash equivalents at beginning of period............. 983,833 477,509
----------- -----------
Cash and cash equivalents at end of period................... $ 657,640 $ 643,732
=========== ===========
NONCASH INVESTING ACTIVITIES
Loans exchanged for mortgage-backed securities.................... $ 884,314 $ 582,659
Real estate acquired through foreclosure.......................... 172,229 210,818
Loans originated to facilitate the sale of foreclosed
properties...................................................... 55,472 52,202
CASH PAID DURING THE PERIOD FOR
Interest on deposits.............................................. 778,274 548,950
Interest on borrowings............................................ 677,353 354,905
Income taxes...................................................... 87,200 55,680
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-6
<PAGE> 85
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING ADJUSTMENTS
The information included in the consolidated statements of financial
position as of September 30, 1996 and December 31, 1995, the supplemental
consolidated statements of income and cash flows for the nine months ended
September 30, 1996 and 1995, and the supplemental consolidated statement of
stockholders' equity for the nine months ended September 30, 1996 and 1995 of
Washington Mutual, Inc. ("Washington Mutual" or the "Company") reflect all
adjustments which are, in the opinion of management, necessary for a fair
statement of the results for the period presented.
2. EARNINGS PER COMMON SHARE
Information used to calculate earnings per share was as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
DATA USED TO COMPUTE PER SHARE AMOUNTS
Net income...................................................... $ 202,212 $ 201,578
Preferred stock dividends:
Noncumulative Perpetual, Series C............................. (4,707) (4,788)
Noncumulative Perpetual, Series E............................. (2,808) (2,850)
Noncumulative Convertible Perpetual, Series D................. (6,300) (6,300)
----------- -----------
Net income available to primary common stock.................... $ 188,397 $ 187,640
=========== ===========
Net income...................................................... $ 202,212 $ 201,578
Preferred stock dividends:
Noncumulative Perpetual, Series C............................. (4,707) (4,788)
Noncumulative Perpetual, Series E............................. (2,808) (2,850)
----------- -----------
Net income available to fully diluted common stock.............. $ 194,697 $ 193,940
=========== ===========
Average common shares outstanding (1):
Primary....................................................... 111,908,946 109,376,709
Noncumulative Convertible Perpetual Preferred Stock, Series
D.......................................................... 5,418,860 5,419,247
----------- -----------
Fully diluted................................................. 117,327,806 114,795,956
=========== ===========
</TABLE>
- ---------------
(1) As part of the business combination with Keystone Holdings, Inc., 8,000,000
shares of common stock, with an assigned value of $42.75 per share were
issued to an escrow for the benefit of the general and limited partners of
Keystone Holdings, Inc. and the FRF. The Company will use the treasury stock
method to determine the effect of the shares upon the Company's financial
statements. As of the merger date, there is no potential dilutive effect of
the 8,000,000 shares of common stock. The shares in the escrow will be
dilutive in the future to the extent that the market price of the common
stock exceeds $42.75 per share.
3. INCOME TAXES
In August 1996, Keystone Holdings, Inc. amended prior-year federal tax
returns to reduce tax bad debt deductions and to make other amendments. As a
result, the net operating loss carryforwards for federal tax purposes were
reduced by approximately $756 million. In September 1996, ASB amended prior-year
state tax returns to reduce tax bad debt deductions. The result was to decrease
state net operating loss carryforwards by
F-7
<PAGE> 86
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $545 million. The decrease in the gross deferred tax asset as a
result of the amendments which reduced the federal and state net operating loss
carryforwards was offset by an equal decrease in the valuation allowance for the
deferred tax asset. As of September 30, 1996, the Company had the following
federal and state income tax net operating loss carryforwards due to expire
under current law during the years indicated:
<TABLE>
<CAPTION>
FEDERAL STATE
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1999...................................... $ -- $ 140
2000...................................... 1,666 754,460
2001...................................... 140 599,241
2002...................................... 278 557,803
2003...................................... 1,602,736 --
2004...................................... 784,195 --
2005...................................... 700,619 --
2007...................................... 12,780 --
2008...................................... 37,460 --
---------- ----------
$3,139,874 $1,911,644
========== ==========
</TABLE>
4. COMMON SHARES OUTSTANDING
On December 18, 1996, the shareholders of Washington Mutual approved an
amendment to the Company's Restated Articles of Incorporation to increase the
number of authorized shares of common stock from 100,000,000 shares to
350,000,000 shares. The supplemental consolidated financial statements reflect
the amendment.
F-8
<PAGE> 87
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Washington Mutual, Inc.:
We have audited the accompanying supplemental consolidated statements of
financial position of Washington Mutual, Inc. and subsidiaries ("the Company")
as of December 31, 1995 and 1994, and the related supplemental consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1995. These supplemental consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits. The supplemental consolidated financial
statements give retroactive effect to the merger of Keystone Holdings, Inc.,
with and into Washington Mutual, Inc. on December 20, 1996, which has been
accounted for as a pooling-of-interests as described in Note 2 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consummation. These supplemental financial statements do
not extend through the date of consummation; however, they will become the
historical consolidated financial statements of the Company after financial
statements covering the date of consummation of the business combination are
issued. We did not audit the consolidated balance sheets of Keystone Holdings,
Inc. and subsidiaries as of December 31, 1995 and 1994, or the related
consolidated statements of earnings, stockholder's equity, and cash flows for
the years ended December 31, 1995, 1994 and 1993, which statements reflect total
assets constituting 47% and 49%, respectively, of consolidated total assets as
of December 31, 1995 and 1994, and total net income constituting 31%, 25% and
30% for the years ended December 31, 1995, 1994 and 1993, respectively. Those
statements were audited by other auditors whose report, dated, January 26, 1996,
except as to Note 27 to the consolidated financial statements, which is as of
February 8, 1996, has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Keystone Holdings, Inc. and subsidiaries for
1995, 1994, and 1993, is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
such supplemental consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Washington Mutual, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1995, in conformity with generally accepted
accounting principles applicable after financial statements are issued for a
period which includes the date of consummation of the business combination.
As discussed in Note 1 to the financial statements, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities, on January 1, 1994 and
December 31, 1993.
Deloitte & Touche LLP
December 24, 1996
Seattle, Washington
F-9
<PAGE> 88
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C>
INTEREST INCOME
Loans............................................................... $2,061,801 $1,658,818 $1,579,480
Note receivable..................................................... 58,841 141,039 241,014
Held-to-maturity securities......................................... 409,063 235,709 54,377
Available-for-sale securities....................................... 381,633 258,678 320,588
Cash equivalents.................................................... 4,748 1,169 3,119
---------- ---------- ----------
Total interest income............................................. 2,916,086 2,295,413 2,198,578
INTEREST EXPENSE
Deposits............................................................ 1,134,818 852,666 868,178
Borrowings.......................................................... 788,618 482,692 343,718
---------- ---------- ----------
Total interest expense............................................ 1,923,436 1,335,358 1,211,896
---------- ---------- ----------
Net interest income............................................ 992,650 960,055 986,682
Provision for loan losses........................................... 74,987 122,009 158,728
---------- ---------- ----------
Net interest income after provision for loan losses............ 917,663 838,046 827,954
OTHER INCOME
Depositor fees...................................................... 79,017 45,255 39,872
Loan servicing fees................................................. 29,315 23,247 20,569
Other service fees.................................................. 49,679 65,248 71,921
Other operating income.............................................. 31,035 39,630 39,082
Gain on sale of loans, inclusive of write-downs..................... 1,717 23,488 25,266
Gain (loss) on sale of other assets, inclusive of write-downs....... (655) 23,926 49,866
Loss on sale of covered assets...................................... (37,399) -- --
Federal Deposit Insurance Corporation ("FDIC") assistance on covered
assets............................................................ 55,630 -- --
---------- ---------- ----------
Total other income................................................ 208,339 220,794 246,576
OTHER EXPENSE
Salaries and employee benefits...................................... 313,304 315,424 316,929
Occupancy and equipment............................................. 111,381 102,403 106,419
Regulatory assessments.............................................. 54,909 54,887 52,444
Data processing fees................................................ 36,538 33,862 35,613
Other operating expense............................................. 145,394 146,463 132,178
Amortization of goodwill and other intangible assets................ 28,306 29,076 24,690
Real estate owned ("REO") operations, inclusive of write-downs...... 10,682 13,402 19,246
---------- ---------- ----------
Total other expense............................................... 700,514 695,517 687,519
---------- ---------- ----------
Income before income taxes, extraordinary items, cumulative
effect of change in tax accounting method and minority
interest...................................................... 425,488 363,323 387,011
Income taxes........................................................ 111,906 109,880 96,034
Provision (benefit) for payments in lieu of taxes................... 7,887 (824) 14,075
---------- ---------- ----------
Income before extraordinary items, cumulative effect of change
in tax accounting method and minority interest................ 305,695 254,267 276,902
Extraordinary items, net of federal income tax effect............... -- -- (8,953)
Cumulative effect of change in tax accounting method................ -- -- 13,365
Minority interest in income of consolidated subsidiaries............ (15,793) (13,992) (13,991)
---------- ---------- ----------
Net Income.......................................................... $ 289,902 $ 240,275 $ 267,323
========== ========== ==========
Net Income Attributable to Common Stock............................. $ 271,318 $ 221,691 $ 253,764
========== ========== ==========
</TABLE>
F-10
<PAGE> 89
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
----- ----- -----
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Per share amounts -- primary
Income before extraordinary items and cumulative effect of change in tax
accounting method........................................................ $2.47 $2.09 $2.38
Extraordinary items, net of federal income tax effect....................... -- -- (0.09)
Cumulative effect of change in tax accounting method........................ -- -- 0.13
----- ----- -----
Net Income............................................................... $2.47 $2.09 $2.42
===== ===== =====
Per share amounts -- fully diluted
Income before extraordinary items and cumulative effect of change in tax
accounting method........................................................ $2.42 $2.06 $2.32
Extraordinary items, net of federal income tax effect....................... -- -- (0.08)
Cumulative effect of change in tax accounting method........................ -- -- 0.12
----- ----- -----
Net Income............................................................... $2.42 $2.06 $2.36
===== ===== =====
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-11
<PAGE> 90
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................................. $ 983,833 $ 477,509
Trading account securities................................................. 238 572
Available-for-sale securities, amortized cost $11,919,009 and $4,362,152... 12,154,725 4,282,160
Held-to-maturity securities, fair value $3,262,850 and $4,228,897.......... 3,197,720 4,456,031
Loans, net of the allowance for loan losses................................ 24,109,136 25,463,458
Loans held for sale........................................................ 83,704 8,634
Note receivable............................................................ -- 1,515,040
REO........................................................................ 125,101 137,767
Premises and equipment..................................................... 452,743 392,688
Goodwill and other intangible assets....................................... 161,127 190,998
Other assets............................................................... 758,295 556,439
----------- -----------
Total assets..................................................... $42,026,622 $37,481,296
=========== ===========
LIABILITIES
Deposits:
Checking accounts........................................................ $ 2,776,329 $ 2,841,689
Savings and money market accounts........................................ 6,573,543 5,727,765
Time deposit accounts.................................................... 15,113,088 14,774,552
----------- -----------
Total deposits................................................... 24,462,960 23,344,006
Annuities.................................................................. 855,503 799,178
Federal funds purchased.................................................... 433,420 --
Securities sold under agreements to repurchase............................. 7,984,756 6,637,346
Advances from the Federal Home Loan Bank ("FHLB").......................... 4,715,739 4,128,977
Other borrowings........................................................... 590,217 381,066
Other liabilities.......................................................... 362,323 255,887
----------- -----------
Total liabilities................................................ 39,404,918 35,546,460
Minority interest.......................................................... 80,000 80,000
Contingencies (Note 28).................................................... -- --
STOCKHOLDERS' EQUITY
Preferred stock, no par value: 10,000,000 shares authorized -- 6,122,500
and 6,200,000 shares issued and outstanding.............................. -- --
Common stock, no par value: 350,000,000 shares authorized -- 119,687,860
and 115,720,886 shares issued and outstanding............................ -- --
Capital surplus............................................................ 920,406 890,344
Capital surplus offset against note receivable............................. -- (167,000)
Valuation reserve for available-for-sale securities........................ 188,715 (61,249)
Retained earnings.......................................................... 1,432,583 1,192,741
----------- -----------
Total stockholders' equity....................................... 2,541,704 1,854,836
----------- -----------
Total liabilities, minority interest and stockholders' equity.... $42,026,622 $37,481,296
=========== ===========
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-12
<PAGE> 91
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF SHARES CAPITAL VALUATION
------------------- SURPLUS OFFSET RESERVE TOTAL
PREFERRED COMMON CAPITAL AGAINST NOTE RETAINED FOR AFS STOCKHOLDERS'
STOCK STOCK SURPLUS RECEIVABLE EARNINGS SECURITIES EQUITY
--------- ------- -------- -------------- ---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993............. 5,494 98,779 $791,736 $ (167,000) $ 843,099 $ -- $1,467,835
Net income............................. -- -- -- -- 267,323 -- 267,323
Miscellaneous stock transactions....... 375 7,523 -- (7,546) -- (23)
Cash dividends declared on preferred
stock................................ -- -- -- -- (13,559) -- (13,559)
Cash dividends declared on common
stock................................ -- -- -- -- (48,936) -- (48,936)
Preferred stock issued................. 2,000 -- 48,182 -- -- -- 48,182
Common stock issued through stock
options and employee stock plans..... -- 1,151 15,508 -- 18 -- 15,526
Establishment of valuation reserve for
available-for-sale
securities -- Keystone Holdings,
Inc.................................. -- -- -- -- -- 29,657 29,657
Conversion of preferred stock to common
stock................................ (1,294) 5,152 -- -- (445) -- (445)
------ ------- -------- --------- ---------- --------- ----------
Balance at December 31, 1993........... 6,200 105,457 862,949 (167,000) 1,039,954 29,657 1,765,560
Establishment of valuation reserve for
available-for-sale
securities -- Washington Mutual,
Inc.................................. -- -- -- -- -- 13,836 13,836
Net income............................. -- -- -- -- 240,275 -- 240,275
Miscellaneous stock transactions....... -- 384 7,762 -- (7,774) -- (12)
Cash dividends declared on preferred
stock................................ -- -- -- -- (18,584) -- (18,584)
Cash dividends declared on common
stock................................ -- -- -- -- (67,835) -- (67,835)
Adjustments in valuation reserve for
available-for-sale securities........ -- -- -- -- -- (104,742) (104,742)
Common stock issued through stock
options and employee stock plans..... -- 426 10,038 -- -- -- 10,038
Immaterial business combination
accounted for as a
pooling-of-interests................. -- 1,454 9,595 -- 6,705 -- 16,300
------ ------- -------- --------- ---------- --------- ----------
Balance at December 31, 1994........... 6,200 107,721 890,344 (167,000) 1,192,741 (61,249) 1,854,836
Net income............................. -- -- -- -- 289,902 -- 289,902
Miscellaneous stock transactions....... -- (1) (13) -- -- -- (13)
Cash dividends declared on preferred
stock................................ -- -- -- -- (18,584) -- (18,584)
Cash dividends declared on common
stock................................ -- -- -- -- (57,997) -- (57,997)
Adjustments in valuation reserve for
available-for-sale securities........ -- -- -- -- -- 249,964 249,964
Common stock issued through stock
options and employee stock plans..... -- 539 8,379 -- -- -- 8,379
Capital surplus previously offset
against note receivable.............. -- -- -- 167,000 -- -- 167,000
Immaterial business combination
accounted for as a
pooling-of-interests................. -- 3,429 23,562 -- 26,645 -- 50,207
Repurchase of preferred stock.......... (77) -- (1,866) -- (124) -- (1,990)
------ ------- -------- --------- ---------- --------- ----------
Balance at December 31, 1995........... 6,123 111,688 $920,406 $ -- $1,432,583 $ 188,715 $2,541,704
====== ======= ======== ========= ========== ========= ==========
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-13
<PAGE> 92
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 289,902 $ 240,275 $ 267,323
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses.............................. 74,987 122,009 158,728
Cumulative effect of change in tax accounting method... -- -- (13,365)
(Gain) on sale of loans................................ (1,717) (23,488) (25,266)
Loss (gain) on sale of other assets.................... 655 (23,926) (49,866)
Loss on sale of covered assets......................... 37,399 -- --
Effect of FDIC assistance on covered assets............ (55,630) -- --
REO operations, inclusive of write-downs............... 10,682 13,402 19,246
Extraordinary loss..................................... -- -- 13,028
Depreciation and amortization.......................... 54,361 58,939 91,435
FHLB stock dividend.................................... (23,155) (22,108) (25,715)
Decrease in trading account securities................. 749 691 1,574
Origination of loans, held for sale.................... (822,025) (263,055) (987,678)
Proceeds on sale of loans, held for sale............... 1,127,076 764,710 900,623
(Increase) in interest receivable...................... (58,902) (28,800) (28,553)
Increase (decrease) in interest payable................ 31,027 22,159 (4,741)
Increase in income taxes payable....................... 38,683 40,205 10,360
(Increase) decrease in other assets.................... (88,951) 10,757 31,114
(Decrease) in other liabilities........................ (23,527) (65,641) (78,523)
----------- ----------- -----------
Net cash provided by operating activities........... 591,614 846,129 279,724
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities............... (2,312,072) (1,480,421) (348,374)
Principal payments and maturities of available-for-sale
securities............................................. 817,048 545,753 142,116
Sales of available-for-sale securities................... 1,673,853 499,719 262,132
Purchases of held-to-maturity securities................. (697,470) (1,931,537) (2,086,760)
Principal payments and maturities of held-to-maturity
securities............................................. 885,205 1,109,796 1,774,438
Sales of held-to-maturity securities..................... -- -- 838,358
Proceeds from sales of loans............................. 84,197 54,754 919,768
Principal payments on loans.............................. 3,067,145 3,332,483 4,691,734
Origination and purchases of loans....................... (8,562,080) (8,666,382) (8,805,116)
New West Note, payments received......................... 1,682,040 1,569,018 1,569,018
Sales of REO............................................. 148,756 202,374 204,335
Other REO operations..................................... 1,774 (1,236) (8,573)
Proceeds from sale of premises and equipment............. 4,871 2,211 8,130
Purchase of premises and equipment....................... (102,877) (58,396) (59,852)
Purchase of mortgage servicing rights.................... (38,270) (37,605) --
Cash proceeds from disposition of credit card
receivables............................................ -- 166,315 --
Cash acquired through acquisitions....................... 68,358 40,679 387,688
----------- ----------- -----------
Net cash (used) by investing activities............. (3,279,522) (4,652,475) (510,958)
</TABLE>
F-14
<PAGE> 93
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits......................... $ 707,375 $ (380,297) $(1,048,485)
Increase in annuities................................... 56,325 85,795 141,955
Increase in federal funds purchased..................... 433,420 -- --
(Decrease) increase in securities sold under short-term
agreements to repurchase.............................. (186,833) 2,289,611 1,065,235
Proceeds from securities sold under long-term agreements
to repurchase......................................... 2,872,557 1,391,682 914,156
Repurchase of securities sold under long-term agreements
to repurchase......................................... (1,408,127) (260,713) (332,188)
Proceeds from FHLB advances............................. 4,710,333 8,209,790 7,116,870
Repayments of FHLB advances............................. (4,123,336) (7,698,071) (7,460,874)
Call of subordinated capital notes...................... -- -- (41,600)
Proceeds of other borrowings............................ 147,867 -- --
Repayments of other borrowings.......................... (1,470) (3,488) (5,536)
Issuance of Keystone Holdings, Inc. Series C Notes...... 175,000 -- --
Repayment of Keystone Holdings, Inc. Series A Notes..... (111,000) -- --
Proceeds from issuance of subordinate notes............. -- -- 19,988
Retirement of subordinate debentures.................... -- -- (20,000)
Decrease in payable to affiliate........................ -- -- (21,000)
Other capital transactions, net......................... (1,298) 14,742 26,430
Cash dividends paid..................................... (76,581) (96,419) (52,495)
----------- ----------- -----------
Net cash provided by financing activities............. 3,194,232 3,552,632 302,456
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents...... 506,324 (253,714) 71,222
Cash and cash equivalents at beginning of year........ 477,509 731,223 660,001
----------- ----------- -----------
Cash and cash equivalents at end of year.............. $ 983,833 $ 477,509 $ 731,223
=========== =========== ===========
NONCASH INVESTING ACTIVITIES
Loans exchanged for mortgage-backed securities.......... $ 6,588,124 $ 183,269 $ 2,374,344
Implementation of new accounting standard -- reclass to
available-for-sale portfolio.......................... -- 2,127,890 1,615,482
Transfer of securities to the available-for-sale
portfolio............................................. 4,924,168 -- --
Real estate acquired through foreclosure................ 255,028 334,499 349,239
Loans originated to facilitate the sale of foreclosed
properties............................................ 65,693 92,415 47,832
CASH PAID DURING THE YEAR FOR
Interest on deposits.................................... 1,125,226 851,546 891,626
Interest on borrowings.................................. 762,000 458,033 322,310
Federal income taxes.................................... 73,130 92,172 65,930
Deposits exchanged in branch swaps...................... -- -- 152,382
DIVIDENDS DECLARED AND PAYABLE IN DIFFERENT YEARS
Common stock dividends.................................. -- (10,000) 10,000
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-15
<PAGE> 94
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying Supplemental Consolidated Financial Statements are the
same as the restated financial statements that will be issued after the
postmerger operating results are published. On December 20, 1996, Keystone
Holdings, Inc. ("Keystone Holdings") merged with and into Washington Mutual,
Inc. ("WMI" and together with its subsidiaries "Washington Mutual" or the
"Company"). The supplemental financial statements reflect the accounting for the
merger as a pooling-of-interests and are presented as if the companies were
merged as of the earliest period shown.
WMI was formed in August 1994 by the Company's predecessor, Washington
Mutual Savings Bank ("WMSB"), a Washington state-chartered savings bank, in
connection with the reorganization of WMSB into a holding company structure. The
reorganization was completed in November 1994 through the merger of WMSB into
Washington Mutual Bank ("WMB"), the Company's Washington state-chartered savings
bank subsidiary, with WMB as the surviving entity. WMB continued as a wholly
owned subsidiary of WMI. The par values of preferred and common stock and
capital surplus of the Company have been restated to reflect the new par value
of the holding company, effective November 1994.
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform to the 1995 presentation. All significant intercompany
transactions and balances have been eliminated. Results of operations of
companies acquired and accounted for as purchases are included from the dates of
acquisition. When Washington Mutual acquires a company through a material
pooling-of-interests, current and prior-period financial statements are restated
to include the accounts of merged companies. Previously reported balances of the
merged companies have been reclassified to conform to WMI's presentation and
restated to give effect to the combinations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements. Changes in
these estimates and assumptions are considered reasonably possible and may have
a material impact on the financial statements.
LINES OF BUSINESS
Washington Mutual provides a broad range of financial services to
individuals and small to mid-sized businesses in Washington, California, Oregon,
Utah, Idaho, Montana, Arizona, Colorado and Nevada through its subsidiary
operations. Financial services of the Company include accepting deposits from
the general public and making residential loans, consumer loans and limited
types of commercial real estate loans, primarily multi-family, which are offered
principally through WMB, American Savings Bank, F.A. ("ASB") and Washington
Mutual Bank fsb ("WMBfsb"). Washington Mutual, through other subsidiaries, also
issues and markets annuity contracts and is the investment advisor to and
distributor of mutual funds.
Washington Mutual diversified its business mix by merging WMB with
Enterprise Bank ("Enterprise"), a Seattle-area commercial bank and Western Bank
("Western") of Coos Bay, Oregon, Oregon's largest community-based commercial
bank. The mergers with Enterprise and Western provide the Company with access to
the higher-growth business segment of commercial banking.
DERIVATIVE INSTRUMENTS
The Company uses derivative instruments, such as interest rate exchange
agreements and interest rate cap agreements, forward sales of financial
instruments, financial futures and options to reduce its exposure to
F-16
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest rate risk. Interest rate exchange agreements and interest rate cap
agreements are used only if they have the effect of changing the interest rate
characteristics of the assets or liabilities to which they are designated. Such
effect is measured either through ongoing correlation or effectiveness tests.
Interest rate exchange agreements and interest rate cap agreements are
designated either against the available-for-sale portfolio or against borrowings
and deposits. Agreements designated against available-for-sale securities are
included at their fair value in the available-for-sale portfolio and any
mark-to-market adjustments are reported as a separate component of stockholders'
equity, net of tax. The fair value of interest rate exchange agreements and
interest rate cap agreements designated against loans, short-term borrowings,
and deposits are not reported on the balance sheet.
The interest differential paid or received on interest rate exchange
agreements is recorded as an adjustment to interest income or interest expense
and classified with the interest income or interest expense of the related asset
or liability. The purchase premium of interest rate cap agreements is
capitalized and amortized and included as a component of interest income or
interest expense over the original term of the interest rate cap agreement. No
purchase premium is paid at the time an interest rate exchange agreement is
entered into.
From time to time, the Company terminates interest rate exchange agreements
and interest rate cap agreements prior to maturity. Such circumstances arise if,
in the judgment of management, such instruments no longer cost-effectively meet
policy objectives. Often such instruments are within one year of maturity. Gains
and losses from terminated interest rate exchange agreements and interest rate
cap agreements are recognized, consistent with the gain or loss on the asset or
liability designated against the agreement. When the asset or liability is not
sold or paid off, the gains or losses are deferred and amortized on a
straight-line basis as additional interest income or interest expense over the
original terms of the agreements or the remaining life of the designated asset
or liability, whichever is less. When the asset or liability is sold or paid
off, the gains or losses are recognized in the current period as an adjustment
to the gain or loss recognized on the corresponding asset or liability.
From time to time, the Company redesignates interest rate exchange
agreements and interest rate cap agreements between available-for-sale
securities and short-term deposits and borrowings. Such redesignations are
treated as a sale out of the one portfolio and as a purchase by the other
portfolio and recorded at the fair value at the time of transfer.
The Company may also buy put or call options on mortgage instruments. The
purpose and criteria for the purchase of options are to manage the interest rate
risk inherent in secondary marketing activities. The costs of such options are
capitalized and amortized on a straight-line basis as a reduction of other
income over the original terms of the options. All such options are carried at
fair value with the corresponding gain or loss recognized in other income.
The Company may write covered call options on its available-for-sale
portfolio to enhance fee income. If the option is exercised, the option fee is
an adjustment to the gain or loss on the sale of the security. If the option is
not exercised, it is recognized as fee income. Covered call options are carried
at cost.
Additionally, the Company uses forward sales of financial instruments to
lock in prices on similar types and coupons of financial instruments and thereby
limit market risk until these financial instruments are sold.
In the event that any of the derivative instruments fail to meet the above
established criteria, they would be marked to market with the corresponding gain
or loss recognized in income.
INVESTMENT SECURITIES
Effective December 31, 1993, Keystone Holdings adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Washington Mutual
F-17
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adopted SFAS No. 115 on January 1, 1994. Following the provisions of the
Statement, management has segregated investment and equity securities into the
following three categories: trading, held-to-maturity and available-for-sale,
and utilizes the accounting conventions for each category described below. The
effect on stockholders' equity at December 31, 1993 of the Keystone Holdings
adoption was a $29.7 million increase. The effect on stockholders' equity at
January 1, 1994 of the Washington Mutual adoption was a $13.8 million increase.
Trading Securities
Trading securities are purchased and held principally for the purpose of
reselling them within a short period of time. Their unrealized gains and losses
are included in earnings.
Held-To-Maturity Securities
Investments classified as held-to-maturity are accounted for at amortized
cost, but an institution must have both the positive intent and the ability to
hold those securities to maturity. There are limited circumstances under which
securities in the held-to-maturity category can be sold without jeopardizing the
cost basis of accounting for the remainder of the securities in this category.
Recognition is provided for unrealized losses in the debt portfolio if any
market valuation differences are deemed to be other than temporary.
Available-For-Sale Securities
Securities not classified as either trading or held-to-maturity are
considered to be available-for-sale. Gains and losses realized on the sale of
these securities are based on the specific identification method. Unrealized
gains and losses for available-for-sale securities are excluded from earnings
and reported (net of tax) as a net amount in a separate component of
stockholders' equity until realized.
The available-for-sale portfolio contains adjustable- and fixed-rate
private-issue (nonagency) mortgage-backed securities ("private-issue
securities") and collateralized mortgage obligations that expose the Company to
certain risks that are not inherent in agency securities, primarily credit risk
and liquidity risk. Because of this added risk, private-issue securities have
historically paid a greater rate of interest than agency securities, enhancing
the overall yield of the portfolio. Such securities are not guaranteed by the
U.S. government or one of its agencies because the loan size, underwriting or
underlying collateral of these securities often does not meet set industry
standards. Consequently, there is the possibility of loss of the principal
investment. For this reason, it is possible that the Company will not receive an
enhanced overall yield on the portfolio and, in fact, could incur a loss.
Additionally, the Company may not be able to sell such securities in certain
market conditions as the number of interested buyers may be limited at that
time. Furthermore, the complex structure of certain collateralized mortgage
obligations in the Company's portfolio increases the difficulty in assessing the
portfolio's risk and its fair value. Examples of some of the more complex
structures include certain collateralized mortgage obligations where the Company
holds subordinated tranches, certain collateralized mortgage obligations that
have been "resecuritized," and certain securities that contain a significant
number of jumbo, nonconforming loans. In an effort to reduce the aforementioned
risks, the Company now performs a credit review on each individual security
prior to purchase. Such a review includes consideration of the collateral
characteristics, borrower payment histories and information concerning loan
delinquencies and losses of the underlying collateral. After a security is
purchased, similar information will be monitored on a periodic basis.
Furthermore, the Company has established internal guidelines limiting the
geographic concentration of the underlying collateral.
F-18
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LOANS
Loans held for investment are stated at the principal amount outstanding,
net of deferred loan fees and any discounts or premiums on purchased loans. The
deferred fees, discounts and premiums are amortized using the interest method
over the estimated life of the loan. The Company sells residential fixed-rate
loans in the secondary market. At the date of origination, the loans so
designated and meeting secondary market guidelines are identified as
held-for-sale and carried at the lower of net cost or fair value on an aggregate
basis, net of their related hedge gains and losses.
Management ceases to accrue interest income on any loan that becomes 90
days or more delinquent and reserves all interest accrued up to that time.
Thereafter, interest income is accrued only if and when, in management's
opinion, projected cash proceeds are deemed sufficient to repay both principal
and interest. All loans for which interest in not being accrued are referred to
as loans on nonaccrual status.
On January 1, 1995, the Company adopted SFAS No. 114, Accounting by
Creditors for Impairment of a Loan. This standard is applicable to all loans
except large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment. Loans that are collectively evaluated for impairment
by Washington Mutual include residential real estate and consumer loans because
of the significant number of loans, their relatively small balances and
historically low level of losses. Residential construction, commercial real
estate and commercial business loans that become delinquent, regardless of the
loan amount, are individually evaluated for impairment. Factors involved in
determining impairment include, but are not limited to, the financial condition
of the borrower, value of the underlying collateral, and current economic
conditions. SFAS No. 114 also applies to all loans that are restructured in a
troubled debt restructuring subsequent to the adoption of SFAS No. 114, as
defined by SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings. A troubled debt restructuring is a restructuring in which the
creditor grants a concession to the borrower that it would not otherwise
consider.
A loan is impaired when it is probable that a creditor will be unable to
collect all amounts due according to the terms of the loan agreement. SFAS No.
114 requires that the valuation of impaired loans be based on the present value
of expected future cash flows discounted at the loan's effective interest rate
or, as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. The Company bases
the measurement of loan impairment on the fair value of the loan's underlying
collateral. The amount by which the recorded investment in the loan exceeds the
value of the impaired loan's collateral is included in the Company's allocated
reserve for loan losses. Any portion of an impaired loan classified as loss
under regulatory guidelines is charged off. The adoption of SFAS No. 114 had no
material impact on the results of operations or financial condition of the
Company.
The Company holds certain loans that have been securitized into
mortgage-backed securities with full recourse.
RESERVE FOR LOAN LOSSES
The reserve for loan losses is maintained at a level sufficient to provide
for estimated loan losses based on evaluating known and inherent risks in the
loan portfolio. The reserve is based on management's continuing analysis of the
pertinent factors underlying the quality of the loan portfolio. These factors
include changes in the size and composition of the loan portfolio, actual loan
loss experience, current and anticipated economic conditions, and detailed
analysis of individual loans and credits for which full collectibility may not
be assured. The detailed analysis includes techniques to estimate the fair value
of loan collateral and the existence of potential alternative sources of
repayment. The appropriate reserve level is estimated based upon factors and
trends identified by management at the time financial statements are prepared.
The reserve includes amounts relating to loans which have been securitized with
recourse, and not sold.
F-19
<PAGE> 98
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
When available information confirms that specific loans or portions thereof
are uncollectible, these amounts are charged off against the reserve for loan
losses. The existence of some or all of the following criteria will generally
confirm that a loss has been incurred: the loan is significantly delinquent and
the borrower has not evidenced the ability or intent to bring the loan current;
the Company has no recourse to the borrower, or if it does, the borrower has
insufficient assets to pay the debt; the fair value of the loan collateral is
significantly below the current loan balance, and there is little or no
near-term prospect for improvement.
Commercial real estate loans are considered by the Company to have somewhat
greater risk of uncollectibility than residential real estate loans due to the
dependency on income production or future development of the real estate.
The ultimate recovery of all loans is susceptible to future market factors
beyond the Company's control. These factors may result in losses or recoveries
differing significantly from those provided in the financial statements.
NOTE RECEIVABLE
On December 28, 1988, (the "1988 Acquisition"), substantially all assets
and liabilities of the failed savings and loan subsidiary (the "Failed
Association") of Financial Corporation of America ("FCA"), were transferred to
ASB and New West Federal Savings and Loan Association ("New West"). As part of
the 1988 Acquisition, ASB received a note ("Note Receivable") from New West
representing the difference between the amount of the deposits and other
liabilities assumed and the value of the assets acquired by ASB at the time of
such acquisition.
As of the 1988 Acquisition, Keystone Holdings and other related entities
also entered into an assistance agreement (the "Assistance Agreement") with the
Federal Savings and Loan Insurance Corporation (the "FSLIC"). Under the terms of
the Assistance Agreement, the FSLIC Resolution Fund (the "FRF") is required to
indemnify ASB for specified losses that may be incurred on, or in connection
with, certain of the acquired assets, and the FRF received warrants entitling
the holder thereof to purchase, for a nominal price, 3,000 shares of N.A.
Capital Holdings ("N.A. Holdings") Class B Common Stock.
Although the Company holds the ownership interest in New West, the Company
does not have a financial interest in New West because of certain contractual
provisions and indemnifications, described above. Any loss incurred by New West
during its liquidation is the financial responsibility of the FRF. In addition,
substantially all decisions made by New West's management must be approved by
the FDIC prior to execution. New West has not recorded any earnings or losses
since its inception. New West was considered a nominee corporation of ASB for
state and federal tax purposes until October 24, 1995 when the Note receivable
was prepaid in full (see Note 8 "Note Receivable" for further discussion).
The balance of the Note Receivable reported in the Company's financial
statements prior to December 31, 1995 has been reduced by the $167.0 million
value ascribed to the warrants. Consensus No. 88-19 of the Emerging Issues Task
Force of the Financial Accounting Standards Board ("FASB") requires that capital
arising from instruments issued to the FSLIC be offset against amounts
receivable from the FSLIC, which in this case included the Note Receivable as
its repayment was supported by FRF assistance to New West.
REO
REO includes properties acquired through foreclosure that are transferred
to REO at the lower of cost or fair value, less estimated selling costs, which
represents the new recorded basis of the property. Subsequently, properties are
evaluated and any additional declines in value are provided for in the REO
reserve for losses. The amount the Company will ultimately recover from REO may
differ substantially from the amount used in
F-20
<PAGE> 99
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
arriving at the net carrying value of these assets because of future market
factors beyond the Company's control or because of changes in the Company's
strategy for sale or development of the property.
Commercial REO that is managed and operated by the Company is depreciated
using the straight-line method over the property's estimated useful life.
MORTGAGE SERVICING RIGHTS
In May 1995, the FASB issued SFAS No. 122, Accounting for Mortgage
Servicing Rights. The statement eliminates the distinction between servicing
rights that are purchased and those that are retained upon the sale or
securitization of loans. The statement requires mortgage servicers to recognize
the servicing rights on loans as separate assets, no matter how acquired. Banks
that sell loans and retain the servicing rights are required to allocate the
total cost of the loans between servicing rights and loans based on their
relative fair values if their values can be estimated. In September 1995,
Keystone Holdings elected early adoption of SFAS No. 122, as permitted by the
Statement, and implemented it as of January 1, 1995. Effective January 1, 1996,
Washington Mutual adopted SFAS No. 122. The adoption of SFAS No. 122 did not
have a material impact on the results of operations or financial condition of
the Company.
Purchased servicing represents the cost of acquiring the right to service
mortgage loans. Originated servicing rights are recorded when mortgage loans are
originated and subsequently sold or securitized with the servicing rights
retained. The total cost of the mortgage loans is allocated to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values. The cost relating to purchased and originated
servicing is capitalized and amortized in proportion to, and over the period of,
estimated future net servicing income.
The Company assesses impairment of the capitalized mortgage servicing
portfolio based on the fair value of those rights on a stratum-by-stratum basis
with any impairment recognized through a valuation allowance for each impaired
stratum. For purposes of measuring impairment, the rights are stratified based
on the following predominant risk characteristics of the underlying loans:
fixed-rate loans by coupon (less than 8%, 8%-10%, 10%-12% and greater than 12%);
and adjustable rate loans by index (Weighted Average Cost of Funds Index for the
Eleventh District Savings Institutions ("COFI"), Treasury, London Interbank
Offering Rate ("LIBOR"), etc.) The amount of impairment recognized is the amount
by which the capitalized mortgage servicing rights for a stratum exceed their
fair value.
In order to determine the fair value of the servicing rights, the Company
uses the market prices under comparable servicing sales contracts, when
available, or alternatively, it uses a valuation model that calculates the
present value of future cash flows. Assumptions used in the valuation model
include market discount rates and anticipated prepayment speeds. The prepayment
speeds are determined from market sources for fixed-rate mortgages with similar
coupons and prepayment reports for comparable adjustable-rate mortgages
("ARMs"). In addition, the Company uses market comparables for estimates of the
cost of servicing per loan, an inflation rate, ancillary income per loan and
default rates. Amounts capitalized are recorded at cost, net of accumulated
amortization and valuation allowance.
PREMISES AND EQUIPMENT
Land, buildings, leasehold improvements and equipment are carried at
amortized cost. Buildings and equipment are depreciated over their estimated
useful lives on the straight-line method. Leasehold improvements are amortized
over the shorter of their useful lives or lease terms.
ANNUITY AND INSURANCE ACCOUNTING
WM Life Insurance, Inc. ("WM Life") is an Arizona-domiciled life insurance
company. WM Life is authorized under state law to issue annuities in seven
states. In addition, WM Life owns Empire Life
F-21
<PAGE> 100
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Insurance Co. ("Empire"), which is currently licensed under state law to issue
annuities in 28 states. WM Life currently issues fixed and variable flexible
premium deferred annuities, single premium fixed deferred annuities and single
premium immediate annuities. Empire currently issues fixed flexible premium
deferred annuities and single premium immediate annuities. Both companies
conduct business through licensed independent agents. The majority of such
agents are employees of affiliates of the Company and operate in the Company's
financial centers. Currently, annuities are primarily issued in Washington and
Oregon.
The Company defers certain costs, such as commissions and the expenses of
underwriting and issuing policies, that are involved in acquiring new annuity
and life insurance business. These costs, which are included in other assets in
the accompanying Consolidated Statements of Financial Position, are amortized
over the lives of the policies in relation to the estimated gross profit.
Annuities equal the policy value as defined in the policy contract as of the
balance sheet date.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company enters into sales of securities under agreements to repurchase
the same ("reverse repurchase agreements") or similar ("dollar repurchase
agreements") securities. Reverse repurchase agreements and dollar rolls are
accounted for as financing arrangements, with the obligation to repurchase
securities sold reflected as a liability in the Consolidated Statement of
Financial Position. The dollar amount of securities underlying the agreements
remain in the respective asset accounts.
TRUST ASSETS
Assets held by the Company in fiduciary or agency capacity for customers
are not included in the Consolidated Financial Statements as such items are not
assets of the Company. Assets totaling $67.3 million and $60.9 million as of
December 31, 1995 and 1994 were held by the Company in fiduciary or agency
capacity.
FEDERAL INCOME TAXES
Income taxes are accounted for using the asset and liability method. Under
this method, a deferred tax asset or liability is determined based on the
enacted tax rates which will be in effect when the differences between the
financial statement carrying amounts and tax bases of existing assets and
liabilities are expected to be reported in the Company's income tax returns. The
deferred tax provision for the year is equal to the change in the deferred tax
liability from the beginning to the end of the year. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
The Company reports income and expenses using the accrual method of
accounting and files a consolidated tax return that includes all of its
subsidiaries excluding Keystone Holdings and its subsidiaries. Keystone Holdings
and its subsidiaries filed a separate consolidated tax return for periods prior
to December 20, 1996.
Subsequent to the consummation of the merger with Keystone Holdings, the
Company will file a consolidated tax return that includes all of its
subsidiaries. For California franchise tax purposes, ASB joins in the filing of
a combined return with its subsidiaries and with ASB Real Estate Group, Inc.
("AREG"). AREG formerly managed certain real estate related assets of New West
and is now inactive as a result of a restructuring transaction in 1993.
The tax sharing agreement entered into by Keystone Holdings and its
subsidiaries (the "Tax Sharing Agreement") requires the subsidiaries to compute
their tax sharing payments as if they were filing a separate return. Such
agreement further requires N.A. Holdings to compute its tax sharing payment as
if it were filing a separate consolidated return with its subsidiaries
(including ASB), with certain adjustments. The principal adjustments are (a) the
income, expenses, gains and losses of New West, a nominee of ASB for income and
F-22
<PAGE> 101
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
franchise tax purposes through October 23, 1995, are excluded; (b) loan fees are
recognized on a straight-line basis over seven years, adjusted for sales of such
loans, rather than as received; and (c) for the years ending on or before
December 31, 1994, the mark-to-market adjustments attributable to the real
estate loan portfolio acquired from the Failed Association is accreted into
income ratably over seven years, adjusted for sales of the acquired loans.
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, 1993
----------------------
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER
SHARE AMOUNTS)
<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>
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<PAGE> 102
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1993
----------------------
(DOLLARS IN THOUSANDS)
<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
========
<CAPTION>
YEAR ENDED
DECEMBER 31, 1993
----------------------
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER
SHARE AMOUNTS)
<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 Bank ("Pacific First")
from RT Holdings, Inc. ("RTH"), a subsidiary of Royal Trustco Limited of
Toronto, Canada. In April 1993, Pacific First operated 129 branches and 14 home
loan centers in Washington and Oregon. At March 31, 1993, Pacific First had
assets of $5.8 billion and deposits of $3.8 billion.
As part of the acquisition of Pacific First, the Company negotiated several
provisions designed to reduce the effect of any Pacific First asset quality
problems on the resulting combined loan portfolio. As a result of the
provisions, RTH purchased $656.2 million book value in assets from Pacific First
prior to the sale to the Company.
As part of the purchase agreement, the Company received indemnification
from RTH for a variety of problems Pacific First had that could result in future
losses to the Company. These indemnification provisions were secured by both
specific funds held in escrow and by a guarantee from RTH's parent company. The
largest individual component is a $10.0 million general indemnity escrow that
can be drawn upon to pay a variety of claims, including any exposure arising
from transactions or acts prior to the purchase date.
F-24
<PAGE> 103
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition of Pacific First was treated as a purchase for accounting
purposes. Accordingly, under generally accepted accounting principles, the
assets and liabilities of Pacific First have been recorded on the books of the
Company at their respective fair market values at the time of the consummation
of the acquisition of Pacific First. Goodwill, the excess of the purchase price
over the net fair value of the assets and liabilities, including identified
intangible assets, was recorded at $178.2 million. Amortization of goodwill over
a 10-year period will result in a charge to earnings of approximately $17.8
million per year.
The accompanying financial statements include the operations of the two
institutions from April 1, 1993 to December 31, 1993. The following pro forma
information presents the results of operations for 1993 as though the
acquisition had occurred on January 1, 1993. The pro forma results do not
necessarily indicate the actual results that would have been obtained, nor are
they necessarily indicative of the future operations of the combined companies.
The unaudited pro forma results of operations were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1993
----------------------
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER
SHARE AMOUNTS)
<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.
F-25
<PAGE> 104
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On January 31, 1996, WMB merged with Western of Coos Bay, Oregon. At the
time of the merger, Western had 42 offices in 35 communities and was Oregon's
largest community-based commercial bank. At January 31, 1996 Western had assets
of $776.3 million, deposits of $696.4 million and stockholders' equity of $69.5
million. The Company issued 5,866,199 shares of common stock to complete the
merger with Western. The merger was treated as a pooling-of-interests. The
supplemental financial information presented in this document reflects the
pooling-of-interests method of accounting for the merger of Western into the
Company. Accordingly, under generally accepted accounting principles, the assets
and liabilities of Western were recorded on the books of the resulting
institution at their values as reported on the books of Western immediately
prior to the consummation of the merger with Western. No goodwill was created in
the merger with Western. This presentation required the restatement of prior
periods as if the companies had been combined for all years presented.
The following supplemental information represents the results of operations
of the Company and Western for 1995, 1994 and 1993 on an individual as well as
combined basis. This information does not necessarily indicate the actual
results that would have been obtained, nor are they necessarily indicative of
the future operations of the combined companies. The supplemental results of
operations were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C>
Washington Mutual:
Total revenue.............................................. $1,625,451 $1,315,651 $1,177,313
Income before extraordinary items and cumulative effect
of change in tax accounting method.................... 190,624 172,304 175,264
Extraordinary items, net of federal income tax effect.... -- -- (8,953)
Cumulative effect of change in tax accounting method..... -- -- 13,365
---------- ---------- ----------
Net income................................................. $ 190,624 $ 172,304 $ 179,676
========== ========== ==========
Per share amounts -- primary
Income before extraordinary items and cumulative effect
of change in tax accounting method.................... $2.68 $2.54 $2.74
Extraordinary items, net of federal income tax effect.... -- -- (0.15)
Cumulative effect of change in tax accounting method..... -- -- 0.23
---------- ---------- ----------
Net income................................................. $2.68 $2.54 $2.82
========== ========== ==========
Per share amounts -- fully diluted
Income before extraordinary items and cumulative effect
of change in tax accounting method.................... $2.59 $2.46 $2.60
Extraordinary items, net of federal income tax effect.... -- -- (0.14)
Cumulative effect of change in tax accounting method..... -- -- 0.21
---------- ---------- ----------
Net income................................................. $2.59 $2.46 $2.67
========== ========== ==========
</TABLE>
F-26
<PAGE> 105
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER SHARE AMOUNTS)
<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,
------------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C>
Washington Mutual and Western:
Total revenue.............................................. $1,696,834 $1,377,052 $1,233,884
Income before extraordinary items and cumulative effect
of change in tax accounting method.................... 199,801 181,322 184,171
Extraordinary items, net of federal income tax effect.... -- -- (8,953)
Cumulative effect of change in tax accounting method..... -- -- 13,365
---------- ---------- ----------
Net income................................................. $ 199,801 $ 181,322 $ 188,583
========== ========== ==========
Per share amounts -- primary
Income before extraordinary items and cumulative effect
of change in tax accounting method....................... $2.59 $2.45 $2.63
Extraordinary items, net of federal income tax effect.... -- -- (0.14)
Cumulative effect of change in tax accounting method..... -- -- 0.21
---------- ---------- ----------
Net income................................................. $2.59 $2.45 $2.70
========== ========== ==========
Per share amounts -- fully diluted
Income before extraordinary items and cumulative effect
of change in tax accounting method....................... $2.51 $2.38 $2.51
Extraordinary items, net of federal income tax effect.... -- -- (0.13)
Cumulative effect of change in tax accounting method..... -- -- 0.19
---------- ---------- ----------
Net income................................................. $2.51 $2.38 $2.57
========== ========== ==========
</TABLE>
On November 30, 1996, WMI merged with Utah Federal Savings Bank ("Utah
FSB") by merging Utah FSB with and into WMBfsb. At October 31, 1996, Utah FSB,
which was an Ogden-based institution, had assets of $121.9 million, deposits of
$105.9 million and stockholders' equity of $12.2 million. The merger will be
accounted for as a pooling-of-interests. Due to the immaterial nature of the
transaction, the Company will not restate prior-period information as if the
companies had been combined.
On December 20, 1996, WMI merged with Keystone Holdings. Keystone Holdings
is an indirect holding company whose principal operating subsidiary, through a
multi-tiered holding company structure, is ASB, a California-based federally
chartered savings bank. N.A. Holdings owns all of the outstanding common stock
of ASB. N.A. Holdings is owned by New American Capital, Inc. ("New Capital")
whose common stock is owned by New American Holdings, Inc. ("New Holdings"), a
direct subsidiary of Keystone Holdings.
At December 20, 1996, Keystone Holdings had assets of approximately $21.9
billion, deposits of approximately $12.9 billion and stockholder's equity of
approximately $574.0 million. The Company issued 47,883,333 shares of common
stock to complete the merger with Keystone Holdings. The merger was treated as a
pooling-of-interests. The financial information presented in this document
reflects the pooling-of-interests
F-27
<PAGE> 106
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
method of accounting for the merger of Keystone Holdings into the Company.
Accordingly, under generally accepted accounting principles, the assets and
liabilities of Keystone Holdings were recorded on the books of the resulting
institution at the amounts as reported on the books of Keystone Holdings
immediately prior to the consummation of the merger with Keystone Holdings. No
goodwill was created in the merger with Keystone Holdings. This presentation
required the restatement of prior periods as if the companies had been combined
for all years presented. Certain amounts in Keystone Holdings' financial
statements have been restated to conform to WMI's presentation.
The following pro forma information represents the results of operations of
the Company and Keystone Holdings for 1995, 1994 and 1993 on an individual as
well as combined basis. The pro forma results do not necessarily indicate the
actual results that would have been obtained, nor are they necessarily
indicative of the future operations of the combined companies. The pro forma
results of Keystone Holdings have been adjusted to (i) eliminate earnings
attributable to the warrant holders and (ii) reflect the preferred stock
dividends to related parties as minority interest. The pro forma results of
operations were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C>
Washington Mutual:
Total revenue.......................................... $1,696,834 $1,377,052 $1,233,884
Income before extraordinary items and cumulative
effect of change in tax accounting method......... 199,801 181,322 184,171
Extraordinary items, net of federal income tax
effect............................................ -- -- (8,953)
Cumulative effect of change in tax accounting
method............................................ -- -- 13,365
---------- ---------- ----------
Net income............................................. $ 199,801 $ 181,322 $ 188,583
========== ========== ==========
Per share amounts -- primary
Income before extraordinary items and cumulative
effect of change in tax accounting method......... $2.59 $2.45 $2.63
Extraordinary items, net of federal income tax
effect............................................ -- -- (0.14)
Cumulative effect of change in tax accounting
method............................................ -- -- 0.21
---------- ---------- ----------
Net income............................................. $2.59 $2.45 $2.70
========== ========== ==========
Per share amounts -- fully diluted
Income before extraordinary items and cumulative
effect of change in tax accounting method......... $2.51 $2.38 $2.51
Extraordinary items, net of federal income tax
effect............................................ -- -- (0.13)
Cumulative effect of change in tax accounting
method............................................ -- -- 0.19
---------- ---------- ----------
Net income............................................. $2.51 $2.38 $2.57
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Keystone Holdings:
Total revenue.......................................... $1,427,591 $1,139,155 $1,211,270
---------- ---------- ----------
Net Income............................................. $ 90,101 $ 58,953 $ 78,740
========== ========== ==========
</TABLE>
F-28
<PAGE> 107
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C>
Washington Mutual and Keystone Holdings:
Total revenue.......................................... $3,124,425 $2,516,207 $2,445,154
Income before extraordinary items and cumulative effect
of change in tax accounting method................... 289,902 240,275 262,911
Extraordinary items, net of federal income tax
effect............................................... -- -- (8,953)
Cumulative effect of change in tax accounting method... -- -- 13,365
---------- ---------- ----------
Net income............................................. $ 289,902 $ 240,275 $ 267,323
========== ========== ==========
Per share amounts -- primary
Income before extraordinary items and cumulative
effect of change in tax accounting method......... $2.47 $2.09 $2.38
Extraordinary items, net of federal income tax
effect............................................ -- -- (0.09)
Cumulative effect of change in tax accounting
method............................................ -- -- 0.13
---------- ---------- ----------
Net income............................................. $2.47 $2.09 $2.42
========== ========== ==========
Per share amounts -- fully diluted
Income before extraordinary items and cumulative
effect of change in tax accounting method......... $2.42 $2.06 $2.32
Extraordinary items, net of federal income tax
effect............................................ -- -- (0.08)
Cumulative effect of change in tax accounting
method............................................ -- -- 0.12
---------- ---------- ----------
Net income............................................. $2.42 $2.06 $2.36
========== ========== ==========
</TABLE>
NOTE 3: CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cash and demand deposits....................................... $689,258 $406,149
Cash equivalents:
Overnight investments........................................ 293,000 69,884
Time deposits................................................ 1,575 1,476
-------- --------
294,575 71,360
-------- --------
$983,833 $477,509
======== ========
</TABLE>
For the purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, overnight investments and time deposits.
Generally, time deposits are short term, with an original maturity of three
months or less.
Federal Reserve Board regulations require depository institutions to
maintain certain minimum reserve balances. Included in cash and demand deposits
were required deposits at the Federal Reserve of $107.9 million and $96.0
million at December 31, 1995 and 1994.
F-29
<PAGE> 108
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4: AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities classified by type and contractual maturity
date consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE YIELD(1)
----------- ---------- ---------- ----------- --------
(DOLLARS IN THOUSANDS)
<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%
After one but within five years..... 184,837 526 (29) 185,334 6.48
After five but within 10 years...... 9,755 41 (125) 9,671 7.23
After 10 years...................... 59,813 121 (770) 59,164 7.02
----------- -------- -------- ----------- ----
319,525 688 (988) 319,225 6.24
Corporate debt obligations:
Due within one year................. 1,502 10 -- 1,512 8.27
After one but within five years..... 136,447 7,492 (205) 143,734 8.70
After five but within 10 years...... 181,038 8,237 (819) 188,456 7.02
After 10 years...................... 97,755 6,626 (98) 104,283 7.50
----------- -------- -------- ----------- ----
416,742 22,365 (1,122) 437,985 7.69
Equity securities:
Preferred stock..................... 110,532 2,535 (2,311) 110,756 7.21
FHLB stock.......................... 414,389 -- -- 414,389 6.74
Other stock......................... 5 3 -- 8 --
----------- -------- -------- ----------- ----
524,926 2,538 (2,311) 525,153 6.84
----------- -------- -------- ----------- ----
1,261,193 25,591 (4,421) 1,282,363 6.98
Mortgage-backed securities:
U.S. government agency:
Due within one year............... 5 -- -- 5 9.23
After one but within five years... 467,226 14,883 (497) 481,612 7.64
After five but within 10 years.... 236,497 14,338 (86) 250,749 7.84
After 10 years.................... 8,713,086 226,286 (19,214) 8,920,158 6.93
----------- -------- -------- ----------- ----
9,416,814 255,507 (19,797) 9,652,524 6.99
Corporate:
Due after five but within 10
years.......................... 18,614 901 (258) 19,257 7.14
After 10 years.................... 1,211,290 8,739 (17,016) 1,203,013 7.37
----------- -------- -------- ----------- ----
1,229,904 9,640 (17,274) 1,222,270 7.37
----------- -------- -------- ----------- ----
10,646,718 265,147 (37,071) 10,874,794 7.03
Derivative instruments:
Interest rate exchange agreements... (848) 2,225 (13,224) (11,847) --
Interest rate cap agreements........ 11,946 -- (2,531) 9,415 --
----------- -------- -------- ----------- ----
11,098 2,225 (15,755) (2,432) --
----------- -------- -------- ----------- ----
$11,919,009 $ 292,963 $ (57,247) $12,154,725 7.03%
=========== ======== ======== =========== ====
</TABLE>
- ---------------
(1) Weighted average yield at end of year
F-30
<PAGE> 109
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE YIELD(1)
---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<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%
After one but within five years...... 382,890 7 (17,728) 365,169 5.55
After five but within 10 years....... 9,469 -- (254) 9,215 6.08
After 10 years....................... 70,340 -- (2,316) 68,024 5.97
---------- ------- --------- ---------- ----
529,636 7 (21,185) 508,458 5.44
Corporate debt obligations:
Due after one but within five
years.............................. 133,255 231 (3,857) 129,629 6.33
After five but within 10 years....... 50,609 296 (2,980) 47,925 7.50
After 10 years....................... 6,502 23 (644) 5,881 7.65
---------- ------- --------- ---------- ----
190,366 550 (7,481) 183,435 6.68
Equity securities:
Preferred stock...................... 35,457 -- (1,790) 33,667 9.95
FHLB stock........................... 353,298 -- -- 353,298 5.67
Other stock.......................... 1,032 -- -- 1,032 --
---------- ------- --------- ---------- ----
389,787 -- (1,790) 387,997 6.03
---------- ------- --------- ---------- ----
1,109,789 557 (30,456) 1,079,890 5.86
Mortgage-backed securities
U.S. government agency:
Due after one but within five
years........................... 209,806 35 (7,440) 202,401 5.06
After five but within 10 years..... 56,929 9 (2,134) 54,804 5.61
After 10 years..................... 2,608,957 1,272 (79,609) 2,530,620 6.30
---------- ------- --------- ---------- ----
2,875,692 1,316 (89,183) 2,787,825 6.20
Corporate:
Due after five but within 10
years........................... 9,716 -- (280) 9,436 5.46
After 10 years..................... 360,549 511 (16,395) 344,665 6.14
---------- ------- --------- ---------- ----
370,265 511 (16,675) 354,101 6.12
---------- ------- --------- ---------- ----
3,245,957 1,827 (105,858) 3,141,926 6.19
Derivative instruments:
Interest rate exchange agreements.... (2,360) 21,014 -- 18,654 --
Interest rate cap agreements......... 8,766 32,924 -- 41,690 --
---------- ------- --------- ---------- ----
6,406 53,938 -- 60,344 --
---------- ------- --------- ---------- ----
$4,362,152 $ 56,322 $ (136,314) $4,282,160 6.02%
========== ======= ========= ========== ====
</TABLE>
- ---------------
(1) Weighted average yield at end of year
Proceeds from sales of investment securities in the available-for-sale
portfolio during 1995 and 1994 were $626.2 million and $161.8 million. The
Company realized $4.0 million in gains and $2.2 million in losses on these sales
during 1995. Similarly, the Company realized $2.5 million in gains and $740,000
in losses on sales
F-31
<PAGE> 110
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
during 1994. Proceeds from sales of mortgage-backed securities in the
available-for-sale portfolio during 1995 and 1994 were $1.0 billion and $337.9
million. The Company realized $13.5 million in gains and $16.2 million in losses
on these sales during 1995 and $2.8 million in gains and $469,000 in losses on
these sales during 1994.
Available-for-sale mortgage-backed securities with a book value of $5.6
billion and a market value of $5.8 billion at December 31, 1995 were pledged to
secure public deposits, securities sold under agreements to repurchase, other
borrowings, interest rate exchange agreements and access to the Federal Reserve
discount window.
There were no sales out of the held-to-maturity portfolio during 1995 and
1994. During 1995, FASB issued a report entitled A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities, Questions and Answers that allowed companies a one-time reassessment
and related reclassification from the held-to-maturity category to the
available-for-sale category without adverse accounting consequences for the
remainder of the portfolio. During the fourth quarter of 1995, the Company
elected to take advantage of this opportunity and reclassified held-to-maturity
securities with a book value of $4.9 billion and gross unrealized gains of $82.6
million and gross unrealized losses of $28.2 million. No transfers between the
held-to-maturity and available-for-sale categories were made during 1994.
At December 31, 1995, net unrealized gains on the available-for-sale
portfolio were $249.2 million and unrealized losses on the derivative
instruments designated against this portfolio were $13.5 million, resulting in a
combined net unrealized gain included as a separate component of stockholders'
equity (on an after-tax basis) of $188.7 million. At December 31, 1994, net
unrealized losses on the available-for-sale portfolio were $133.9 million and
unrealized gains on the derivative instruments designated against this portfolio
were $53.9 million, resulting in a combined net unrealized loss included as a
separate component of stockholders' equity (on an after-tax basis) of $61.2
million.
On December 31, 1995, the Company held $1.2 billion of private-issue
mortgage-backed securities. Of that amount, 33 percent were of the highest
investment grade (AAA), 55 percent were rated investment grade (AA or A), 8
percent were rated lowest investment grade (BBB) and 4 percent were rated below
investment grade (BB or below). During 1995, the Company realized $8.4 million
in losses on securities in the below investment grade portfolio.
As of December 31, 1995, the Company had mortgage-backed securities with
book value of $293.3 million and a market value of $291.9 million from a single
issuer, the Resolution Trust Corporation.
F-32
<PAGE> 111
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5: HELD-TO-MATURITY SECURITIES
Held-to-maturity securities classified by type and contractual maturity
date consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE YIELD(1)
---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
Due within one year................... $ 19,693 $ -- $ -- $ 19,693 5.24%
After five but within 10 years........ 6,592 906 -- 7,498 8.09
---------- ------- ------- ---------- ----
26,285 906 -- 27,191 6.03
Corporate debt obligations:
Due within one year................... 98,969 -- (9) 98,960 5.70
After one but within five years....... 31,173 2,895 (2) 34,066 8.66
After five but within 10 years........ 22,586 2,472 (3) 25,055 8.37
After 10 years........................ 17,162 2,310 (9) 19,463 8.91
---------- ------- ------- ---------- ----
169,890 7,677 (23) 177,544 7.00
Municipal obligations:
Due within one year................... 1,090 1 -- 1,091 6.85
After one but within five years....... 1,658 89 -- 1,747 7.44
After five but within 10 years........ 36,202 2,083 -- 38,285 6.88
After 10 years........................ 53,371 2,908 -- 56,279 6.37
---------- ------- ------- ---------- ----
92,321 5,081 -- 97,402 6.60
---------- ------- ------- ---------- ----
288,496 13,664 (23) 302,137 6.78
Mortgage-backed securities
U.S. government agency:
After 10 years........................ 2,909,224 54,833 (3,344) 2,960,713 7.44
---------- ------- ------- ---------- ----
$3,197,720 $ 68,497 $ (3,367) $3,262,850 7.38%
========== ======= ======= ========== ====
</TABLE>
- ---------------
(1) Weighted average yield at end of year.
F-33
<PAGE> 112
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE YIELD(1)
---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
Due within one year.................. $ 24,038 $ -- $ (2) $ 24,036 $ 4.95%
After one but within five years...... 23,972 1 (478) 23,495 6.82
After five but within 10 years....... 8,557 -- (61) 8,496 7.75
---------- ------- --------- ---------- ----
56,567 1 (541) 56,027 6.16
Corporate debt obligations:
Due within one year.................. 69,269 15 (82) 69,202 5.65
After one but within five years...... 95,607 1,914 (3,644) 93,877 8.00
After five but within 10 years....... 172,808 727 (13,787) 159,748 7.24
After 10 years....................... 95,857 493 (8,831) 87,519 7.80
---------- ------- --------- ---------- ----
433,541 3,149 (26,344) 410,346 7.27
Municipal obligations:
Due within one year.................. 806 3 -- 809 8.33
After one but within five years...... 1,662 7 (14) 1,655 7.15
After five but within 10 years....... 26,968 812 (636) 27,144 6.51
After 10 years....................... 51,326 1,867 (753) 52,440 6.88
---------- ------- --------- ---------- ----
80,762 2,689 (1,403) 82,048 6.78
---------- ------- --------- ---------- ----
570,870 5,839 (28,288) 548,421 7.08
Mortgage-backed securities:
U.S. government agency:
Due within one year.................. 4 -- -- 4 6.72
After five but within 10 years....... 12,296 -- (1,019) 11,277 6.13
After 10 years....................... 3,313,021 640 (188,128) 3,125,533 6.68
---------- ------- --------- ---------- ----
3,325,321 640 (189,147) 3,136,814 6.68
Corporate:
Due within one year.................. 15 -- -- 15 9.23
After one but within five years...... 51 2 (1) 52 10.44
After five but within 10 years....... 548 13 -- 561 11.06
After 10 years....................... 559,226 252 (16,444) 543,034 6.44
---------- ------- --------- ---------- ----
559,840 267 (16,445) 543,662 6.44
---------- ------- --------- ---------- ----
3,885,161 907 (205,592) 3,680,476 6.65
---------- ------- --------- ---------- ----
$4,456,031 $6,746 $ (233,880) $4,228,897 6.71%
========== ======= ========= ========== ====
</TABLE>
- ---------------
(1) Weighted average yield at end of year.
Held-to-maturity mortgage-backed securities with a book value of $1.9
billion and a market value of $1.9 billion at December 31, 1995 were pledged to
secure public deposits, securities sold under agreements to repurchase, other
borrowings, interest rate exchange agreements and access to the Federal Reserve
discount window.
F-34
<PAGE> 113
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6: LOANS
Loans consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real Estate:
Residential............................................. $17,303,305 $17,766,215
Residential construction................................ 615,814 549,271
Commercial real estate.................................. 3,487,574 4,699,220
----------- -----------
21,406,693 23,014,706
Second mortgage and other consumer........................ 1,974,673 1,841,613
Manufactured housing...................................... 867,181 731,714
Commercial business....................................... 179,568 129,048
Reserve for loan losses................................... (235,275) (244,989)
----------- -----------
$24,192,840 $25,472,092
=========== ===========
</TABLE>
Included in the table above are loans held-for-sale of $83.7 million and
$8.6 million at December 31, 1995 and 1994.
Nonaccrual loans totaled $213.8 million and $280.9 million at December 31,
1995 and 1994. If interest on these loans had been recognized, such income would
have been $10.8 million and $11.6 million for 1995 and 1994. At December 31,
1995 and 1994, the Company had troubled debt restructurings aggregating $90.6
million and $54.6 million. During 1995 and 1994, these troubled debt
restructurings returned a net yield of 8.13 percent and 8.87 percent, thereby
contributing $5.9 million and $5.5 million to interest income. Had these loans
not been restructured and interest accrued at their original rates, the
additional interest income would not have been material.
At December 31, 1995, loans totaling $169.1 million were impaired, of which
$91.7 million had allocated reserves of $16.6 million. The remaining $77.4
million were previously written down and had no reserves allocated to them. Of
the $169.1 million of impaired loans, $26.7 million were on nonaccrual status
and $142.3 million (including $57.1 million of troubled debt restructurings)
were performing but judged to be impaired. The average balance of impaired loans
during the year was $177.6 million, and the Company recognized $12.4 million of
related interest income. Interest income on impaired loans is normally
recognized on the accrual basis, unless the loan is more than 90 days past due,
in which case interest income is recorded on the cash basis. An immaterial
amount of interest income was recorded on the cash basis during 1995.
F-35
<PAGE> 114
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loans, exclusive of reserve for loan losses, by geographic concentration
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------
CALIFORNIA WASHINGTON OREGON OTHER TOTAL
----------- ---------- ---------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate:
Residential....................... $ 9,701,368 $5,669,411 $1,450,311 $482,215 $17,303,305
Residential construction.......... -- 345,163 224,117 46,534 615,814
Apartment buildings............... 1,296,649 591,764 201,452 109,358 2,199,223
Other commercial real estate...... 500,652 425,240 264,235 98,224 1,288,351
----------- ---------- ---------- -------- -----------
11,498,669 7,031,578 2,140,115 736,331 21,406,693
Second mortgage and other
consumer.......................... 88,764 1,519,796 344,708 21,405 1,974,673
Manufactured housing................ 99,464 567,012 166,322 34,383 867,181
Commercial business................. -- 57,882 121,519 167 179,568
----------- ---------- ---------- -------- -----------
$11,686,897 $9,176,268 $2,772,664 $792,286 $24,428,115
=========== ========== ========== ======== ===========
</TABLE>
California loans include $3.7 billion of loans in the Los Angeles area,
$3.7 billion of loans in the San Francisco Bay area, $1.5 billion of loans in
Orange County and $2.9 billion of loans in other California areas.
Loans, exclusive of reserve for loan losses, deferred loan fees and
premiums and discounts, by maturity or repricing date were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Adjustable-rate loans:
Due within one year............................................. $ 14,151,629
After one but within five years................................. 2,385,004
After five but within 10 years.................................. 101,957
After 10 years.................................................. 29,840
-----------
16,668,430
Fixed-rate loans:
Due within one year............................................. 401,380
After one but within five years................................. 1,347,147
After five but within 10 years.................................. 1,690,024
After 10 years.................................................. 4,396,502
-----------
7,835,053
-----------
$ 24,503,483
===========
</TABLE>
In addition to loans the Company serviced for its own portfolio, it
serviced loans of $21.4 billion and $15.3 billion at December 31, 1995 and 1994
for U.S. government agencies, institutions and private investors.
Loans of $5.2 billion at December 31, 1995 were pledged to secure advances
from the FHLB.
Unamortized deferred loan fees were $75.1 million and $121.3 million at
December 31, 1995 and 1994.
At December 31, 1995, the Company had $663.4 million in fixed-rate mortgage
loan commitments, $638.2 million in adjustable-rate mortgage loan commitments,
$72.0 million in commercial business loan commitments and $576.5 million in
undisbursed lines of credit.
F-36
<PAGE> 115
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7: RESERVE FOR LOAN LOSSES
Changes in the reserve for loan losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
-------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year............................... $244,989 $ 245,062 $ 179,612
Provision for loan losses................................ 74,987 122,009 158,728
Reserves added through business combinations............. 5,372 921 46,000
Reserves charged off:
Residential............................................ (57,147) (89,637) (93,799)
Residential construction............................... (125) (190) (297)
Commercial real estate................................. (33,149) (26,835) (26,967)
Manufactured housing, second mortgage and other
consumer............................................ (6,888) (10,544) (16,964)
Commercial business.................................... (813) (2,065) (3,065)
-------- --------- ---------
(98,122) (129,271) (141,092)
Reserves recovered:
Residential............................................ 2,393 2,522 45
Residential construction............................... 47 -- --
Commercial real estate................................. 4,426 2,186 889
Manufactured housing, second mortgage and other
consumer............................................ 701 1,117 768
Commercial business.................................... 482 443 112
-------- --------- ---------
8,049 6,268 1,814
-------- --------- ---------
Balance, end of year..................................... $235,275 $ 244,989 $ 245,062
======== ========= =========
</TABLE>
The Company holds certain loans that have been securitized into
mortgage-backed securities with full recourse. The Company includes those loans
securitized with recourse in determining the adequacy of the reserve for loan
losses. The balance of the reserve for loan losses related to loans securitized
with recourse totaled $17.4 million, $16.7 million and $12.1 million at December
31, 1995, 1994 and 1993.
As part of the ongoing process to determine the adequacy of the reserve for
loan losses, the Company reviews the components of its loan portfolio for
specific risk of principal loss. Reserves are then allocated for impaired loans.
The Company intends to provide an additional $125.0 million in loan loss
provision at the Effective Date. This additional loan loss provision is being
provided principally because a number of Washington Mutual (prior to the
business combination with Keystone Holdings) credit administration and asset
management philosophies and procedures differ from those of ASB. These
differences consist principally of the following: (i) Washington Mutual is more
proactive than ASB in dealing with emerging credit problems and tends to prefer
judicial foreclosure actions to induce borrowers to correct defaults, whereas
ASB tends to prefer workouts in lieu of a more aggressive foreclosure stance;
and (ii) ASB has considered the risk characteristics of its portfolio of
multi-family loans of less than $1 million to be similar to its single-family
residential portfolio. Washington Mutual, on the other hand, considers the risk
characteristics of that portfolio to be more closely aligned with its commercial
property portfolio, which tends to have more loss exposure than the single-
family residential portfolio. Washington Mutual intends to conform ASB's asset
management practices, administration, philosophies and procedures to its own, or
in some instances to revise ASB's current asset management strategies to conform
to strategies being developed by Washington Mutual. The plan of realization of
troubled loans differed between the companies and therefore results in different
levels of loss
F-37
<PAGE> 116
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reserves. The additional loan loss provision is to a lesser degree being
provided because Washington Mutual believes that, while there has been an
increase in the price of houses in California markets, a decline in collateral
values for some portions of the California real estate market has occurred in
1996.
An analysis of the reserve for loan losses is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Allocated reserves:
Commercial real estate....................................... $ 16,488 $ 20,025
Residential construction..................................... 158 1,327
Commercial business.......................................... -- --
-------- --------
16,646 21,352
Unallocated reserves........................................... 218,629 223,637
-------- --------
$235,275 $244,989
======== ========
Total reserve for loan losses as a percentage of:
Total loans and recourse obligations......................... 0.79% 0.91%
Nonperforming loans.......................................... 110.04 87.22
</TABLE>
NOTE 8: NOTE RECEIVABLE
In October 1995, Keystone Holdings agreed with the FDIC to allow prepayment
of the remaining balance of the Note Receivable. Prior to October 1995, the FDIC
had always caused New West to prepay the Note Receivable to the maximum extent
permitted by its terms. If the maximum prepayments under its terms were to have
continued, the balance of the Note Receivable would have been reduced to
approximately $113.0 million in November 1995 and fully repaid in February 1996.
ASB received the remaining principal balance of $505.3 million, plus interest,
on October 24, 1995. ASB utilized the proceeds received to pay down certain
short-term borrowings and to originate new loans.
The following is a summary of the Note Receivable activity for the years
indicated:
<TABLE>
<CAPTION>
CAPITAL NET OF
NOTE RECEIVABLE SURPLUS OFFSET CAPITAL SURPLUS
--------------- -------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1992...................... $ 4,767,144 $ 167,000 $ 4,600,144
Receivable transferred to New West................ 52,932 -- 52,932
Optional prepayments.............................. (1,569,018) -- (1,569,018)
----------- -------- -----------
Balance at December 31, 1993...................... 3,251,058 167,000 3,084,058
Optional prepayments.............................. (1,569,018) -- (1,569,018)
----------- -------- -----------
Balance at December 31, 1994...................... 1,682,040 167,000 1,515,040
Optional prepayments.............................. (1,682,040) (167,000) (1,515,040)
----------- -------- -----------
Balance at December 31, 1995...................... $ -- $ -- $ --
=========== ======== ===========
</TABLE>
F-38
<PAGE> 117
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9: REO
REO consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Real estate acquired through foreclosure....................... $134,195 $144,923
Other repossessed assets....................................... 1,018 979
Reserve for losses............................................. (10,112) (8,135)
--------- --------
$125,101 $137,767
========= ========
</TABLE>
Changes in the REO reserve for losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year......................... $ 8,135 $ 13,330 $ 16,025
Provision for REO losses........................... 10,523 15,491 26,889
Reserves charged-off, net of recoveries............ (8,546) (20,686) (29,584)
------- -------- --------
$ 10,112 $ 8,135 $ 13,330
======= ======== ========
</TABLE>
REO operations, inclusive of write-downs were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) from operations...................... $ (3,457) $ (2,977) $ 665
Gain on sale of REO................................ 3,298 5,066 6,978
Provision for REO losses........................... (10,523) (15,491) (26,889)
-------- -------- --------
$(10,682) $(13,402) $(19,246)
======== ======== ========
</TABLE>
NOTE 10: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Furniture and equipment........................................ $243,527 $235,771
Buildings...................................................... 363,894 289,434
Leasehold improvements......................................... 54,683 54,490
Construction in progress....................................... 8,080 9,047
--------- ---------
670,184 588,742
Accumulated depreciation....................................... (296,779) (268,755)
--------- ---------
373,405 319,987
Land........................................................... 79,338 72,701
--------- ---------
$452,743 $392,688
========= =========
</TABLE>
Depreciation expense for 1995, 1994, and 1993 was $41.3 million, $38.4
million, and $38.9 million, respectively.
F-39
<PAGE> 118
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has noncancelable operating leases for financial centers,
office facilities and equipment. Rental expense, including amounts paid under
month-to-month cancelable leases, amounted to $40.4 million, $44.5 million and
$44.2 million in 1995, 1994, and 1993, respectively.
Future minimum net rental commitments, including maintenance and other
associated costs, for all noncancelable leases were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------
LAND & FURNITURE &
BUILDINGS EQUIPMENT
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commitments:
Due within one year......................................... $ 30,200 $ 3,882
After one but within two years.............................. 28,803 2,822
After two but within three years............................ 26,268 1,630
After three but within four years........................... 24,177 652
After four but within five years............................ 22,344 --
After five years............................................ 87,315 --
-------- ------
$ 219,107 $ 8,986
======== ======
</TABLE>
In March 1995, the FASB issued SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The statement
establishes accounting standards for the impairment of long-lived assets that
either will be held and used in operations or that will be disposed of.
Effective January 1, 1996, the Company adopted SFAS No. 121. The adoption is not
anticipated to have a material impact on the results of operations or financial
condition of the Company.
In January 1995, a wholly owned service corporation subsidiary of ASB
purchased from a related limited partnership the Irvine Plaza building
structures and adjoining land currently utilized for ASB's executive offices and
various departments. The total cash purchase price paid for the property was
$45.2 million.
NOTE 11: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(DOLLARS IN
THOUSANDS)
<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.
F-40
<PAGE> 119
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1993, the acquisition of Pacific First was accounted for as a
purchase of assets and assumption of liabilities and increased goodwill and
other intangible assets by $178.2 million.
NOTE 12: MORTGAGE SERVICING RIGHTS
Mortgage servicing rights are included in other assets and consisted of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year........................ $ 70,911 $ 66,031 $ 77,945
Additions......................................... 58,306 38,385 21,446
Sales............................................. -- (13,087) --
Amortization...................................... (23,840) (20,418) (27,083)
Write-downs....................................... -- -- (6,277)
Impairment valuation allowance.................... (882) -- --
-------- -------- --------
Balance, end of year.............................. $ 104,495 $ 70,911 $ 66,031
======== ======== ========
</TABLE>
In 1995, with the adoption of SFAS No. 122, the Company recorded a
valuation allowance for impairment of mortgage servicing rights of $882,000. No
write-downs were recorded in 1994. In 1993, prior to the adoption of SFAS No.
122, the Company recorded a specific write-down of $6.3 million on mortgage
servicing rights.
NOTE 13: DEPOSITS
Deposits consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Checking accounts:
Interest bearing........................................ $ 2,111,124 $ 2,342,407
Noninterest bearing..................................... 665,205 499,282
----------- -----------
2,776,329 2,841,689
Savings accounts.......................................... 1,905,659 2,224,784
Money market accounts..................................... 4,667,884 3,502,981
Time deposit accounts:
Due within one year..................................... 12,696,186 10,496,491
After one but within two years.......................... 1,410,809 2,780,944
After two but within three years........................ 409,580 765,219
After three but within four years....................... 243,541 293,167
After four but within five years........................ 258,415 293,522
After five years........................................ 94,557 145,209
----------- -----------
15,113,088 14,774,552
----------- -----------
$24,462,960 $23,344,006
=========== ===========
</TABLE>
Time certificates of deposit in amounts of $100,000 or more totaled $3.1
billion and $2.8 billion at December 31, 1995 and 1994. At December 31, 1995,
$1.9 billion of these deposits mature within three
F-41
<PAGE> 120
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
months, $490.8 million mature in three to six months, $371.3 million mature in
six months to one year, and $352.8 million mature after one year.
Financial data pertaining to the weighted average cost of deposits were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Weighted daily average interest rate during the year........... 4.69% 3.69% 3.76%
</TABLE>
NOTE 14: FEDERAL FUNDS PURCHASED
The Company purchased federal funds from a variety of counterparties during
1995. All federal funds purchased had maturities of thirty days or less, with
the majority having maturities of one day. As of December 31, 1995, the balance
of federal funds purchased was $433.4 million.
Financial data pertaining to the weighted average cost, the level of
federal funds purchased, and the related interest expense were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
-------- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Weighted average interest rate at end of year............. 5.83% --% --%
Weighted daily average interest rate during the year...... 5.98 -- --
Daily average balance of federal funds purchased.......... $270,861 $ -- $ --
Maximum amount of federal funds purchased at any month
end..................................................... 998,000 -- --
Interest expense during the year.......................... 16,188 -- --
</TABLE>
NOTE 15: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Reverse repurchase agreements............................... $7,592,841 $6,109,868
Dollar repurchase agreements................................ 391,915 527,478
---------- ----------
$7,984,756 $6,637,346
========== ==========
</TABLE>
The Company sold, under agreements to repurchase, specific securities of
the U.S. government and its agencies and other approved investments to
broker-dealers and customers. The securities underlying the agreements with
broker-dealers were delivered to the dealer who arranged the transaction or were
held by a safekeeping agent for the Company's account. Securities delivered to
broker-dealers may be loaned out in the ordinary course of operations. The
securities underlying the agreements with customers were held in a segregated
account by a safekeeping agent for the Company.
F-42
<PAGE> 121
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities or repricing of securities sold under agreements to
repurchase were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Securities sold under agreements to repurchase:
Due within 30 days........................................ $5,225,817 $4,853,237
After 30 but within 90 days............................... 1,764,074 787,151
After 90 but within 180 days.............................. 490,361 502,123
After 180 but within one year............................. -- 244,360
After one year............................................ 504,504 250,475
---------- ----------
$7,984,756 $6,637,346
========== ==========
</TABLE>
Financial data pertaining to the weighted average cost, the level of
securities sold under agreements to repurchase and the related interest expense
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Weighted average interest rate at end of
year......................................... 5.92% 5.94% 3.41%
Weighted daily average interest rate during the
year......................................... 6.14 4.69 3.66
Daily average of securities sold under
agreements to repurchase..................... $7,859,948 $4,318,592 $2,155,082
Maximum securities sold under agreements to
repurchase at any month end.................. 8,647,814 6,637,346 3,208,288
Interest expense during the year............... 482,698 202,677 78,853
</TABLE>
NOTE 16: ADVANCES FROM THE FHLB
As members of the FHLB, WMB, WM Life, WMBfsb and ASB maintain credit lines
that are percentages of their total regulatory assets, subject to
collateralization requirements. As members of the FHLB of Seattle, WMB's, WM
Life's and WMBfsb's advances are collateralized in aggregate, as provided for in
the Advances, Security and Deposit Agreements with the FHLB, by all FHLB stock
owned, by deposits with the FHLB, and by certain mortgages or deeds of trust and
securities of the U.S. government and agencies thereof. As a member of the FHLB
of San Francisco, ASB's advances are collateralized by all FHLB stock owned and
certain mortgages and deeds of trust.
F-43
<PAGE> 122
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of advances from the FHLB were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1995 1994
------------------------------- -------------------------------
RANGES OF RANGES OF
AMOUNT INTEREST RATES AMOUNT INTEREST RATES
---------- ---------------- ---------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB advances:
Due within one year................ $2,545,594 4.74%-8.54% $1,466,133 3.95%-8.30%
After one but within two years..... 1,331,000 4.38 -8.45 1,394,852 4.74 -8.54
After two but within three years... 545,642 5.59 -8.50 789,478 4.38 -7.44
After three but within four
years........................... 57,000 8.50 -8.63 146,944 5.49 -6.15
After four but within five years... 55,137 6.25 -9.34 110,403 6.19 -8.53
After five years................... 181,366 2.80 -8.65 221,167 4.50 -9.34
---------- ----------
$4,715,739 $4,128,977
========== ==========
</TABLE>
Financial data pertaining to the weighted average cost, the level of FHLB
advances and the related interest expense were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Weighted average interest rate at end of year.......... 5.76% 5.72% 5.36%
Weighted daily average interest rate during the year... 5.72 5.38 6.17
Daily average of FHLB advances......................... $3,539,006 $3,966,494 $3,152,198
Maximum FHLB advances at any month end................. 4,715,739 4,560,891 3,617,596
Interest expense during the year....................... 202,422 213,259 194,631
</TABLE>
NOTE 17: OTHER BORROWINGS
Other borrowings consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
RANGE OF RANGE OF
AMOUNT INTEREST RATES AMOUNT INTEREST RATES
-------- -------------- -------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Series C Floating Rate Notes, due 2000...... $175,000 7.31% $ -- --%
Series B 9.60% Notes, due 1999.............. 169,000 9.60 169,000 9.60
Senior notes, due 2005...................... 147,845 7.46 -- --
Series A Floating Notes, due 1997........... -- -- 111,000 7.88
Notes payable, due 1998..................... 76,405 6.13-8.00 79,039 6.13-8.75
Subordinated notes, due 1998................ 20,500 8.81 20,500 8.50
Other....................................... 1,467 -- 1,527 --
-------- --------
$590,217 $381,066
======== ========
</TABLE>
On March 23, 1995, New Capital completed the private placement of $175.0
million of its Series C Floating Rate Notes due April 12, 2000 (the "Series C
Notes"). The net proceeds from the issuance of the Series C Notes were used to
redeem the $111.0 million Series A Notes and to fund a $60.0 million capital
contribution from N.A. Holdings to ASB. Interest on the Series C Notes accrues
at a rate equal to three-month LIBOR plus 1.375 percent, reset on a quarterly
basis, and interest payments are made quarterly.
F-44
<PAGE> 123
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The indenture related to the Series C Notes contains certain covenants
that, among other things, require the maintenance of regulatory capital at ASB
and limit the following: (i) funded indebtedness, (ii) subsidiary funded
indebtedness, (iii) upstream payments, (iv) subsidiary dividends, (v) liens,
(vi) certain mergers and consolidations, (vii) issuance of subsidiary capital
stock, (viii) transactions with affiliates and (ix) lines of business. New
Capital is in compliance with all such covenants and restrictions.
On January 14, 1992, New Capital completed the private placement of $111.0
million of its Series A Floating Rate Notes due 1997 ("Series A Notes") and
$169.0 million of its Series B 9.60 percent Notes due 1999 ("Series B Notes").
Interest on the Series A Notes accrued at three-month LIBOR plus 2.25 percent
and repriced quarterly. A note purchase agreement (the "Note Purchase
Agreement") was executed by New Capital in connection with the private placement
of the Series A and Series B Notes.
On October 12, 1993, in accordance with a subordinated note purchase
agreement (the "Subordinated Note Agreement"), New Capital issued $20.5 million
of subordinated notes. The subordinated notes accrue interest at a rate equal to
three-month LIBOR plus 2.875 percent. Interest is paid quarterly and the
subordinated notes mature on October 12, 1998.
The Note Purchase Agreement and the Subordinated Note Agreement contain
certain limitations regarding the payment of cash dividends on common or
preferred stock, the reacquisition or issuance of common or preferred stock,
additional borrowings and payments thereon and certain other transactions. Under
the terms of the Note Purchase Agreement and the Subordinated Note Agreement,
New Capital cannot pay dividends on its preferred stock or common stock unless
its consolidated net worth exceeds $375.0 million. As long as New Capital's
consolidated net worth exceeds $375.0 million, it can make restricted payments
if the cumulative restricted payments do not exceed the sum of (i) $30.0
million, (ii) the proceeds from certain capital contributions, and (iii) 50% of
the cumulative adjusted net earnings (as defined in the agreements) of New
Capital. The percentage limitation applied to cumulative adjusted net earnings
is increased to 65% percent as long as New Capital's consolidated net worth
after the proposed restricted payments exceeds $475.0 million. As of December
31, 1995, New Capital's consolidated net worth was $653.4 million and the 65%
percent limitation was in effect. Under the terms of the Series C Note
Indenture, New Capital may pay dividends and make other capital distributions
("Upstream Payments") to the extent that it has the capacity to incur an
additional dollar of funded indebtedness (as defined in the Series C Indenture)
after the proposed Upstream Payment. Based on the most restrictive of New
Capital's debt covenants, as of December 31, 1995, New Capital would have been
permitted to make up to $55.8 million in dividend or other restricted payments.
New Capital is in compliance with all such limitations.
A redemption notice was provided to holders of the Series A Notes as
required by the Note Purchase Agreement and the redemption was completed on
April 12, 1995. As of March 30, 1995, New Capital irrevocably placed sufficient
funds in trust with its paying agent to satisfy the required principal and
interest necessary to redeem the Series A Notes on their redemption date. As a
result, New Capital recorded the payment of those funds as an in-substance
defeasance of the Series A Notes. The early retirement of the Series A Notes
required New Capital to write off certain related unamortized debt issuance
costs and to mark certain interest rate cap agreements to market as of March 30,
1995, resulting in a pre-tax loss on early retirement of debt of approximately
$2.1 million.
In August 1995, the Company issued $150.0 million of senior notes bearing
an interest rate of 7.25 percent. The notes are due August 15, 2005 and may not
be redeemed prior to maturity.
As part of the acquisition of Pacific First, the Company assumed a $75.0
million note payable bearing an interest rate of 8.0 percent to the City of
Tampa. The City of Tampa issued capital improvement revenue bonds in 1988 and
invested a portion of the receipts with Pacific First. The note matures in 1998
and is subject to periodic withdrawals.
F-45
<PAGE> 124
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18: INTEREST RATE RISK MANAGEMENT
From time to time, the following strategies may be used by the Company to
reduce its exposure to interest rate risk: the origination and purchase of
adjustable-rate mortgage loans and the purchase of adjustable-rate
mortgage-backed securities; the sale of fixed-rate residential mortgage loan
production or fixed-rate mortgage-backed securities; and the use of derivative
instruments, such as interest rate exchange agreements and interest rate cap
agreements.
As of December 31, 1995, interest-sensitive assets of $27.7 billion and
interest-sensitive liabilities of $31.5 billion were scheduled to mature or
reprice within one year. At December 31, 1995, the Company had entered into
interest rate exchange agreements and interest rate cap agreements with notional
values of $2.7 billion and $9.8 billion. Without these instruments the Company's
one-year gap at December 31, 1995 would have been a negative 8.90 percent as
opposed to a negative 2.57 percent.
Interest rate exchange agreements and interest rate cap agreements expose
the Company to credit risk in the event of nonperformance by counterparties to
such agreements. This risk consists primarily of the termination value of
agreements where the Company is in a favorable position. The Company controls
the credit risk associated with its interest rate exchange agreements and
interest rate cap agreements through counterparty credit review, counterparty
exposure limits and monitoring procedures.
The Company's use of derivative instruments reduces the negative effect
that changing interest rates may have on net interest income. The Company uses
such instruments to reduce the volatility of net interest income over an
interest rate cycle. None of the Company's derivative instruments are what are
termed leveraged derivative instruments. These types of instruments are riskier
than the derivatives used by the Company in that they have significant embedded
options that enhance the performance in certain circumstances but dramatically
reduce the performance in other circumstances.
From time to time, the Company terminates interest rate exchange agreements
and interest rate cap agreements prior to maturity. Such circumstances arise if,
in the judgment of management, such instruments no longer cost-effectively meet
policy objectives. Often such instruments are within one year of maturity.
During 1995, the Company terminated an interest rate exchange agreement with a
notional value of $75.0 million and recorded a deferred gain of $845,000. There
were no other terminations of interest rate exchange agreements or interest rate
cap agreements in 1995. During 1994, the Company terminated interest rate
exchange agreements with a notional value of $370.0 million for deferred gains
of $1.4 million and deferred losses of $4.8 million. In 1993, interest rate
exchange agreements with a notional value of $90.0 million were terminated and
deferred losses of $3.4 million were recorded. During 1994, the Company
terminated interest rate cap agreements with a notional value of $375.0 million
and deferred gains of $860,000 were recorded. No interest rate cap agreements
were terminated in 1993.
F-46
<PAGE> 125
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of interest rate exchange agreements were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------------------
NOTIONAL SHORT-TERM LONG-TERM CARRYING FAIR
AMOUNT RECEIPT RATE(1) PAYMENT RATE VALUE VALUE
---------- --------------- ------------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Designated against available-for-sale
securities:
Due within one year................ $ 465,000 5.13% 5.92% $ 1,528 $ 1,528
After one but within two years..... 200,000 6.83 5.88 (4,144) (4,144)
After two but within three years... 300,000 6.05 5.92 (5,244) (5,244)
After three years.................. 200,000 6.88 5.88 (3,987) (3,987)
Designated against deposits and
borrowings:
Due within one year................ 495,000 6.95 6.08 -- 2,385
After one but within two years..... 484,500 5.96 6.62 -- (8,461)
After two but within three years... 276,000 6.04 6.75 -- (8,746)
After three years.................. 261,000 7.10 8.27 -- (7,793)
---------- ---- ---- --------- ---------
$2,681,500 6.26% 6.38% $(11,847) $(34,462)
========== ==== ==== ========= =========
</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.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------------------------
NOTIONAL SHORT-TERM LONG-TERM CARRYING FAIR
AMOUNT RECEIPT RATE(1) PAYMENT RATE VALUE VALUE
---------- --------------- ------------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Designated against available-for-sale
securities:
Due within one year................ $ 150,000 6.38% 4.33% $ 4,700 $ 4,700
After one but within two years..... 350,000 5.69 4.54 13,954 13,954
Designated against deposits and
borrowings:
Due within one year................ 355,000 4.62 6.66 -- (3,367)
After one but within two years..... 685,000 6.52 6.16 -- 8,748
After two but within three years... 500,500 5.75 6.76 -- 14,772
After three years.................. 602,000 6.33 7.70 -- 1,908
---------- ---- ---- --------- ---------
$2,642,500 5.96% 6.37% $ 18,654 $ 40,715
========== ==== ==== ========= =========
</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.
F-47
<PAGE> 126
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of interest rate cap agreements were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------------------
SHORT-TERM
NOTIONAL STRIKE RECEIPT CARRYING FAIR
AMOUNT RATE RATE(1) VALUE VALUE
---------- ------ -------------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Designated against available-for-sale
securities:
Due within one year(2)..................... $1,425,000 5.34% 5.90% $ 4,484 $ 4,484
After one but within two years(3).......... 875,000 5.85 5.83 3,799 3,799
After two but within three years(4)........ 250,000 6.05 5.90 1,132 1,132
Designated against deposits and borrowings:
Due within one year(5)..................... 5,193,000 7.43 5.63 151 (1,775)
After one but within two years(6).......... 386,000 9.18 5.60 1,241 2
After two but within three years(7)........ 286,000 8.81 5.49 1,177 42
After three years............................ 1,359,000 8.05 5.27 15,122 1,101
---------- ---- ---- -------- -------
$9,774,000 7.14% 5.64% $ 27,106 $ 8,785
========== ==== ==== ======== =======
</TABLE>
- ---------------
(1) The terms of each agreement have specific London Interbank Offering Rate or
Cost of Funds Index for the Eleventh District Savings Institutions reset and
index requirements, which result in different short-term receipt rates for
each agreement. The receipt rate represents the weighted average rate as of
the last reset date for each agreement.
(2) Includes $425.0 million notional amount with a weighted average cap ceiling
of 8.06%
(3) Includes $600.0 million notional amount with a weighted average cap ceiling
of 7.75%
(4) Includes $250.0 million notional amount with a weighted average cap ceiling
of 7.65%
(5) Includes $30.0 million notional amount with a weighted average cap ceiling
of 9.50% and $5.0 billion notional amount with a weighted average floor of
4.85%
(6) Includes $45.0 million notional amount with a weighted average cap ceiling
of 9.50%
(7) Includes $40.0 million notional amount with a weighted average cap ceiling
of 9.50%
(8) Includes $1.1 billion notional amount with a weighted average cap ceiling of
9.50%
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------------------
SHORT-TERM
NOTIONAL STRIKE RECEIPT CARRYING FAIR
AMOUNT RATE RATE(1) VALUE VALUE
---------- ------ -------------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Designated against available-for-sale
securities:
Due after one but within two years......... $ 600,000 5.13% 5.76% $ 24,936 $24,936
After two years............................ 275,000 4.80 5.70 16,754 16,754
Designated against deposits and borrowings:
Due after one but within two years(2)...... 1,018,000 6.14 5.90 937 21,366
After two but within three years(3)........ 441,000 9.21 5.91 2,234 3,677
After three years(4)....................... 1,250,000 8.21 4.53 13,641 15,759
---------- ---- ---- ------- -------
$3,584,000 6.97% 5.38% $ 58,502 $82,492
========== ==== ==== ======= =======
</TABLE>
- ---------------
(1) The terms of each agreement have specific London Interbank Offering Rate or
Cost of Funds Index for the Eleventh District Savings Institutions reset and
index requirements, which result in different short-term receipt rates for
each agreement. The receipt rate represents the weighted average rate as of
the last reset date for each agreement.
F-48
<PAGE> 127
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) Includes $455.0 million notional amount with a weighted average cap ceiling
of 8.15%.
(3) Includes $45.0 million notional amount with a weighted average cap ceiling
of 9.50%.
(4) Includes $968.5 million notional amount with a weighted average cap ceiling
of 9.50%.
Changes in interest rate exchange agreements and interest rate cap
agreements were as follows:
<TABLE>
<CAPTION>
INTEREST RATE INTEREST RATE
EXCHANGE AGREEMENTS CAP AGREEMENTS
------------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Notional balance, beginning of year.................. $ 2,642,500 $3,584,000
Purchases............................................ 705,000 6,190,000
Terminations and maturities.......................... (666,000) --
---------- ----------
Notional balance, end of year........................ $ 2,681,500 $9,774,000
========== ==========
</TABLE>
The unamortized balance of prepaid fees and deferred gains and losses from
terminated interest rate exchange agreements and interest rate cap agreements
are scheduled to be amortized into interest expense as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------
GAIN ON GAIN ON SHORT- LOSS ON SHORT- NET
AVAILABLE-FOR- TERM BORROWINGS TERM BORROWINGS GAIN
SALE SECURITIES AND DEPOSITS AND DEPOSITS (LOSS)
--------------- --------------- --------------- -------
(DOLLARS IN THOUSANDS)
<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>
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,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Weighted average net effective cost at end of year..... 0.12% 0.42% 0.88%
Weighted average net effective cost during the year.... -- 1.44 2.26
Monthly average notional amount of interest rate
exchange agreements.................................. $2,749,167 $2,803,750 $1,992,517
Maximum notional amount of interest rate exchange
agreements at any month end.......................... 2,901,500 3,058,500 2,593,500
Net cost included with interest expense on deposits
during the year...................................... 3,540 13,286 19,250
Net cost included with interest expense on borrowings
during the year...................................... 6,842 28,426 25,827
Net (benefit) included with interest income on
available-for-sale securities during the year........ (10,495) (1,316) --
</TABLE>
F-49
<PAGE> 128
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Monthly average notional amount of interest rate cap
agreements........................................... $6,363,000 $2,557,625 $1,761,625
Maximum notional amount of interest rate cap agreements
at any month end..................................... 9,774,000 3,584,000 2,129,500
Net cost included with interest expense on deposits
during the year...................................... 7,875 2,257 3,078
Net cost included with interest expense on borrowings
during the year...................................... 415 565 472
Net (benefit) cost included with interest income on
available-for-sale securities during the year........ (5,340) 1,365 --
</TABLE>
NOTE 19: GAIN (LOSS) ON SALE OF OTHER ASSETS, INCLUSIVE OF WRITE-DOWNS
Gain (loss) on sale of other assets, inclusive of write-downs consisted of
the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Trading account securities............................ $ 529 $ 45 $ 1,123
Available-for-sale securities......................... (929) 4,111 2,675
Held-to-maturity securities........................... -- -- 26,706
Premises and equipment................................ (1,458) (1,270) 442
Other................................................. 1,203 21,040 18,920
------- ------- -------
$ (655) $23,926 $49,866
======= ======= =======
</TABLE>
NOTE 20: INCOME TAXES
The provision for income taxes from continuing operations consisted of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current income tax expense.......................... $ 92,315 $ 94,452 $77,390
Deferred income tax expense......................... 19,591 15,428 14,569
-------- -------- -------
$111,906 $109,880 $91,959
======== ======== =======
</TABLE>
In determining taxable income, savings banks are allowed bad debt
deductions based on a percentage of taxable income or on actual experience. Each
year, savings banks may select whichever method results in the most tax savings.
The Company primarily used the percentage method in 1995 and 1994 and the
experience method in 1993. Effective with the adoption of SFAS No. 109, this bad
debt deduction is no longer treated as a permanent difference. Effective for
years ending after December 31, 1995, the reserve method of accounting for tax
basis bad debts is no longer available to the Company (see Note 32, "Subsequent
Events").
F-50
<PAGE> 129
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of the Company's deferred tax assets and
liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 1,632,230 $ 1,690,939
Book loan loss reserves................................. 106,828 124,075
Purchase accounting adjustments......................... 41,343 56,486
Deferred losses......................................... -- 12,166
Other................................................... 59,468 52,377
----------- -----------
1,839,869 1,936,043
Valuation allowance....................................... (1,150,206) (1,157,320)
----------- -----------
Deferred tax asset, net of valuation allowance............ 689,663 778,723
Deferred tax liabilities:
Tax bad debt reserves................................... 467,125 538,297
FHLB stock dividends.................................... 60,636 50,810
Deferred loan fees...................................... 32,958 19,163
Deferred gains.......................................... 50,947 11,655
Purchase accounting adjustments......................... 26,644 41,831
Other................................................... 63,546 49,073
----------- -----------
701,856 710,829
----------- -----------
Net deferred tax (liability) asset........................ $ (12,193) $ 67,894
=========== ===========
</TABLE>
The valuation allowances of $1.2 billion at December 31, 1995 and 1994,
include $130.6 million and $270.2 million, respectively, related to payments in
lieu of taxes that will arise from the realization of the net deferred tax
asset. These valuation allowances represent the excess of the gross deferred tax
asset over the sum of the taxes and the payments in lieu of taxes related to:
(1) projected future taxable income; (2) reversing taxable temporary
differences; and (3) tax planning strategies.
The decline in the valuation allowance of $7.1 million during the year
ended December 31, 1995 was due primarily to a greater-than-anticipated
utilization of the beginning balance of the deferred tax asset.
The enactment in 1993 of certain federal tax legislation had the effect of
retroactively disallowing certain losses and bad debt deductions arising from
assets of New West. As a result, the Company reduced its gross deferred tax
asset and related valuation allowance by $155.0 million.
Also during 1993, California enacted legislation reducing the net operating
loss carryforward period from 15 years to 10 years for losses incurred prior to
1994 relating to assets acquired in a tax-free reorganization under Internal
Revenue Code Section 368(a)(1)(G). This change had a negligible impact on the
valuation allowance.
As of December 31, 1995, Keystone Holdings' net deferred tax asset was
$112.6 million. In order to fully realize the net deferred tax asset, Keystone
Holdings will need to generate future taxable income of approximately $672.1
million prior to the expiration of its tax net operating losses, which begin to
expire in 1999. Based on Keystone Holdings' history of prior operating earnings
and expectations for the future, management believes it is more likely than not
that Keystone Holdings, on a continuing company basis, will realize the recorded
benefit of $112.6 million as of December 31, 1996 through use of existing net
operating
F-51
<PAGE> 130
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loss carryovers existing at December 31, 1995. However, in August 1996 Keystone
Holdings amended certain prior-year state and federal tax returns. (See Note 32
"Subsequent Events" for further discussion.)
As of December 31, 1995, prior to the amendments mentioned above, the
Company had the following federal and state income tax net operating loss
carryforwards due to expire under current law during the years indicated:
<TABLE>
<CAPTION>
FEDERAL STATE
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
2000........................................................ $ -- $ 140
2001........................................................ -- 754,460
2002........................................................ -- 599,241
2003........................................................ -- 1,102,387
2004........................................................ 1,641,595 --
2005........................................................ 784,196 --
2006........................................................ 701,008 --
2007........................................................ 105,825 --
2008........................................................ 625,887 --
2009........................................................ 37,460 --
---------- ----------
$3,895,971 $2,456,228
========== ==========
</TABLE>
In April 1994, revenue procedures were issued allowing the Company to
change its method of accounting for loan fees, effective for 1993. The change
allowed most members of the Company's consolidated filing group to defer the
recognition of loan fees for income tax purposes.
Under SFAS No. 115, where actual benefits or liabilities are expected to be
realized, the net realizable tax effects of unrealized gains and losses on
available-for-sale securities at December 31, 1995 and 1994 were included in the
deferred tax liabilities and assets. The tax effect was made directly to
stockholders' equity and was not included in the provision for income taxes.
The change in the net deferred tax asset (liability) was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Deferred tax asset, beginning of year....................... $ 67,894
Tax effect of valuation adjustment on available-for-sale
securities............................................. (55,155)
Deferred income tax expense............................... (19,591)
Other adjustments......................................... (5,341)
--------
Deferred tax liability, end of year......................... $(12,193)
========
</TABLE>
F-52
<PAGE> 131
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliations between income taxes computed at statutory rates and income
taxes included in the Supplemental Consolidated Statements of Income were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
-------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income taxes computed at statutory rates.......... $148,920 $127,163 $ 136,420
Tax effect of:
Utilization of current tax losses of New West
(nominee to ASB)........................... (17,482) (55,100) (90,136)
Amortization of goodwill and other
intangible assets.......................... 6,631 6,688 6,281
Change in tax laws and rates................. -- -- 121,034
State franchise tax, net of federal tax
benefit.................................... 3,899 (2,890) 39,286
Increase in base year reserve amount......... (16,318) (11,605) --
Valuation allowance change from prior year... (7,114) 48,241 (107,658)
Dividends received deduction................. (987) (506) (441)
Tax exempt income............................ (1,973) (1,680) (1,924)
Other........................................ (3,670) (431) (6,828)
-------- -------- ---------
Income taxes before extraordinary items........... 111,906 109,880 96,034
Tax effect of:
Call of subordinated capital notes........... -- -- (709)
Penalty for prepayment of FHLB advances...... -- -- (3,366)
-------- -------- ---------
Income taxes included in the Consolidated
Statements of Income............................ $111,906 $109,880 $ 91,959
======== ======== =========
</TABLE>
NOTE 21: PAYMENTS IN LIEU OF TAXES
The Assistance Agreement generally provides that 75.0 percent of most of
the federal tax savings and approximately 19.5 percent of most of the California
tax savings (as computed in accordance with the Assistance Agreement)
attributable to ASB's utilization of any current tax losses or tax loss
carryovers of New West are to be paid by the Company for the benefit of the FRF.
The Assistance Agreement sets forth certain special adjustments to federal
taxable income to arrive at "FSLIC taxable income." The principal adjustments
effectively permit ASB to (i) recognize loan fees ratably over seven years
adjusted for loan dispositions, (ii) treat the income and expenses of N.A.
Holdings and New Capital as income and expenses of ASB, and (iii) for years
ending on or before December 31, 1994, to recognize approximately 36.0 percent
of the amortization of the mark-to-market adjustment attributable to the
acquired loan portfolio.
The provision (benefit) for payments in lieu of taxes consisted of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ----- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Provision (benefit) for payments in lieu of taxes:
Federal................................................ $3,450 $(137) $ 327
State.................................................. 4,437 (687) 13,748
------ ----- -------
Total provision (benefit) for payments in lieu of
taxes.................................................. $7,887 $(824) $14,075
====== ===== =======
</TABLE>
F-53
<PAGE> 132
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 22: EXTRAORDINARY ITEMS
Extraordinary items consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------ ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Call of subordinated capital notes.................... $ -- $ -- $ (2,266)
Penalty for prepayment of FHLB advances............... -- -- (10,762)
----- ----- --------
-- -- (13,028)
Federal income tax benefits........................... -- -- 4,075
----- ----- --------
$ -- $ -- $ (8,953)
===== ===== ========
</TABLE>
On September 15, 1993, the Company redeemed for cash all $40.0 million in
principal of its 10.50 percent subordinated capital notes due March 15, 1999.
The Company prepaid $432.6 million in advances from the FHLB during 1993.
NOTE 23: STOCKHOLDERS' EQUITY
COMMON STOCK
In the third quarter of 1993, Washington Mutual's Board of Directors
declared a 50 percent stock dividend on its shares of common stock. The stock
dividend had the effect of a three-for-two stock split. Cash dividends declared,
as adjusted for the above mentioned stock dividend, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,(1)
-------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
First quarter............................................... $0.19 $0.16 $0.10
Second quarter.............................................. 0.19 0.17 0.11
Third quarter............................................... 0.19 0.18 0.14
Fourth quarter.............................................. 0.20 0.19 0.15
</TABLE>
- ---------------
(1) Dividends per share includes only those amounts paid to Washington Mutual
shareholders, prior to business combinations.
Prior to the business combination with Washington Mutual, Keystone Holdings
paid total common cash dividends of $5.6 million, $22.5 million and $18.0
million in 1995, 1994 and 1993.
Not only is the dividend policy of Washington Mutual influenced by legal,
regulatory and economic restrictions, but it is also predicated on the ability
of its subsidiaries to declare and pay dividends to Washington Mutual. These
subsidiaries are in turn subject to legal and regulatory restrictions on their
ability to pay dividends.
Retained earnings of the Company at December 31, 1995 included a pre-1988
thrift bad debt reserve for tax purposes of $448.1 million for which no federal
income taxes had been provided. In the future, if this thrift bad debt reserve
is used for any purpose other than to absorb bad debt losses, if any of the
banking subsidiaries do not meet the 60 percent qualified assets test or if
legislation is enacted requiring recapture of all thrift bad debt reserves, the
Company will incur a federal income tax liability at the then prevailing
corporate tax rate.
On October 16, 1990, the Company's Board of Directors adopted a shareholder
rights plan and declared a dividend of one right for each outstanding share of
common stock to shareholders of record on October 31, 1990. The rights have
certain anti-takeover effects. They are intended to discourage coercive or
unfair takeover tactics and to encourage any potential acquirer to negotiate a
price fair to all shareholders. The rights
F-54
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
may cause substantial dilution to an acquiring party that attempts to acquire
the Company on terms not approved by the Board of Directors, but they will not
interfere with any friendly merger or other business combination. The plan was
not adopted in response to any specific effort to acquire control of the
Company.
PREFERRED STOCK
In August 1989, the Company issued 1,300,000 shares of Noncumulative
Convertible Perpetual Preferred Stock, Series A, at $50 per share for net
proceeds of $63.2 million. In January 1993, the Company issued a notice of
redemption to all holders of its Preferred Stock, Series A. Virtually all
holders of the Preferred Stock, Series A, converted their shares into common
stock prior to the redemption date of February 12, 1993.
In December 1992, the Company issued 2,800,000 shares of Noncumulative
Perpetual Preferred Stock, Series C, at $25 per share for net proceeds of $67.4
million. The stock has a liquidation preference of $25 per share plus dividends
accrued and unpaid for the then current dividend period. Dividends, if and when
declared by Washington Mutual's Board of Directors, are at an annual rate of
$2.28 per share. Dividends have been declared and paid in all quarters since
issuance. The Company may redeem the stock on or after December 31, 1997 at the
redemption price of $25 per share plus unpaid dividends, whether or not
declared, for the then current dividend period up to the date fixed for
redemption. In November 1995, the Company purchased and retired 47,500 shares of
its stock.
Also in December 1992, the Company issued 1,400,000 shares of Noncumulative
Convertible Perpetual Preferred Stock, Series D, at $100 per share for net
proceeds of $136.4 million. The stock has a liquidation preference of $100 per
share plus dividends accrued and unpaid for the then current dividend period.
The stock is convertible at a rate of 3.870891 shares of common stock per share
of preferred stock (after adjustment for the third quarter 1993 50 percent stock
dividend discussed below). Dividends, if and when declared by Washington
Mutual's Board of Directors, are at an annual rate of $6.00 per share. Dividends
have been declared and paid in all quarters since issuance. The Company may
redeem the stock on or after December 31, 1996 at an initial redemption price of
$103.60 per share. The redemption price declines to $100 per share by the year
2003.
In September 1993, the Company issued 2,000,000 shares of Noncumulative
Perpetual Preferred Stock, Series E, at $25 per share for net proceeds of $48.2
million. The stock has a liquidation preference of $25 per share plus dividends
accrued and unpaid for the then current dividend period. Dividends, if and when
declared by Washington Mutual's Board of Directors, are at an annual rate of
$1.90 per share. Dividends have been declared and paid in all quarters since
issuance. The Company may redeem the stock on or after September 15, 1998, at
the redemption price of $25 per share plus unpaid dividends, whether or not
declared, for the then current dividend period up to the date fixed for
redemption. In November 1995, the Company purchased and retired 30,000 shares of
its stock.
In December 1988, New Capital issued $80 million of Cumulative Redeemable
Preferred Stock. The Preferred Stock is presented as a minority interest in the
Company's Supplemental Consolidated Financial Statements.
The Preferred Stocks, Series C, Series D and Series E, are senior to common
stock as to dividends and liquidation, but they do not confer general voting
rights.
NOTE 24: EARNINGS PER COMMON SHARE
Primary earnings per common share have been calculated by dividing net
income, after deducting dividends on preferred stock, by the weighted average
number of shares outstanding for the period. Fully diluted earnings per common
share assume conversion of the outstanding convertible preferred stock.
F-55
<PAGE> 134
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information used to calculate earnings per share was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income.......................................... $ 289,902 $ 240,275 $ 267,323
Preferred stock dividends:
Noncumulative Perpetual, Series C................. (6,384) (6,384) (5,628)
Noncumulative Perpetual, Series E................. (3,800) (3,800) (538)
Noncumulative Convertible Perpetual, Series D..... (8,400) (8,400) (7,393)
----------- ----------- -----------
Net income attributable to primary common stock..... $ 271,318 $ 221,691 $ 253,764
=========== =========== ===========
Net income.......................................... $ 289,902 $ 240,275 $ 267,323
Preferred stock dividends:
Noncumulative Perpetual, Series C................. (6,384) (6,384) (5,628)
Noncumulative Perpetual, Series E................. (3,800) (3,800) (538)
----------- ----------- -----------
Net income attributable to fully diluted common
stock............................................. $ 279,718 $ 230,091 $ 261,157
=========== =========== ===========
Average number of common shares outstanding (1):
Primary........................................... 109,944,477 106,245,127 104,691,406
Noncumulative Convertible Perpetual, Series A..... -- -- 643,121
Noncumulative Convertible Perpetual, Series D..... 5,419,247 5,419,247 5,419,247
----------- ----------- -----------
Fully diluted..................................... 115,363,724 111,664,374 110,753,774
=========== =========== ===========
</TABLE>
- ---------------
(1) As part of the business combination with Keystone Holdings, 8,000,000 shares
of common stock, with a assigned value of $42.75 per share were issued to an
escrow for the benefit of the general and limited partners of Keystone
Holdings and the FRF. The Company will use the treasury stock method to
determine the effect of the shares upon the Company's financial statements.
As of the merger date, there is no potential dilutive effect of the
8,000,000 shares of common stock. The shares in the escrow will be dilutive
in the future to the extent that the market price of the common stock
exceeds $42.75 per share.
NOTE 25: REGULATORY CAPITAL REQUIREMENTS
WMI is not subject to any regulatory capital requirements. However, each of
its subsidiary depository and insurance institutions is subject to various
capital requirements. WMB is subject to the FDIC capital requirements while ASB
and WMBfsb are subject to the Office of Thrift Supervision ("OTS") capital
requirements.
The FDIC currently measures an institution's capital using a leverage limit
together with certain risk-based ratios. The FDIC requires most banks it
regulates to maintain a minimum leverage ratio, defined as core ("Tier 1")
capital divided by total regulatory assets, of at least 4.00 percent to 5.00
percent. It also requires total capital of at least 8.00 percent of
risk-weighted assets and Tier 1 capital of at least 4.00 percent of risk-
weighted assets. The OTS requires savings associations, such as ASB and WMBfsb,
to meet each of three separate capital adequacy standards: a core capital
leverage requirement, a tangible capital requirement and a risk-based capital
requirement. OTS regulations require savings associations to maintain core
capital of at least 3.00 percent of assets and tangible capital (excluding all
goodwill) of at least 1.50 percent of assets. Most savings institutions are
required to maintain a minimum leverage capital ratio of at least 4.00 percent.
OTS regulations incorporate a risk-based capital requirement that is designed to
be no less stringent than the capital
F-56
<PAGE> 135
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
standard applicable to national banks and is modeled in many respects on, but
not identical to, the risk-based capital requirements adopted by the FDIC. These
regulations require a core risk-based capital ratio of at least 4.00 percent and
a total risk-based capital ratio of at least 8.00 percent.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") created a statutory framework that increased the importance of
meeting applicable capital requirements. For WMB, ASB and WMBfsb, FDICIA
establishes five capital categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. An institution's category depends upon where its capital
levels are in relation to relevant capital measures, which include a risk-based
capital measure, a leverage ratio capital measure and certain other factors. The
federal banking agencies (including the FDIC and the OTS) have adopted
regulations which implement this statutory framework. Under these regulations,
in order to be well capitalized a bank must have a ratio of total capital to
risk-weighted assets of not less than 10.00 percent, a ratio of Tier 1 capital
to risk-weighted assets of not less than 6.00 percent, and a leverage ratio of
Tier 1 capital to total average assets of not less than 5.00 percent and must
not be subject to any federal supervisory order or directive to meet a specific
capital level. In order to be adequately capitalized, an institution must have a
total risk-based capital ratio of not less than 8.00 percent, a Tier 1
risk-based capital ratio of not less than 4.00 percent, and a leverage ratio of
not less than 4.00 percent. Any institution which is neither well capitalized
nor adequately capitalized will be considered undercapitalized. Undercapitalized
institutions are subject to certain regulatory controls and restrictions which
become more extensive as an institution becomes more severely undercapitalized.
At December 31, 1995, WMB, ASB and WMBfsb were well capitalized.
The OTS has adopted final regulations adding an interest rate risk
component to the risk-based capital requirements for savings associations (such
as ASB and WMBfsb), although implementation of the regulation has been delayed.
Management believes the effect of including such an interest rate risk component
in the calculation of risk-adjusted capital will not cause ASB or WMBfsb to
cease to be well capitalized. In August 1995, the FDIC revised its capital
standards to state explicitly that it will consider the risk of declines in the
economic value of capital due to changes in interest rates. The FDIC stated that
in the future, after gaining more experience with the risk measurement process,
it will issue a proposed rule that would establish an explicit minimum capital
charge for interest rate risk. The ultimate effect of such risk-based capital
requirements cannot be determined until final regulations are adopted.
WM Life is subject to risk-based capital requirements developed by the
National Association of Insurance Commissioners ("NAIC"). This measure uses four
major categories of risk to calculate an appropriate level of capital to support
an insurance company's overall business operations. The four risk categories are
asset risk, insurance risk, interest rate risk and business risk. At December
31, 1995, WM Life's capital was 672 percent of its required regulatory
risk-based level.
Capital ratios for WMB (on a consolidated basis), WMBfsb (on a consolidated
basis) and ASB (on a consolidated basis) were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------
WMB WMBfsb ASB
----- ------ -----
<S> <C> <C> <C>
Tangible capital ratio.................................... n.a.% 6.76% 5.39%
Leverage capital ratio.................................... 5.72 6.76 5.41
Total risk-based capital ratio............................ 11.58 12.64 10.12
Tier 1 or core risk-based capital ratio................... 10.70 11.39 9.39
</TABLE>
F-57
<PAGE> 136
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliations of WMB, WMBfsb and ASB's consolidated stockholders' equity
to regulatory capital were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------
WMB WMBfsb ASB
---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Stockholders' equity..................................... $1,418,271 $46,117 $1,238,950
Reporting differences:
Goodwill and other intangible assets................... (160,781) (401) (3,329)
Valuation reserve for available-for-sale securities.... (65,683) (202) (110,367)
Deferred tax asset..................................... -- -- (78,596)
Investment in securities-related subsidiaries.......... (6,579) -- --
Purchased mortgage servicing rights.................... (542) (818) --
Other nonqualifying assets............................. (542) -- --
---------- -------- ----------
Total regulatory capital............................ $1,184,144 $44,696 $1,046,658
========== ======== ==========
</TABLE>
NOTE 26: STOCK OPTION PLAN
On March 8, 1984, the Company's stockholders approved the adoption of the
1983 incentive stock option plan, providing for the award of incentive stock
options or nonqualified stock options and stock appreciation rights ("SARs") to
certain officers of the Company at the discretion of the Board of Directors. On
April 19, 1994, the Company's stockholders' approved the adoption of the 1994
stock option plan in which the right to purchase common stock of the Company may
be granted to employees, directors, consultants and advisers of the Company. The
1994 plan is similar in some respects to the 1983 plan, which terminated
according to its terms in 1993. Consistent with the Company's practice under the
1983 plan, it is anticipated that the majority of options available under the
plan will be granted to the most senior management of the Company. The 1994 plan
does not affect any options granted under the 1983 plan.
Under the 1994 stock option plan, on the date of the grant, the exercise
price of the option must at least equal the market value per share of the
Company's common stock. The 1994 plan provides for the granting of options for a
maximum of 4,000,000 common shares.
A SAR represents the right to receive in cash an amount equal to the
difference between the market value of one share of the Company's common stock
on the date of exercise of the SAR and the market value of such a share on the
date of the grant. The market value is the closing stock price on the date of
the grant. The increased value of SARs during 1995 and 1993, which had been
recorded as compensation expense, was $81,000 and $15,000. During 1994, due to
the decline in the price of the Company's common stock, a credit of $49,000 was
recorded against compensation expense.
Stock options and SARs are exercisable on a phased-in schedule. At December
31, 1995, stock options of 900,528 and 6,750 SARs were fully exercisable.
F-58
<PAGE> 137
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 27: EMPLOYEE BENEFITS PROGRAMS
Washington Mutual maintains a noncontributory cash balance defined benefit
pension plan for substantially all eligible employees. American provided a
substantially similar plan which was terminated effective June 30, 1995.
Benefits earned for each year of service are based primarily on the level of
compensation in that year plus a stipulated rate of return on the benefit
balance. It is the Company's policy to fund the Plan on a current basis to the
extent deductible under federal income tax regulations. The combined net
periodic pension cost for the Plans was $2.0 million, $1.3 million and $3.9
million for 1995, 1994 and 1993. The weighted average discount rate was 7.25
percent, 8.00 percent and 7.25 percent for 1995, 1994 and 1993. The long-term
rate of return on assets was 8.00 percent for 1995, 8.00 percent for 1994 and
9.00 percent for 1993. The assumed rate of increase in future compensation
levels was 6.00 percent for all years presented. The Plan's assets consist
primarily of listed common stocks, U. S. government obligations, corporate debt
obligations and annuity contracts.
At the termination date of American's plan, all participants' accrued
benefits became fully vested. The net assets of the plan were allocated as
prescribed by the Employee Retirement Income Security Act of 1974
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<PAGE> 138
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and the Pension Benefit Guaranty Corporation and their related regulations. All
participants received full benefits. The termination resulted in a settlement
under SFAS 88. American recognized a gain of $1.7 million as a result of the
settlement. The majority of the projected benefit obligation was settled in
1995. At December 31, 1995, the terminated plan had $1.8 million in remaining
assets. Ultimate distribution of these assets is pending IRS approval.
The plan's funded status and amounts recognized in the Company's financial
statements were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
KEYSTONE
WASHINGTON MUTUAL HOLDINGS
--------------------- --------
1995 1994 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Benefit obligations:
Vested benefits........................................... $(46,628) $(34,885) $ (5,307)
Nonvested benefits........................................ (2,367) (4,690) (1,316)
-------- -------- -------
Accumulated benefit obligation.............................. (48,995) (39,575) (6,623)
Effect of future compensation increases..................... (1,598) (1,429) --
-------- -------- -------
Projected benefit obligation................................ (50,593) (41,004) (6,623)
Plan assets at fair value................................... 61,722 53,037 8,035
Plan assets in excess of projected benefit obligation....... 11,129 12,033 1,412
-------- -------- -------
Unrecognized (gain) loss due to past experience different
from assumptions.......................................... (2,103) 1,710 --
Unrecognized prior service cost............................. 2,093 -- --
Unrecognized net asset at transition being recognized over
18.6 years................................................ (3,300) (3,682) (3,317)
-------- -------- -------
Prepaid pension asset....................................... $ 7,819 $ 10,061 $ (1,905)
======== ======== =======
</TABLE>
Net periodic pension expense included the following:
<TABLE>
<CAPTION>
WASHINGTON MUTUAL KEYSTONE HOLDINGS
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------ ------------------------
1995 1994 1993 1995 1994 1993
-------- ------- ------- ----- ----- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service cost -- benefits earned during
the period........................... $ 3,240 $ 2,952 $ 1,643 $ -- $ -- $3,162
Interest cost on projected benefit
obligation........................... 3,336 2,695 1,904 594 688 803
Actual (gain) loss on plan assets...... (11,935) 463 (5,637) (896) 152 (840)
Amortization and deferral, net......... 7,601 (4,779) 2,665 78 (896) 233
-------- ------- ------- ----- ----- ------
$ 2,242 $ 1,331 $ 575 $(224) $ (56) $3,358
======== ======= ======= ===== ===== ======
</TABLE>
During 1994, the defined benefit pension plan acquired in the acquisition
of Pacific First was merged into the Company's defined benefit pension plan. The
fair value of plan assets exceeded the projected benefit obligation, and the
accrued pension cost was reduced by $10.8 million.
In addition, the Company currently provides eligible retired employees with
access to medical coverage on the same basis as active employees and provides
certain other health care insurance benefits to a limited number of retired
employees. Postretirement benefits, such as retiree health benefits, are accrued
during the years an employee provides services.
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<PAGE> 139
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The funded status of these benefits were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(DOLLARS IN
THOUSANDS)
<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,
----------------------
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost.................................................. $206 $220 $154
Interest cost................................................. 344 322 320
Amortization of transition obligation......................... 147 147 147
---- ---- ----
$697 $689 $621
==== ==== ====
</TABLE>
The weighted average discount rate was 7.25 percent, 8.00 percent and 7.25
percent for 1995, 1994 and 1993. The medical trend rate starts at 13.00 percent
for 1993 and declines steadily to 6.00 percent by the year 2000. The effect of a
1.00 percent increase in the trend rates is not significant.
Washington Mutual maintains a savings plan for substantially all eligible
employees that allows participants to make contributions by salary deduction
equal to 15.00 percent or less of their salary pursuant to Section 401(k) of the
Internal Revenue Code. ASB maintained a substantially similar plan. Employees'
contributions vest immediately. The Company's partial matching contributions
vest over five years.
ASB implemented a Supplemental Executive Retirement Plan ("SERP") in 1990.
The SERP is a non qualified, noncontributory, defined benefit plan where
benefits are paid to certain officers using a target percentage which is based
upon the number of years of service with ASB. This percentage is applied to the
participant's average annual earnings for the highest three out of the final ten
years of employment. These benefits are reduced to the extent a participant
receives benefits from the defined benefit pension plan.
In 1990, ASB implemented the Phantom Share Plan (the "PSP") for the benefit
of certain of its officers. The PSP provides a long-term financial performance
incentive to its participants. Participants in the PSP are granted phantom
shares (units of value), the values of which are determined similar to that of
actual equity securities. The PSP calls for immediate exercisability and cashing
out in the event of a change in control of Keystone Holdings or any of its
subsidiaries. In July 1996, Keystone Holdings entered into an agreement to merge
with Washington Mutual. As a result of the business combination, the phantom
shares will become immediately exercisable, and ASB will incur an expense of
approximately $12.0 million in 1996, upon consummation of the merger.
ASB established a Short-Term Incentive Plan ("STI") for the benefit of
certain of its executives. The STI provides a short-term incentive to its
participants based upon the achievement of both overall company and individual
goals.
F-61
<PAGE> 140
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total employee benefit plan expense was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net periodic pension expense........................ $ 2,018 $ 1,275 $ 3,933
Net periodic postretirement expense................. 697 689 621
Company's contributions to savings plan............. 10,027 12,374 7,641
SERP expense........................................ 1,590 1,900 1,237
STI expense......................................... 3,247 2,219 3,141
------- ------- -------
$17,579 $18,457 $16,573
======= ======= =======
</TABLE>
In November 1992, the FASB issued SFAS No. 112, Employers' Accounting for
Postemployment Benefits. This statement establishes standards of financial
accounting and reporting for the estimated cost of benefits provided by an
employer to former or inactive employees after employment but before retirement.
Effective January 1, 1994, the Company adopted SFAS No. 112. There were no costs
accrued under this pronouncement.
NOTE 28: CONTINGENCIES
The Company has certain litigation and negotiations in progress resulting
from activities arising from normal operations. In the opinion of management,
none of these matters is likely to have a material adverse effect on the
Company's financial position.
As part of the administration and oversight of the Assistance Agreement and
other agreements among ASB, certain of its affiliates and the FDIC, the FDIC has
a variety of review and audit rights, including the right to review and audit
computations of payments in lieu of taxes. ASB and certain of its affiliates
have entered into a settlement agreement with the FDIC for all periods through
June 30, 1994, pursuant to which ASB, its affiliates and the FDIC have mutually
settled and released various claims in consideration of certain nominal
payments. The Office of Inspector General has commenced an audit of certain
transactions and payments under the Assistance Agreement and other agreements
occurring during the period beginning July 1, 1994 and ending June 30, 1996.
Keystone Holdings has received no notice of any issues involving more than
nominal amounts arising after June 30, 1994.
F-62
<PAGE> 141
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 29: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The results of operations on a quarterly basis have been restated to give
effect to the business combination with Keystone Holdings. Results of operations
on a quarterly basis were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER
-------------------------------- --------------------------------
WASHINGTON KEYSTONE WASHINGTON KEYSTONE
MUTUAL HOLDINGS RESTATED MUTUAL HOLDINGS RESTATED
---------- -------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Interest income.................. $367,447 $305,735 $673,182 $390,016 $330,727 $720,743
Interest expense................. 218,374 228,270 446,644 240,585 242,493 483,078
-------- -------- -------- -------- -------- --------
Net interest income.............. 149,073 77,465 226,538 149,431 88,234 237,665
Provision for loan losses........ 2,800 18,869 21,669 2,850 15,664 18,514
Other income..................... 28,855 29,188 58,043 29,554 18,315 47,869
Other expense.................... 103,081 71,496 174,577 106,332 73,101 179,433
-------- -------- -------- -------- -------- --------
Income before income taxes....... 72,047 16,288 88,335 69,803 17,784 87,587
Income taxes..................... 26,797 (6,081) 20,716 22,030 642 22,672
Minority interest in earnings of
consolidated subsidiary........ -- 3,948 3,948 -- 3,948 3,948
-------- -------- -------- -------- -------- --------
Net income....................... $ 45,250 $ 18,421 $ 63,671 $ 47,773 $ 13,194 $ 60,967
======== ======== ======== ======== ======== ========
Net income attributable to common
stock.......................... $ 40,604 $ 18,421 $ 59,025 $ 43,127 $ 13,194 $ 56,321
======== ======== ======== ======== ======== ========
Net income per common share:
Primary........................ $0.60 $0.55 $0.62 $0.51
Fully diluted.................. 0.58 0.54 0.60 0.51
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------------------
THIRD QUARTER FOURTH QUARTER
-------------------------------- --------------------------------
WASHINGTON KEYSTONE WASHINGTON KEYSTONE
MUTUAL HOLDINGS RESTATED MUTUAL HOLDINGS RESTATED
---------- -------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Interest income.................. $405,638 $346,343 $751,981 $415,859 $354,321 $770,180
Interest expense................. 248,844 246,712 495,556 252,921 245,237 498,158
-------- -------- -------- -------- -------- --------
Net interest income.............. 156,794 99,631 256,425 162,938 109,084 272,022
Provision for loan losses........ 2,800 14,557 17,357 2,700 14,747 17,447
Other income..................... 28,280 18,033 46,313 31,185 24,929 56,114
Other expense.................... 102,530 68,484 171,014 105,712 69,778 175,490
-------- -------- -------- -------- -------- --------
Income before income taxes....... 79,744 34,623 114,367 85,711 49,488 135,199
Income taxes..................... 28,056 5,023 33,079 30,621 12,705 43,326
Minority interest in earnings of
consolidated subsidiary........ -- 3,948 3,948 -- 3,949 3,949
-------- -------- -------- -------- -------- --------
Net income....................... $ 51,688 $ 25,652 $ 77,340 $ 55,090 $ 32,834 $ 87,924
======== ======== ======== ======== ======== ========
Net income attributable to common
stock.......................... $ 47,042 $ 25,652 $ 72,694 $ 50,444 $ 32,834 $ 83,278
======== ======== ======== ======== ======== ========
Net income per common share:
Primary........................ $0.66 $0.66 $0.71 $0.75
Fully diluted.................. 0.64 0.64 0.69 0.73
</TABLE>
F-63
<PAGE> 142
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
-------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER
-------------------------------- --------------------------------
WASHINGTON KEYSTONE WASHINGTON KEYSTONE
MUTUAL HOLDINGS RESTATED MUTUAL HOLDINGS RESTATED
---------- -------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Interest income.................. $287,581 $253,452 $541,033 $300,272 $248,798 $549,070
Interest expense................. 136,111 155,147 291,258 149,832 157,856 307,688
-------- -------- -------- -------- -------- --------
Net interest income.............. 151,470 98,305 249,775 150,440 90,942 241,382
Provision for loan losses........ 5,000 32,973 37,973 5,050 25,218 30,268
Other income..................... 30,782 34,481 65,263 30,236 16,500 46,736
Other expense.................... 107,557 74,647 182,204 104,422 68,627 173,049
-------- -------- -------- -------- -------- --------
Income before income taxes....... 69,695 25,166 94,861 71,204 13,597 84,801
Income taxes..................... 25,923 1,467 27,390 26,930 921 27,851
Minority interest in earnings of
consolidated subsidiary........ -- 3,498 3,498 -- 3,498 3,498
-------- -------- -------- -------- -------- --------
Net income....................... $ 43,772 $ 20,201 $ 63,973 $ 44,274 $ 9,178 $ 53,452
======== ======== ======== ======== ======== ========
Net income attributable to common
stock.......................... $ 39,126 $ 20,201 $ 59,327 $ 39,628 $ 9,178 $ 48,806
======== ======== ======== ======== ======== ========
Net income per common share:
Primary........................ $0.59 $0.56 $0.60 $0.46
Fully diluted.................. 0.58 0.55 0.58 0.46
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
-------------------------------------------------------------------
THIRD QUARTER FOURTH QUARTER
-------------------------------- --------------------------------
WASHINGTON KEYSTONE WASHINGTON KEYSTONE
MUTUAL HOLDINGS RESTATED MUTUAL HOLDINGS RESTATED
---------- -------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Interest income.................. $321,545 $257,746 $579,291 $349,152 $276,867 $626,019
Interest expense................. 168,756 173,468 342,224 197,172 197,016 394,188
-------- -------- -------- -------- -------- --------
Net interest income.............. 152,789 84,278 237,067 151,980 79,851 231,831
Provision for loan losses........ 5,200 21,047 26,247 5,150 22,371 27,521
Other income..................... 28,389 15,788 44,177 29,095 35,523 64,618
Other expense.................... 101,464 69,387 170,851 101,857 67,556 169,413
-------- -------- -------- -------- -------- --------
Income before income taxes....... 74,514 9,632 84,146 74,068 25,447 99,515
Income taxes..................... 28,035 (1,249) 26,786 27,271 (242) 27,029
Minority interest in earnings of
consolidated subsidiary........ -- 3,498 3,498 -- 3,498 3,498
-------- -------- -------- -------- -------- --------
Net income....................... $ 46,479 $ 7,383 $ 53,862 $ 46,797 $ 22,191 $ 68,988
======== ======== ======== ======== ======== ========
Net income attributable to common
stock.......................... $ 41,833 $ 7,383 $ 49,216 $ 42,151 $ 22,191 $ 64,342
======== ======== ======== ======== ======== ========
Net income per common share:
Primary........................ $0.63 $0.47 $0.63 $0.60
Fully diluted.................. 0.61 0.46 0.61 0.59
</TABLE>
F-64
<PAGE> 143
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 30: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
The fair value of financial instruments were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents........... $ 983,833 $ 983,833 $ 477,509 $ 477,509
Trading account securities.......... 238 238 572 572
Available-for-sale securities....... 12,154,725 12,154,725 4,282,160 4,282,160
Held-to-maturity securities......... 3,197,720 3,262,850 4,456,031 4,228,897
Mortgage servicing rights........... 104,495 109,950 70,911 71,915
Loans, exclusive of reserve for loan
losses........................... 24,428,115 24,788,750 25,717,081 24,777,595
Note receivable..................... -- -- 1,515,040 1,667,405
----------- ----------- ----------- -----------
40,869,126 41,300,346 36,519,304 35,506,053
Financial liabilities:
Deposits............................ 24,462,960 24,624,673 23,344,006 23,284,547
Annuities........................... 855,503 855,503 799,178 799,178
Federal funds purchased............. 433,420 433,493 -- --
Securities sold under agreements to
repurchase....................... 7,984,756 7,985,202 6,637,346 6,636,487
Advances from the FHLB.............. 4,715,739 4,732,366 4,128,977 4,060,902
Other borrowings.................... 590,217 612,240 381,066 378,780
----------- ----------- ----------- -----------
39,042,595 39,243,477 35,290,573 35,159,894
Derivative instruments(1):
Interest rate exchange agreements:
Designated against available for
sale securities.................. (11,847) (11,847) 18,654 18,654
Designated against short term
borrowings and deposits.......... -- (22,615) -- 22,061
Interest rate cap agreements: -- -- -- --
Designated against available for
sale securities.................. 9,415 9,415 41,690 41,690
Designated against short term
borrowings and deposits.......... 17,691 (630) 16,812 40,802
----------- ----------- ----------- -----------
15,259 (25,677) 77,156 123,207
Off-balance-sheet loan commitments.... -- 3,595 -- (8,078)
----------- ----------- ----------- -----------
Net financial instruments............. $ 1,841,790 $ 2,034,787 $ 1,305,887 $ 461,288
=========== =========== =========== ===========
</TABLE>
- ---------------
(1) See Note 18: Interest Rate Risk Management.
F-65
<PAGE> 144
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument as of December 31, 1995 and 1994:
Cash and cash equivalents -- The carrying amount represented fair value.
Note Receivable -- In January 1995, the FDIC offered to pay down the
remaining principal balance of the Note Receivable at-par. Therefore, the fair
value of the Note Receivable at December 31, 1994 represented the at-par offer
by the FDIC, as it was the best indication of the current fair value. Keystone
Holdings agreed with the FDIC in October 1995 to allow prepayment of the
remaining balance of the Note Receivable. On October 24, 1995, ASB received the
remaining principal balance of the Note Receivable of $505.3 million, plus
interest.
Trading account securities--Fair values were based on quoted market prices.
Available-for-sale securities--Fair values were based on quoted market
prices or dealer quotes. If a quoted market price was not available, fair value
was estimated using quoted market prices for similar securities.
Held-to-maturity securities--Fair values were based on quoted market prices
or dealer quotes. If a quoted market price was not available, fair value was
estimated using quoted market prices for similar securities.
Mortgage servicing rights--The fair value of mortgage servicing rights is
estimated using projected cash flows, adjusted for the effects of anticipated
prepayments, using a market discount rate.
Loans--Loans were priced using the discounted cash flow method. The
discount rate used was the rate currently offered on similar products.
Deposits--The fair value of checking accounts, savings accounts and money
market accounts was the amount payable on demand at the reporting date. For time
deposit accounts, the fair value was determined using the discounted cash flow
method. The discount rate was equal to the rate currently offered on similar
products. Core deposit intangibles are not included.
Annuities--The carrying amount represented fair value.
Federal funds purchased--These were valued using the discounted cash flow
method. The discount rate was equal to the rate currently offered on similar
borrowings.
Securities sold under agreements to repurchase--These were valued using the
discounted cash flow method. The discount rate was equal to the rate currently
offered on similar borrowings.
Advances from the FHLB--These were valued using the discounted cash flow
method. The discount rate was equal to the rate currently offered on similar
borrowings.
Other borrowings--These were valued using the discounted cash flow method.
The discount rate was equal to the rate currently offered on similar borrowings.
Derivative instruments--The fair value for interest rate exchange
agreements was determined using dealer quotations, when available, or the
discounted cash flow method. The market prices for similar instruments were used
to value interest rate cap agreements.
Off-balance-sheet loan commitments--Loan commitments are commitments the
Company made to borrowers at locked-in rates. The fair value of loan commitments
was estimated based on current levels of interest rates versus the committed
interest rates. The balance shown represents the differential between committed
value and fair value.
F-66
<PAGE> 145
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 31: FINANCIAL INFORMATION -- WMI
WMI was formed August 17, 1994. The following WMI (parent company only)
financial information should be read in conjunction with the other notes to the
consolidated financial statements.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD OF AUGUST 17, 1994
YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
INTEREST INCOME
Available-for-sale securities............................ $ 8,033 $ 1,641
Cash equivalents......................................... 471 44
-------- -------
Total interest income.................................. 8,504 1,685
INTEREST EXPENSE
Borrowings............................................... 9,072 884
-------- -------
Total interest expense................................. 9,072 884
-------- -------
Net interest (expense) income....................... (568) 801
OTHER INCOME
Equity in net earnings of subsidiaries(1)................ 293,630 13,103
Other operating income................................... 8 --
(Loss) on sale of other assets, inclusive of
write-downs............................................ (171) --
-------- -------
Total other income..................................... 293,467 13,103
OTHER EXPENSE
Salaries and employee benefits........................... 2,716 --
Occupancy and equipment.................................. 1 --
Other operating expense.................................. 3,289 228
-------- -------
Total other expense.................................... 6,006 228
-------- -------
Income before income taxes.......................... 286,893 13,676
Income taxes............................................. (865) 201
-------- -------
Net income(1)............................................ $287,758 $13,475
======== =======
</TABLE>
- ---------------
(1) Contains intercompany transactions eliminated upon consolidation.
F-67
<PAGE> 146
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................... $ 90,096 $ 5,903
Available-for-sale securities....................................... 99,932 104,987
Loans............................................................... 147,867 --
Investment in subsidiaries(1)....................................... 2,451,956 1,834,977
Other assets........................................................ 929 654
---------- ----------
Total assets........................................................ $2,790,780 $1,946,521
========== ==========
LIABILITIES
Securities sold under agreements to repurchase...................... $ 82,481 $ 84,329
Other borrowings.................................................... 147,845 --
Other liabilities................................................... 5,647 (14)
---------- ----------
Total liabilities................................................... 235,973 84,315
Stockholders' Equity
Preferred stock, no par value: 10,000,000
shares authorized -- 6,122,500 and 6,200,000 shares issued and
outstanding..................................................... -- --
Common stock, no par value: 350,000,000 shares
authorized -- 119,574,254 and 115,720,886 shares issued and
outstanding..................................................... -- --
Capital surplus(1).................................................. 1,029,549 998,497
Valuation reserve for available-for-sale securities................. 2,390 (2,511)
Valuation reserve for available-for-sale
securities -- subsidiaries........................................ 186,325 (58,738)
Retained earnings(1)................................................ 1,336,543 924,958
---------- ----------
Total stockholders' equity.......................................... 2,554,807 1,862,206
---------- ----------
Total liabilities and stockholders' equity.......................... $2,790,780 $1,946,521
========== ==========
</TABLE>
- ---------------
(1) Contains intercompany transactions eliminated upon consolidation.
F-68
<PAGE> 147
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD OF AUGUST 17, 1994
YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash Flows From Operating Activities Net income(1)....... $ 287,758 $ 13,475
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Decrease (increase) in interest receivable.............. 80 (693)
Increase in interest payable............................ 3,167 884
(Decrease) in income taxes payable...................... (865) (1,151)
Equity in undistributed earnings of subsidiaries(1)..... (293,630) (13,103)
Decrease in other assets................................ 9,910 39
Increase in other liabilities........................... 720 252
--------- --------
Net cash provided (used) by operating activities..... 7,140 (297)
Cash Flows From Investing Activities
Purchases of available-for-sale securities................ -- (111,984)
Principal repayments of available-for-sale securities..... 12,594 4,486
Originations and purchases of loans....................... (147,867) --
Dividends received from subsidiaries...................... 136,521 --
Acquisition of wholly owned subsidiary(1)................. -- (82,877)
--------- --------
Net cash provided (used) by investing activities..... 1,248 (190,375)
Cash Flows From Financing Activities
(Decrease) increase in securities sold under agreements to
repurchase.............................................. (1,848) 84,329
Proceeds of other borrowings.............................. 147,845 --
Issuance of common stock through stock options and
employee stock plans.................................... 8,379 994
Repurchase of preferred stock............................. (1,990) --
Cash dividends paid....................................... (76,581) --
Contribution from wholly owned subsidiaries(1)............ -- 111,252
--------- --------
Net cash provided by financing activities............ 75,805 196,575
--------- --------
Increase in cash and cash equivalents................ 84,193 5,903
Cash and cash equivalents at beginning of year....... 5,903 --
--------- --------
Cash and cash equivalents at end of year............. $ 90,096 $ 5,903
========= ========
</TABLE>
- ---------------
(1) Contains intercompany transactions eliminated upon consolidation.
NOTE 32: SUBSEQUENT EVENTS
BUSINESS COMBINATIONS
On July 21, 1996, Washington Mutual signed an agreement to acquire, through
merger, Keystone Holdings, the indirect holding company of American Savings Bank
F.A. At September 30, 1996, Keystone Holdings, on a consolidated basis, had
assets of $21.3 billion, deposits of $12.9 billion, and stockholder's equity of
$520.0 million. The transaction was completed December 20, 1996.
F-69
<PAGE> 148
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On September 9, 1996, Washington Mutual signed an agreement to acquire
United Western Financial Group, Inc. ("United Western") of Salt Lake City and
its United Savings Bank and Western Mortgage Loan subsidiaries for $80.3 million
in cash. At September 30, 1996, United Western had assets of $414.9 million,
deposits of $294.4 million, and stockholders' equity of $53.8 million. The
transaction, which is scheduled to be completed in the first quarter of 1997, is
subject to the approval of banking regulators and a majority of shareholders of
United Western's common stock.
On November 30, 1996, WMI merged with Utah Federal Savings Bank (Utah FSB")
by merging Utah FSB with and into WMBfsb. At October 31, 1996, Utah FSB, which
was an Ogden-based institution, had assets of $121.9 million, deposits of $105.9
million and stockholders' equity of $12.2 million. The merger will be accounted
for as a pooling-of-interests. Due to the immaterial nature of the transaction,
the Company will not restate prior-period information as if the companies had
been combined.
The balances stated above related to Keystone Holdings, United Western and
Utah FSB are unaudited.
FEDERAL AND STATE TAXATION MATTERS
In August 1996, the President signed the Small Business Job Protection Act
of 1996 (the "Act"). Under the Act, the reserve method of accounting for tax
basis bad debts is no longer available, effective for years ending after
December 31, 1995. As a result, the Company will be required to use the specific
charge-off method of accounting for tax basis bad debts for 1996 and later
years. In addition, the Company will also be required to recapture its post-1987
additions to its bad debt reserves, whether such additions were made pursuant to
the percentage of taxable income method or the experience method. As of December
31, 1995, these additions were $151.3 million which, pursuant to the Act, will
be included in taxable income ratably over a six-taxable-year period beginning
with the year ending December 31, 1997. The recapture of the post-1987 additions
to tax basis bad debt reserves will not result in a charge to earnings as these
amounts are included in the deferred tax liability at December 31, 1995.
In August 1996, Keystone Holdings amended prior-year federal tax returns to
reduce tax bad debt deductions and to make other amendments. As a result, net
operating loss carryforwards for federal tax purposes were reduced by
approximately $756 million. In September 1996, ASB amended prior-year state tax
returns to reduce tax bad debt deductions. The result was to decrease state net
operating loss carryovers by approximately $545 million. The decrease in the
gross deferred tax asset as a result of the amendments which reduced the federal
and state net operating loss carryforwards was offset by an equal decrease in
the valuation allowance for the deferred tax asset.
SAIF RECAPITALIZATION ASSESSMENT
On September 30, 1996, President Clinton signed legislation intended, among
other things, to recapitalize the Savings Association Insurance Fund ("SAIF")
and to reduce the gap between SAIF premiums and the Bank Insurance Fund ("BIF")
premiums. The legislation provides for a special one-time assessment on
SAIF-insured deposits that were held as of March 31, 1995, including certain
deposits acquired after that date. The assessment will bring the SAIF's reserve
ratio to the legally required level of $1.25 for every $100 in insured deposits.
Beginning in January 1997, deposits insured through the SAIF at most
institutions probably will be subject to regular FDIC assessments amounting to
6.4 cents per $100 per year, while deposits insured through the BIF at most
institutions probably will be subject to regular FDIC assessments amounting to
1.3 cents per $100 per year.
The Company's special assessment resulted in a pretax charge of $124.2
million, which was taken in the quarter ended September 30, 1996. Based on the
current level of deposits, the Company estimates that the reduction in the
regular assessment on its SAIF deposits beginning in 1997 should result in
annual savings of approximately $31 million.
F-70
<PAGE> 149
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FINANCING MATTERS
On February 8, 1996, ASB completed the private placement of $100.0 million
of Subordinated Notes (the "Notes") maturing February 15, 2006. The Notes bear
interest at a rate of 6.625% per annum. Interest on the Notes is payable
semi-annually in arrears on each February 15 and August 15, beginning on August
15, 1996.
In November 1996, Washington Mutual received commitments for $200 million
of Revolving Credit Facilities with two tranches: a $100 million 364-day
facility and a $100 million 4-year facility. Chase Manhattan Bank will act as
Administrative Agent for the Facilities. Proceeds of the Facilities were used
for funding needs at the closing of the Transaction, including redemption of the
New Capital securities, and are available for general corporate purposes,
including providing capital at a subsidiary level.
On December 2, 1996, Washington Mutual announced it will redeem on December
31, 1996, all of the Company's outstanding noncumulative perpetual preferred
stock, Series D at the redemption price of $103.60 per share.
On December 20, 1996, Washington Mutual redeemed $10.5 million of debt
securities and $80.0 million of nonconvertible preferred stock issued by New
Capital. Washington Mutual also gave the requisite notice to redeem $354.0
million of additional debt securities issued by New Capital. By redeeming such
equity and debt, management believes it can significantly reduce its overall
cost of funds.
AMENDMENTS TO THE ARTICLES OF INCORPORATION
On December 18, 1996, the shareholders of Washington Mutual approved an
amendment to the Company's Restated Articles of Incorporation to increase the
number of authorized shares of common stock from 100,000,000 shares to
350,000,000 shares.
F-71
<PAGE> 150
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Summary Financial Data................ 7
Risk Factors.......................... 11
Use of Proceeds....................... 13
Market Prices and Dividends........... 13
The Keystone Transaction.............. 15
Selected Financial Data............... 17
Management's Discussion and Analysis
of Financial Position and Results of
Operations.......................... 20
Business.............................. 47
Selling Stockholders.................. 67
Description of Washington Mutual
Common Stock........................ 68
Certain United States Federal Tax
Consequences to Non-United States
Purchasers.......................... 72
Underwriting.......................... 74
ERISA Matters......................... 75
Experts............................... 75
Legal Matters......................... 75
Available Information................. 76
Incorporation of Certain Documents by
Reference........................... 76
Supplemental Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
15,085,305 SHARES
[WASHINGTON MUTUAL LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 151
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION TIME BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
INTERNATIONAL PROSPECTUS
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 2, 1997
PROSPECTUS
15,085,305 SHARES
LOGO
COMMON STOCK
------------------------
Of the 15,085,305 shares (the "Shares") of common stock, no par value
("Common Stock"), of Washington Mutual, Inc., a Washington corporation
("Washington Mutual" or the "Company"), offered hereby, 14,000,000 Shares are
offered by the Federal Deposit Insurance Corporation (the "FDIC"), for the
account of the FSLIC Resolution Fund, which is a government-controlled
instrumentality of the United States of America managed by the FDIC (the "FRF";
the FDIC in its capacity as manager of the FRF is referred to herein as the
"FDIC-Manager"), and 1,085,305 Shares are offered by certain other stockholders
of the Company identified herein (collectively with the FRF, the "Selling
Stockholders"). See "Selling Stockholders." The Shares were issued in connection
with a recent transaction pursuant to which Washington Mutual acquired Keystone
Holdings, Inc. ("Keystone Holdings") by merger, as a result of which the direct
and indirect subsidiaries of Keystone Holdings, including American Savings Bank,
F.A. ("ASB"), became subsidiaries of the Company. See "The Keystone
Transaction." The Company will not receive any proceeds from the sale of the
Shares hereunder.
Of the 15,085,305 Shares offered hereby, Shares are being offered
outside the United States and Canada by the International Managers (the
"International Offering") and Shares are being offered in a concurrent
offering in the United States and Canada by the U.S. Underwriters (the "U.S.
Offering" and, together with the International Offering, the "Offerings"). The
initial public offering price and the aggregate underwriting discount per Share
are identical for the Offerings. See "Underwriting."
The Company's Common Stock is traded on the National Market tier of The
Nasdaq Stock Market (the "Nasdaq Stock Market") under the symbol "WAMU." On
December 30, 1996, the last reported sale price of the Common Stock was $43 1/8
per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SHARES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
==============================================================================
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) STOCKHOLDERS(2)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................ $ $ $
- ------------------------------------------------------------------------------
Total.................... $ $ $
==============================================================================
</TABLE>
(1) The Company and the Selling Stockholders have severally agreed to indemnify
the several Underwriters (the "Underwriters") against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) Before deduction of expenses payable by the Company estimated to be
$720,000.
The Shares are offered by the several Underwriters, subject to prior sale,
when, as and if issued to and accepted by them, subject to approval of certain
legal matters by counsel for the Underwriters and certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the Shares
will be made in New York, New York, on or about , 1997.
------------------------
MERRILL LYNCH INTERNATIONAL
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
------------------------
The date of this Prospectus is , 1997
<PAGE> 152
ALTERNATE PAGE FOR
INTERNATIONAL PROSPECTUS
MAP OF THE STATES OF WASHINGTON, OREGON, CALIFORNIA, UTAH, IDAHO, MONTANA,
ARIZONA, COLORADO AND NEVADA AND A TABLE SETTING FORTH THE NUMBERS OF THE
COMPANY'S BRANCHES, LOAN PRODUCTION CENTERS, COMMERCIAL BANK OFFICES AND NUMBER
OF HOUSEHOLDS SERVED.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET'S SMALLCAP
MARKET, THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK
MARKETS' SMALLCAP MARKET, THE NASDAQ NATIONAL MARKET OR OTHERWISE IN ACCORDANCE
WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934.
NO ACTION HAS BEEN TAKEN IN ANY JURISDICTION BY THE COMPANY OR THE
UNDERWRITERS THAT WOULD PERMIT A PUBLIC OFFERING OF THE COMMON STOCK IN ANY
JURISDICTION WHERE ACTION FOR THAT PURPOSE IS REQUIRED, OTHER THAN THE UNITED
STATES. THE DISTRIBUTION OF THIS PROSPECTUS AND THE OFFERING AND SALE OF THE
COMMON STOCK IN CERTAIN JURISDICTIONS MAY BE RESTRICTED BY LAW. THE COMMON STOCK
MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, AND NEITHER THIS PROSPECTUS
NOR ANY OTHER OFFERING MATERIAL OR ADVERTISEMENT IN CONNECTION WITH THE COMMON
STOCK MAY BE DISTRIBUTED OR PUBLISHED, IN OR FROM ANY JURISDICTION, EXCEPT UNDER
CIRCUMSTANCES THAT WILL RESULT IN COMPLIANCE WITH APPLICABLE RULES AND
REGULATIONS OF ANY SUCH JURISDICTION. PERSONS INTO WHOSE POSSESSION THIS
PROSPECTUS COMES ARE REQUIRED BY THE COMPANY AND THE INTERNATIONAL MANAGERS TO
INFORM THEMSELVES ABOUT AND TO OBSERVE ANY SUCH RESTRICTIONS. FOR A FURTHER
DESCRIPTION OF CERTAIN RESTRICTIONS ON OFFERING AND SALES OF THE COMMON STOCK,
SEE "UNDERWRITING."
THE COMMON STOCK MAY NOT BE OFFERED OR SOLD IN OR INTO THE UNITED KINGDOM
EXCEPT TO PERSONS WHOSE ORDINARY ACTIVITIES INVOLVE THEM IN ACQUIRING, HOLDING,
MANAGING OR DISPOSING OF INVESTMENTS (AS PRINCIPAL OR AGENT) FOR THE PURPOSES OF
THEIR BUSINESSES (OR IN OTHER CIRCUMSTANCES THAT DO NOT CONSTITUTE AN OFFER TO
THE PUBLIC IN THE UNITED KINGDOM FOR THE PURPOSES OF THE PUBLIC OFFERS OF
SECURITIES REGULATIONS 1995), AND THIS DOCUMENT MAY ONLY BE ISSUED OR PASSED ON
IN OR INTO THE UNITED KINGDOM TO ANY PERSON TO WHOM THE DOCUMENT MAY LAWFULLY BE
ISSUED OR PASSED ON BY REASON OF, OR OF ANY REGULATION MADE UNDER, SECTION 58
FINANCIAL SERVICES ACT 1986.
ALL APPLICABLE PROVISIONS OF THE PUBLIC OFFERS OF SECURITIES REGULATIONS
1995 AND THE FINANCIAL SERVICES ACT 1986 MUST BE COMPLIED WITH IN RESPECT OF
ANYTHING DONE IN RELATION TO THE COMMON STOCK IN, FROM OR OTHERWISE INVOLVING,
THE UNITED KINGDOM.
2
<PAGE> 153
ALTERNATE PAGE FOR
INTERNATIONAL PROSPECTUS
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"International Purchase Agreement") between the Company and each of the
institutions named below (the "International Managers", for whom Merrill Lynch
International and Friedman, Billings, Ramsey & Co., Inc. are acting as
representatives (the "International Representatives")), and concurrently with
the sale of shares of Common Stock to certain underwriters in the
United States (the "U.S. Underwriters" and, together with the International
Managers, the "Underwriters"), the Company has agreed to sell to each of the
International Managers, and each of the International Managers has severally
agreed to purchase, the aggregate number of shares of Common Stock set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER
INTERNATIONAL MANAGERS OF SHARES
------------------------------------------------------------------------- ----------
<S> <C>
Merrill Lynch International..............................................
Friedman, Billings, Ramsey & Co., Inc....................................
-----------
Total..........................................................
===========
</TABLE>
The Company also has entered into a purchase agreement (the "U.S. Purchase
Agreement") with the U.S. Underwriters. Subject to the terms and conditions set
forth in the U.S. Purchase Agreement, and concurrently with the sale of
shares of Common Stock to the International Managers, the Company has
agreed to sell to the U.S. Underwriters, and the U.S. Underwriters have
severally agreed to purchase an aggregate of shares of
Common Stock. The initial public offering price per share of the Common Stock
and the underwriting discount per share of the Common Stock are identical under
the International Purchase Agreement and the U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement,
the several International Managers and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such Purchase Agreement if any such shares of Common Stock being sold
pursuant to each such Purchase Agreement are purchased. Under certain
circumstances, the commitments of non-defaulting International Managers or U.S.
Underwriters may be increased.
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement,
sales may be made between the International Managers and the U.S. Underwriters
of such number of shares of Common Stock as may be mutually agreed. The price of
any share of Common Stock so sold shall be the initial public offering price,
less an amount not greater than the selling concession. Under the terms of the
Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom they sell
shares of Common Stock will not offer to sell or sell shares of Common Stock to
persons who are non-United States or non-Canadian persons or to persons they
believe intend to resell to persons who are non-United States or non-Canadian
persons, and the International Managers and any dealer to whom they sell shares
of Common Stock will not offer to sell or sell shares of Common Stock to United
States or Canadian persons or to persons they believe intend to resell to United
States or Canadian persons, except, in each case, for transactions pursuant to
the Intersyndicate Agreement.
The International Representatives have advised the Company that the
International Managers propose initially to offer the shares of Common Stock to
the public at the initial public offering price set forth on the cover page of
this Prospectus, and to certain dealers (who may include International Managers)
at such price less a concession not in excess of $ per share of Common Stock.
The International Managers may allow, and such dealers may reallow, a discount
not in excess of $ per share of Common Stock on sales to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
72
<PAGE> 154
ALTERNATE PAGE FOR
INTERNATIONAL PROSPECTUS
Each International Manager has agreed that (i) it has not offered or sold,
and will not for a period of six months following consummation of the Offerings
offer or sell, in the United Kingdom by means of any document, any shares of
Common Stock offered hereby, other than to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances that do not constitute an offer to the public within the meaning
of the Public Offers of Securities Regulations 1995, (ii) it has complied with
and will comply with all applicable provisions of the Financial Services Act
1986 with respect to anything done by it in relation to the shares of Common
Stock in, from, or otherwise involving the United Kingdom any document received
by it in connection with the issue of the shares of Common Stock if that person
is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1995, as amended, or is a person
to whom the document may otherwise lawfully be issued or passed on.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, or to contribute to payments the Underwriters may be
required to make in respect thereof.
The Company has agreed that it will not, with certain exceptions, offer,
sell or otherwise dispose of any shares of Common Stock for a period of 60 days
from the date of this Prospectus without the prior written consent of Merrill
Lynch, Pierce, Fenner & Smith Incorporated. This prohibition will not affect
shares of Common Stock issued by the Company pursuant to acquisitions, employee
or director benefit plans, any dividend reimbursement plan, or the conversion or
exercise of securities convertible into or exercisable for Common Stock.
Merrill Lynch, Pierce, Fenner & Smith Incorporated renders various
financial advisory services to the Company from time to time.
ERISA MATTERS
Washington Mutual and certain of its subsidiaries and affiliates, including
WMB, ASB, Murphey Favre, Composite Research and WM Life, may be considered
"parties in interest" within the meaning of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or "disqualified persons" within the
meaning of Section 4975 of the Code, with respect to many employee benefit plans
and individual retirement accounts ("IRAs"), including without limitation by
reason of providing trust custodial services, annuity products, investment
advice or brokerage services to such plans and IRAs. Prohibited transactions
within the meaning of ERISA or the Code may occur if, for example, the Shares
are acquired by an employee benefit plan or IRA or an entity (such as an
insurance company general account) deemed to be investing assets of an employee
benefit plan, unless such Shares are acquired pursuant to an exemption from the
prohibited transaction rules. Any such plan or entity proposing to invest in the
Shares should consult with its legal counsel.
EXPERTS
The Supplemental Consolidated Financial Statements of the Company, as of
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995, included in this Prospectus and Registration Statement have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein. Insofar as the report of Deloitte & Touche LLP relates
to the amounts included for Keystone Holdings Inc. and subsidiaries for 1995,
1994, and 1993 it is based solely on the report of other auditors. The
consolidated financial statements of Keystone Holdings and subsidiaries for
1995, 1994 and 1993, incorporated herein by reference from the Proxy Statement
dated November 12, 1996 have been audited by KPMG Peat Marwick LLP, independent
auditors, as stated in their report also incorporated herein by reference. The
consolidated financial statements of the Company incorporated in this Prospectus
by reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, as amended by Form 8-K dated October 18, 1996, Form 8-K/A
dated October 23, 1996, and Form 8-K/A dated October 25, 1996 also have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports, which
73
<PAGE> 155
ALTERNATE PAGE FOR
INTERNATIONAL PROSPECTUS
are incorporated herein by reference. Such financial statements of the Company
and Keystone Holdings are included herein or incorporated by reference in
reliance upon the respective reports of such firms given upon their authority as
experts in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby has been
passed upon by Foster Pepper & Shefelman, counsel to Washington Mutual. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles,
California. As of December 20, 1996, individual members of Foster Pepper &
Shefelman owned an aggregate of 43,953 shares of Common Stock, 160 shares of
Series C Preferred and 100 shares of Series D Preferred.
AVAILABLE INFORMATION
Washington Mutual is subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports, proxy statements and
other information with the Commission. The reports, proxy statements and other
information filed by Washington Mutual with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional Offices at Seven World Trade Center (13th Floor), New York, New York
10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, at
prescribed rates. The Commission also maintains a Web site that contains copies
of reports, proxy and information statements and other information regarding
registrants that file electronically, including the Company, with the Commission
at http://www.sec.gov. In addition, material filed by Washington Mutual can be
inspected at the offices of the National Association of Securities Dealers,
Inc., Report Section, 1735 K Street N.W., Washington, D.C. 20006. In accordance
with the rules and regulations of the Commission, this Prospectus does not
contain certain information contained in the Registration Statement the Company
has filed with the Commission to which reference is hereby made for further
information. Statements in this Prospectus regarding the contents of any
contract or other document are not necessarily complete; with respect to each
such contract or document, reference is made to the copy of such document filed
with the Commission for a more complete description of the matter involved, and
each statement shall be deemed to be qualified in its entirety by such
reference.
74
<PAGE> 156
ALTERNATE PAGE FOR
INTERNATIONAL PROSPECTUS
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Washington Mutual
pursuant to the Exchange Act are incorporated by reference in this Prospectus:
1. Annual Report on Form 10-K for the year ended December 31, 1995;
2. Quarterly Reports on Form 10-Q, as amended, for each of the quarterly
periods ended March 31, 1996, June 30, 1996 and September 30, 1996;
3. Current Report on Form 8-K dated March 15, 1996;
4. Item 2 of Current Report on Form 8-K dated July 22, 1996;
5. Current Report on Form 8-K dated October 18, 1996, as amended by Form
8-K/A dated October 23, 1996, as amended by Form 8-K/A dated October 25,
1996; and
6. Appendix B, pages B-1 through B-54, of the Company's definitive proxy
statement dated November 12, 1996.
All documents and reports filed by Washington Mutual pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of offering of the Shares shall be deemed to be
incorporated by reference in this Prospectus and to be part hereof from the date
of filing of such documents or reports. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document that also
is or is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
This Prospectus incorporates documents by reference that are not presented
herein or delivered herewith. These documents (other than exhibits to such
documents unless such exhibits are specifically incorporated by reference) are
available upon request to each person to whom a copy of this Prospectus is
delivered, without charge, upon request to the Company at Investor Relations,
Washington Mutual, Inc., Washington Mutual Tower, 1201 Third Avenue, 12th Floor,
Seattle, Washington 98101 (telephone number (206) 461-3187).
75
<PAGE> 157
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
======================================================
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
IN THIS PROSPECTUS, REFERENCES TO "DOLLARS" AND "$" ARE TO UNITED STATES
DOLLARS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Summary Financial Data................ 7
Risk Factors.......................... 11
Use of Proceeds....................... 13
Market Prices and Dividends........... 13
The Keyshare Transaction.............. 15
Selected Financial Data............... 17
Management's Discussion and Analysis
of Financial Position and Results of
Operations.......................... 20
Business.............................. 47
Selling Stockholders.................. 67
Description of Washington Mutual
Common Stock........................ 68
Certain United States Federal Tax
Consequences to Non-United States
Purchasers.......................... 72
Underwriting.......................... 74
ERISA Matters......................... 75
Experts............................... 75
Legal Matters......................... 76
Available Information................. 76
Incorporation of Certain Documents by
Reference........................... 77
Supplemental Consolidated Financial
Statements.......................... F-1
</TABLE>
======================================================
======================================================
15,085,305 SHARES
WASHINGTON MUTUAL, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH INTERNATIONAL
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
, 1997
======================================================
<PAGE> 158
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee....................... $184,567
--------
Attorneys' Fees and Expenses.............................................. 125,000
--------
Accountants' Fees and Expenses............................................ 200,000
--------
Blue Sky Filing Fees and Expenses......................................... 5,000
--------
Printing Fees and Expenses................................................ 200,000
--------
Miscellaneous Expenses.................................................... 5,433
--------
Total........................................................... $720,000
========
</TABLE>
- ---------------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 23B.08.320 of the Washington Business Corporation Act (the
"Corporation Act") provides that the personal liability of directors to a
corporation imposed by Section 23B.08.310 of the Corporation Act may be
eliminated by the articles of incorporation of the corporation, except in the
case of acts or omissions involving certain types of conduct. At Article XIII of
its Restated Articles of Incorporation, the Registrant has elected to eliminate
the liability of directors to the Registrant to the extent permitted by law.
Thus, a director of the Registrant is not personally liable to the Registrant or
its shareholders for monetary damages for conduct as a director, except for
liability of the director (i) for acts or omissions that involve intentional
misconduct by the director or a knowing violation of law by the director, (ii)
for conduct violating Section 23B.08.310 of the Corporation Act, or (iii) for
any transaction from which the director will personally receive a benefit in
money, property or services to which the director is not legally entitled. If
Washington law is amended to authorize corporate action that further eliminates
or limits the liability of directors, then the liability of Washington Mutual
directors will be eliminated or limited to the fullest extent permitted by
Washington law, as so amended.
Section 23B.08.560 of the Corporation Act provides that if authorized by
(i) the articles of incorporation, (ii) a bylaw adopted or ratified by the
shareholders, or (iii) a resolution adopted or ratified, before or after the
event, by the shareholders, a corporation will have the power to indemnify
directors made party to a proceeding, or to obligate itself to advance or
reimburse expenses incurred in a proceeding, without regard to the limitations
on indemnification contained in Sections 23B.08.510 through 23B.08.550 of the
Corporation Act.
Pursuant to Article X of Washington Mutual's Restated Articles of
Incorporation and Article VIII of Washington Mutual's Bylaws, Washington Mutual
must, subject to certain exceptions, indemnify and defend its directors against
any expense, liability or loss arising from or in connection with any actual or
threatened action, suit or proceeding relating to service for or at the request
of Washington Mutual, including without limitation, liability under the
Securities Act. Washington Mutual is not permitted to indemnify a director from
or on account of acts or omissions of such director which are finally adjudged
to be intentional misconduct, or from or on account of conduct in violation of
RCW 23B.08.310, or a knowing violation of the law from or on account of any
transaction with respect to which it is finally adjudged that such director
received a benefit in money, property or services to which he or she was not
entitled. If Washington law is amended to authorize further indemnification of
directors, then Washington Mutual directors shall be indemnified to the fullest
extent permitted by Washington law, as so amended. Also, pursuant to Article X
of Washington Mutual's Restated Articles of Incorporation and Article VIII of
Washington Mutual's Bylaws, Washington Mutual may, by action of the Board of
Directors of Washington Mutual, provide indemnification and pay expenses to
officers, employees and agents of Washington Mutual or another corporation,
partnership, joint venture, trust or other enterprise with the same scope and
effect as above described in relation to directors. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers or persons
II-1
<PAGE> 159
controlling Washington Mutual pursuant to the provisions described above,
Washington Mutual has been informed that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
-------
<S> <C>
1.1* Form of Purchase Agreement
3.1 Restated Articles of Incorporation of the Registrant, as amended dated December
18, 1996
3.2** Bylaws of the Registrant
4.1** Rights Agreement, dated October 16, 1990, as amended by Amendment No. 1 to Rights
Agreement, dated October 31, 1994, and as supplemented by Supplement to Rights
Agreement, dated November 29, 1994
5.1 Opinion of Foster Pepper & Shefelman
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Foster Pepper & Shefelman (contained in its opinion filed as Exhibit
5.1)
24.1 Power of Attorney (included on Signatures pages)
27 Financial Data Schedule
</TABLE>
- ---------------
* To be filed as an exhibit to a report on Form 8-K to be incorporated by
reference into this Registration Statement subsequent to its effectiveness.
** Incorporated by reference to Washington Mutual, Inc. Current Report on Form
8-K dated November 29, 1994 (File No. 0-25188).
ITEM 17. UNDERTAKINGS
(b) The undersigned registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the Offerings of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrants pursuant to the provisions referred to in Item 15 or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer, or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(i) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered herein, and the Offerings of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 160
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Seattle, State of Washington, on the
30th day of December, 1996.
WASHINGTON MUTUAL, INC.
By: /s/ KERRY K. KILLINGER
-----------------------------------
Kerry K. Killinger
President and Chief Executive
Officer
Pursuant to the requirement of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities indicated below on the 30th day of December, 1996.
<TABLE>
<S> <C>
/s/ KERRY K. KILLINGER /s/ WILLIAM A. LONGBRAKE*
- -------------------------------------------- --------------------------------------------
Kerry K. Killinger William A. Longbrake
Chairman, President and Executive Vice President and
Chief Executive Officer; Director Chief Financial Officer
(Principal Executive Officer) (Principal Financial Officer)
/s/ DOUGLAS G. WISDORF*
--------------------------------------------
Douglas G. Wisdorf
Deputy Chief Financial Officer and
Controller
(Principal Accounting Officer)
/s/ DOUGLAS P. BEIGHLE* /s/ WILLIAM P. GERBERDING*
- -------------------------------------------- --------------------------------------------
Douglas P. Beighle William P. Gerberding
Director Director
/s/ HERBERT M. BRIDGE* /s/ DR. SAMUEL B. MCKINNEY*
- -------------------------------------------- --------------------------------------------
Herbert M. Bridge Dr. Samuel B. McKinney
Director Director
/s/ ROGER H. EIGSTI* /s/ MICHAEL K. MURPHEY*
- -------------------------------------------- --------------------------------------------
Roger H. Eigsti Michael K. Murphey
Director Director
/s/ JOHN W. ELLIS* /s/ LOUIS H. PEPPER*
- -------------------------------------------- --------------------------------------------
John W. Ellis Louis H. Pepper
Director Director
</TABLE>
II-3
<PAGE> 161
<TABLE>
<S> <C>
/s/ DANIEL J. EVANS* /s/ WILLIAM G. REED, JR.*
- -------------------------------------------- --------------------------------------------
Daniel J. Evans William G. Reed, Jr.
Director Director
/s/ ANNE V. FARRELL* /s/ JAMES H. STEVER*
- -------------------------------------------- --------------------------------------------
Anne V. Farrell James H. Stever
Director Director
- -------------------------------------------- --------------------------------------------
David Bonderman J. Taylor Crandall
Director Director
*By /s/ KERRY K. KILLINGER
----------------------------------------
Kerry K. Killinger
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 162
EXHIBITS INDEX
<TABLE>
<S> <C>
3.1 Restated Articles of Incorporation of the Registrant, as amended dated December 18,
1996
5.1 Opinion of Foster Pepper & Shefelman
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 3.1
RESTATED ARTICLES OF INCORPORATION
OF
WASHINGTON MUTUAL, INC.
Pursuant to the provisions of RCW 23B.10.070 of the Washington Business
Corporation Act, WASHINGTON MUTUAL, INC., hereby certifies that these Restated
Articles of Incorporation correctly set forth without change the provisions of
the Articles of Incorporation of the corporation, as amended. These Restated
Articles of Incorporation supersede the original Articles of Incorporation and
all amendments thereto.
ARTICLE I
Name
The name of this corporation is WASHINGTON MUTUAL, INC. (the
"Company").
ARTICLE II
Capital Stock
A. Issuance of and Payment for Stock. The total number of shares of
capital stock which the Company has authority to issue is 110,000,000 shares of
which 100,000,000 shares shall be shares of common stock with no par value per
share and 10,000,000 shares shall be shares of preferred stock with no par value
per share. The shares may be issued by the Company from time to time as approved
by its Board of Directors without the approval of the shareholders. The
consideration for issuance of the shares shall be paid in full before their
issuance. Neither promissory notes nor the promise of future services shall
constitute payment or part payment for the issuance of shares of the Company.
The consideration for the shares shall be cash, tangible or intangible property,
labor or services actually performed for the Company or any combination of the
foregoing. In the absence of actual fraud in the transaction, the value of such
property, labor or services, as determined by the Board of Directors of the
Company, shall be conclusive. Upon payment of such consideration, such shares
shall be deemed to be fully paid and non-assessable.
B. Voting by Class or Series. Except as expressly provided in these
Articles or in any resolutions of the Board of Directors designating and
establishing the terms of any series of preferred stock, no holders of any class
or series of capital stock shall have any right to vote as a separate class or
series or to vote more than one vote per share. Notwithstanding the foregoing,
the
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<PAGE> 2
restriction on voting separately by class or series shall not apply to the
extent that applicable law requires such voting, nor shall this restriction
apply to any amendment to these Articles which would adversely change the
specific terms of any class or series of capital stock as set forth in this
Article II or in any resolution of the Board of Directors designating and
establishing the terms of any series of preferred stock. For purposes of the
preceding sentence, an amendment which increases the number of authorized shares
of any class or series of capital stock, or substitutes the surviving
institution in a merger or consolidation for the Company, shall not be such an
adverse change.
C. Common Stock. On matters on which holders of common stock are
entitled to vote, each holder of shares of common stock shall be entitled to one
vote for each share held by such holder.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full amount
of dividends and of sinking fund or retirement fund or other retirement
payments, if any, to which such holders are respectively entitled in preference
to the common stock, then dividends may be paid on the common stock and on any
class or series of stock entitled to participate therewith as to dividends, out
of any assets legally available for the payment of dividends; but only when and
as declared by the Board of Directors.
In the event of any liquidation, dissolution or winding up of the
Company, after there shall have been paid to or set aside for the holders of any
class having preferences over the common stock in the event of liquidation,
dissolution or winding up of the full preferential amounts to which they are
respectively entitled, the holders of the common stock, and of any class or
series of stock entitled to participate therewith, in whole or in part, as to
distribution of assets, shall be entitled, after payment or provision for
payment of all debts and liabilities of the Company, to receive pro rata the
remaining assets of the Company available for distribution, in cash or in kind.
Each share of common stock shall have the same relative rights as and
be identical in all respects with all the other shares of common stock.
D. Preferred Stock.
(1) The authorized Preferred Stock shall be comprised of 10,000,000
shares no par value per share, which authorized Preferred Stock shall initially
consist of 2,800,000 shares of 9.12% Noncumulative Perpetual Preferred Stock,
Series C, 1,400,000 shares of $6.00 Noncumulative Convertible Perpetual
Preferred Stock, Series D, and 2,000,000 shares of 7.60% Noncumulative Perpetual
Preferred Stock, Series E. The Board of Directors of the Company is authorized
by resolution or resolutions from time to time adopted, to provide for the
issuance of preferred stock in one
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<PAGE> 3
or more additional series by designating and establishing the terms of such a
series. With respect to any such series, the Board of Directors is authorized to
fix and state the voting powers, designations, preferences and relative,
participating, optional or other special right of the shares of each such series
and the qualifications, limitations and restrictions thereon, including, but not
limited to, determination of any of the following:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rates or the amount of dividends to be paid on
the shares of such series, whether dividends shall be cumulative and, if so,
from which date or dates, the payment date or dates for dividends, and the
participating or other special rights, if any, with respect to dividends;
(c) The voting powers, full, special or limited, if any, of
shares of such series;
(d) Whether the shares of such series shall be redeemable and,
if so, the price or prices at which, and the terms and conditions on which, such
shares may be redeemed;
(e) The amount or amounts payable upon the shares of such series
in the event of voluntary or involuntary liquidation, dissolution or winding up
of the Company;
(f) Whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such fund and the
manner of its application, including the price or prices at which such shares
may be redeemed or purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible into,
or exchangeable for, shares of any other class or classes or of any other series
of the same or any other class or classes of stock of the Company and, if so
convertible or exchangeable, the conversion price or prices, or the rate of
exchange, and the adjustments thereof, if any, at which such conversion or
exchange may be made, and any other terms and conditions of such conversion or
exchange; and
(h) Whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued shares of serial
preferred stock and whether such shares may be reissued as shares of the same or
any other series of serial preferred stock.
Each share of each series of preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
-3-
<PAGE> 4
While the foregoing authorizes the Board of Directors, in establishing
the terms of a series of preferred stock, to permit holders of that series of
preferred stock to elect separately one or more directors, in no event shall the
total number of directors separately elected by holders of one or more series of
preferred stock equal or exceed fifty percent (50%) of the total number of
authorized directors.
(2) The terms and designations of the initially authorized series of
Preferred Stock shall be as follows:
(A) 9.12% Noncumulative Perpetual Preferred Stock, Series C.
1. Designation. There shall initially be a series of
preferred stock whose designation shall be "9.12% Noncumulative Perpetual
Preferred Stock, Series C" ("Series C"). The number of shares of Series C shall
be 2,800,000. The liquidation preference of Series C shall be $25.00 per share
(plus accrued and unpaid dividends for the then-current dividend period up to
the date fixed for liquidation, dissolution or winding up).
2. Rank. The shares of Series C shall, with respect to
dividend rights and rights on liquidation, winding up and dissolution of the
Company, rank prior to the Company's common stock (the "Common Stock") and to
all other classes and series of equity securities of the Company now or
hereafter authorized, issued or outstanding, other than any classes or series of
equity securities of the Company either (a) ranking on a parity with shares of
Series C as to dividend rights and rights upon liquidation, winding up or
dissolution of the Company (the "Series C Parity Stock"), or (b) ranking senior
to shares of Series C as to dividend rights and rights upon liquidation, winding
up or dissolution of the Company (the Common Stock and such other classes and
series of equity securities other than those described in (a) or (b)
collectively may be referred to herein as the "Series C Junior Stock"). The
shares of Series C shall be subject to the creation of such Series C Parity
Stock and such Series C Junior Stock to the extent not expressly prohibited by
these Articles.
Any class or classes of stock of the Company shall be deemed to rank
prior to Series C as to dividends and as to distribution of assets upon
liquidation, dissolution or winding up if the holders of such class shall be
entitled to the receipt of dividends and of amounts distributable upon
liquidation, dissolution or winding up in preference or priority to the holders
of shares of Series C.
3. Noncumulative Dividends and Dividend Rate. Holders of
shares of Series C shall be entitled to receive, when, as and if declared by the
Board of Directors, or a duly authorized committee thereof, out of funds legally
available therefor, cash dividends from the date of issue thereof at the annual
rate of $2.28 per share, payable quarterly in arrears, on February 15,
-4-
<PAGE> 5
May 15, August 15 and November 15 (each a "Series C Dividend Payment Date") of
each year, commencing on the first Series C Dividend Payment Date after issuance
of the shares of Series C; provided, however, that if any such day is a
non-business day, the Series C Dividend Payment Date will be the next business
day. Each declared dividend shall be payable to holders of record as they appear
at the close of business on the stock books of the Company on such record dates,
not more than 30 calendar days and not less than 10 calendar days preceding the
payment dates therefor, as are determined by the Board of Directors of the
Company or a duly authorized committee thereof (each of such dates a "Series C
Record Date"). Quarterly dividend periods (each a "Series C Dividend Period")
shall commence on and include the fifteenth day of February, May, August and
November of each year (except as set forth above with respect to the initial
Series C Dividend Period) and shall end on and include the day next preceding
the next following Series C Dividend Payment Date.
Dividends on the shares of Series C shall be noncumulative so that if a
dividend on the shares of Series C with respect to any Series C Dividend Period
is not declared by the Board of Directors of the Company, or any duly authorized
committee thereof, then the Company shall have no obligation at any time to pay
a dividend on the shares of Series C in respect of such Series C Dividend
Period. Holders of the shares of Series C shall not be entitled to any
dividends, whether payable in cash, property or stock, in excess of the
noncumulative dividends declared by the Board of Directors, or a duly authorized
committee thereof, as set forth herein.
Any Series C Parity Stock issued by the Company shall only have
dividend periods which end on the same date as a Series C Dividend Period. No
full dividends shall be declared or paid or set apart for payment on any Series
C Parity Stock in respect of any such dividend period unless full dividends on
Series C for the Series C Dividend Period ending on the same date as such
dividend period shall have been paid or contemporaneously are declared and paid
or declared and a sum sufficient for the payment thereof set apart for such
payment.
If at any time with respect to any Series C Dividend Period dividends
are not declared and paid in full (or declared and a sum sufficient for such
full payment so set apart) upon the shares of Series C, dividends upon shares of
Series C and dividends on any shares of Series C Parity Stock outstanding shall
only be declared by the Board of Directors or a duly authorized committee
thereof pro rata with respect thereto, so that the amount of dividends declared
per share on Series C and such Series C Parity Stock shall bear to each other
the same ratio that accrued dividends per share on the shares of Series C for
such Series C Dividend Period (which shall not include any accumulation in
respect of unpaid dividends for prior Series C Dividend Periods) and full
dividends, including accumulations, if any, on shares of Series C Parity Stock,
bear to each other.
-5-
<PAGE> 6
Unless full dividends have been declared and paid (or declared and a
sum sufficient for such full payment set apart for payment) on all outstanding
shares of Series C for the immediately preceding Series C Dividend Period, the
Company shall not declare or pay any dividends (other than in Common Stock or
other Series C Junior Stock) or set any amount aside for payment thereof or make
any other distribution on the Common Stock or on any other Series C Junior
Stock, nor shall any Common Stock nor any Series C Junior Stock be redeemed (or
any moneys be paid to or made available for a sinking fund for the redemption of
any shares of any such stock), or any Series C Junior Stock or Series C Parity
Stock be purchased or otherwise acquired by the Company for any consideration
except by conversion into or exchange for Series C Junior Stock.
Regardless of the length of the initial Series C Dividend Period and
whether or not the time period from the date of issue of the shares of Series C
to the Series C Dividend Payment Date constitutes a full quarter, a full
quarterly dividend of $.57 per share shall be paid on the initial Series C
Dividend Payment Date. Dividends payable for any other period shorter than a
full Series C Dividend Period shall be computed on the basis of twelve 30-day
months and a 360-day year. Dividends payable for each full quarterly dividend
period shall be computed by dividing the annual dividend rate by four.
4. Voting Rights. Except as indicated below and except as
otherwise required by applicable law, the holders of shares of Series C will not
be entitled to vote for any purpose.
As long as any shares of Series C remain outstanding, the consent of
the holders of at least two-thirds of the shares of Series C at the time
outstanding (unless the vote or consent of the holders of a greater number of
shares shall then be required by law), given in person by proxy, by a vote at a
meeting of the holders of Series C called for such purpose at which the holders
of shares of Series C shall vote together as a separate class, shall be
necessary (i) to issue or authorize any additional class of equity stock (it
being understood that subordinated debt instruments, including mandatory
convertible debt, are not for these purposes equity stock) ranking prior to
Series C as to dividends or upon liquidation, winding up or dissolution or which
possess rights to vote separately as one class with Series C on a basis of more
than one vote for each $25.00 of stated liquidation preference thereof
(excluding any liquidation preference for accrued but unpaid dividends) or to
issue or authorize any obligation or security convertible into or evidencing a
right to purchase, or to reclassify any authorized stock of the Company into,
any such additional class of equity stock or (ii) to repeal, amend or otherwise
change any of the provisions of these Articles in any manner which adversely
affects the powers, preferences, voting power or other rights or privileges of
Series C; provided, however, that amending these Articles to increase the number
of authorized shares of common or preferred stock shall not be deemed to be
included within the scope of (ii) above.
-6-
<PAGE> 7
In connection with any matter on which holders of Series C are entitled
to vote including, without limitation, the election of directors as set forth
below or any matter on which the holders of Series C are entitled to vote as one
class or otherwise pursuant to law or the provisions of these Articles, each
holder of Series C shall be entitled to one vote for each share of Series C held
by such holder.
To the extent permitted by law, if the equivalent of six full quarterly
dividends on Series C, whether or not consecutive, are not declared and paid,
the holders of shares of Series C, together with the holders of any Series C
Parity Stock as to which the payment of dividends is in arrears and unpaid in an
aggregate amount equal to or exceeding the amount of dividends payable for six
quarterly dividend periods (or if dividends are payable other than on a
quarterly basis the number of dividend periods, whether or not consecutive,
containing in the aggregate not less than 540 calendar days) and which by its
terms provides for voting rights similar to those of the shares of Series C (the
"Series C Voting Parity Stock"), shall have the exclusive right at the next
annual meeting of shareholders for the election of directors or at a special
meeting called as described below, voting separately as one class, to elect two
directors for newly created directorships of the Company, each director to be in
addition to the number of directors constituting the Board of Directors of the
Company immediately prior to the accrual of such right (the remaining directors
to be elected by the other class or classes of stock entitled to vote therefor).
At any time when the right to elect such directors shall have so vested, the
Company may, and upon written request of the holders of record of not less than
20% of the total number of shares of Series C and such Series C Voting Parity
Stock then outstanding shall, call a special meeting of the holders of such
shares to fill such newly created directorships. In the case of such a written
request, such special meeting shall be held within 90 days after delivery of
such request and in either case, at the place and upon the notice provided by
law and the Bylaws of the Company, provided that the Company shall not be
required to call such a special meeting if such request is received less than
120 days before the date fixed for the next annual meeting of shareholders. The
right of holders of shares of Series C to elect directors shall continue until
dividends on the shares of Series C, have been declared and paid in full for
four consecutive Series C Dividend Periods, at which time such voting right of
the holders of the shares of Series C and the Series C Voting Parity Stock
shall, without further action, terminate, subject to revesting in the event of
each and every subsequent failure of the Company to pay such dividends for the
requisite number of periods as described above.
The term of office of all directors elected by the holders of the
shares of Series C and the Series C Voting Parity Stock in office at any time
when the aforesaid voting right is vested in such holders shall terminate upon
the election of their successors at any meeting of shareholders for the purpose
of electing
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<PAGE> 8
directors; provided however, that without further action and unless otherwise
required by law, any director who shall have been elected by holders of the
shares of Series C and the Series C Voting Parity Stock as provided herein may
be removed at any time, either with or without cause, by the affirmative vote of
the holders of record of a majority of the outstanding shares of Series C and
the Series C Voting Parity Stock, voting separately as one class, at a duly held
shareholders' meeting. Upon termination of the aforesaid voting right in
accordance with the foregoing provisions, the term of office of all directors
elected by the holders of the shares of Series C and the Series C Voting Parity
Stock pursuant thereto then in office shall, without further action, thereupon
terminate unless otherwise required by law. Upon such termination the number of
directors constituting the Board of Directors of the Company shall, without
further action, be reduced by two, subject always to the increase of the number
of directors pursuant to the foregoing provisions in the case of the future
right of holders of the shares of Series C and the Series C Voting Parity Stock
to elect directors as provided above.
Unless otherwise required by law, in case of any vacancy occurring
among the directors so elected, the remaining director who shall have been so
elected may appoint a successor to hold office for the unexpired term of the
director whose place shall be vacant, and if all directors so elected by the
holders of the shares of Series C and the Series C Voting Parity Stock shall
cease to serve as directors before their term shall expire, the holders of the
shares of Series C and the Series C Voting Parity Stock then outstanding may, at
a meeting of such holders duly held, elect successors to hold office of the
unexpired terms of the directors whose places shall be vacant.
The directors to be elected by the shares of Series C and the Series C
Voting Parity Stock, voting together as a class, shall not become members of any
of the three classes of directors otherwise required by these Articles. If these
Articles and applicable law were construed to require classification of such
directors and as a result, or if for any other reason, the holders of the shares
of Series C and the Series C Voting Parity Stock are not able to elect the
specified number of directors at the next annual meeting of shareholders in the
manner described above, the Company shall use its best efforts to take all
actions necessary to permit the full exercise of such voting rights (including,
if necessary, taking action to increase the authorized number of directors
standing for election at such next annual meeting of shareholders or seeking to
amend, alter or change these Articles and bylaws of the Company).
5. Optional Redemption. The shares of Series C will not be
redeemable before December 31, 1997. On or after December 31, 1997, the shares
of Series C are redeemable at the option of the Company for cash, in whole or in
part, at any time and from time to time, at $25.00 per share, to the extent that
the Company has funds legally available therefor, plus unpaid dividends (whether
or not declared) for the then-current Series C
-8-
<PAGE> 9
Dividend Period up to the date fixed for redemption (without accumulation of
accrued and unpaid dividends for prior Series C Dividend Periods) (the "Series C
Redemption Price") without interest.
The Company shall not redeem or set aside funds for the redemption of
any Series C Parity Stock unless prior to or contemporaneously therewith it
redeems, or sets aside funds for the redemption of, a number of shares of Series
C whose liquidation preference bears the same relationship to the aggregate
liquidation preference of all shares of Series C then outstanding as the
liquidation preference of such Series C Parity Stock to be redeemed bears to the
aggregate liquidation preference of all Series C Parity Stock then outstanding.
In addition, notwithstanding the foregoing, the Company may redeem Series C
Parity Stock without redeeming a proportional amount of Series C in the event
(i) such Series C Parity Stock is convertible into Common Stock and (ii) the
average of the daily closing prices of Common Stock for the 30-day period ending
15 days prior to the date of the notice of redemption is in excess of the
conversion price of such Series C Parity Stock.
In the event that fewer than all the outstanding shares of Series C are
to be redeemed, the number of shares to be redeemed shall be determined by the
Board of Directors and the shares to be redeemed shall be determined by lot or
pro rata as may be determined by the Board of Directors or by any other method
as may be determined by the Board of Directors in its sole discretion to be
equitable.
In the event the Company shall redeem shares of Series C, notice of
such redemption (a "Series C Notice of Redemption") shall be given by first
class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior
to the redemption date, to each holder of record of the shares to be redeemed,
at such holder's address as the same appears on the stock register of the
Company. Each Notice of Redemption shall include the following information: (1)
the redemption date; (2) the number of shares of Series C to be redeemed and, if
fewer than all the shares held by such holder are to be redeemed, the number of
such shares to be redeemed from such holder; (3) the Series C Redemption Price
(specifying the amount of unpaid dividends to be included therein); (4) the
place or places where certificates for such shares are to be surrendered for
payment of the Series C Redemption Price; (5) that dividends on the shares to be
redeemed will cease to accrue as of such redemption date; and (6) the provision
hereunder pursuant to which such redemption is being made.
On or after a redemption date, each holder of shares of Series C that
were called for redemption shall surrender the certificate or certificates
evidencing such shares to the Company at any place designated for such surrender
in the Notice of Redemption and shall then be entitled to receive payment of the
Series C Redemption Price for each share. If less than all the shares
represented by one share certificate are to be redeemed, the
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<PAGE> 10
Company shall issue a new share certificate for the shares not redeemed.
By noon of the business day immediately preceding the redemption date,
the Company shall irrevocably deposit with First Interstate Company of
Washington, N.A., in its capacity as paying agent with respect to the shares of
Series C or any successor paying agent (the "Paying Agent"), an aggregate amount
of immediately available funds or short-term money market instruments or U.S.
Treasury Securities sufficient to pay the Series C Redemption Price specified
herein for the shares of Series C to be redeemed on such date and shall give the
Paying Agent irrevocable instructions to pay such Series C Redemption Price to
the holders of record of the shares of Series C called for redemption.
If a Notice of Redemption shall have been given and the deposit
referred to in the preceding paragraph made, then dividends shall cease, as of
the redemption date, to accumulate on the shares of Series C called for
redemption and all other rights of holders of the shares so called for
redemption shall cease on and after the redemption date, except the right of
holders of such shares to receive the Series C Redemption Price against delivery
of such shares, but without interest, and such shares shall cease to be
outstanding. The Company shall be entitled to receive, from time to time, from
the Paying Agent the interest, if any, earned on such monies deposited with the
Paying Agent, and the holders of any shares to be redeemed with such monies
shall have no claim to any such interest. With regard to any other funds so
deposited that are unclaimed by holders of shares at the end of two years from
such redemption date, the Paying Agent shall, upon demand, pay over to the
Company such amount remaining on deposit, the Paying Agent shall thereupon be
relieved of all responsibility to the holders of such shares and the holders of
shares of Series C so called for redemption shall thereafter be entitled to look
only to the Company for payment thereof.
Any shares of Series C which shall at any time have been redeemed
shall, after such redemption, have the status of authorized but unissued shares
of preferred stock of the Company, without designation as to series until such
shares are once more designated as part of a particular series by the Board of
Directors.
6. No Conversion Rights. Holders of shares of Series C will
have no right to convert shares of Series C into Common Stock or any other
security of the Company.
7. Liquidation Preference. In the event of any liquidation,
dissolution or winding up of the Company, voluntary or involuntary, the holders
of the outstanding shares of Series C shall be entitled to receive out of the
assets of the Company, or the proceeds thereof, available for distribution to
shareholders, before any distribution of assets is made to the holders of Common
Stock or other Series C Junior Stock, liquidating
-10-
<PAGE> 11
distributions in the amount of $25.00 per share plus dividends accrued and
unpaid for the then-current Series C Dividend Period (without accumulation of
accrued and unpaid dividends for prior Series C Dividend Periods) to the date
fixed for such liquidation, dissolution or winding up. After payment of the full
amount of the liquidating distribution to which they are entitled, the holders
of shares of Series C will not be entitled to any further participation in any
distribution of assets of the Company. All distributions made with respect to
the shares of Series C in connection with such liquidation, dissolution or
winding up of the Company shall be made pro rata to the holders entitled
thereto.
If, upon any liquidation, dissolution or winding up of the Company, the
assets of the Company, and proceeds thereof, available for distribution among
the holders of the shares of Series C and of any Series C Parity Stock, shall be
insufficient to pay in full the preferential amount set forth in the preceding
paragraph above to the holders of the shares of Series C and liquidating
payments on all such Series C Parity Stock, then such assets and proceeds shall
be distributed among the holders of Series C and all such Series C Parity Stock
ratably in accordance with the respective amounts which would be payable on such
shares of Series C and any such Series C Parity Stock if all amounts payable
thereon were paid in full.
8. Payments on Stock Ranking Junior. In the event of any
such liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, unless and until payment in full is made to the holders of all
outstanding shares of Series C of the liquidation distribution to which they are
entitled, no dividend or other distribution shall be made to the holders of the
Common Stock or any other Series C Junior Stock, and no purchase, redemption or
other acquisition for any consideration by the Company shall be made in respect
of the shares of the Common Stock or such other class of junior Stock.
Neither a consolidation or merger of the Company into or with another
entity or entities nor the sale, transfer or exchange (for cash, shares of
equity stock, securities or other consideration) of all or substantially all of
the property and assets of the Company, shall be deemed to be a liquidation,
dissolution or winding up of the Company within the meaning of this Section
D.(2)(A).
9. Sinking Fund. No sinking fund shall be provided for the
purchase of redemption of shares of Series C.
10. Preemptive Rights. No holder of shares of Series C shall
have any preemptive right to subscribe to stock, obligations, warrants, rights
to subscribe to stock, or other securities of this corporation of any class,
whether now or hereafter authorized.
-11-
<PAGE> 12
(B) $6.00 Noncumulative Convertible Perpetual
Preferred Stock, Series D
1. Designation. There shall initially be a series of
preferred stock whose designation shall be "$6.00 Noncumulative Convertible
Perpetual Preferred Stock, Series D" ("Series D"). The number of shares of
Series D shall be 1,400,000. The liquidation preference of Series D shall be
$100.00 per share (plus accrued and unpaid dividends for the then-current
dividend period up to the date fixed for liquidation, dissolution or winding
up).
2. Rank. The shares of Series D shall, with respect to
dividend rights and rights on liquidation, winding up and dissolution of the
Company, rank prior to the Common Stock and to all other classes and series of
equity securities of the Company now or hereafter authorized, issued or
outstanding, other than any classes or series of equity securities of the
Company either (a) ranking on a parity with shares of Series D as to dividend
rights and rights upon liquidation, winding up or dissolution of the Company
(the "Series D Parity Stock"), or (b) ranking senior to shares of Series D as to
dividend rights and rights upon liquidation, winding up or dissolution of the
Company (the Common Stock and such other classes and series of equity securities
other than those described in (a) or (b) collectively may be referred to herein
as the "Series D Junior Stock"). The shares of Series D shall be subject to the
creation of such Series D Parity Stock and such Series D Junior Stock to the
extent not expressly prohibited by these Articles.
Any class or classes of stock of the Company shall be deemed to rank
prior to Series D as to dividends and as to distribution of assets upon
liquidation, dissolution or winding up if the holders of such class shall be
entitled to the receipt of dividends and of amounts distributable upon
liquidation, dissolution or winding up in preference or priority to the holders
of shares of Series D.
3. Noncumulative Dividends and Dividend Rate. Holders of
shares of Series D shall be entitled to receive, when, as and if declared by the
Board of Directors, or a duly authorized committee thereof, out of funds legally
available therefor, cash dividends from the date of issue thereof at the annual
rate of $6.00 per share, payable quarterly in arrears, on February 15, May 15,
August 15 and November 15 (each a "Series D Dividend Payment Date") of each
year, commencing on the first Series D Dividend Payment Date after issuance of
the shares of Series D; provided, however, that if any such day is a
non-business day, the Series D Dividend Payment Date will be the next business
day. Each declared dividend shall be payable to holders of record as they appear
at the close of business on the stock books of the Company on such record dates,
not more than 30 calendar days and not less than 10 calendar days preceding the
payment dates therefor, as are determined by the Board of Directors of the
Company or a duly authorized committee thereof (each of such dates a "Series D
Record
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<PAGE> 13
Date"). Quarterly dividend periods (each a "Series D Dividend Period") shall
commence on and include the fifteenth day of February, May, August and November
of each year (except as set forth above with respect to the initial Series D
Dividend Period) and shall end on and include the day next preceding the next
following Series D Dividend Payment Date.
Dividends on the shares of Series D shall be noncumulative so that if a
dividend on the shares of Series D with respect to any Series D Dividend Period
is not declared by the Board of Directors of the Company, or any duly authorized
committee thereof, then the Company shall have no obligation at any time to pay
a dividend on the shares of Series D in respect of such Series D Dividend
Period. Holders of the shares of Series D shall not be entitled to any
dividends, whether payable in cash, property or stock, in excess of the
noncumulative dividends declared by the Board of Directors, or a duly authorized
committee thereof, as set forth herein.
Any Series D Parity Stock issued by the Company shall only have
dividend periods which end on the same date as a Series D Dividend Period. No
full dividends shall be declared or paid or set apart for payment on any Series
D Parity Stock in respect of any such dividend period unless full dividends on
Series D for the Series D Dividend Period ending on the same date as such
dividend period shall have been paid or contemporaneously are declared and paid
or declared and a sum sufficient for the payment thereof set apart for such
payment.
If at any time with respect to any Series D Dividend Period dividends
are not declared and paid in full (or declared and a sum sufficient for such
full payment so set apart) upon the shares of Series D, dividends upon shares of
Series D and dividends on any shares of Series D Parity Stock outstanding shall
only be declared by the Board of Directors or a duly authorized committee
thereof pro rata with respect thereto, so that the amount of dividends declared
per share on Series D and such Series D Parity Stock shall bear to each other
the same ratio that accrued dividends per share on the shares of Series D for
such Series D Dividend Period (which shall not include any accumulation in
respect of unpaid dividends for prior Series D Dividend Periods) and full
dividends, including accumulations, if any, on shares of Series D Parity Stock,
bear to each other.
Unless full dividends have been declared and paid (or declared and a
sum sufficient for such full payment set apart for payment) on all outstanding
shares of Series D for the immediately preceding Series D Dividend Period, the
Company shall not declare or pay any dividends (other than in Common Stock or
other Series D Junior Stock) or set any amount aside for payment thereof or make
any other distribution on the Common Stock or on any other Series D Junior
Stock, nor shall any Common Stock nor any Series D Junior Stock be redeemed (or
any moneys be paid to or made available for a sinking fund for the redemption of
any shares of any such stock), or any Series D Junior Stock or Series D Parity
Stock be purchased
-13-
<PAGE> 14
or otherwise acquired by the Company for any consideration except by conversion
into or exchange for Series D Junior Stock.
Regardless of the length of the initial Series D Dividend Period and
whether or not the time period from the date of issue of the shares of Series D
to the Series D Dividend Payment Date constitutes a full quarter, a full
quarterly dividend of $1.50 per share shall be paid on the initial Series D
Dividend Payment Date. Dividends payable for any other period shorter than a
full Series D Dividend Period shall be computed on the basis of twelve 30-day
months and a 360-day year. Dividends payable for each full quarterly dividend
period shall be computed by dividing the annual dividend rate by four.
4. Voting Rights. Except as indicated below and except as
otherwise required by applicable law, the holders of shares of Series D will not
be entitled to vote for any purpose.
As long as any shares of Series D remain outstanding, the consent of
the holders of at least two-thirds of the shares of Series D at the time
outstanding (unless the vote or consent of the holders of a greater number of
shares shall then be required by law), given in person by proxy, by a vote at a
meeting of the holders of Series D called for such purpose at which the holders
of shares of Series D shall vote together as a separate class, shall be
necessary (i) to issue or authorize any additional class of equity stock (it
being understood that subordinated debt instruments, including mandatory
convertible debt, are not for these purposes equity stock) ranking prior to
Series D as to dividends or upon liquidation, winding up or dissolution or which
possess rights to vote separately as one class with Series D on a basis of more
than one vote for each $25.00 of stated liquidation preference thereof
(excluding any liquidation preference for accrued but unpaid dividends) or to
issue or authorize any obligation or security convertible into or evidencing a
right to purchase, or to reclassify any authorized stock of the Company into,
any such additional class of equity stock or (ii) to repeal, amend or otherwise
change any of the provisions of these Articles in any manner which adversely
affects the powers, preferences, voting power or other rights or privileges of
Series D; provided, however, that amending these Articles to increase the number
of authorized shares of common or preferred stock shall not be deemed to be
included within the scope of (ii) above.
In connection with any matter on which holders of Series D are entitled
to vote including, without limitation, the election of directors as set forth
below or any matter on which the holders of Series D are entitled to vote as one
class or otherwise pursuant to law or the provisions of these Articles, each
holder of Series D shall be entitled to one vote for each share of Series D held
by such holder.
To the extent permitted by law, if the equivalent of six full quarterly
dividends on Series D, whether or not consecutive, are
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<PAGE> 15
not declared and paid, the holders of shares of Series D, together with the
holders of any Series D Parity Stock as to which the payment of dividends is in
arrears and unpaid in an aggregate amount equal to or exceeding the amount of
dividends payable for six quarterly dividend periods (or if dividends are
payable other than on a quarterly basis the number of dividend periods, whether
or not consecutive, containing in the aggregate not less than 540 calendar days)
and which by its terms provides for voting rights similar to those of the shares
of Series D (the "Series D Voting Parity Stock"), shall have the exclusive right
at the next annual meeting of shareholders for the election of directors or at a
special meeting called as described below, voting separately as one class, to
elect two directors for newly created directorships of the Company, each
director to be in addition to the number of directors constituting the Board of
Directors of the Company immediately prior to the accrual of such right (the
remaining directors to be elected by the other class or classes of stock
entitled to vote therefor). At any time when the right to elect such directors
shall have so vested, the Company may, and upon written request of the holders
of record of not less than 20% of the total number of shares of Series D and
such Series D Voting Parity Stock then outstanding shall, call a special meeting
of the holders of such shares to fill such newly created directorships. In the
case of such a written request, such special meeting shall be held within 90
days after delivery of such request and in either case, at the place and upon
the notice provided by law and in the Bylaws of the Company, provided that the
Company shall not be required to call such a special meeting if such request is
received less than 120 days before the date fixed for the next annual meeting of
shareholders. The right of holders of shares of Series D to elect directors
shall continue until dividends on the shares of Series D, have been declared and
paid in full for four consecutive Series D Dividend Periods, at which time such
voting right of the holders of the shares of Series D and the Series D Voting
Parity Stock shall, without further action, terminate, subject to revesting in
the event of each and every subsequent failure of the Company to pay such
dividends for the requisite number of periods as described above.
The term of office of all directors elected by the holders of the
shares of Series D and the Series D Voting Parity Stock in office at any time
when the aforesaid voting right is vested in such holders shall terminate upon
the election of their successors at any meeting of shareholders for the purpose
of electing directors; provided however, that without further action and unless
otherwise required by law, any director who shall have been elected by holders
of the shares of Series D and the Series D Voting Parity Stock as provided
herein may be removed at any time, either with or without cause, by the
affirmative vote of the holders of record of a majority of the outstanding
shares of Series D and the Series D Voting Parity Stock, voting separately as
one class, at a duly held shareholders' meeting. Upon termination of the
aforesaid voting right in accordance with the foregoing provisions, the term of
office of all directors elected by the holders of the shares of
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<PAGE> 16
Series D and the Series D Voting Parity Stock pursuant thereto then in office
shall, without further action, thereupon terminate unless otherwise required by
law. Upon such termination the number of directors constituting the Board of
Directors of the Company shall, without further action, be reduced by two,
subject always to the increase of the number of directors pursuant to the
foregoing provisions in the case of the future right of holders of the shares of
Series D and the Series D Voting Parity Stock to elect directors as provided
above.
Unless otherwise required by law, in case of any vacancy occurring
among the directors so elected, the remaining director who shall have been so
elected may appoint a successor to hold office for the unexpired term of the
director whose place shall be vacant, and if all directors so elected by the
holders of the shares of Series D and the Series D Voting Parity Stock shall
cease to serve as directors before their term shall expire, the holders of the
shares of Series D and the Series D Voting Parity Stock then outstanding may, at
a meeting of such holders duly held, elect successors to hold office of the
unexpired terms of the directors whose places shall be vacant.
The directors to be elected by the shares of Series D and the Series D
Voting Parity Stock, voting together as a class, shall not become members of any
of the three classes of directors otherwise required by these Articles. If these
Articles and applicable law were construed to require classification of such
directors and as a result, or if for any other reason, the holders of the shares
of Series D and the Series D Voting Parity Stock are not able to elect the
specified number of directors at the next annual meeting of shareholders in the
manner described above, the Company shall use its best efforts to take all
actions necessary to permit the full exercise of such voting rights (including,
if necessary, taking action to increase the authorized number of directors
standing for election at such next annual meeting of shareholders or seeking to
amend, alter or change these Articles and Bylaws of the Company).
5. Optional Redemption. The shares of Series D will not be
redeemable before December 31, 1996. On or after December 31, 1996, the shares
of Series D are redeemable at the option of the Company for cash, in whole or in
part, at any time and from time to time, at the following redemption prices per
share if redeemed during the 12-month period ending December 31 in each of the
following years to the extent that the Company has funds legally available
therefor:
-16-
<PAGE> 17
<TABLE>
<CAPTION>
redemption price redemption price
per share of per share of
Year Series D Year Series D
- ---- -------- ---- --------
<C> <C> <C> <C>
1997 $103.60 2001 $101.20
1998 $103.00 2002 $100.60
1999 $102.40 2003 and
2000 $101.80 thereafter $100.00
</TABLE>
plus in each case accrued and unpaid dividends (whether or not declared) for the
last complete Series D Dividend Period immediately preceding the date fixed for
redemption (without accumulation of accrued and unpaid dividends for prior
Series D Dividend Periods) (the "Series D Redemption Price") without interest.
The Company shall not redeem or set aside funds for the redemption of
any Series D Parity Stock unless prior to or contemporaneously therewith it
redeems, or sets aside funds for the redemption of, a number of shares of Series
D whose liquidation preference bears the same relationship to the aggregate
liquidation preference of all shares of Series D then outstanding as the
liquidation preference of such Series D Parity Stock to be redeemed bears to the
aggregate liquidation preference of all Series D Parity Stock then outstanding.
In addition, notwithstanding the foregoing, the Company may redeem Series D
Parity Stock without redeeming a proportional amount of Series D in the event
(i) such Series D Parity Stock is convertible into Common Stock and (ii) the
average of the daily Closing Prices (as defined in 6(a) below) of Common Stock
for the 30-day period ending 15 days prior to the date of the notice of
redemption is in excess of the conversion price of such Series D Parity Stock.
In the event that fewer than all the outstanding shares of Series D are
to be redeemed, the number of shares to be redeemed shall be determined by the
Board of Directors and the shares to be redeemed shall be determined by lot or
pro rata as may be determined by the Board of Directors or by any other method
as may be determined by the Board of Directors in its sole discretion to be
equitable.
In the event the Company shall redeem shares of Series D, notice of
such redemption (a "Series D Notice of Redemption") shall be given by first
class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior
to the redemption date, to each holder of record of the shares to be redeemed,
at such holder's address as the same appears on the stock register of the
Company. Each Series D Notice of Redemption shall include the following
information: (1) the redemption date; (2) the number of shares of Series D to be
redeemed and, if fewer than all the shares held by such holder are to be
redeemed, the number of such shares to be redeemed from such holder; (3) the
Series D Redemption Price
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<PAGE> 18
(specifying the amount of accrued and unpaid dividends to be included therein);
(4) the place or places where certificates for such shares are to be surrendered
for payment of the Series D Redemption Price; (5) that dividends on the shares
to be redeemed will cease or ceased to accrue as of the end of the Series D
Dividend Period immediately preceding such redemption date; and (6) the
provision hereunder pursuant to which such redemption is being made.
On or after a redemption date, each holder of shares of Series D that
were called for redemption shall surrender the certificate or certificates
evidencing such shares to the Company at any place designated for such surrender
in the Series D Notice of Redemption and shall then be entitled to receive
payment of the Series D Redemption Price for each share. If less than all the
shares represented by one share certificate are to be redeemed, the Company
shall issue a new share certificate for the shares not redeemed.
By noon of the business day immediately preceding the redemption date,
the Company shall irrevocably deposit with First Interstate Company of
Washington, N.A., in its capacity as paying agent with respect to the shares of
Series D or any successor paying agent (the "Series D Paying Agent"), an
aggregate amount of immediately available funds or short-term money market
instruments or U.S. Treasury Securities sufficient to pay the Series D
Redemption Price specified herein for the shares of Series D to be redeemed on
such date and shall give the Series D Paying Agent irrevocable instructions to
pay such Series D Redemption Price to the holders of record of the shares of
Series D called for redemption.
If a Series D Notice of Redemption shall have been given and the
deposit referred to in the preceding paragraph made, then dividends shall cease
after the end of the complete Series D Dividend Period immediately preceding the
redemption date, to accumulate on the shares of Series D called for redemption
and all other rights of holders of the shares so called for redemption shall
cease on and after the redemption date, except the right of holders of such
shares to receive the Series D Redemption Price against delivery of such shares,
but without interest, and such shares shall cease to be outstanding. The Company
shall be entitled to receive, from time to time, from the Series D Paying Agent
the interest, if any, earned on such monies deposited with the Series D Paying
Agent, and the holders of any shares to be redeemed with such monies shall have
no claim to any such interest. The Company shall be entitled to receive upon
demand any amounts so deposited which exceed the total obtained by multiplying
the Series D Redemption Price times the difference between the number of shares
called for redemption and the number of such shares converted on or before the
redemption date. With regard to any other funds so deposited that are unclaimed
by holders of shares at the end of two years from such redemption date, the
Series D Paying Agent shall, upon demand, pay over to the Company such amount
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<PAGE> 19
remaining on deposit, the Series D Paying Agent shall thereupon be relieved of
all responsibility to the holders of such shares and the holders of shares of
Series D so called for redemption shall thereafter be entitled to look only to
the Company for payment thereof.
Any shares of Series D which shall at any time have been redeemed
shall, after such redemption, have the status of authorized but unissued shares
of preferred stock of the Company, without designation as to series until such
shares are once more designated as part of a particular series by the Board of
Directors.
6. Conversion Rights.
(a) Holders of shares of Series D will have the right, at
their option at any time and from time to time, to convert any or all of such
shares into the number of shares of Common Stock of the Company determined by
dividing $100.00 for each share of Series D to be converted by the then
effective conversion price, except that if any shares of Series D are called for
redemption, the conversion rights pertaining thereto will terminate at the close
of business on the date fixed for redemption, unless the Company defaults in the
payment of the Series D Redemption Price. The market value of a share of Common
Stock (the "Series D Market Price") on any date shall be deemed to be the
average of the daily Closing Prices for the 30-day period ending 15 days prior
to the date in question. The term "Series D Closing Price," with respect to any
day, shall mean (i) the last sales price in the over-the-counter market, as
reported by the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") or a similar accepted reporting service for the date of any
such determination, or (ii) if the Common Stock is listed or admitted for
trading on the New York Stock Exchange, the last reported sales price per share
of Common Stock on such date on the New York Stock Exchange, or (iii) if the
Common Stock is not listed or admitted for trading on the New York Stock
Exchange, the last reported sales price on the principal national securities
exchange on which the Common Stock is admitted for trading, or (iv) if no such
quotations are available and the Common Stock is not so listed or admitted, the
fair market value on the date in question of a share of Common Stock as
determined in good faith by the Board of Directors. If more than one share of
Series D is surrendered for conversion at one time by the same holder, the
number of full shares of Common Stock which shall be issuable on conversion
thereof shall be computed on the basis of all such shares so surrendered.
(b) The holders of shares of Series D at the close of
business on a dividend payment Series D Record Date shall be entitled to receive
the dividend payable on such shares (except that holders of shares of Series D
subject to redemption on a redemption date between such Series D Record Date and
the Series D Dividend Payment Date shall not be entitled to receive such
dividend on such Series D Dividend Payment Date) on the
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<PAGE> 20
corresponding Series D Dividend Payment Date notwithstanding the conversion
thereof or the Company's default on payment of the dividend due on such Series D
Dividend Payment Date. However, shares of Series D surrendered for conversion
during the period after any dividend payment Series D Record Date and before
such Series D Dividend Payment Date (except shares subject to redemption on a
redemption date during such period) must be accompanied by payment of an amount
equal to the dividend payable on such shares on such Series D Dividend Payment
Date. Holders of shares of Series D on a dividend payment Series D Record Date
who (or whose transferees) convert shares of Series D on a Series D Dividend
Payment Date will receive the dividend payable on such Series D by the Company
on such date, and the converting holder need not include payment in the amount
of such dividend upon surrender of shares of Series D for conversion.
(c) The initial conversion price for each share of Series
D is $25.8338. The initial conversion price or other conversion price then in
effect shall be subject to adjustment from time to time as follows:
(i) In case the Company shall declare a dividend or
other distribution on any class of capital stock of the Company payable in
shares of Common Stock, the conversion price in effect at the opening of
business on the day following the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution shall be
reduced by multiplying such conversion price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the close
of business on the date fixed for such determination and the denominator shall
be the sum of such number of shares and the total number of shares constituting
such dividend or other distribution, such reduction to become effective
immediately after the opening of business on the day following the date fixed
for such determination.
(ii) In case the Company shall subdivide the
outstanding shares of the Common Stock into a greater number of shares, the
conversion price in effect at the opening of business on the day following the
day upon which such subdivision becomes effective shall be proportionately
reduced, and, conversely, in case the outstanding shares of Common Stock shall
be combined into a smaller number of shares, the conversion price in effect at
the opening of business on the day following the day upon which such combination
becomes effective shall be proportionately increased.
(iii) In case the Common Stock issuable upon the
conversion of Series D shall be changed into the same or a different number of
shares of any class or classes of stock, whether by capital reorganization,
reclassification, or otherwise (other than a stock dividend or a subdivision or
combination of shares provided for in subclause (i) or (ii), or a
reorganization, merger, consolidation or sale of assets provided
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<PAGE> 21
for in (d)), then and in each such event the holders of shares of Series D shall
have the right thereafter to convert such shares into the kind and amount of
shares of stock and other securities and property receivable upon such
reorganization, reclassification or other change, by holders of the number of
shares of Common Stock into which such shares of Series D might have been
converted immediately prior to such reorganization, reclassification or change.
(iv) In case the Company shall issue to all holders
of the Common Stock rights or warrants entitling them (within a 45 calendar-day
period after the date fixed for the determination of stockholders entitled to
receive such rights or warrants) to subscribe for or purchase shares of Common
Stock at less than the Series D Market Price on the date fixed for such
determination, the conversion price in effect at the opening of business on the
day following the date fixed for such determination shall be reduced by
multiplying such conversion price by a fraction of which the numerator shall be
the number of shares of Common Stock outstanding at the close of business on the
date fixed for such determination plus the number of shares of Common Stock
which the aggregate of the offering price of the total number of shares of
Common Stock so offered for subscription or purchase would purchase at such
current Series D Market Price and the denominator shall be the number of shares
of Common Stock outstanding at the close of business on the date fixed for such
determination plus the number of shares of Common Stock so offered for
subscription or purchase, such reduction to become effective immediately after
the opening of business on the day following the date fixed for such
determination.
(v) In case the Company shall, by dividend or
otherwise, distribute to all holders of shares of Common Stock evidences of
indebtedness or assets (including rights or warrants to purchase capital stock,
or any other securities, but excluding any dividend or distribution referred to
in (i), any rights or warrants referred to in (iv) and any dividend or
distribution paid in cash out of the retained earnings or consolidated net
income of the Company), the conversion price shall be adjusted by multiplying
the conversion price in effect immediately prior to the close of business on the
date fixed for the determination of stockholders entitled to receive such
distribution by a fraction of which the numerator shall be the current Series D
Market Price of the Common Stock on the date fixed for such determination less
the fair market value (as determined by the Board of Directors, whose
determination shall be conclusive) of the portion of the assets or evidences of
indebtedness so distributed allocable to one share of Common Stock and the
denominator shall be such current Series D Market Price of the Common Stock,
such adjustment to become effective immediately prior to the opening of business
on the day following the date fixed for the determination of stockholders
entitled to receive such distribution. In the event that the Company shall
distribute or shall have distributed to all holders of shares of Common Stock
-21-
<PAGE> 22
rights or warrants to purchase capital stock that are not initially detachable
from the Common Stock (whether or not such distribution shall have occurred
prior to the date of issuance of Series D), then the distribution of separate
certificates representing such rights or warrants subsequent to their initial
distribution shall be deemed to be the distribution of such rights or warrants
for purposes of this subclause (v).
Notwithstanding the foregoing, in the event that the Company shall
distribute rights or warrants to purchase capital stock (other than those
referred in (iv) above) ("Series D Rights") to holders of Common Stock, the
Company may, in lieu of making the foregoing adjustment pursuant to this
subclause (v), make proper provision so that each holder of shares of Series D
who converts such shares of Series D before the record date for such
distribution shall be entitled to receive upon such conversion shares of Common
Stock issued with Series D Rights and after the record date for such
distribution and prior to the expiration or redemption of the Series D Rights
shall be entitled to receive upon such conversion, in addition to the shares of
Common Stock issuable upon such conversion, the same number of Series D Rights
to which a holder of the number of shares of Common Stock into which the shares
of Series D so converted were convertible immediately prior to the record date
for such distribution would have been entitled on the record date for such
distribution in accordance with the terms and provisions of and applicable to
the Series D Rights.
(vi) No adjustment in the conversion price shall be
required unless such adjustment would require an increase or decrease of at
least 1% of the conversion price then in effect; provided, however, that any
adjustments which by reason of this subsection (vi) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
(d) In case of any (i) consolidation or merger of the
Company with or into another entity (other than a consolidation or merger in
which the Company is the surviving entity), (ii) sale, transfer, lease or
conveyance of all or substantially all the assets of the Company, (iii)
reclassification, capital reorganization or change in the Company's Common Stock
(other than solely a change in par value, or from par value to no par value), or
(iv) consolidation or merger of another entity into the Company and in which
there is a reclassification or change of the Company's Common Stock (other than
solely a change in par value or from par value to no par value), then each
holder of shares of Series D then outstanding shall have the right thereafter to
convert each share of Series D held by such holder into the same kind and amount
of shares of stock, other securities, cash or other property (or any combination
thereof) which the holder would have received had the holder converted such
holder's shares of Series D to Common Stock immediately prior to the occurrence
of such event. If the consideration into which Series D is convertible following
any such event consists of common stock of the Company or the surviving
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entity (as the case may be), then from and after the occurrence of such event
the conversion price for each share of Series D into such common stock shall be
subject to the same anti-dilution and other adjustments described herein,
applied as if such common stock were Common Stock of the Company.
No fractional shares of Common Stock shall be issued upon any
conversion, but, in lieu thereof, there shall be paid to each holder of shares
of Series D surrendered for conversion who, but for the provisions of this
paragraph would be entitled to receive a fraction of a share of Common Stock on
such conversion, as soon as practicable after the date shares of Series D are
surrendered for conversion an amount in cash equal to the same fraction of the
Market Value on the date of surrender of a full share of Common Stock, unless
the Board of Directors or a duly authorized committee thereof shall determine to
adjust fractional shares by the issue of fractional scrip certificates or in
some other manner. If more than one share of Series D is surrendered for
conversion at one time by the same holder, the number of full shares of Common
Stock which shall be issuable on conversion thereof shall be computed on the
basis of all such shares so surrendered.
(e) In addition to the foregoing adjustments, the Company
may, but shall not be required to, make such reductions in the conversion price
as it considers to be advisable in order that any event treated for federal
income tax purposes as a dividend of stock or stock rights will be taxable to
the recipients to the minimum extent determined to be reasonable under the
circumstances as determined by the Board of Directors.
(f) Whenever any adjustment is required in the conversion
price of Series D, the Company shall forthwith (A) keep available at each of its
offices and agencies at which shares of Series D are convertible a statement
describing in reasonable detail the adjustment and the method of calculation
used; and (B) cause a copy of such statement to be mailed to the holders of
record of the shares of Series D.
(g) If in any case a state of facts occurs wherein in the
opinion of the Board of Directors the other provisions of this Section D.(2)(B)
with respect to conversion rights are not strictly applicable or if strictly
applied would not fairly protect the conversion rights of the shares of Series D
in accordance with essential intent and principles of such provisions, then the
Board shall make an adjustment in the application of such provisions, in
accordance with the essential intent and principles so as to protect such
conversion rights aforesaid, all as the Board in its discretion shall determine.
(h) The Company shall at all times reserve and keep
available out of the authorized but unissued shares of Common Stock the maximum
number of shares of Common Stock into which all shares of Series D from time to
time outstanding are convertible, but shares of Common Stock held in the
treasury of the
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<PAGE> 24
Company may in its discretion be delivered upon any conversion of shares of
Series D.
(i) Shares of Series D converted into Common Stock shall
have the status of authorized but unissued shares of Series D provided that the
Board has the authority to declare at any time that such converted shares shall,
after conversion, have the status of authorized but unissued shares of preferred
stock of the Company without designation as to series (until once more
designated as a part of a particular series by the Board of Directors) and
provided that in the event a Series D Notice of Redemption for all outstanding
shares of Series D is made, then all shares converted prior to the redemption
date shall as of the redemption date automatically have the status of such
authorized but unissued shares of preferred stock of the Company without
designation as to series.
7. Liquidation Preference. In the event of any liquidation,
dissolution or winding up of the Company, voluntary or involuntary, the holders
of the outstanding shares of Series D shall be entitled to receive out of the
assets of the Company, or the proceeds thereof, available for distribution to
shareholders, before any distribution of assets is made to the holders of Common
Stock or other Series D Junior Stock, liquidating distributions in the amount of
$100.00 per share plus dividends accrued and unpaid for the then-current Series
D Dividend Period (without accumulation of accrued and unpaid dividends for
prior Series D Dividend Periods) to the date fixed for such liquidation,
dissolution or winding up. After payment of the full amount of the liquidating
distribution to which they are entitled, the holders of shares of Series D will
not be entitled to any further participation in any distribution of assets of
the Company. All distributions made with respect to the shares of Series D in
connection with such liquidation, dissolution or winding up of the Company shall
be made pro rata to the holders entitled thereto.
If, upon any liquidation, dissolution or winding up of the Company, the
assets of the Company, and proceeds thereof, available for distribution among
the holders of the shares of Series D and of any Series D Parity Stock, shall be
insufficient to pay in full the preferential amount set forth in the preceding
paragraph above to the holders of the shares of Series D and liquidating
payments on all such Series D Parity Stock, then such assets and proceeds shall
be distributed among the holders of Series D and all such Series D Parity Stock
ratably in accordance with the respective amounts which would be payable on such
shares of Series D and any such Series D Parity Stock if all amounts payable
thereon were paid in full.
8. Payments on Stock Ranking Junior. In the event of any
such liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, unless and until payment in full is made to the holders of all
outstanding shares of Series D of the liquidation distribution to which they are
entitled, no
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<PAGE> 25
dividend or other distribution shall be made to the holders of the Common Stock
or any other Series D Junior Stock, and no purchase, redemption or other
acquisition for any consideration by the Company shall be made in respect of the
shares of the Common Stock or such other class of junior Stock.
Neither a consolidation or merger of the Company into or with another
entity or entities nor the sale, transfer or exchange (for cash, shares of
equity stock, securities or other consideration) of all or substantially all of
the property and assets of the Company, shall be deemed to be a liquidation,
dissolution or winding up of the Company within the meaning of this Section
D.(2)(B).
9. Sinking Fund. No sinking fund shall be provided for
the purchase of redemption of shares of Series D.
10. Preemptive Rights. No holder of shares of Series D
shall have any preemptive right to subscribe to stock, obligations, warrants,
rights to subscribe to stock, or other securities of this corporation of any
class, whether now or hereafter authorized.
(C) 7.60% Noncumulative Perpetual Preferred Stock, Series E.
1. Designation. There shall initially be a series of
preferred stock whose designation shall be "7.60% Noncumulative Perpetual
Preferred Stock, Series E" ("Series E"). The number of shares of Series E shall
be 2,000,000. The liquidation preference of Series E shall be $25.00 per share
(plus accrued and unpaid dividends for the then-current dividend period up to
the date fixed for liquidation, dissolution or winding up).
2. Rank. The shares of Series E shall, with respect to
dividend rights and rights on liquidation, winding up and dissolution of the
Company, rank prior to the Common Stock and to all other classes and series of
equity securities of the Company now or hereafter authorized, issued or
outstanding, other than any classes or series of equity securities of the
Company either (a) ranking on a parity with shares of Series E as to dividend
rights and rights upon liquidation, winding up or dissolution of the Company
(the "Series E Parity Stock"), or (b) ranking senior to shares of Series E as to
dividend rights and rights upon liquidation, winding up or dissolution of the
Company (the Common Stock and such other classes and series of equity securities
other than those described in (a) or (b) collectively may be referred to herein
as the "Series E Junior Stock"). The shares of Series E shall be subject to the
creation of such Series E Parity Stock and such Series E Junior Stock to the
extent not expressly prohibited by these Articles.
Any class or classes of stock of the Company shall be deemed to rank
prior to Series E as to dividends and as to distribution of assets upon
liquidation, dissolution or winding up if the holders
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<PAGE> 26
of such class shall be entitled to the receipt of dividends and of amounts
distributable upon liquidation, dissolution or winding up in preference or
priority to the holders of shares of Series E.
3. Noncumulative Dividends and Dividend Rate. Holders of
shares of Series E shall be entitled to receive, when, as and if declared by the
Board of Directors, or a duly authorized committee thereof, out of funds legally
available therefor, cash dividends from the date of issue thereof at the annual
rate of $1.90 per share, payable quarterly in arrears, on February 15, May 15,
August 15 and November 15 (each a "Series E Dividend Payment Date") of each
year, commencing on the first Series E Dividend Payment Date after issuance of
the shares of Series E; provided, however, that if any such day is a
non-business day, the Series E Dividend Payment Date will be the next business
day. Each declared dividend shall be payable to holders of record as they appear
at the close of business on the stock books of the Company on such record dates,
not more than 30 calendar days and not less than 10 calendar days preceding the
payment dates therefor, as are determined by the Board of Directors of the
Company or a duly authorized committee thereof (each of such dates a "Series E
Record Date"). Quarterly dividend periods (each a "Series E Dividend Period")
shall commence on and include the fifteenth day of February, May, August and
November of each year (except as set forth above with respect to the initial
Series E Dividend Period) and shall end on and include the day next preceding
the next following Series E Dividend Payment Date.
Dividends on the shares of Series E shall be noncumulative so that if a
dividend on the shares of Series E with respect to any Series E Dividend Period
is not declared by the Board of Directors of the Company, or any duly authorized
committee thereof, then the Company shall have no obligation at any time to pay
a dividend on the shares of Series E in respect of such Series E Dividend
Period. Holders of the shares of Series E shall not be entitled to any
dividends, whether payable in cash, property or stock, in excess of the
noncumulative dividends declared by the Board of Directors, or a duly authorized
committee thereof, as set forth herein.
Any Series E Parity Stock issued by the Company shall only have
dividend periods which end on the same date as a Series E Dividend Period. No
full dividends shall be declared or paid or set apart for payment on any Series
E Parity Stock in respect of any such dividend period unless full dividends on
Series E for the Series E Dividend Period ending on the same date as such
dividend period shall have been paid or contemporaneously are declared and paid
or declared and a sum sufficient for the payment thereof set apart for such
payment.
If at any time with respect to any Series E Dividend Period dividends
are not declared and paid in full (or declared and a sum sufficient for such
full payment so set apart) upon the shares of Series E, dividends upon shares of
Series E and dividends on any shares of Series E Parity Stock outstanding shall
only be declared
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<PAGE> 27
by the Board of Directors or a duly authorized committee thereof pro rata with
respect thereto, so that the amount of dividends declared per share on Series E
and such Series E Parity Stock shall bear to each other the same ratio that
accrued dividends per share on the shares of Series E for such Series E Dividend
Period (which shall not include any accumulation in respect of unpaid dividends
for prior Series E Dividend Periods) and full dividends, including
accumulations, if any, on shares of Series E Parity Stock, bear to each other.
Unless full dividends have been declared and paid (or declared and a
sum sufficient for such full payment set apart for payment) on all outstanding
shares of Series E for the immediately preceding Series E Dividend Period, the
Company shall not declare or pay any dividends (other than in Common Stock or
other Series E Junior Stock) or set any amount aside for payment thereof or make
any other distribution on the Common Stock or on any other Series E Junior
Stock, nor shall any Common Stock nor any Series E Junior Stock be redeemed (or
any moneys be paid to or made available for a sinking fund for the redemption of
any shares of any such stock), or any Series E Junior Stock or Series E Parity
Stock be purchased or otherwise acquired by the Company for any consideration
except by conversion into or exchange for Series E Junior Stock.
Regardless of the length of the initial Series E Dividend Period and
whether or not the time period from the date of issue of the shares of Series E
to the Series E Dividend Payment Date constitutes a full quarter, a full
quarterly dividend of $.475 per share shall be paid on the initial Series E
Dividend Payment Date. Dividends payable for any other period shorter than a
full Series E Dividend Period shall be computed on the basis of twelve 30-day
months and a 360-day year. Dividends payable for each full quarterly dividend
period shall be computed by dividing the annual dividend rate by four.
4. Voting Rights. Except as indicated below and except as
otherwise required by applicable law, the holders of shares of Series E will not
be entitled to vote for any purpose.
As long as any shares of Series E remain outstanding, the consent of
the holders of at least a majority of the shares of Series E at the time
outstanding (unless the vote or consent of the holders of a greater number of
shares shall then be required by law), given in person by proxy, by a vote at a
meeting of the holders of Series E called for such purpose at which the holders
of shares of Series E shall vote together as a separate class, shall be
necessary (i) to issue or authorize any additional class of equity stock (it
being understood that subordinated debt instruments, including mandatory
convertible debt, are not for these purposes equity stock) ranking prior to
Series E as to dividends or upon liquidation, winding up or dissolution or which
possess rights to vote separately as one class with Series E on a basis of more
than one vote for each $25.00 of stated liquidation preference thereof
(excluding any liquidation preference for
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accrued but unpaid dividends) or to issue or authorize any obligation or
security convertible into or evidencing a right to purchase, or to reclassify
any authorized stock of the Company into, any such additional class of equity
stock or (ii) to repeal, amend or otherwise change any of the provisions of
these Articles in any manner which adversely affects the powers, preferences,
voting power or other rights or privileges of Series E; provided, however, that
amending these Articles to increase the number of authorized shares of common or
preferred stock shall not be deemed to be included within the scope of (ii)
above.
In connection with any matter on which holders of Series E are entitled
to vote including, without limitation, the election of directors as set forth
below or any matter on which the holders of Series E are entitled to vote as one
class or otherwise pursuant to law or the provisions of these Articles, each
holder of Series E shall be entitled to one vote for each share of Series E held
by such holder.
To the extent permitted by law, if the equivalent of six full quarterly
dividends on Series E, whether or not consecutive, are not declared and paid,
the holders of shares of Series E, together with the holders of any Series E
Parity Stock as to which the payment of dividends is in arrears and unpaid in an
aggregate amount equal to or exceeding the amount of dividends payable for six
quarterly dividend periods (or if dividends are payable other than on a
quarterly basis the number of dividend periods, whether or not consecutive,
containing in the aggregate not less than 540 calendar days) and which by its
terms provides for voting rights similar to those of the shares of Series E (the
"Series E Voting Parity Stock"), shall have the exclusive right at the next
annual meeting of shareholders for the election of directors or at a special
meeting called as described below, voting separately as one class, to elect two
directors for newly created directorships of the Company, each director to be in
addition to the number of directors constituting the Board of Directors of the
Company immediately prior to the accrual of such right (the remaining directors
to be elected by the other class or classes of stock entitled to vote therefor).
At any time when the right to elect such directors shall have so vested, the
Company may, and upon written request of the holders of record of not less than
20% of the total number of shares of Series E and such Series E Voting Parity
Stock then outstanding shall, call a special meeting of the holders of such
shares to fill such newly created directorships. In the case of such a written
request, such special meeting shall be held within 90 days after delivery of
such request and in either case, at the place and upon the notice provided by
law and in the Bylaws of the Company, provided that the Company shall not be
required to call such a special meeting if such request is received less than
120 days before the date fixed for the next annual meeting of shareholders. The
right of holders of shares of Series E to elect directors shall continue until
dividends on the shares of Series E, have been declared and paid in full for
four consecutive Series E Dividend Periods, at which time such voting
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right of the holders of the shares of Series E and the Series E Voting Parity
Stock shall, without further action, terminate, subject to revesting in the
event of each and every subsequent failure of the Company to pay such dividends
for the requisite number of periods as described above.
The term of office of all directors elected by the holders of the
shares of Series E and the Series E Voting Parity Stock in office at any time
when the aforesaid voting right is vested in such holders shall terminate upon
the election of their successors at any meeting of shareholders for the purpose
of electing directors; provided however, that without further action and unless
otherwise required by law, any director who shall have been elected by holders
of the shares of Series E and the Series E Voting Parity Stock as provided
herein may be removed at any time, either with or without cause, by the
affirmative vote of the holders of record of a majority of the outstanding
shares of Series E and the Series E Voting Parity Stock, voting separately as
one class, at a duly held shareholders' meeting. Upon termination of the
aforesaid voting right in accordance with the foregoing provisions, the term of
office of all directors elected by the holders of the shares of Series E and the
Series E Voting Parity Stock pursuant thereto then in office shall, without
further action, thereupon terminate unless otherwise required by law. Upon such
termination the number of directors constituting the Board of Directors of the
Company shall, without further action, be reduced by two, subject always to the
increase of the number of directors pursuant to the foregoing provisions in the
case of the future right of holders of the shares of Series E and the Series E
Voting Parity Stock to elect directors as provided above.
Unless otherwise required by law, in case of any vacancy occurring
among the directors so elected, the remaining director who shall have been so
elected may appoint a successor to hold office for the unexpired term of the
director whose place shall be vacant, and if all directors so elected by the
holders of the shares of Series E and the Series E Voting Parity Stock shall
cease to serve as directors before their term shall expire, the holders of the
shares of Series E and the Series E Voting Parity Stock then outstanding may, at
a meeting of such holders duly held, elect successors to hold office of the
unexpired terms of the directors whose places shall be vacant.
The directors to be elected by the shares of Series E and the Series E
Voting Parity Stock, voting together as a class, shall not become members of any
of the three classes of directors otherwise required by these Articles. If these
Articles and applicable law were construed to require classification of such
directors and as a result, or if for any other reason, the holders of the shares
of Series E and the Series E Voting Parity Stock are not able to elect the
specified number of directors at the next annual meeting of shareholders in the
manner described above, the Company shall use its best efforts to take all
actions necessary to permit the full exercise of such voting rights (including,
if necessary, taking
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action to increase the authorized number of directors standing for election at
such next annual meeting of shareholders or seeking to amend, alter or change
these Articles and bylaws of the Company).
5. Optional Redemption. The shares of Series E will not
be redeemable before September 15, 1998. On or after September 15, 1998, the
shares of Series E are redeemable at the option of the Company for cash, in
whole or in part, at any time and from time to time, at $25.00 per share, to the
extent that the Company has funds legally available therefor, plus unpaid
dividends (whether or not declared) for the then-current Series E Dividend
Period up to the date fixed for redemption (without accumulation of accrued and
unpaid dividends for prior Series E Dividend Periods) (the "Series E Redemption
Price") without interest.
The Company shall not redeem or set aside funds for the redemption of
any Series E Parity Stock unless prior to or contemporaneously therewith it
redeems, or sets aside funds for the redemption of, a number of shares of Series
E whose liquidation preference bears the same relationship to the aggregate
liquidation preference of all shares of Series E then outstanding as the
liquidation preference of such Series E Parity Stock to be redeemed bears to the
aggregate liquidation preference of all Series E Parity Stock then outstanding.
Notwithstanding the foregoing, the Company may redeem Series E Parity Stock
without redeeming a proportional amount of Series E in the event (i) such Series
E Parity Stock is convertible into Common Stock and (ii) the average of the
daily closing prices of Common Stock for the 30-day period ending 15 days prior
to the date of the notice of redemption is in excess of the conversion price of
such Series E Parity Stock.
In the event that fewer than all the outstanding shares of Series E are
to be redeemed, the number of shares to be redeemed shall be determined by the
Board of Directors and the shares to be redeemed shall be determined by lot or
pro rata as may be determined by the Board of Directors or by any other method
as may be determined by the Board of Directors in its sole discretion to be
equitable.
In the event the Company shall redeem shares of Series E, notice of
such redemption (a "Series E Notice of Redemption") shall be given by first
class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior
to the redemption date, to each holder of record of the shares to be redeemed,
at such holder's address as the same appears on the stock register of the
Company. Each Series E Notice of Redemption shall include the following
information: (1) the redemption date; (2) the number of shares of Series E to be
redeemed and, if fewer than all the shares held by such holder are to be
redeemed, the number of such shares to be redeemed from such holder; (3) the
Series E Redemption Price (specifying the amount of unpaid dividends to be
included therein); (4) the place or places where certificates for such shares
are to be surrendered for payment of the Series E Redemption Price; (5) that
dividends on the shares to be redeemed will cease to
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<PAGE> 31
accrue as of such redemption date; and (6) the provision hereunder pursuant to
which such redemption is being made.
On or after a redemption date, each holder of shares of Series E that
were called for redemption shall surrender the certificate or certificates
evidencing such shares to the Company at any place designated for such surrender
in the Series E Notice of Redemption and shall then be entitled to receive
payment of the Series E Redemption Price for each share. If less than all the
shares represented by one share certificate are to be redeemed, the Company
shall issue a new share certificate for the shares not redeemed.
By noon of the business day immediately preceding the redemption date,
the Company shall irrevocably deposit with First Interstate Company of
Washington, N.A., in its capacity as paying agent with respect to the shares of
Series E or any successor paying agent (the "Series E Paying Agent"), an
aggregate amount of immediately available funds or short-term money market
instruments or U.S. Treasury Securities sufficient to pay the Series E
Redemption Price specified herein for the shares of Series E to be redeemed on
such date and shall give the Series E Paying Agent irrevocable instructions to
pay such Series E Redemption Price to the holders of record of the shares of
Series E called for redemption.
If a Series E Notice of Redemption shall have been given and the
deposit referred to in the preceding paragraph made, then dividends shall cease,
as of the redemption date, to accumulate on the shares of Series E called for
redemption and all other rights of holders of the shares so called for
redemption shall cease on and after the redemption date, except the right of
holders of such shares to receive the Series E Redemption Price against delivery
of such shares, but without interest, and such shares shall cease to be
outstanding. The Company shall be entitled to receive, from time to time, from
the Series E Paying Agent the interest, if any, earned on such monies deposited
with the Series E Paying Agent, and the holders of any shares to be redeemed
with such monies shall have no claim to any such interest. With regard to any
other funds so deposited that are unclaimed by holders of shares at the end of
two years from such redemption date, the Series E Paying Agent shall, upon
demand, pay over to the Company such amount remaining on deposit, the Series E
Paying Agent shall thereupon be relieved of all responsibility to the holders of
such shares and the holders of shares of Series E so called for redemption shall
thereafter be entitled to look only to the Company for payment thereof.
Any shares of Series E which shall at any time have been redeemed
shall, after such redemption, have the status of authorized but unissued shares
of preferred stock of the Company, without designation as to series until such
shares are once more designated as part of a particular series by the Board of
Directors.
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6. No Conversion Rights. Holders of shares of Series E
will have no right to convert shares of Series E into Common Stock or any other
security of the Company.
7. Liquidation Preference. In the event of any
liquidation, dissolution or winding up of the Company, voluntary or involuntary,
the holders of the outstanding shares of Series E shall be entitled to receive
out of the assets of the Company, or the proceeds thereof, available for
distribution to shareholders, before any distribution of assets is made to the
holders of Common Stock or other Series E Junior Stock, liquidating
distributions in the amount of $25.00 per share plus dividends accrued and
unpaid for the then-current Series E Dividend Period (without accumulation of
accrued and unpaid dividends for prior Series E Dividend Periods) to the date
fixed for such liquidation, dissolution or winding up. After payment of the full
amount of the liquidating distribution to which they are entitled, the holders
of shares of Series E will not be entitled to any further participation in any
distribution of assets of the Company. All distributions made with respect to
the shares of Series E in connection with such liquidation, dissolution or
winding up of the Company shall be made pro rata to the holders entitled
thereto.
If, upon any liquidation, dissolution or winding up of the Company, the
assets of the Company, and proceeds thereof, available for distribution among
the holders of the shares of Series E and of any Series E Parity Stock, shall be
insufficient to pay in full the preferential amount set forth in the preceding
paragraph above to the holders of the shares of Series E and liquidating
payments on all such Series E Parity Stock, then such assets and proceeds shall
be distributed among the holders of Series E and all such Series E Parity Stock
ratably in accordance with the respective amounts which would be payable on such
shares of Series E and any such Series E Parity Stock if all amounts payable
thereon were paid in full.
8. Payments on Stock Ranking Junior. In the event of any
such liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, unless and until payment in full is made to the holders of all
outstanding shares of Series E of the liquidation distribution to which they are
entitled, no dividend or other distribution shall be made to the holders of the
Common Stock or any other Series E Junior Stock, and no purchase, redemption or
other acquisition for any consideration by the Company shall be made in respect
of the shares of the Common Stock or such other class of junior Stock.
Neither a consolidation or merger of the Company into or with another
entity or entities nor the sale, transfer or exchange (for cash, shares of
equity stock, securities or other consideration) of all or substantially all of
the property and assets of the Company, shall be deemed to be a liquidation,
dissolution or winding up of the Company within the meaning of this Section
D.(A)(3).
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9. Sinking Fund. No sinking fund shall be provided for
the purchase of redemption of shares of Series E.
10. Preemptive Rights. No holder of shares of Series E
shall have any preemptive right to subscribe to stock, obligations, warrants,
rights to subscribe to stock, or other securities of this corporation of any
class, whether now or hereafter authorized.
ARTICLE III
Preemptive Rights
The shareholders of the Company have no preemptive rights to acquire
additional shares of the Company.
ARTICLE IV
Board of Directors
The Company shall be managed by a Board of Directors. The number of
directors shall be stated in the Company's Bylaws, provided, however, that such
number shall be not less than five (5). In the absence of such a provision in
the Bylaws, the board shall consist of the number of directors constituting the
initial Board of Directors. The initial directors shall be five (5) in number.
There shall be three classes of elected directors designated as Class 1, Class
2, and Class 3 directors. Each class shall contain one-third of the total number
of directors, as near as may be. The terms of the Class 1 directors shall expire
at the first annual shareholders' meeting after their election. The terms of the
Class 2 directors shall expire at the second annual shareholders' meeting after
their election. The terms of the Class 3 directors shall expire at the third
annual shareholders' meeting after their election. At each annual shareholders'
meeting held thereafter, directors shall be chosen for a term of three years to
succeed those whose terms expire. A vacancy on the Board of Directors may be
filled by the Board in accordance with the applicable provisions of the
Company's Bylaws. A director elected to fill a vacancy shall be elected for a
term of office continuing only until the next election of directors by
shareholders.
ARTICLE V
Removal of Directors
Any director may be removed by the shareholders only with good cause
and in accordance with the applicable provisions of the Company's Bylaws.
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<PAGE> 34
ARTICLE VI
Cumulative Voting
The right to cumulate votes in the election of directors shall not
exist with respect to shares of stock of the Company.
ARTICLE VII
Bylaws
The Board of Directors has the power to adopt, amend or repeal the
Bylaws of the Company, subject to the concurrent power of the shareholders, by
at least two-thirds affirmative vote of the shares of the Company entitled to
vote thereon, to adopt, amend or repeal the Bylaws.
ARTICLE VIII
Dealings With Interested Persons
The Company may enter into contracts and otherwise transact business as
vendor, purchaser, or otherwise, with its directors, officers, and shareholders
and with corporations, associations, firms, and entities in which they are or
may become interested as directors, officers, shareholders, members, or
otherwise, as freely as though such interest did not exist; provided, however,
that no director or officer shall become an indorser, surety or guarantor or in
any manner an obligor for any loan made by the Company, and provided further
that no director or officer shall, for himself or as agent or partner of
another, directly or indirectly borrow any of the funds or deposits held by the
Company or become the owner of real property upon which the Company holds a
mortgage. A loan to or a purchase by a corporation in which a director or
officer of the Company is a stockholder of fifteen percent (15%) or more of the
total outstanding stock, or in which such director or officer and other
directors of the Company are collectively stockholders of twenty-five percent
(25%) or more of the total outstanding stock, shall be deemed a loan to or a
purchase by such director or officer within the meaning of this Article, except
when the loan to or purchase by such corporation occurred without his or her
knowledge or against his or her protest. Except as otherwise provided in this
Article and in the absence of fraud, the fact that any director, officer,
shareholder, or any corporation, association, firm or other entity of which any
director, officer, or shareholder is interested, is in any way interested in any
transaction or contract shall not make the transaction or contract void or
voidable, or require the director, officer, or shareholder to account to the
Company for any profits therefrom if the transaction or contract is or shall be
authorized, ratified, or approved by (i) vote of a majority of a quorum of the
Board of Directors excluding any interested director or directors, (ii) the
written consent of the holders of a majority of the shares entitled to vote, or
(iii) a general resolution approving the acts of the directors and officers
adopted at a shareholders meeting by vote of
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<PAGE> 35
the holders of the majority of the shares entitled to vote. Nothing herein
contained shall create any liability in the events described or prevent the
authorization, ratification or approval of such transactions or contracts in any
other manner.
ARTICLE IX
Shareholder Vote Required to Approve Plan of Merger
If pursuant to the Washington Business Corporation Act the Company's
shareholders are required to approve a plan of merger, then (a) if two-thirds of
the directors vote to recommend the plan of merger to the shareholders, the plan
of merger shall be approved by a vote of the holders of a majority of the
outstanding voting shares of the Company; (b) in all other cases where a
shareholder vote is required by the Washington Business Corporation Act, such
Act, as it may be amended, will control.
ARTICLE X
Indemnification
The Company has the power to indemnify, and to purchase and maintain
insurance for, its directors, officers, employees, and other persons and agents
against all liability, damage, and expenses arising from or in connection with
service for or at the request of, employment by, or other affiliation with the
Company or other firms or entities.
ARTICLE XI
Business Combinations
A. For the purposes of this Article XI:
(1) The terms "Affiliate" and "Associate" shall have the
meanings attached to them by Rule 12b-2 under the Securities Exchange Act of
1934, as amended, or any similar successor rule.
(2) The term "beneficial owner" and correlative terms shall
have the meaning as set forth in Rule 13d-3 under the Securities Exchange Act of
1934, as amended, or any similar successor rule. Without limitation and in
addition to the foregoing, any shares of Voting Stock of the Company which any
Major Stockholder has the right to vote or to acquire (i) pursuant to any
agreement, (ii) by reason of tenders of shares by shareholders of the Company in
connection with or pursuant to a tender offer made by such Major Stockholder
(whether or not any tenders have been accepted, but excluding tenders which have
been rejected), or (iii) upon the exercise of conversion rights, warrants,
options or otherwise, shall be deemed "beneficially owned" by such Major
Stockholder.
(3) The term "Business Combination" shall mean:
-35-
<PAGE> 36
(a) any merger or consolidation (whether in a single
transaction or a series of related transactions, including a series of separate
transactions with a Major Stockholder, any Affiliate or Associate thereof or any
Person acting in concert therewith) of the Company or any Subsidiary with or
into a Major Stockholder or of a Major Stockholder into the Company or a
Subsidiary;
(b) any sale, lease, exchange, transfer, distribution to
stockholders or other disposition, including without limitation, a mortgage,
pledge or any other security device, to or with a Major Stockholder by the
Company or any of its Subsidiaries (in a single transaction or a series of
related transactions) of all, substantially all or any Substantial Part of the
assets of the Company or a Subsidiary (including, without limitation, any
securities of a Subsidiary);
(c) the purchase, exchange, lease or other acquisition by
the Company or any of its Subsidiaries (in a single transaction or a series of
related transactions) of all, substantially all or any Substantial Part of the
assets or business of a Major Stockholder;
(d) the issuance of any securities, or of any rights,
warrants or options to acquire any securities, of the Company or a Subsidiary to
a Major Stockholder or the acquisition by the Company or a Subsidiary of any
securities, or of any rights, warrants or options to acquire any securities, of
a Major Stockholder;
(e) any reclassification of Voting Stock, recapitalization
or other transaction (other than a redemption in accordance with the terms of
the security redeemed) which has the effect, directly or indirectly, of
increasing the proportionate amount of Voting Stock of the Company or any
Subsidiary which is beneficially owned by a Major Stockholder, or any partial or
complete liquidation, spin off, split off or split up of the Company or any
Subsidiary; provided, however, that this Section A(2)(e) shall not relate to any
transaction of the types specified herein that has been approved by a majority
of the Continuing Directors; and
(f) any agreement, contract or other arrangement providing
for any of the transactions described herein.
(4) The term "Continuing Director" shall mean (i) a person who
was a member of the Board of Directors of the Company immediately prior to the
time that any then-existing Major Stockholder became a Major Stockholder, or
(ii) a person designated (before initially becoming a director) as a Continuing
Director by a majority of the then Continuing Directors. All references to a
vote of the Continuing Directors shall mean a vote of the total number of
Continuing Directors.
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<PAGE> 37
(5) The term "Major Stockholder" shall mean any Person which,
together with its Affiliates and Associates and any Person acting in concert
therewith, is the beneficial owner of five percent (5%) or more of the votes
held by the holders of the outstanding shares of the Voting Stock of the
Company, and any Affiliate or Associate of a Major Stockholder, including a
Person acting in concert therewith. The term "Major Stockholder" shall not
include a Subsidiary.
(6) The term "other consideration to be received" shall
include, without limitation, Voting Stock retained by the Company's existing
shareholders in the event of a Business Combination which is a merger or
consolidation in which the Company is the surviving corporation.
(7) The term "Person" shall mean any individual, corporation,
partnership or other person, group or entity (other than the Company, any
Subsidiary or a trustee holding stock for the benefit of employees of the
Company or its Subsidiaries, or any one of them, pursuant to one or more
employee benefit plans or arrangements). When two or more persons act as a
partnership, limited partnership, syndicate, association or other group for the
purpose of acquiring, holding or disposing of shares of stock, such
partnerships, syndicate, association or group will be deemed a "Person."
(8) The term "Subsidiary" shall mean any business entity fifty
percent (50%) or more of which is beneficially owned by the Company.
(9) The term "Substantial Part," as used in reference to the
assets of the Company or any Subsidiary or of any Major Stockholder means assets
having a value of more than five percent (5%) of the total consolidated assets
of the Company and its Subsidiaries as of the end of the Company's most recent
fiscal year ending prior to the time the determination is made.
(10) The term "Voting Stock" shall mean the stock or other
securities entitled to vote upon any action to be taken in connection with any
Business Combination or entitled to vote generally in the election of directors,
including stock or other securities convertible into Voting Stock.
B. Notwithstanding any other provisions of these Articles of
Incorporation and except as set forth in Section C of this Article XI, neither
the Company nor any Subsidiary shall be a party to a Business Combination
unless:
(1) The Business Combination was approved by the Board of Directors
of the Company prior to the Major Stockholder involved in the Business
Combination becoming such; or
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<PAGE> 38
(2) The Major Stockholder involved in the Business Combination
sought and obtained the unanimous prior approval of the Board of Directors to
become a Major Stockholder and the Business Combination was approved by a
majority of the Continuing Directors; or
(3) The Business Combination was approved by at least eighty percent
(80%) of the Continuing Directors of the Company; or
(4) The Business Combination was approved by at least ninety-five
percent (95%) of the outstanding Voting Stock beneficially owned by shareholders
other than any Major Stockholder.
C. The approval requirements of Section B shall not apply if:
(1) The Business Combination is approved by at least the majority
vote of the shares of the Voting Stock and the majority vote of the shares of
the Voting Stock beneficially owned by shareholders other than any Major
Stockholder; and
(2) All of the following conditions are satisfied:
(a) The aggregate of the cash and the fair market value of other
consideration to be received per share (as adjusted for stock splits, stock
dividends, reclassification of shares into a lesser number and similar events)
by holders of the common stock of the Company in the Business Combination is not
less than the higher of (i) the highest per share price (including brokerage
commissions, soliciting dealers' fees, dealer-management compensation, and other
expenses, including, but not limited to, costs of newspaper advertisements,
printing expenses and attorneys' fees) paid by the Major Stockholder in
acquiring any of the Company's common stock; or (ii) an amount which bears the
same or a greater percentage relationship to the market price of the Company's
common stock immediately prior to the announcement of such Business Combination
as the highest per share price determined in (i) above bears to the market price
of the Company's common stock immediately prior to the commencement of
acquisition of the Company's common stock by such Major Stockholder, but in no
event in excess of two times the highest per share price determined in (i)
above; and
(b) The consideration to be received in such Business
Combination by holders of the common stock of the Company shall be, except to
the extent that a stockholder agrees otherwise as to all or a part of his or her
shares, in the same form and of the same kind as paid by the Major Stockholder
in acquiring his Voting Stock.
(c) After becoming a Major Stockholder and prior to the
consummation of such Business Combination, (i) such Major Stockholder shall not
have acquired any newly issued shares of
-38-
<PAGE> 39
capital stock, directly or indirectly, from the Company or a Subsidiary (except
upon conversion of convertible securities acquired by it prior to becoming a
Major Stockholder or upon compliance with the provisions of this Article XI or
as a result of a pro rata stock dividend or stock split), and (ii) such Major
Stockholder shall not have received the benefit, directly or indirectly (except
proportionately as a shareholder), of any loans, advances, guarantees, pledges
or other financial assistance or tax credits provided by the Company or a
Subsidiary, or made any major changes in this Company's business or equity
capital structure; and
(d) A proxy statement responsive to the requirements of the
Securities Exchange Act of 1934, whether or not the Company is then subject to
such requirements, shall be mailed to all shareholders of the Company for the
purpose of soliciting shareholder approval of such Business Combination and
shall contain on the front thereof, in a prominent place, (i) any
recommendations as to the advisability (or inadvisability) of the Business
Combination which the Continuing Directors may choose to state, and (ii) the
opinion of a reputable national investment banking firm as to the fairness (or
lack thereof) of the terms of such Business Combination, from the point of view
of the remaining shareholders of the Company. Such investment banking firm shall
be engaged solely on behalf of the remaining shareholders, be paid a reasonable
fee for their services by the Company upon receipt of such opinion, and be one
of the so-called major bracket investment banking firms which has not previously
been associated with such Major Stockholder and to be selected by a majority of
the Continuing Directors.
D. During the time a Major Stockholder exists, a resolution to
voluntarily dissolve the Company shall be adopted only upon: (1) the consent of
all of the Company's shareholders; or (2) the affirmative vote of at least
two-thirds of the total number of directors, the affirmative vote of the holders
of at least two-thirds of the shares of the Company entitled to vote thereon,
and the affirmative vote of the holders of at least two-thirds of the shares of
each class of shares entitled to vote thereon as a class, if any.
E. As to any particular transaction, the Continuing Directors shall
have the power and duty to determine, on the basis of information known to them:
(1) The amount of Voting Stock beneficially held by any Person;
(2) Whether a Person is an Affiliate or an Associate of another;
(3) Whether a Person is acting in concert with another;
(4) Whether the assets subject to any Business Combination
constitute a Substantial Part;
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<PAGE> 40
(5) Whether a proposed transaction is subject to the provisions of
this Article; and
(6) Such other matters with respect to which a determination is
required under this Article.
Any such determination shall be conclusive and binding for all purposes
of this Article.
F. The affirmative vote required by this Article is in addition to the
vote of the holders of any class or series of stock of the Company otherwise
required by law, these Articles of Incorporation, any resolution which has been
adopted by the Board of Directors providing for the issuance of a class or
series of stock or any agreement between the Company and any national securities
exchange.
ARTICLE XII
Amendment
The Company may increase or decrease its capital stock or otherwise
amend these Articles of Incorporation by a vote of the stockholders representing
two-thirds of its issued capital stock at any regular meeting or special meeting
duly called for that purpose in the manner prescribed by its Bylaws, provided,
however, that Article XI may not be repealed or amended in any respect unless
such action is approved by at least a ninety-five percent (95%) vote of the
outstanding Voting Stock beneficially owned by shareholders other than any Major
Stockholder, and provided further, that the Board of Directors may amend these
Articles without stockholder action as necessary to designate the preferences,
limitations, and relative rights of a class or series of shares of the Company
prior to issuance of any shares in that class or series. Notice of a meeting to
increase or decrease authorized capital stock shall first be published once a
week for four weekly issues in a newspaper published in Seattle, Washington, of
if there is no newspaper published in Seattle, then in some newspaper published
in King County, Washington. The notice shall state the purpose of the meeting,
the amount of the present authorized capital stock of the Company and the
proposed new authorized capital stock.
ARTICLE XIII
Limitation of Liability
A director of the Company shall not be personally liable to the Company
or its shareholders for monetary damages for conduct as a director ("Protected
Conduct"). However, Protected Conduct shall exclude (i) acts or omissions which
involve intentional misconduct by the director or a knowing violation of law by
the director, (ii) any conduct violating Section 23B.08.310 of the Revised Code
of Washington, and (iii) any transaction from which the director
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<PAGE> 41
will personally receive a benefit in money, property or services to which the
director is not legally entitled. If Washington law is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Company shall be eliminated
or limited to the fullest extent permitted by Washington law, as so amended. Any
repeal or modification of this Article XIII by the shareholders of the Company
shall not adversely affect any right or protection of a director of the Company
existing at the time of such repeal or modification.
ARTICLE XIV
The street address of the initial registered office of the Company is:
1201 Third Avenue
15th Floor
Seattle, WA 98101
and the name of the initial registered agent at that address is:
Marc R. Kittner
ARTICLE XV
The name and address of the incorporator is:
William L. Lynch
Washington Mutual Savings Bank
1201 Third Ave. 15th Floor
Seattle, WA 98101
ARTICLE XVI
Special Meeting of the Shareholders
Special meetings of the shareholders for any purpose or purposes,
unless otherwise prescribed by statute, may be called by the board of directors
or by any other person or persons authorized to do so in the Company's Bylaws.
Notwithstanding RCW 23B.07.020(1)(b) or any other provision in these Articles or
the Company's Bylaws, a special meeting of the shareholders may be called by the
shareholders only if the holders of at least twenty-five percent of all the
votes to be cast on any issue proposed to be considered at the proposed special
meeting sign, date and deliver to the Company's secretary one or more written
demands for the meeting describing the purpose or purposes for which it is to be
held.
-41-
<PAGE> 42
Executed this 28th day of November, 1994.
/s/ William L. Lynch
--------------------
William L. Lynch,
Corporate Secretary
-42-
<PAGE> 43
ARTICLES OF AMENDMENT
TO THE
RESTATED ARTICLES OF INCORPORATION
OF
WASHINGTON MUTUAL, INC.
Pursuant to the provisions of Chapter 23B.10 of the Washington Business
Corporation Act, WASHINGTON MUTUAL, INC., a Washington corporation, hereby
adopts the following articles of amendment to its restated articles of
incorporation:
FIRST: The name of the corporation is:
WASHINGTON MUTUAL, INC.
SECOND: The first sentence of Article IIA. of the Restated Articles of
Incorporation, "Capital Stock--Issuance of and Payment for Stock", is amended to
read in its entirety as follows:
"The total number of shares of capital stock which the Company has
authority to issue is 360,000,000 shares of which 350,000,000 shares
shall be shares of common stock with no par value per share and
10,000,000 shares shall be shares of preferred stock with no par value
per share."
THIRD: The amendment does not provide for an exchange, reclassification
or cancellation of any issued shares.
FOURTH: The foregoing amendment of the Articles of Incorporation was
adopted on October 16, 1996, by the board of directors of the corporation in
accordance with the provisions of RCW 23B.10.030, and duly approved by the
shareholders on December 18, 1996, in accordance with the provisions of RCW
23B.10.030 and RCW 23B.10.040.
EXECUTED this 18th day of December, 1996.
WASHINGTON MUTUAL, INC.
By: /s/ Kerry K. Killinger
--------------------------------------
Its: President and Chief Executive Officer
-------------------------------------
<PAGE> 1
Exhibit 5.1
FOSTER PEPPER & SHEFELMAN
December 31, 1996
Board of Directors
Washington Mutual, Inc.
1201 Third Avenue
Seattle, Washington 98101
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel for Washington Mutual, Inc., a Washington
corporation (the "Company"), in connection with the preparation and filing of a
Registration Statement ("Registration Statement") on Form S-3 under the
Securities Act of 1933, as amended, for up to 15,085,305 shares (the "Shares")
of the Company common stock, no par value per share (the "Common Stock"). Such
Shares are currently outstanding shares of Common Stock and are held of record
by the selling shareholders listed in the Registration Statement.
We have examined the Registration Statement and the action of the Board
of Directors of the Company in authorizing the issuance of the Shares and such
other documents and records as we deem necessary for the purpose of this
opinion.
Based on the foregoing, we are of the opinion that the Shares are
legally issued, fully paid and nonassessable.
We hereby consent to the filing of this Opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the heading "Legal
Matters" in the Prospectus in the Registration Statement.
Very truly yours,
/s/ FOSTER PEPPER & SHEFELMAN
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion of our report dated December 24, 1996 on the
Supplemental Consolidated Financial Statements of Washington Mutual, Inc. and
subsidiaries, and to the incorporation by reference in Amendment No. 1 to
Registration Statement No. 333-17291 of Washington Mutual, Inc. and related
Prospectus of our report dated February 14, 1996, appearing on Form 10-K and our
report dated October 15, 1996, appearing on Form 8-K dated October 18, 1996, as
amended by Form 8-K/A dated October 23, 1996, as amended by Form 8K/A dated
October 25, 1996.
We also consent to the reference to us under the heading "Experts" in such
Registration Statement and Prospectus.
/s/ Deloitte & Touche LLP
Seattle, Washington
December 30, 1996
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Keystone Holdings, Inc.
We consent to the use of our report dated January 26, 1996, except as to Note
27 to the consolidated financial statements, which is as of February 28, 1996,
on the consolidated financial statements of Keystone Holdings, Inc. and
subsidiaries as of December 31, 1995 and 1994, and for each of the years in the
three-year period ended December 31, 1995, incorporated herein by reference and
to the reference to our firm under the heading "Experts" in the Registration
Statement.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
December 31, 1996
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<PERIOD-END> SEP-30-1996
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