<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: October 23, 1997
Washington Mutual, Inc.
----------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
Washington
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0-25188 91-1653725
------------------------ ----------------------------
Commission File Number IRS Identification No.
1201 Third Avenue, Seattle, Washington 98101
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Address of Principal Executive Office Postal Code
206-461-2000
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Registrant's telephone number including area code
ITEM 5. OTHER EVENTS
On July 1, 1997, Great Western Financial Corporation ("GWFC") was
merged with and into a subsidiary of Washington Mutual, Inc. The merger was
accounted for as a pooling-of-interests. This Form 8-K contains audited
supplemental consolidated financial statements for Washington Mutual, Inc. for
the three years ended December 31, 1996 and unaudited supplemental consolidated
financial statements for the six months ended June 30, 1997 and 1996, which
have been restated as if the respective companies had been combined for all
periods presented. In addition, included herein is Management's Discussion and
Analysis of Financial Position and Results of Operations for the periods
presented in the supplemental consolidated financial statements.
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
(i) SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1996, 1995 AND 1994.
Independent Auditors' Report.
Supplemental Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994.
Supplemental Consolidated Statements of Financial Position as of
December 31, 1996 and 1995.
Supplemental Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994.
Supplemental Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.
Notes to Supplemental Consolidated Financial Statements
(ii) UNAUDITED SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1997 AND 1996.
Supplemental Consolidated Statements of Income for the six months ended
June 30, 1997 and 1996.
Supplemental Consolidated Statements of Financial Position as of June
30, 1997 and December 31, 1996.
Supplemental Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 1997 and 1996.
Supplemental Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996.
Notes to Supplemental Consolidated Financial Statements.
(b) Exhibits
(i) Consent of KPMG Peat Marwick LLP.
(ii) Consent of Deloitte & Touche LLP.
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WASHINGTON MUTUAL, INC.
Date: October 23, 1997 By: /s/ WILLIAM A. LONGBRAKE
-------------------------
Chief Financial Officer
<PAGE> 4
SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data for
Washington Mutual, Inc. ("Washington Mutual" or the "Company") and 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 in this Current Report on Form 8-K, and which give effect to the
Company's merger with Great Western Financial Corporation ("Great Western"). The
merger with Great Western 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, stockholders' equity, and results of operations of Great
Western have been recorded on the books of Washington Mutual at their values as
carried on the books of Great Western, and no goodwill was created. Washington
Mutual's supplemental financial information contained herein 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, 1996.
1
<PAGE> 5
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------- ------------- -------------
INCOME STATEMENT DATA (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Interest income .................... $ 6,387,090 $ 6,158,371 $ 4,928,851 $ 4,883,407 $ 5,268,651
Interest expense ................... 3,814,143 3,860,018 2,642,806 2,509,827 2,971,220
------------ ------------ ------------- ------------- -------------
Net interest income ................ 2,572,947 2,298,353 2,286,045 2,373,580 2,297,431
Provision for loan losses .......... 392,435 251,424 327,068 620,808 578,537
Other income ....................... 658,164 603,567 694,228 648,925 518,778
Other expense ...................... 2,428,599 1,802,886 1,883,348 1,922,639 1,819,540
------------ ------------ ------------- ------------- -------------
Income before income taxes, extra-
ordinary items, cumulative effect
of changes, and minority
interest.......................... 410,077 847,610 769,857 479,058 418,131
Income taxes ....................... 141,220 273,006 265,180 126,034 84,062
Provision for payments in lieu of
taxes ............................ 25,187 7,887 (824) 14,075 53,980
Extraordinary items, net of federal
income tax effect ................ -- -- -- (8,953) (4,638)
Cumulative effect of change in tax
accounting method ................ -- -- -- 13,365 121,045
Cumulative effect of change in other
post-retirement employee benefits -- -- -- -- (29,906)
Minority interest in earnings of
consolidated subsidiaries ........ 13,570 15,793 13,992 13,991 14,030
------------ ------------ ------------- ------------- -------------
Net income ......................... $ 230,100 $ 550,924 $ 491,509 $ 320,546 $ 179,558
============ ============ ============= ============= =============
Net income attributable to common
stock ............................. $ 191,386 $ 507,325 $ 447,910 $ 253,764 $ 262,140
============ ============ ============= ============= =============
Net income per common share(1):
Primary .......................... $ 0.81 $ 2.17 $ 1.98 $ 1.30 $ 1.54
Fully diluted .................... 0.80 2.15 1.97 1.27 1.49
Average fully diluted common shares
used to calculate earnings per
share(5) ......................... 238,463,909 239,520,022 232,057,126 235,721,785 227,000,202
SELECTED FINANCIAL DATA
Cash dividends paid per common
share(1)(2) ...................... $ 0.90 $ 0.77 $ 0.70 $ 0.50 $ 0.33
Common stock dividend payout ratio:
Pre-business combinations(2)(3)... 29.01% 25.74% 24.50% 15.98% 15.43%
Post-business combination ........ 112.13 33.16 38.73 62.81 60.25
Return on average assets ........... 0.27 0.66 0.67 0.36 0.44
Return on average stockholders'
equity ........................... 4.40 11.58 11.36 6.14 7.09
Return on average common
stockholders equity .............. 3.86 11.33 11.07 5.54 6.77
</TABLE>
2
<PAGE> 6
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Assets .......................... $ 87,426,497 $ 86,613,386 $ 79,699,553 $ 71,961,681 $ 66,118,109
Available-for-sale securities ... 16,095,343 20,749,500 7,780,460 4,917,290 3,836,349
Held-to-maturity securities ..... 4,479,056 5,084,456 10,791,135 6,270,139 4,638,473
Loans:
Residential ................... 48,689,404 41,907,598 42,737,451 41,171,112 38,833,829
Residential construction ...... 728,121 629,280 559,365 435,307 373,743
Commercial real estate ........ 6,488,254 6,467,013 6,086,906 6,095,881 4,737,741
Manufactured housing, second
mortgage and other consumer . 3,399,278 3,358,832 2,894,327 2,678,169 1,702,834
Consumer finance .............. 2,185,903 2,136,022 1,998,830 1,830,995 1,722,611
Commercial business ........... 340,149 179,568 257,048 261,468 504,717
Reserve for loan losses ....... (677,141) (598,124) (683,040) (747,331) (624,509)
------------- ------------- ------------- ------------- -------------
Total loans ................ 61,153,968 54,080,189 53,850,887 51,725,601 47,250,966
============= ============= ============= ============= =============
Deposits ........................ 52,666,914 53,697,888 52,044,953 54,876,165 51,637,869
Annuities ....................... 878,057 855,503 799,178 713,383 571,428
Borrowings ...................... 27,407,744 25,169,766 21,078,049 10,416,757 8,714,104
Stockholders' equity ............ 4,993,088 5,364,180 4,338,622 4,188,961 3,917,569
Stockholders' equity ratio ...... 5.71% 6.19% 5.44% 5.82% 5.93%
Fully diluted book value per
common share(1)(4) ............ $ 20.13 $ 20.73 $ 17.01 $ 16.65 $ 15.93
Number of fully diluted common
shares at end of period(4)(5).. 242,230,645 246,366,127 239,731,824 235,938,428 232,792,166
</TABLE>
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(1) Net income per common share, cash dividends paid per common share, fully
diluted book value per common share and number of common shares outstanding
for 1992 have been adjusted for the third quarter 1993 50% stock dividend.
(2) Dividends include only amounts paid to Washington Mutual, Inc. shareholders.
(3) Dividend payout ratio is based on Washington Mutual's net income prior to
business combinations, which was $223.9 million, $190.6 million, $172.3
million, $179.7 million, and $110.5 million in 1996, 1995, 1994, 1993, and
1992.
(4) Does not include 8,000,000 shares of common stock issued to an escrow for
the benefit of the general and limited partners of Keystone Holdings and the
FSLIC Resolution Fund ("FRF") and their transferees.
(5) As part of the business combination with Keystone Holdings, 8,000,000 shares
of common stock, with an assigned value of $41.6125 per share, were issued
to an escrow for the benefit of the general and limited partners of Keystone
Holdings and the FRF and their transferees. The Company will use the
treasury stock method to determine the effect of the shares upon the
Company's financial statements. At December 31, 1996, the dilutive effect of
the 8,000,000 shares of common stock on primary and fully diluted earnings
per share was minimal.
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<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 30, 1996
The following discussion and analysis should be read in conjunction with
the Supplemental Consolidated Financial Statements and Notes thereto presented
elsewhere in this report.
GENERAL
Washington Mutual is a financial services company committed to serving
consumers and small and mid-sized businesses primarily throughout the Western
United States and Florida. The Company's banking subsidiaries accept deposits
from the general public, make residential loans, consumer loans, limited types
of commercial real estate loans (primarily loans secured by multi-family
properties), and engage in certain commercial banking activities. The Company's
consumer finance operations provide direct installment loans and related credit
insurance services and purchase retail installment contracts. Washington Mutual
also sells annuities and other insurance products, offers full service
securities brokerage, and acts as the investment advisor to and the distributor
of mutual funds.
The Keystone Holdings Transaction. In December 1996, Keystone Holdings,
Inc. ("Keystone Holdings") merged with and into Washington Mutual, and all of
the subsidiaries of Keystone Holdings, including American Savings Bank, F.A.
("ASB"), became subsidiaries of the Company. ASB became an operating subsidiary
of the Company.
Keystone Holdings commenced operations in December 1988 as an indirect
holding company for ASB. ASB was formed to effect the December 1988 acquisition
(the "1988 Acquisition") of certain assets and liabilities of the failed savings
and loan association subsidiary (the "Failed Association") of Financial
Corporation of America. 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, 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 transferred to the Federal Deposit Insurance
Corporation ("FDIC") as manager of the FRF, prior to the merger of Keystone
Holdings with and into Washington Mutual. New West was subsequently liquidated.
The Great Western Transaction. In July 1997, Great Western merged with
and into a subsidiary of Washington Mutual, and all of the subsidiaries of Great
Western, including Great Western Bank, a Federal Savings Bank ("GWB") and its
consumer finance subsidiary, Aristar, Inc. ("Aristar"), became subsidiaries of
the Company. On October 1, 1997, GWB was merged with and into ASB and at the
time of such merger the name of ASB was changed to Washington Mutual Bank, FA.
Great Western was a diversified financial services company with more than 1,150
mortgage lending, retail banking and consumer finance offices nationwide. GWB
conducts most of its real estate lending operations in 27 states with business
concentrated in California, Florida, Texas and Washington. Aristar operates in
23 states primarily in the Southeast and Southwest regions of the United States
principally under the names Blazer Financial Services and City Finance Company.
4
<PAGE> 8
The mergers of Keystone Holdings and Great Western have been accounted
for as poolings-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
and Great Western.
In connection with the closing of the merger with Great Western, the
Company recorded pretax transaction-related expenses of $366.9 million in the
third quarter of 1997. (This brings the total of such expenses for the first
nine months of 1997 to $424.9 million.) As anticipated, the largest of these
expense categories were severance and management payments and facilities and
equipment impairment.
Additionally, the Company has begun to implement its plan to securitize
and sell approximately $1.1 billion of residential mortgage loans from GWB's
portfolio which the Company had previously identified as having both high
loan-to-value ratios and borrowers whose credit history is marginal. These loans
are being transferred to a special purpose corporation which will issue two
classes of securities. One class will be subordinated to the other, thereby
providing credit enhancement to the first class. When this securitization is
completed, in the fourth quarter of 1997, the securities will be placed in the
Company's available-for-sale or trading portfolios, as management deems
appropriate. The securities may subsequently be sold, from time to time, based
upon management's future judgment of market conditions and execution
capabilities. As a result of the foregoing process, the identified loans have
been classified as held for sale as of September 30, 1997 and marked to the
lower of cost or market with a charge to earnings of approximately $100.0
million.
In addition to the transaction-related charges and the market
adjustment of the loans, during the first nine months of 1997 the Company
recorded $116.5 million in tax benefits related to the exercise of options
under the Great Western stock option plan. This benefit was recorded directly
as an increase to stockholders' equity as the options were exercised. The net
after-tax effect upon stockholders' equity of all adjustments from
merger-related activity was a reduction of $267.9 million.
RESULTS OF OPERATIONS
Washington Mutual's 1996 net income of $230.1 million was down from
$550.9 million in 1995 and $491.5 million in 1994. Earnings for 1996 were
reduced a total of $489.4 million due to an after-tax charge of $209.8 million
for transaction-related expenses resulting from the merger with Keystone
Holdings; an after-tax charge of $79.6 million at Great Western for nonrecurring
charges (including a $68.3 million pretax restructuring charge related to
reengineering their loan origination operations and to consolidate Great
Western's corporate headquarters and a $50.0 million pretax provision for losses
on the bulk sale by Great Western of nonperforming loans and real estate); and
by a third quarter after-tax charge of $200.0 million representing the Company's
portion of the one-time assessment paid by savings institutions and banks
nationally to recapitalize the Savings Association Insurance Fund ("SAIF").
Fully diluted earnings per share were $0.80 in 1996, compared with $2.15 in 1995
and $1.97 in 1994. Washington Mutual's return on average assets for 1996 equaled
0.27%, down from 0.66% in 1995 and 0.67% in 1994. Its return on common
stockholders' equity for 1996 was 3.86%, also down from 11.33% in 1995 and
11.07% in 1994. An increase of approximately 250 basis points in short-term
market interest rates in 1994 led to a compression of the net interest margin in
late 1994 and 1995 (the net interest margin measures the Company's net interest
income as a percentage of average interest-earning assets) and a corresponding
pressure on net interest income. 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 during 1996.
Net Interest Income. Net interest income for 1996 of $2.6 billion
increased 12% from $2.3 billion in both 1995 and 1994. The net interest margin
for 1996 was 3.13%, compared with 2.91% in 1995 and 3.30% in 1994. The 1996
increase in net interest income and margin reflected the effect of two primary
factors. First, average interest-earning assets of $82.3 billion increased 4%
from 1995. Second, the net interest spread (which is the difference between the
Company's yield on interest-earning assets and its cost of funds) rose to 2.99%
for 1996 from 2.81% during 1995. To a certain extent, the Company's net interest
spread is affected by changes in the yield curve. Savings institutions generally
have better
5
<PAGE> 9
financial results in a steep yield curve environment. During 1996, the
difference between the yield on a three-month treasury bill and a 30-year bond
was 155 basis points compared with 124 basis points a year earlier. This
increased differential helped increase the Company's net interest spread.
Although long-term interest rates were generally higher during 1996 when
compared with 1995, the Company's yield on loans and investments dropped 3 basis
points to 7.76% during 1996, compared with 7.79% for 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 more than
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 4.77% for 1996, from 4.98% during 1995.
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% during 1995, a decline in the net interest spread from
3.23% in 1994 to 2.81% in 1995 limited the increase in net interest income. 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 4.98% from 3.88% during 1994. The
yield on interest-earning assets during 1995 increased to only 7.79% from 7.11%
during 1994 because long-term interest rates did not increase as much as
short-term rates.
Rising interest rates during 1994 and into 1995 also had a negative
effect on the net interest spread due to the lag in repricing of the Company's
adjustable-rate mortgages ("ARMs"), particularly its ARMs indexed to the 11th
District Cost of Funds Index ("COFI"). In both 1995 and 1994, the net interest
spread was negatively affected by the lag between COFI and changes in the
repricing of the Company's interest-bearing liabilities. However, during 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 net interest
spread. See " -- Interest Rate Risk Management" and "Consolidated Financial
Statements -- Note 18: Interest Rate Risk Management."
6
<PAGE> 10
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, 1996 YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994
-------------------------------- -------------------------------- -------------------------------
INTEREST INTEREST INTEREST
INCOME INCOME INCOME
AVERAGE OR AVERAGE OR AVERAGE OR
BALANCE(1) RATE EXPENSE BALANCE(2) RATE EXPENSE BALANCE(2) RATE EXPENSE
----------- ---- ---------- ----------- ---- ---------- ----------- ---- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments(3)..... $25,026,183 7.06% $1,765,937 $23,291,051 7.08% $1,649,792 $14,674,748 5.70% $ 837,110
New West Note...... -- -- -- 723,800 8.13 58,841 2,346,753 6.01 141,039
Loans(4)........... 57,273,243 8.07 4,621,153 55,048,673 8.08 4,449,738 52,277,836 7.56 3,950,702
----------- ---- ---------- ----------- ---- ---------- ----------- ---- ----------
Total
interest-earning
assets........... 82,299,426 7.76 6,387,090 79,063,524 7.79 6,158,371 69,299,337 7.11 4,928,851
Other assets....... 4,377,424 4,617,038 4,511,338
----------- ----------- -----------
Total assets... $86,676,850 $83,680,562 $73,810,675
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Checking accounts $ 6,898,233 0.83 57,449 $ 6,744,793 0.95 63,958 $ 6,990,250 1.00 69,564
Savings and money
market accounts 13,670,008 3.18 434,691 13,541,539 3.32 449,813 14,626,997 2.49 364,542
Time deposits.... 32,458,419 5.39 1,748,162 33,205,445 5.54 1,838,132 31,657,602 4.32 1,368,859
----------- ---- ---------- ----------- ---- ---------- ----------- ---- ----------
Total deposits. 53,026,660 4.22 2,240,302 53,491,777 4.40 2,351,903 53,274,849 3.38 1,802,965
Borrowings:
Annuities........ 812,185 5.01 40,658 801,129 5.58 44,716 734,969 4.51 33,143
Federal funds
purchased and
commercial
paper.......... 2,040,637 5.40 110,247 1,898,473 6.19 117,442 759,404 4.40 33,390
Securities sold
under
agreements
to repurchase 14,360,452 5.50 790,483 14,800,811 6.11 904,698 6,313,546 4.76 300,820
Advances from
FHLBs.......... 6,509,897 5.56 361,695 3,668,898 5.73 210,324 4,269,344 5.41 231,037
Other interest-
bearing
liabilities.... 3,143,556 8.61 270,758 2,867,735 8.05 230,935 2,743,820 8.80 241,451
----------- ---- ---------- ----------- ---- ---------- ----------- ---- ----------
Total
borrowings... 26,866,727 5.86 1,573,841 24,037,046 6.27 1,508,115 14,821,083 5.67 839,841
----------- ---- ---------- ----------- ---- ---------- ----------- ---- ----------
Total interest
bearing
liabilities.. 79,893,387 4.77 3,814,143 77,528,823 4.98 3,860,018 68,095,932 3.88 2,642,806
----------- ---- ---------- ----------- ---- ---------- ----------- ---- ----------
Other liabilities.. 1,552,701 1,392,702 1,389,350
----------- ----------- -----------
Total
liabilities.. 81,446,088 78,921,525 69,485,282
Stockholders'
equity........... 5,230,762 4,759,037 4,325,393
----------- ----------- -----------
Total
liabilities and
stockholders'
equity....... $86,676,850 $83,680,562 $73,810,675
=========== =========== ===========
Net interest
spread and net
interest income.. 2.99% $2,572,947 2.81% $2,298,353 3.23% $2,286,045
==== ========== ==== ========== ==== ==========
Net interest
margin........... 3.13% 2.91% 3.30%
</TABLE>
- ----------
(1) Average balances were calculated on a monthly basis. Due to the relative
consistency of the Company's asset and liability balances during 1996, 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 1996.
(2) Average balances were calculated on a daily basis for Keystone Holdings and
were calculated on a monthly basis for Washington Mutual and Great Western.
Due to the relative consistency of the Company's asset and liability
balances during 1995 and 1994, 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 and 1994.
(3) The Company holds a small amount of tax exempt securities, but has chosen
not to report the applicable interest income and yield on a tax equivalent
basis.
(4) Nonaccruing loans were included in the average loan amounts outstanding.
Amortized net deferred loan fees are included in the interest income
calculations.
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 changes in interest rates and upon changes in 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
7
<PAGE> 11
rate (changes in average interest rate multiplied by the prior period's volume).
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>
1996 VS. 1995 1995 VS. 1994
----------------------------------------- -------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------------- TOTAL ------------------------- TOTAL
VOLUME(1) RATE CHANGE VOLUME(2) RATE CHANGE
--------- --------- --------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Investments ............... $ 122,412 $ (6,267) $ 116,145 $ 575,674 $ 237,008 $ 812,682
New West Note ............. (58,841) -- (58,841) (167,731) 85,533 (82,198)
Loans (3) ................. 179,476 (8,061) 171,415 215,697 283,339 499,036
--------- --------- --------- --------- --------- -----------
Total interest income 243,047 (14,328) 228,719 623,640 605,880 1,229,520
INTEREST EXPENSE
Deposits:
Checking accounts ....... 1,496 (8,005) (6,509) (2,394) (3,212) (5,606)
Savings and money market
accounts ............. 4,319 (19,441) (15,122) (24,469) 109,740 85,271
Time deposits ........... (40,845) (49,125) (89,970) 69,714 399,559 469,273
--------- --------- --------- --------- --------- -----------
Total deposit expense (35,030) (76,571) (111,601) 42,851 506,087 548,938
Borrowings:
Annuities ............... 627 (4,685) (4,058) 3,178 8,395 11,573
Federal funds purchased
and commercial paper .... 10,405 (17,600) (7,195) 66,115 17,937 84,052
Securities sold under
agreements to
repurchase ............ (26,300) (87,915) (114,215) 498,897 104,981 603,878
Advances from FHLBs ..... 157,640 (6,269) 151,371 (35,828) 15,115 (20,713)
Other ................... 23,108 16,715 39,823 11,957 (22,473) (10,516)
--------- --------- --------- --------- --------- -----------
Total borrowing
expense ............ 165,480 (99,754) 65,726 544,319 123,955 668,274
--------- --------- --------- --------- --------- -----------
Total interest expense 130,450 (176,325) (45,875) 587,170 630,042 1,217,212
--------- --------- --------- --------- --------- -----------
Net interest income ....... $ 112,597 $ 161,997 $ 274,594 $ 36,470 $ (24,162) $ 12,308
========= ========= ========= ========= ========= ===========
</TABLE>
- ------------
(1) Average balances in 1996 were calculated on a monthly basis. Due to the
relative consistency of the Company's asset and liability balances during
1996, 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 1996.
(2) Average balances were calculated on a daily basis for Keystone Holdings and
were calculated on a monthly basis for Washington Mutual and Great Western.
Due to the relative consistency of the Company's asset and liability
balances during 1995 and 1994, 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 and 1994.
(3) Nonaccruing loans were included in the average loan amounts outstanding.
8
<PAGE> 12
Other Income. Other income was $658.2 million in 1996, compared with
$603.6 million in 1995 and $694.2 million in 1994.
Other income consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Depositor fees ..................... $ 282,468 $ 233,879 $ 185,958
Loan servicing fees ................ 86,987 84,474 74,100
Securities and insurance commissions 175,483 168,939 206,203
Other operating income ............. 88,836 71,932 111,529
Gain on sale of loans .............. 44,897 11,024 29,180
Gain on sale of assets ............. 17,832 34,739 88,079
Write-down of MBS .................. (38,339) (19,651) (821)
Loss on sale of covered assets ..... -- (37,399) --
FDIC assistance on covered assets .. -- 55,630 --
--------- --------- ---------
Total other income ............... $ 658,164 $ 603,567 $ 694,228
========= ========= =========
</TABLE>
Depositor fees of $282.5 million in 1996 increased from $233.9 million
in 1995 and $186.0 million in 1994. The increases reflected an expanded use of
NSF and overdraft protection fees on checking accounts combined with an
aggressive marketing campaign centered in the Pacific Northwest that increased
the number of checking accounts. The growth in depositor fees has been tempered
somewhat by an increase in the amount of deposit account-related losses
(included in other operating expense) incurred by the Company resulting from the
increased number of checking accounts. Management closely monitors the amount of
losses incurred.
Loan servicing fees were $87.0 million in 1996, up from $84.5 million in
1995 and $74.1 million in 1994. The higher level of loan servicing fees
recognized reflected the increase in the amount of loans serviced for others.
The average balance of loans serviced for others during 1996 increased
approximately 7% from 1995 due primarily to the securitization and sale of
residential loans. Loans serviced for others totaled $34.7 billion at December
31, 1996. The increase in the portfolio of loans serviced for others to $32.5
billion at December 31, 1995, from $26.3 billion at the end of 1994 was due
mainly to the purchase of servicing rights on $4.2 billion of loans and loan
securitizations. 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,
-----------------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loan servicing income ................... $ 123,832 $ 106,484 $ 103,704
Amortization of mortgage servicing rights (36,845) (22,010) (29,604)
--------- --------- ---------
Loan servicing fees ................... $ 86,987 $ 84,474 $ 74,100
========= ========= =========
</TABLE>
Securities and insurance commissions were principally generated by the
Company's nonbanking subsidiaries and totaled $175.5 million for 1996, compared
with $168.9 million for 1995 and $206.2 million for 1994. The lower level of
commissions during 1995 was the result of lower than anticipated
9
<PAGE> 13
sales activity at the securities subsidiaries. During 1996, commissions included
the addition of nonproprietary mutual funds which improved the product mix.
Other operating income during 1996 was $88.8 million, compared with
$71.9 million in 1995 and $111.5 million in 1994. While the majority of other
operating income was derived from loan-related fees, other operating income also
included the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Real estate fees $ 29,105 $ 24,208 $29,385
Real estate held for investment income 9,448 4,314 8,308
Mutual Travel fee income* -- 3,632 14,215
Loss on affordable housing (4,052) (7,611) --
</TABLE>
*During 1994, Mutual Travel, Inc. ("Mutual Travel"), the Company's travel agency
subsidiary, recorded $14.2 million on fee income. With the sale of Mutual Travel
in March 1995, fees recorded by the company amounted to only $3.6 million for
1995.
Gain on sale of loans totaled $44.9 million in 1996, compared with $11.0
million in 1995 and $29.2 million in 1994. During 1996, Great Western sold a
substantial portion of its student loan portfolio for $386.6 million, realizing
a gain of $22.5 million. Most of the remaining gains recognized during 1996 were
the result of selling $2.0 billion of fixed-rate loans as part of WMB's program
of selling fixed-rate loan production with the objective of reducing the effect
of future movements in interest rates. See below for further discussion of gain
recognition under a new accounting pronouncement. During 1995 and 1994,
Washington Mutual retained or securitized most of its loan production. During
1994, a $25.0 million gain was realized on the sale of ASB's credit card
portfolio with a book value of $151.9 million.
The balance of mortgage servicing rights increased to $165.3 million at
December 31, 1996, from $115.1 million at the end of 1995 and $71.5 million at
the end of 1994. The higher level of capitalized servicing rights reflected the
increase in the amount of loans serviced for others and the implementation of
Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting for
Mortgage Servicing Rights by the Company in 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 loans and retain the
servicing rights are required to allocate the total cost of the loans between
servicing rights and principal balance. 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.
10
<PAGE> 14
Mortgage servicing rights were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
--------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year ..... $ 115,145 $ 71,489 $ 75,191
Additions .................... 96,166 66,548 38,989
Sales ........................ (5,395) -- (13,087)
Amortization ................. (36,845) (22,010) (29,604)
Impairment of short servicing (1,643) -- --
Impairment valuation allowance (2,158) (882) --
--------- --------- --------
Balance, end of year ........... $ 165,270 $ 115,145 $ 71,489
========= ========= ========
</TABLE>
Gain on sale of assets consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Securities transactions ...................... $ 8,040 $ 21,585 $ 4,554
Gain on sale of leases ....................... 811 14,909 1,507
Mortgage servicing rights .................... 4,030 -- 20,396
Premises and equipment ....................... (460) (2,958) 60,978
Recognition of deferred gain on sale of
Mutual Travel .............................. 4,100 -- --
Other ........................................ 1,311 1,203 644
-------- -------- -------
Total gain on sale of assets ............... $ 17,832 $ 34,739 $88,079
======== ======== =======
</TABLE>
Net gain on the sale of assets was $17.8 million during 1996. The
largest component was net gains on securities transactions of $8.0 million. In
1995, net gain on the sale of assets was $34.7 million, mainly due to net gains
on securities transactions of $21.6 million and gain on sale of leases of $14.9
million. Included in gains on the sale of assets in 1994 of $88.1 million was a
$62.3 million gain on the sale of 31 GWB retail banking branches located on
Florida's west coast. This branch network was not able to develop the economies
of scale necessary to meet the Company's performance objectives. During 1994,
the Company also recognized a $20.4 million gain on the sale of mortgage
servicing rights related to $1.9 billion of loans serviced for others.
Impairment charge-offs on MBS are reported in write-down of MBS.
Write-downs on MBS were $38.3 million for 1996, down from $19.7 in 1995 and
$821,000 in 1994. The year-to-year increase reflected the Company's pricing
decision to securitize more of its loans with full or limited recourse.
During 1995, a loss of $37.4 million was recognized on 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 $55.6 million 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.
Other Expense. Other expense in 1996 totaled $2.4 billion, compared with
$1.8 billion in 1995 and $1.9 billion in 1994. Included in other expense in 1996
were restructuring charges of $68.3 million at Great Western,
transaction-related expenses of $158.1 million resulting from the merger with
Keystone Holdings and the one-time SAIF recapitalization assessment of $312.6
million.
11
<PAGE> 15
Other expense consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salaries and employee benefits .............. $ 819,965 $ 793,971 $ 829,684
Occupancy and equipment ..................... 321,142 309,368 320,287
Regulatory assessments ...................... 108,271 121,274 132,338
SAIF special assessment ..................... 312,552 -- --
Telecommunications and outsourced information
services .................................. 151,312 138,564 97,258
Other operating expense ..................... 405,244 351,952 368,919
Restructure expense ......................... 68,293 -- --
Transaction-related expense ................. 158,121 2,000 --
Amortization of goodwill and other intangible
assets .................................... 65,394 68,592 87,765
Foreclosed asset expense, net ............... 18,305 17,165 47,097
---------- ---------- ----------
Total other expense ....................... $2,428,599 $1,802,886 $1,883,348
========== ========== ==========
</TABLE>
Salaries and employee benefits totaled $820.0 million during 1996
compared with $794.0 million during 1995 and $829.7 million during 1994. Despite
reductions in the number of full-time equivalent employees, record loan
production and, correspondingly, higher commissions during 1996 contributed to
the rise in salary expense. Full-time equivalent employees were 17,689 at
December 31, 1996, down from 18,169 at year-end 1995. The decrease in full-time
equivalent employees was augmented by the sale of WMB's item processing
operation and the outsourcing of WMB's information systems and property
management departments during 1996. The decrease in salary and employee benefits
during 1995 compared with 1994 was due to reductions in the work force.
The increase in occupancy and equipment expense to $321.1 million in
1996 from $309.4 million in 1995 was primarily due to the growth in the number
of consumer financial centers and an expansion of head office facilities.
Occupancy expense in 1994 included $11.7 million of building repairs resulting
from the January 1994 Northridge, California earthquake.
Regulatory assessments (excluding the one-time SAIF recapitalization
assessment) were $108.3 million in 1996, down from $121.3 million in 1995 and
$132.3 million in 1994, reflecting a reduction in the assessment rate on the
portion of the Company's deposits insured through the BIF.
Washington Mutual's special assessment on deposits held by its banking
subsidiaries resulted in a pretax charge of $312.6 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
$78 million.
Telecommunications and outsourced information services in 1996 were
$151.3 million, compared with $138.6 million in 1995 and $97.3 million in 1994.
The year-to-year increase reflected the Company's growth and continued use of
outsourced data processing services.
Other operating expense increased to $405.2 million in 1996 from $352.0
million in 1995 and $368.9 million in 1994. Increases in 1996 were due in part
to higher professional fees associated with process reengineering projects
designed to increase income, improve strategies and operations and reduce costs.
In general, other operating expense tends to rise with the increased size of the
Company.
12
<PAGE> 16
During 1996, the Company implemented a restructure plan at GWB to
improve its competitive position, accelerate expense reduction and enhance
future revenue growth by streamlining operations, making efficient use of
premises and modernizing its systems platform. Due to merger activities, some of
the planned restructure activities, such as consolidation of GWB's campus
premises and standardization of GWB's distributed systems platform, have been
suspended.
Restructure activity consisted of the following:
<TABLE>
<CAPTION>
1996
RESTRUCTURE DEC. 31, 1996
ACCRUAL 1996 ACTIVITY BALANCE
------- ------------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Severance ................. $17,036 $ (2,776) $14,260
Premises .................. 29,456 -- 29,456
Equipment ................. 21,801 (18,388) 3,413
------- -------- -------
$68,293 $(21,164) $47,129
======= ======== =======
</TABLE>
Transaction-related expenses in 1996 associated with the merger with
Keystone Holdings were related to severance and management payments, payments
related to a tax settlement between Keystone Holdings and the FRF, write-downs
on software and equipment, premiums paid on redemption of debt securities of a
Keystone Holdings subsidiary, professional fees and investment banking fees. See
" -- General" for a discussion of the merger with Keystone Holdings and
transaction-related expenses anticipated to be recorded as part of the merger
with Great Western. As part of the merger with Olympus Capital Corporation in
1995, the Company recorded transaction-related expenses of $2.0 million.
The following is a reconciliation of the accrual activity established for the
transaction-related expenses associated with the Keystone Holdings merger:
<TABLE>
<CAPTION>
1996 TRANSACTION- DEC. 31, 1996
RELATED ACCRUAL 1996 ACTIVITY BALANCE
--------------- ------------- -------
(dollars in thousands)
<S> <C> <C> <C>
Severance ...................... $ 42,678 $ -- $42,678
Legal, underwriting and other... 115,443 <78,635> 36,808
-------- --------- -------
$158,121 $<78,635> $79,486
======== ========= =======
</TABLE>
Goodwill and other intangible assets have resulted from branch
acquisitions and 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 amortization of
goodwill and other intangible assets was $65.4 million in 1996, compared with
$68.6 million in 1995. Included in the $87.8 million of amortization expense in
1994 was $11.7 million of accelerated amortization related to interstate banking
access rights.
Foreclosed asset expense, net was $18.3 million in 1996 compared with
$17.2 million in 1995 and $47.1 million in 1994. During 1996, the Company
recorded a provision for losses on foreclosed assets at ASB of $7.1 million and
a reversal of $13.0 million to the provision at Great Western as a result of the
reduction in nonperforming real estate assets and improving prospects for the
remainder of the California portfolio. The provision totaled $12.0 million
during 1995 and $27.5 million in 1994 and reflected credit
13
<PAGE> 17
problems in California. See " -- Asset Quality -- Provision for Loan Losses and
Reserve for Loan Losses." In general, foreclosed asset operations in California
resulted in net operating expenses, as opposed to net operating income in
Washington.
Taxation. Income taxes include federal income taxes and applicable state
income taxes.
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% of most of the federal income tax savings and 19.5% 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 certain 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." Due to the above arrangements, the
Company's effective tax rate (including payments in lieu of taxes) for the three
years ended December 31, 1996 has averaged below 34%, compared to a normal
corporate tax rate of 35%.
The provision for income taxes of $141.2 million for 1996 represented
an effective tax rate of 34%. The 1996 provision included a $25.2 million
provision for payments in lieu of taxes. In 1996, the benefit for use of net
operating loss carryover decreased due to the change of control as of December
20, 1996. 1996 was also the first year in which New West's current losses were
not included in ASB's taxable income. In addition, ASB realized in 1995 and 1994
benefits from increases to tax base year bad debt reserves which were not
realized in 1996. See "Supplemental Consolidated Financial Statements -- Note
20: Income Taxes."
Due to Section 382 of the Code, most of the value of the net operating
loss carryforward deductions of Keystone Holdings and its subsidiaries was
eliminated due to the Keystone Holdings 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 for ASB) will
be greatly reduced.
Nonbanking Subsidiary Operations. The Company's principal nonbanking
subsidiary is Aristar. During 1996, the consumer finance line of business had
net income of $62.5 million, down from $65.3 million in 1995 and $64.1 million
in 1994. Despite growth in the loan portfolio, credit quality for the market
served by this line of business deteriorated in 1996 as evidenced by the
year-to-year increase in loan loss provision of $10.3 million.
14
<PAGE> 18
REVIEW OF FINANCIAL POSITION
Assets. At December 31, 1996, the Company's assets were $87.4 billion,
an increase of 1% from $86.6 billion at December 31, 1995. During 1995, total
assets grew $6.9 billion. Most of the growth during 1996 and 1995 resulted from
retaining originated loans (either as part of the loan portfolio or as MBS).
Investment Activities. Washington Mutual's investment portfolio of $20.6
billion at December 31, 1996 declined $5.2 billion from the December 31, 1995
balance of $25.8 billion. Contributing to the decline were paydowns of
investment securities and the Company's decision to continue the restructuring
of WMB's investment portfolio by selling fixed-rate securities and replacing
them with adjustable-rate loans and 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 negatively
affected the yield on interest-earning investment securities. See " -- Net
Interest Income."
The Company's securities portfolio consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1996 1995 1994
------------ ------------ -----------
Investment securities:
<S> <C> <C> <C>
U.S. government and agency obligations $ 884,972 $ 962,178 $ 1,089,432
Corporate debt obligations ........... 1,118,690 1,053,240 981,802
Municipal obligations ................ 108,271 92,508 80,762
Equity securities .................... 208,877 141,241 63,133
------------ ------------ -----------
2,320,810 2,249,167 2,215,129
Mortgage-backed securities:
U.S. government agency ............... 16,906,066 21,700,810 14,569,874
Corporate ............................ 1,347,356 1,886,649 1,726,820
------------ ------------ -----------
18,253,422 23,587,459 16,296,694
Derivative instruments:
Interest rate exchange agreements .... (646) (11,847) 18,654
Interest rate cap agreements ......... 2,460 9,415 41,690
------------ ------------ -----------
1,814 (2,432) 60,344
------------ ------------ -----------
$ 20,576,046 $ 25,834,194 $18,572,167
============ ============ ===========
</TABLE>
At December 31, 1996, the Company's investment portfolio included $16.1
billion of available-for-sale securities, $4.5 billion of held-to-maturity
securities (with a fair value of $4.5 billion), and $1.6 million of trading
account securities. MBS constituted $18.3 billion or 89% of the total investment
portfolio. MBS consisted largely of single-family residential loans swapped for
MBS to provide collateral for borrowings. At December 31, 1996, $12.8 billion
represented securitized single-family residential loans originated by the
Company. The Company has retained the credit risk on approximately 73% of the
loans underlying these securities.
15
<PAGE> 19
The securities portfolio by remaining maturity period, including yield was
the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------
CARRYING VALUE YIELD
-------------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Investment securities:
U.S. government and agency obligations:
Due within one year ........................ $ 258,522 6.47%
Due after one year but within five years.... 605,464 6.32
After five but within 10 years ............. 18,301 7.32
After 10 years ............................. 2,685 6.92
------------ ----
884,972 6.38
Corporate debt obligations:
Due within one year ........................ 327,989 5.66
Due after one year but within five years.... 412,353 6.80
After five but within 10 years ............. 244,205 7.24
After 10 years ............................. 134,143 7.64
------------ ----
1,118,690 6.66
Equity securities:
Preferred stock ............................ 174,210 6.88
Other securities ........................... 34,667 5.99
------------ ----
208,877 6.73
Municipal obligations:
Due after one year but within five years.... 7,294 6.24
After five but within 10 years ............. 30,176 6.70
After 10 years ............................. 70,801 6.02
------------ ----
108,271 6.22
------------ ----
2,320,810 6.54
Mortgage-backed securities:
U.S. government agency:
Due within one year ........................ 76,314 5.48
Due after one year but within five years ... 427,464 7.13
After five but within 10 years ............. 276,116 7.22
After 10 years ............................. 16,126,458 7.13
------------ ----
16,906,352 7.10
Corporate:
Due after five but within 10 years.......... 24,869 7.59
After 10 years ............................. 1,322,487 7.34
------------ ----
1,347,356 7.34
------------ ----
18,253,422 7.11
Derivative instruments:
Interest rate exchange agreements ............. (646) --
Interest rate cap agreements .................. 2,460 --
------------ ----
1,814 --
------------ ----
$ 20,576,046 7.03%
============ ====
</TABLE>
The Company's investment portfolio increased 39% to $25.8 billion at
December 31, 1995 from $18.6 billion a year earlier, primarily due to the
Company's retention of MBS which were securitized with loans originated by the
Company. Also in 1995, Washington Mutual leveraged its capital through purchases
of investment securities. These purchases were funded mostly through borrowings.
By leveraging the
16
<PAGE> 20
balance sheet through the use of these wholesale activities, Washington Mutual
generated additional net interest income.
At December 31, 1995, the Company's investment portfolio included $20.7
billion of available-for-sale securities, $5.1 billion of held-to-maturity
securities (with a fair value of $5.2 billion), and $238,000 of trading account
securities. During 1995, the Financial Accounting Standards Board ("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 $10.8
billion of its held-to-maturity securities into the available-for-sale category
on December 1, 1995.
Loans. Total loans outstanding at December 31, 1996 were $61.2 billion,
up from $54.1 billion at December 31, 1995. Changes in the loan balances are
primarily driven by originations of new loans, prepayments of existing loans,
scheduled repayments of principal, and loan securitizations. The increase in
single-family residential real estate loans is due to customer demand for
adjustable-rate mortgage lending rather than fixed-rate loans, which are usually
sold shortly after origination.
Loans, exclusive of reserve for loan losses, consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans:
Residential ....................... $48,689,404 $41,907,598 $42,737,451 $41,171,112 $38,833,829
Residential construction .......... 728,121 629,280 559,365 435,307 373,743
Commercial real estate ............ 6,488,254 6,467,013 6,086,906 6,095,881 4,737,741
Manufactured housing, second
mortgage and other consumer ..... 3,399,278 3,358,832 2,894,327 2,678,169 1,702,834
Consumer finance .................. 2,185,903 2,136,022 1,998,830 1,830,995 1,722,611
Commercial business ............... 340,149 179,568 257,048 261,468 504,717
----------- ----------- ----------- ----------- -----------
Total loans .................... $61,831,109 $54,678,313 $54,533,927 $52,472,932 $47,875,475
=========== =========== =========== =========== ===========
Loans as a percentage of total loans:
Residential ....................... 79% 77% 79% 79% 80%
Residential construction .......... 1 1 1 1 1
Commercial real estate ............ 10 12 11 12 10
Manufactured housing, second
mortgage and other consumer ..... 5 6 5 5 4
Consumer finance .................. 4 4 4 3 4
Commercial business ............... 1 -- -- -- 1
----------- ----------- ----------- ----------- -----------
Total loans .................... 100% 100% 100% 100% 100%
=========== =========== =========== =========== ===========
</TABLE>
17
<PAGE> 21
Consumer finance loans consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate secured loans ....... $ 994,097 $ 890,949
Installment loans ............... 1,109,143 1,182,892
Retail installment contracts .... 400,530 397,977
Deferred fees ................... (317,867) (335,796)
----------- -----------
Total consumer finance loans $ 2,185,903 $ 2,136,022
=========== ===========
</TABLE>
The majority of consumer finance loans have maximum terms of 360
months, with the exception of retail installment contracts which have maximum
terms of 60 months. The majority of loans provide for a fixed rate of interest
over the contractual life of the loan.
Loan originations were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Real estate:
Residential (1-4 family units):
Adjustable rate ............. $11,088,190 $10,374,740 $12,167,231
Fixed rate .................. 4,930,874 3,583,603 1,947,035
Residential construction:
Custom ...................... 779,698 583,658 705,655
Builder ..................... 514,047 377,169 349,521
Apartment buildings ............ 548,531 391,942 669,201
Other commercial real estate ... 295,043 242,987 199,749
----------- ----------- -----------
Total real estate loans ..... 18,156,383 15,554,099 16,038,392
Second mortgage and other consumer 1,301,952 1,005,871 1,038,176
Manufactured housing ............. 334,721 274,115 277,358
Consumer finance ................. 1,995,696 2,124,368 2,046,085
Commercial business .............. 348,400 167,830 128,539
----------- ----------- -----------
Total loans originated ...... $22,137,152 $19,126,283 $19,528,550
=========== =========== ===========
Residential refinances to total
residential originations ...... 41.13% 39.94% 46.24%
</TABLE>
The strong housing market, attractive interest rates, and an increased
number of distribution outlets led to record lending volumes during 1996. In
early 1994, the Company's originations included significant refinancing activity
that was generated by low market interest rates. The onset of higher interest
rates later in 1994 curtailed refinancing activity for the year and resulted in
an increase in residential adjustable-rate originations compared to residential
fixed-rate originations. Refinancings increased again during the second half of
1995 and during 1996 as market interest rates declined. In addition, of the
total residential loans originated in 1996, 69% were adjustable rate, the
majority of which were indexed to COFI.
The decline in apartment building originations from 1994 to 1995 was due
to a management decision to reduce lending volumes in that product line in
California.
Deposits. Total deposits were $52.7 billion at December 31, 1996, down
$1.0 billion from $53.7 billion at the end of 1995.
18
<PAGE> 22
Deposits consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Checking accounts:
Interest bearing ................ $ 4,980,766 $ 5,194,668 $ 5,617,095
Noninterest bearing ............. 2,576,822 2,243,622 1,955,262
----------- ----------- -----------
Total checking accounts ....... 7,557,588 7,438,290 7,572,357
Savings accounts .................. 3,265,995 3,668,641 4,223,254
MMDAs ............................. 10,320,276 9,494,137 8,915,393
Time deposit accounts:
Due within one year ............. 27,002,176 25,718,918 21,594,888
After one but within two years .. 2,525,843 5,245,809 6,234,944
After two but within three years 713,005 799,580 1,794,219
After three but within four years 631,922 618,541 732,167
After four but within five years 567,004 615,415 823,522
After five years ................ 83,105 98,557 154,209
----------- ----------- -----------
Total time deposit accounts ... 31,523,055 33,096,820 31,333,949
----------- ----------- -----------
Total deposits ............... $52,666,914 $53,697,888 $52,044,953
=========== =========== ===========
</TABLE>
The total decrease in deposits reflected the competitive environment of
banking institutions and the wide array of investment opportunities available to
consumers. Partially offsetting the $1.6 billion 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. While money market and
checking accounts are liquid, they are considered by the Company to be the core
relationship with its customers. In the aggregate, the Company views these core
accounts to be a more stable source of long-term funding.
While the vast majority of its 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.
Financial data pertaining to deposits were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Decrease due to deposit outflow .......... $ (3,337,939) $ (1,116,046) $ (4,035,904)
Increase due to acquired deposits ........ 106,663 417,078 263,998
Decrease due to deposits sold ............ -- -- (1,033,986)
Increase due to interest credited ........ 2,240,302 2,351,903 1,802,965
------------ ------------ ------------
(Decrease) increase in total deposits $ (1,030,974) $ 1,652,935 $ (3,002,927)
============ ============ ============
Total deposits at end of period .......... $ 52,666,914 $ 53,697,888 $ 52,044,953
Weighted average rate for the period ..... 4.22% 4.40% 3.38%
</TABLE>
Borrowings and Annuities. Washington Mutual's borrowings primarily take
the form of federal funds purchased, commercial paper, securities sold under
agreements to repurchase and advances from the FHLBs of Seattle and San
Francisco.
19
<PAGE> 23
The exact mix at any given time is dependent upon the market pricing of the
individual borrowing sources. The increase in the level of borrowings in 1996
was used to fund the Company's asset growth.
Borrowings and annuities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Annuities ...................... $ 878,057 $ 855,503 $ 799,178
Federal funds purchased and
commercial paper ............. 2,153,506 1,749,833 1,020,461
Securities sold under agreements
to repurchase ................ 12,033,119 14,853,052 12,936,401
Advances from the FHLB ......... 10,011,425 5,570,819 4,315,977
Other borrowings* .............. 3,209,694 2,996,062 2,805,210
----------- ----------- -----------
Total borrowings ............. $28,285,801 $26,025,269 $21,877,227
=========== =========== ===========
</TABLE>
- -----------
* Includes $100.0 million of Company-obligated mandatorily redeemable preferred
securities of the Company's subsidiary trust in 1996 and 1995.
In December 1995, Great Western Financial Trust I (the "subsidiary
trust"), a wholly-owned subsidiary of the Company, issued $100.0 million of
8.25% Trust Originated Preferred Securities (the "preferred securities"). In
connection with the subsidiary trust's issuance of the preferred securities, the
Company issued to the subsidiary trust $103.1 million principal amount of its
8.25% subordinated deferrable interest notes, due 2025 (the "subordinated
notes"). The sole assets of the subsidiary trust are and will be the
subordinated notes. The Company's obligations under the subordinated notes and
related agreements, taken together, constitute a full and unconditional
guarantee by the Company of the subsidiary trust's obligations under the
preferred securities.
In December 1996, Washington Mutual entered into two Facilities: a
$100.0 million 364-day facility and a $100.0 million 4-year facility. At
December 31, 1996, no monies had been drawn. However, in January 1997, $150.0
million was drawn for the redemption of debt securities of a Keystone Holdings'
subsidiary and in February 1997, another $20.0 million was drawn. The remaining
proceeds of the Facilities are available for general corporate purposes,
including providing capital at a subsidiary level.
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, was issued in June 1996 and established,
among other things, new criteria for determining whether a transfer of financial
assets in exchange for cash or other consideration should be accounted for as a
sale or as a pledge of collateral in a secured borrowing. As issued, Statement
No. 125 is effective for all transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. In December
1996, the FASB issued SFAS No. 127, Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125. SFAS No. 127 defers for one year the
effective date of certain provisions of SFAS No. 125. The Company will implement
SFAS No. 125, as amended by SFAS No. 127 as required. The adoption is not
anticipated to have a material impact on the results of operations or financial
position of the Company.
20
<PAGE> 24
ASSET QUALITY
Provision for Loan Losses and Reserve for Loan Losses. 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 management 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 California market has shown signs of improvement, however it
requires continued review. There are regional differences in economic
performance within California and among property types which are attributable to
differing recovery rates for the wide range of economic activities within
California. On a regional basis, the economic factors affecting the
single-family market appear to be somewhat more favorable in Northern California
than in Southern California.
The provision for loan losses during 1996 was $392.4 million, which
included a $125.0 million addition to the reserve for loan losses at the date of
the merger with Keystone Holdings. 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 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 allocated approximately 43% of the additional $125.0 million provision to
loans in the commercial real estate loan portfolio. The remainder was attributed
to ASB's various residential loan portfolios, for which specific reserve
allocations were not recorded.
In addition to the $125.0 million discussed above and a one-time
addition of $50.0 million attributable to the bulk sale of loans, the provision
for loan losses for 1996 included $217.4 million of charges, which was down from
the $251.4 million in 1995, reflecting the fact that the dollar amounts of
nonperforming assets were down between the two periods. The balance of the
reserve for loan losses was $677.1 million or 84% of nonperforming assets at
December 31, 1996, compared with $598.1 million or 60% of nonperforming assets
at December 31, 1995.
The provision for loan losses during 1995 was $251.4 million, compared
with $327.1 million in 1994 and $620.8 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.
21
<PAGE> 25
The provision for loan losses of $620.8 million during 1993 was up from
1992's level of $578.5 million. 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.
Management believes that the high rate of delinquencies in prior years'
originations can be attributed to 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 Bank.
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 1996
totaled $314.5 million, which was less than the level of net charge-offs of
$341.7 million in 1995, $392.3 million in 1994, $592.0 million in 1993, and
$352.8 million in 1992. The downward trend in residential charge-offs over the
past several years resulted in declines in the overall provision for loan
losses. Charge-offs on loans secured by commercial real estate in 1996 were
lower, compared with the previous four years. The commercial real estate
portfolio has continued to decrease as a result of the Company's decision to
reduce commercial real estate lending in California. The quality of the
commercial real estate loan portfolio continues to improve as a result of the
recovery in the commercial real estate markets nationwide and particularly in
California. There has been a substantial amount of liquidity that has returned
to the real estate markets. This liquidity has contributed significantly to the
Company's progress in reducing this portfolio. The Company expects the
commercial real estate portfolio to continue to improve in quality. Charge-offs
of consumer finance loans have increased in recent years as a result of some
deterioration in credit quality of the consumer finance loan portfolio.
22
<PAGE> 26
Changes in the reserve for loan losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year ..... $ 598,124 $ 683,040 $ 747,331 $ 624,509 $ 393,473
Provision for loan losses ...... 392,435 251,424 327,068 620,808 578,537
Reserves added through business
combinations ................. 1,077 5,372 921 46,000 5,321
Adoption of SFAS 114............ -- -- -- 47,974 --
Loans charged-off:
Residential .................. (232,653) (240,489) (278,786) (346,565) (130,846)
Residential construction ..... (16) (125) (190) (297) (937)
Commercial real estate ....... (36,354) (55,888) (69,816) (178,667) (136,988)
Manufactured housing, second
mortgage and other consumer (11,127) (8,905) (14,306) (40,058) (53,664)
Consumer finance ............. (60,520) (62,206) (54,041) (50,174) (55,436)
Commercial business/credits .. (435) (813) (2,065) (3,065) (1,321)
--------- --------- --------- --------- ---------
(341,105) (368,426) (419,204) (618,826) (379,192)
Recoveries of loans previously
charged-off:
Residential .................. 5,693 3,891 3,942 2,070 229
Residential construction ..... -- 47 -- -- --
Commercial real estate ....... 3,425 5,286 5,110 5,162 5,579
Manufactured housing, second
mortgage and other consumer 1,221 951 1,861 3,999 5,004
Consumer finance ............. 16,197 16,057 15,568 15,523 14,661
Commercial business/credits .. 74 482 443 112 897
--------- --------- --------- --------- ---------
26,610 26,714 26,924 26,866 26,370
--------- --------- --------- --------- ---------
Net charge-offs ................ (314,495) (341,712) (392,280) (591,960) (352,822)
--------- --------- --------- --------- ---------
Balance, end of year ........... $ 677,141 $ 598,124 $ 683,040 $ 747,331 $ 624,509
========= ========= ========= ========= =========
Net charge-offs as a percentage
of average loans ............. 0.55% 0.62% 0.74% 1.14% 0.74%
</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. Commercial real estate,
residential construction and commercial business loans are evaluated
individually for impairment. Allocated reserves at the end of 1996 increased
significantly to $118.6 million. During 1996, the Company's review of ASB's loan
portfolio resulted in approximately 43% of the additional $125.0 million
provision being allocated to loans in the commercial real estate loan portfolio.
Unallocated reserves are established for loss exposure that are not yet
identified but may exist in the remainder of the loan portfolio. In determining
the adequacy of unallocated reserves, management considers changes in the size
and composition of the loan portfolio, historical loan loss experience, current
and anticipated economic conditions, and the Company's credit administration and
asset management philosophies and procedures.
23
<PAGE> 27
An analysis of the reserve for loan losses was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Specific and allocated reserves:
Commercial real estate ......... $117,343 $ 66,397 $ 58,595 $ 60,005 $ 40,610
Builder construction ........... -- 158 1,327 1,503 1,219
Commercial business/credits .... 1,285 -- -- 1,718 5,597
-------- -------- -------- -------- --------
Total specific and allocated
reserves .................. 118,628 66,555 59,922 63,226 47,426
Unallocated reserves ............. 558,513 531,569 623,118 684,105 577,083
-------- -------- -------- -------- --------
Total loan loss reserves .... $677,141 $598,124 $683,040 $747,331 $624,509
======== ======== ======== ======== ========
Total reserve for loan losses as a
percentage of:
Nonperforming loans ............ 118% 85% 81% 78% 52%
Nonperforming assets ........... 84 60 59 52 26
</TABLE>
A reserve for losses on foreclosed assets is maintained for any
subsequent decline in the value of foreclosed property. The reserve was $9.0
million at December 31, 1996, compared with $37.0 million at December 31, 1995.
The level is based upon a routine review foreclosed assets and the strength of
national and local economies.
Nonperforming Assets. Assets considered to be nonperforming include
nonaccrual loans and investment securities, foreclosed assets and real estate
held for investment properties which do not generate sufficient income to meet
return on investment criteria ("REI"). When and if loans sold on a recourse
basis are nonperforming, they are included in nonaccrual loans. Management's
classification of a loan as nonaccrual does not necessarily indicate that the
principal of the loan is uncollectible in whole or in part. Loans are generally
placed on nonaccrual status when they become more than 90 days past due. See
"Supplemental Consolidated Financial Statements -- Note 1: Summary of
Significant Accounting Policies."
Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Real estate loans:
Residential ............... $461,730 $590,040 $ 662,136 $ 754,618 $1,035,888
Residential construction .. 9,235 9,550 4,640 8,527 5,856
Apartment buildings ....... 19,659 36,300 110,944 93,474 68,059
Other commercial real
estate .................. 14,616 26,663 35,549 63,516 51,883
-------- -------- ---------- ---------- ----------
Total real estate loans 505,240 662,553 813,269 920,135 1,161,686
Second mortgage and other
consumer ................. 14,346 9,266 8,077 16,487 14,446
Manufactured housing ....... 8,721 1,923 1,643 2,207 1,571
Consumer finance ........... 45,622 25,772 21,277 20,667 21,840
Commercial business
loans/credits ............ 1,068 824 1,018 3,785 8,580
-------- -------- ---------- ---------- ----------
Total nonperforming
loans ............... 574,997 700,338 845,284 963,281 1,208,123
Foreclosed assets ............ 222,884 286,705 313,392 470,167 1,157,154
Other nonperforming assets ... 7,232 4,564 4,980 -- --
-------- -------- ---------- ---------- ----------
Total nonperforming
assets .............. $805,113 $991,607 $1,163,656 $1,433,448 $2,365,277
======== ======== ========== ========== ==========
Nonperforming assets as a
percentage of total assets . 0.92% 1.14% 1.46% 1.99% 3.58%
</TABLE>
24
<PAGE> 28
Nonperforming assets decreased to $805.1 million or 0.92% of total
assets at December 31, 1996, compared with $991.6 million or 1.14% of total
assets at December 31, 1995. Nonperforming assets decreased 15% during 1995,
from $1.2 billion at the end of 1994. At December 31, 1996, nonperforming assets
in California accounted for approximately 70% of total nonperforming assets,
down from 80% and 78% at December 31, 1995 and 1994. Declining market rents and
occupancy rates in certain areas of Los Angeles that were negatively affected by
the economic environment during the three years ended December 31, 1995, as well
as the Los Angeles riots in 1992 and the Northridge earthquake in January 1994,
contributed to higher charge-offs in the apartment loan portfolio in 1994 and
1995, thereby reducing the level of nonperforming apartment loans. See " --
Provision for Loan Losses and Reserve for Loan Losses."
Nonperforming assets by geographic concentration were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------------------------------------
OTHER
CALIFORNIA WASHINGTON FLORIDA OREGON STATES(1) TOTAL
-------- ------- ------- ------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential ................ $338,643 $48,867 $17,216 $ 9,516 $ 47,488 $ 461,730
Residential construction ... -- 5,823 -- 2,143 1,269 9,235
Apartment buildings ........ 17,590 1,759 -- 267 43 19,659
Other commercial real estate 9,676 1,718 364 227 2,631 14,616
-------- ------- ------- ------- -------- ---------
Total real estate loans . 365,909 58,167 17,580 12,153 51,431 505,240
Second mortgage and other
consumer ................... 2,101 5,514 108 3,010 3,613 14,346
Manufactured housing ......... 446 3,893 -- 1,818 2,564 8,721
Consumer finance ............. 2,775 -- 2,450 -- 40,397 45,622
Commercial business .......... -- 193 -- 691 184 1,068
-------- ------- ------- ------- -------- ---------
Total nonperforming loans 371,231 67,767 20,138 17,672 98,189 574,997
Foreclosed assets ............ 192,738 25,380 5,925 462 7,384 231,889
Foreclosed assets reserves ... -- -- -- -- -- (9,005)
Other nonperforming assets ... 3,410 -- -- -- 3,822 7,232
-------- ------- ------- ------- -------- ---------
Total nonperforming assets . $567,379 $93,147 $26,063 $18,134 $109,395 $ 805,113
======== ======= ======= ======= ======== =========
Nonperforming assets by state
as a percentage of total
nonperforming assets ....... 70% 11% 3% 2% 14% 100%
</TABLE>
(1) No one other state represented more than 1% of the total.
Real estate loans and nonperforming real estate loans by region in
California were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------------------------------------------
NORTHERN CALIFORNIA CENTRAL CALIFORNIA SOUTHERN CALIFORNIA TOTAL
----------------------- ----------------------- ----------------------- -----------------------
Non- Non- Non- Non-
Portfolio performing Portfolio performing Portfolio performing Portfolio performing
--------- ---------- --------- ---------- --------- ---------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential............ $10,165,632 $79,938 $2,339,852 $15,559 $16,511,611 $243,146 $29,017,096 $338,643
Apartment buildings.... 803,946 837 351,687 993 1,719,814 15,765 2,875,590 17,590
Other commercial real
estate............... 269,937 118 120,517 600 935,817 8,953 1,327,369 9,676
----------- ------- ---------- ------- ----------- -------- ----------- --------
Total real
estate loans..... $11,239,515 $80,893 $2,812,056 $17,152 $19,167,242 $267,864 $33,220,055 $365,909
=========== ======= ========== ======= =========== ======== =========== ========
</TABLE>
25
<PAGE> 29
The California real estate market requires continued review. There
appear to be regional differences in economic performance within California and
among property types which are attributable to differing recovery rates for the
wide range of economic activities within California.
On a regional basis, the economic factors affecting the single-family
market appear to be somewhat more favorable in Northern California than in
Southern California. In particular, the median metropolitan area sales price of
existing single-family homes in the San Jose area increased from the third
quarter of 1995 to the third quarter of 1996 by 3%. During the same period, the
median sales price for the Los Angeles area declined 3% while the median sales
price for the San Diego area increased by approximately 1%.
Impaired Loans. On January 1, 1995, the Company adopted SFAS No. 114,
Accounting by Creditors for Impairment of a Loan as modified by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures. 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. All builder construction, commercial real estate
and commercial business loans are individually evaluated for impairment. Factors
involved in determining impairment include, but are not limited to, the
financial condition of the borrower, the value of the underlying collateral, and
current economic conditions.
A loan is considered 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. Impaired loans include all loans on nonaccrual and any
substandard loan, whether or not performing, with an allocated reserve. 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 December 31, 1996, loans totaling $498.3 million were impaired, of
which $402.1 million had allocated reserves of $79.7 million. The remaining
$96.2 million were either nonperforming or previously written down and had no
reserves allocated to them. Of the $498.3 million of impaired loans, $45.6
million were on nonaccrual status. The average balance of impaired loans during
1996 was $479.2 million and the Company recognized $30.7 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. The rise in the level of impaired
26
<PAGE> 30
loans during 1996 reflected, for the most part, the Company's review of large
commercial real estate loans at ASB. Of the $125.0 million addition to the
reserve for loan losses, $18.9 million was allocated to $110.3 million of
commercial real estate loans that management deemed to be impaired.
The amount of impaired loans based upon the fair value of the underlying
collateral and the related allocated reserve for loan losses were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------
LOAN ALLOCATED
AMOUNT RESERVES
-------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans:
With allocated reserves .................. $ 19,071 $ 6,641
Without allocated reserves................ 26,561 --
-------- -------
45,632 6,641
Other impaired loans:
With allocated reserves .................. 382,975 73,063
Without allocated reserves................ 69,649 --
-------- -------
452,624 73,063
-------- -------
Total impaired loans .................. $498,256 $79,704
======== =======
</TABLE>
At December 31, 1995, loans totaling $417.6 million were impaired, of
which $274.6 million had allocated reserves of $61.8 million. The remaining
$143.0 million were either nonperforming or previously written down and had no
reserves allocated to them. Of the $417.6 million of impaired loans, $67.7
million were on nonaccrual status and $349.8 million were performing but judged
to be impaired.
The amount of impaired loans based upon the fair value of the underlying
collateral and the related allocated reserve for loan losses were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------
LOAN ALLOCATED
AMOUNT RESERVES
-------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans:
With allocated reserves ................... $ 30,202 $ 9,851
Without allocated reserves ................ 37,522 --
-------- -------
67,724 9,851
Other impaired loans:
With allocated reserves ................... 244,327 51,932
Without allocated reserves ................ 105,500 --
-------- -------
349,827 51,932
-------- -------
Total impaired loans ................... $417,551 $61,783
======== =======
</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 1996,
the Company securitized and then sold
27
<PAGE> 31
the majority of the fixed-rate loans it originated, while retaining nearly all
of its adjustable-rate loan production. In addition, as part of the balance
sheet restructuring strategy initiated in late 1995, the Company purchased
adjustable-rate assets and sold fixed-rate mortgage-backed securities. The
Company, however, has short-term volatility of net interest income due to the
effect of the COFI lag. Management plans 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.
The implementation of strategies to reduce interest rate risk, however,
generally has a negative effect on 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 its asset and liability management program, the Company
actively manages asset and liability maturities and at various times uses
derivative instruments, such as interest rate exchange agreements, interest rate
cap agreements and cash flow swaps, 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. These
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the statement of financial condition. The contract or
notional amount of these instruments reflects the extent of involvement the
Company has in particular classes of financial instruments. For interest rate
exchange agreements and interest rate cap agreements, the notional amount does
not represent exposure to credit loss. The amount potentially subject to credit
loss is limited to the net difference between the calculated payable and
receivable amounts on each transaction, which is generally netted and paid or
received quarterly, and the net market or settlement value of the agreement. The
Company is subject to credit loss only in the event of nonperformance by
counterparties to the agreements. Based on management's credit analysis and
collateral requirements, however, the Company does not anticipate any credit
losses on these agreements. The Company's interest rate exchange agreements and
interest rate cap agreements are generally transacted with other financial
institutions such as major banks and broker-dealers, with no single institution
handling a disproportionate amount of the transactions.
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. These instruments generally are not
intended to be 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."
A conventional measure of interest rate sensitivity for savings
institutions is the one-year gap, which is calculated by dividing the difference
between assets maturing or repricing within one year and total
28
<PAGE> 32
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>
DECEMBER 31,
---------------------------------
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest-sensitive assets ..................................... $ 66,697,670 $ 64,689,380
Derivative instruments designated against assets .............. 1,150,000 1,825,000
Interest-sensitive liabilities ................................ (66,759,281) (64,779,960)
Derivative instruments designated against liabilities ......... 1,707,433 941,000
------------ ------------
Net asset sensitivity ....................................... $ 2,795,822 $ 2,675,420
============ ============
One-year gap ................................................ 3.20% 3.09%
</TABLE>
At the end of 1996, Washington Mutual's one-year gap was a positive
3.20%, compared with a positive 3.09% at the end of 1995. While the Company's
consolidated one-year gap at December 31, 1996 was fairly neutral, WMB's, ASB's
and GWB's one-year gap positions were quite different. WMB's one-year gap was a
negative 18.19% at the end of 1996 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 1996.
Since the vast majority of interest-earning assets at ASB and GWB were COFI ARM
products, their one-year gap at the end of 1996 was a positive 12.85% and
10.31%. At December 31, 1996, the Company had entered into interest rate
exchange agreements and interest rate cap agreements with notional values of
$9.4 billion. Without these instruments, the Company's one-year gap at December
31, 1996, would have been a negative 0.37% as opposed to a positive 3.20%. See
"Supplemental Consolidated Financial Statements -- Note 18: Interest Rate Risk
Management" for a discussion of the use of derivative instruments.
29
<PAGE> 33
Interest sensitivity analysis by repricing period or maturity was as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------------------------------------
AFTER
DUE WITHIN DUE WITHIN AFTER ONE AFTER TWO AFTER FIVE 10 YEARS OR
0-3 4-12 BUT WITHIN BUT WITHIN BUT WITHIN NONINTEREST
MONTHS MONTHS TWO YEARS FIVE YEARS 10 YEARS SENSITIVE TOTAL
----------- ------------ ----------- ----------- ---------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Cash, cash
equivalents and
trading account
securities ......... $ 1,665,355 $ -- $ -- $ 1,647 $ -- $ -- $ 1,667,002
Available-for-sale
securities ......... 10,318,480 3,336,675 719,078 807,369 586,049 1,170,694 16,938,345
Held-to-maturity
securities ......... 4,107,455 1,445 12,189 37,102 119,682 201,183 4,479,056
Loans:
Real estate ........ 36,374,008 8,298,710 1,544,580 6,494,467 2,523,423 3,028,174 58,263,362
Manufactured
housing, second
mortgage and
other consumer ... 1,246,095 804,552 613,828 508,087 162,393 50,901 3,385,856
Commercial business 259,559 26,872 11,549 19,733 2,832 -- 320,545
Loan loss reserve
and deferred fees -- -- -- -- -- (815,795) (815,795)
----------- ------------ ----------- ----------- ---------- ----------- ------------
Total loans .... 37,879,662 9,130,134 2,169,957 7,022,287 2,688,648 2,263,280 61,153,968
----------- ------------ ----------- ----------- ---------- ----------- ------------
Total interest-
earning
assets ..... 53,970,952 12,468,254 2,901,224 7,868,405 3,394,379 3,635,157 84,238,371
Other assets ......... 258,464 -- -- -- -- 2,929,662 3,188,126
----------- ------------ ----------- ----------- ---------- ----------- ------------
Total assets ... 54,229,416 12,468,254 2,901,224 7,868,405 3,394,379 6,564,819 87,426,497
Derivative instruments
affecting interest
sensitivity:
Interest rate exchange
agreements:
Designated against
available-for-sale
securities ....... 500,000 -- (300,000) (200,000) -- -- --
Interest rate cap
agreements:
Designated against
available-for-sale
securities ....... 1,050,000 (400,000) (650,000) -- -- -- --
----------- ------------ ----------- ----------- ---------- ----------- ------------
Total effect of
derivative
instruments .. 1,550,000 (400,000) (950,000) (200,000) -- -- --
----------- ------------ ----------- ----------- ---------- ----------- ------------
Total assets and
derivative
instruments .. 55,779,416 12,068,254 1,951,205 7,668,405 3,394,379 6,564,819 87,426,497
INTEREST-BEARING
LIABILITIES
Deposits:
Checking accounts .. 4,996,605 -- -- -- -- 2,560,983 7,557,588
Savings and money
market accounts .. 10,515,297 -- -- -- -- 3,070,974 13,586,271
Time deposits ...... 10,443,152 16,559,024 2,525,843 1,911,931 78,810 4,295 31,523,055
----------- ------------ ----------- ----------- ---------- ----------- ------------
Total deposits . 25,955,054 16,559,024 2,525,843 1,911,931 78,810 5,636,252 52,666,914
Annuities ............ 87,806 263,417 263,417 263,417 -- -- 878,057
Federal funds
purchased and
commercial paper ... 2,153,506 -- -- -- -- -- 2,153,506
Securities sold under
agreements to
repurchase ......... 11,117,977 421,054 191,918 302,170 -- -- 12,033,119
Advances from the FHLB 8,005,237 1,496,546 153,509 308,910 5,306 41,917 10,011,425
Other interest-
bearing liabilities 446,546 253,114 572,990 1,343,646 547,633 45,765 3,209,694
----------- ------------ ----------- ----------- ---------- ----------- ------------
Total interest-
bearing
liabilities .. 47,766,126 18,993,155 3,707,677 4,130,074 631,749 5,723,934 80,952,715
Other liabilities and
stockholders' equity -- -- -- -- -- 6,473,782 6,473,782
----------- ------------ ----------- ----------- ---------- ----------- ------------
Total iabilities and
</TABLE>
30
<PAGE> 34
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------------------------------------
AFTER
DUE WITHIN DUE WITHIN AFTER ONE AFTER TWO AFTER FIVE 10 YEARS OR
0-3 4-12 BUT WITHIN BUT WITHIN BUT WITHIN NONINTEREST
MONTHS MONTHS TWO YEARS FIVE YEARS 10 YEARS SENSITIVE TOTAL
----------- ------------ ----------- ----------- ---------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
stockholders'
equity............ 47,766,126 18,993,155 3,707,677 4,130,074 631,749 12,197,716 87,426,497
Derivative instruments
affecting interest
sensitivity:
Interest rate exchange
agreements:
Designated against
deposits and
short-term
borrowings............ (1,497,881) 405,948 446,533 636,200 9,200 -- --
Interest rate cap
agreements:
Designated against
deposits and
short-term
borrowings............ (615,500) -- 254,000 361,500 -- -- --
----------- ------------ ----------- ----------- ---------- ----------- ------------
Total effect of
derivative
instruments....... (2,113,381) 405,948 700,533 997,700 9,200 -- --
----------- ------------ ----------- ----------- ---------- ----------- ------------
Total liabilities,
stockholders'
equity
and derivative
instruments....... 45,652,745 19,399,103 4,408,210 5,127,774 640,949 12,197,716 87,317,464
----------- ------------ ----------- ----------- ---------- ----------- ------------
Net asset
(liability)
sensitivity....... $10,126,671 $ (7,330,849) $(2,456,986) $ 2,540,631 $2,753,430 $(5,632,897) $ (3,079,093
=========== ============ =========== =========== ========== =========== ============
Net asset (liability)
sensitivity as a
percentage of
total assets...... 11.58% (8.39)% (2.81)% 2.91% 3.15% (6.44)% --%
Cumulative net asset
(liability)
sensitivity ............ $10,126,671 $ 2,795,822 $ 338,836 $ 2,879,467 $5,632,897 $ -- $ --
Cumulative net asset
(liability)
sensitivity as a
percentage of total
assets.................. 11.58% 3.20%
</TABLE>
While the one-year gap helps provide some information about a financial
institution's interest sensitivity, it does not predict the trend of future
earnings. For this reason, Washington Mutual uses financial modeling to forecast
earnings under different interest rate projections. Although this modeling is
very helpful in managing interest rate risk, it does require significant
assumptions for the projection of loan prepayment rates, loan origination
volumes and liability funding sources that may prove to be inaccurate.
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 the vast majority 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-
31
<PAGE> 35
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
agreements, 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, 1996
-------------------------------------------------------------------
AFTER ONE
DUE WITHIN DUE WITHIN BUT WITHIN AFTER
0-3 MONTHS 4-12 MONTHS TWO YEARS TWO YEARS TOTAL
----------- ----------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Principal amount of securities $10,318,480 $3,336,675 $719,078 $ 2,564,112 $16,938,345
Effect of derivative
instruments.................. 2,225,000 -- -- (2,225,000) --
----------- ---------- -------- ----------- -----------
Principal amount of
securities after
effect of derivative
instruments.................. $12,543,480 $3,336,675 $719,078 $ 339,112 $16,938,345
=========== ========== ======== =========== ===========
</TABLE>
The following table presents the effect interest rate exchange
agreements and interest rate cap agreements would have had on the repricing
period of securities in the available-for-sale portfolio in a decreasing
interest rate environment (down 200 basis points) for the period the derivatives
are outstanding:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------------------
AFTER ONE
DUE WITHIN DUE WITHIN BUT WITHIN AFTER
0-3 MONTHS 4-12 MONTHS TWO YEARS TWO YEARS TOTAL
----------- ----------- --------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Principal amount of securities $10,318,480 $3,336,675 $719,078 $2,564,112 $16,938,345
Effect of derivative
instruments................. 700,000 -- -- (700,000) --
----------- ---------- -------- ---------- -----------
Principal amount of
securities after
effect of derivative
instruments................. $11,018,480 $3,336,675 $719,078 $1,864,112 $16,938,345
=========== ========== ======== ========== ===========
</TABLE>
Management actively manages the liability maturities and at various
times uses derivative instruments, such as interest rate exchange agreements and
interest rate cap agreements, to reduce the negative effect that rising rates
could have on net interest income. The Company seeks to lengthen the repricing
period of its deposits and borrowings by entering into interest rate cap
agreements to provide an additional layer of interest rate protection should
interest rates on deposits and borrowings rise. Through the use of these
agreements, management attempts to offset increases in interest expense related
to these deposits and borrowings and effectively lengthen 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
32
<PAGE> 36
repricing the deposits and borrowings 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 and
interest rate cap agreements would have had on the repricing period of deposits
and borrowings currently (as of December 31, 1996) or in an increasing rate
environment (up 200 basis points) for the period the derivatives are
outstanding:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------
AFTER ONE
DUE WITHIN DUE WITHIN BUT WITHIN AFTER
0-3 MONTHS 4-12 MONTHS TWO YEARS TWO YEARS TOTAL
----------- ----------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amount of deposits and borrowings........ $47,766,126 $18,993,155 $3,707,677 $10,485,757 $80,952,715
Effect of derivative instruments......... (6,897,400) -- -- 6,897,400 --
----------- ----------- ---------- ----------- -----------
Amount of deposits and borrowings after
effect of derivative instruments....... $40,868,726 $18,993,155 $3,707,677 $17,383,157 $80,952,715
=========== =========== ========== =========== ===========
</TABLE>
The following table presents the effect interest rate exchange
agreements and interest rate cap agreements would have had on the repricing
period of deposits and borrowings currently (as of December 31, 1996) or in a
decreasing interest rate environment (down 200 basis points) for the period the
derivatives are outstanding:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------
AFTER ONE
DUE WITHIN DUE WITHIN BUT WITHIN AFTER
0-3 MONTHS 4-12 MONTHS TWO YEARS TWO YEARS TOTAL
----------- ----------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amount of deposits and borrowings........ $47,766,126 $18,993,155 $3,707,677 $10,485,757 $80,952,715
Effect of derivative instruments......... (1,642,400) -- -- 1,642,400 --
----------- ----------- ---------- ----------- -----------
Amount of deposits and borrowings after
effect of derivative instruments....... $46,123,726 $18,993,155 $3,707,677 $12,128,157 $80,952,715
=========== =========== ========== =========== ===========
</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-
33
<PAGE> 37
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 December 31, 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 December 31, 1996, met the established FDIC guidelines.
Regulations promulgated by the OTS require that the Company's federal
savings banks maintain for each calendar month an average daily balance of
liquid assets at least equal to 5.00% of the prior month's average daily balance
of net withdrawable deposits plus borrowings due within one year. At December
31, 1996, all three federal savings banks had liquidity ratios in excess of
5.00%.
As presented in the Consolidated Statements of Cash Flows, the sources
of liquidity vary between years. The statement of cash flows includes operating,
investing and financing categories. Cash flows from operating activities
included net income for 1996 of $230.1 million, $558.3 million for noncash items
and $810.2 million of other net cash flows from operating activities. Cash flows
from investing activities consisted mainly of both proceeds from and purchases
of securities, and the impact of loans made and principal collected on loans. In
1996, cash flows from investing activities included sales and principal payments
on securities and loans held for investment totaling $22.4 billion. Loans
originated and purchased for investment required $18.0 billion, and $7.5 billion
was used for the purchase of securities. Cash flows from financing activities
consisted of the net change in the Company's deposit accounts and short-term
borrowings, the proceeds and repayments from both securities sold under
long-term agreements to repurchase and FHLB advances, and also the issuance of
long-term debt. In 1996, the above mentioned financing activities increased cash
and cash equivalents by $1.2 billion on a net basis. Cash and cash equivalents
were $1.7 billion at December 31, 1996. See "Supplemental Consolidated Financial
Statements -- Consolidated Statements of Cash Flows."
At December 31, 1996, the Company was in position to obtain an
additional $19.7 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.
34
<PAGE> 38
CAPITAL REQUIREMENTS
At December 31, 1996, WMB, ASB, GWB, and WMBfsb exceeded all current
regulatory capital requirements and were categorized as well capitalized, the
highest regulatory standard.
The regulatory capital ratios of the WMB, ASB, GWB, and WMBfsb and
minimum regulatory requirements to be categorized as well capitalized were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------- WELL-CAPITALIZED
WMB ASB GWB WMBFSB MINIMUM
----- ----- ----- ------ -------
<S> <C> <C> <C> <C> <C>
Capital ratios:
Leverage............ 5.76% 5.17% 5.85% 6.90% 5.00%
Tier 1 risk-based... 10.28 8.90 9.77 10.50 6.00
Total risk-based.... 11.09 10.92 11.23 11.58 10.00
</TABLE>
In addition, the Company's federal savings banks are required by OTS
regulations to maintain core capital of at least 3.00% of assets and tangible
capital of at least 1.50% of assets. ASB, GWB and WMBfsb all satisfied this
requirement at December 31, 1996.
WM Life Insurance Co. ("WM Life") is subject to risk-based capital
requirements developed by the National Association of Insurance Commissioners.
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, 1996, WM Life's capital was 663% of its required
regulatory risk-based level.
The Company's securities subsidiaries are also subject to capital
requirements. At December 31, 1996, all of Washington Mutual's securities
subsidiaries were in compliance with their applicable capital requirements.
35
<PAGE> 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH
THE SIX MONTHS ENDED JUNE 30, 1996
RESULTS OF OPERATIONS
For the six months ended June 30, 1997, net income was $370.8 million or
$1.44 per fully diluted share compared with $339.0 million or $1.32 per fully
diluted share for the first six months of 1996. The Company's earnings during
1997 were reduced by $58.0 million in pretax transaction-related expenses.
NET INTEREST INCOME. The Company's net interest income was $1.3 billion for the
six months ended June 30, 1997 up slightly from the same period in 1996. The
slight increase in net interest income was primarily due to a 4% increase in
average interest-earning assets during the first six months of 1997 compared
with the same period in 1996. The Company's net interest margin was 3.07% for
the six months ended June 30, 1997 compared with 3.17% for the same period in
1996 (The net interest margin measures the Company's annualized net interest
income as a percentage of interest-earning assets.)
The Company's combined yield on loans and investments was 7.76% for the
six months ended June 30, 1997 compared with 7.77% for the same period in 1996.
Interest rates on deposits decreased for the six months ended June 30, 1997 as
higher cost time deposits matured and money market deposit accounts were added.
However, the Company's combined cost of funds for the same period rose from the
1996 level as a result of the Company's increased reliance on borrowings, which
typically are more expensive than deposits. Average borrowings outstanding
during the first six months of 1997 were $30.3 billion, an increase of 18% from
the same period in 1996 while deposits were down 2%. As a result, the Company's
combined cost of funds was 4.80% for the six months ended June 30, 1997 compared
with 4.79% for the same period in 1996. The net interest spread was 2.96% for
the first six months of 1997 compared with 2.98% for the same period in 1996.
(The net interest spread is the difference between the Company's yield on assets
and its cost of funds.) The net interest rate spread decreases in an increasing
interest-rate environment as increases in COFI, to which most interest-earning
assets are tied, lag behind deposit and borrowing rate increases.
OTHER INCOME. Other income was $376.4 million for the six months ended June 30,
1997 compared with $295.5 million for the same period in 1996.
Depositor fees for the six months ended June 30, 1997 were $175.0
million, an increase of 33% from $132.0 million during the first half of 1996.
The increase reflected expanded use of fee-based products, revisions to
fee collection policies, and an increase in retail checking accounts. The
profitability of these accounts is tempered somewhat by the amount of deposit
account-related losses (included with other expenses) incurred by the Company
related to the increased number of checking accounts. Management closely
monitors the amount of such losses.
Loan servicing fees were $43.1 million for the six months ended June 30,
1997, up 5% from the same period a year ago. Loans serviced for others increased
to $35.4 billion at June 30, 1997 from $31.4 billion one year earlier due to
additions to the servicing portfolio throughout 1996 and the first half of 1997.
Securities and insurance commissions were $91.0 million for the six
months ended June 30, 1997, up from $87.4 million for the same period a year
ago. The increase was due in part to increased sales volumes resulting from the
addition of non-proprietary annuities and mutual funds in 1996.
Other operating income increased to $56.3 million for the six months
ended June 30, 1997 compared with $40.0 million during the same period in 1996.
The increase was due in part to the acquisition of United Western and several
one-time adjustments totaling $2.3 million.
Gains on the sale of loans were $13.5 million for the first six months
of 1997 compared with $14.0 million for the same period in 1996. The Company
sold approximately $2.2 billion and $1.9 billion of primarily fixed-rate
mortgage loans during the first six months of 1997 and 1996, respectively.
1
<PAGE> 40
Sales of assets generated a net gain of $10.0 million during the first
six months of 1997 compared with a net loss of $4.2 million for the same period
in 1996. The gain during the first half of 1997 included a $4.2 million gain on
the sale of corporate property and a $2.7 million gain on the sale of equipment.
Both of these transactions occurred at GWB. The year-to-date 1996 loss included
$6.9 million of securities transaction losses arising from the Company's efforts
to replace fixed-rate assets with adjustable-rate assets at WMB, partially
offset by a $4.1 million gain on the sale of Mutual Travel, Inc.
Write-downs to record losses on loans underlying mortgage-backed
securities with full or limited recourse were $12.4 million and $14.5 million
for the six months ended June 30, 1997 and 1996.
OTHER EXPENSE. Other expenses for the six months ending June 30, 1997 totaled
$967.3 million compared with $937.0 million during the same period in 1996.
Salaries and employee benefits were $411.6 million for the six months
ended June 30, 1997 compared with $421.6 million for the comparable period in
1996. The decrease in expense reflected efforts by GWB to reengineer their
mortgage business and other efficiency initiatives. The staffing level of full
- -time equivalent employees was 20,389 at June 30, 1997 compared with 20,795 at
June 30, 1996.
Occupancy and equipment expense decreased slightly to $158.8 million for
the six months ended June 30, 1997 from $159.6 million for the same period in
1996, primarily as a result of expenses associated with new financial centers.
Regulatory assessments were $17.2 million for the six months ended June
30, 1997, a decrease of 70% from $56.4 million for the comparable period in
1996, due to a reduction in the assessment rate on the Company's deposits
insured by the Savings Association Insurance Fund ("SAIF").
Telecommunications and outsourced information services were $86.1
million for the six months ended June 30, 1997 compared with $70.5 million for
the same period in 1996. Most of the 1997 increases resulted from higher levels
of customer support services and company usage.
Other operating expense for the first half of 1997 was $199.6 million,
up from $178.0 million during the same period a year earlier. The increase was
due in part to other professional fees associated with reengineering projects
and acquisition-related charges.
2
<PAGE> 41
During the first half of 1997, transaction-related expenses of $58.0
million were incurred by Great Western in anticipation of its merger with the
Company. The majority of the expense covered various investment banking and
legal fees. For the six months ended June 30, 1996, transaction-related
expenses totaled $1.5 million.
In connection with the closing of the merger with Great Western, the
Company recorded pretax transaction-related expenses of $366.9 million in the
third quarter of 1997. (This brings the total of such expenses for the first
nine months of 1997 to $424.9 million.) As anticipated, the largest of these
expense categories were severance and management payments and facilities and
equipment impairment.
Additionally, the Company has begun to implement its plan to securitize
and sell approximately $1.1 billion of residential mortgage loans from GWB's
portfolio which the Company had previously identified as having both high
loan-to-value ratios and borrowers whose credit history is marginal. These loans
are being transferred to a special purpose corporation which will issue two
classes of securities. One class will be subordinated to the other, thereby
providing credit enhancement to the first class. When this securitization is
completed, in the fourth quarter of 1997, the securities will be placed in the
Company's available-for-sale or trading portfolios, as management deems
appropriate. The securities may subsequently be sold, from time to time, based
upon management's future judgment of market conditions and execution
capabilities. As a result of the foregoing process, the identified loans have
been classified as held for sale as of September 30, 1997 and marked to the
lower of cost or market with a charge to earnings of approximately $100.0
million.
In addition to the transaction-related charges and the market
adjustment of the loans, during he first nine months of 1997 the Company
recorded $116.5 million in tax benefits related to the exercise of options
under the great western stock option plan. This benefit was recorded directly
as an increase to stockholders' equity as the options were exercised. The net
after-tax effect upon stockholders' equity of all adjustments from
merger-related activity was a reduction of $267.9 million.
Transaction-related expenses associated with the merger of Keystone
Holdings were recorded in 1996. The following is a reconciliation of the
activity related the Keystone Holdings merger during the first six months of
1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
ACCRUAL ACTIVITY BALANCE
---------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Severance $42,678 $(36,739) $ 5,939
Legal, underwriting and other 36,808 (11,467) 25,341
---------------------------------------------------------------------------
$79,486 $(48,206) $31,280
===========================================================================
</TABLE>
In 1996, the Company implemented a restructure plan at GWB. The
restructuring initiatives were designed to improve GWB's competitive position,
accelerate expense reduction and enhance future revenue growth by streamlining
operations, making efficient use of premises and modernizing its system
platform. Due to the merger activities with the Company, some of GWB's planned
restructure activities have been suspended. Accruals related to these activities
have not been reversed.
Restructure activity consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
ACCRUAL ACTIVITY BALANCE
--------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Severance $14,260 $ 1,257* $15,517
Premises 29,456 (7,143) 22,313
Equipment 3,413 (257) 3,156
--------------------------------------------------------------------------
$47,129 $(6,143) $40,986
==========================================================================
</TABLE>
*In February 1997, GWB revised its broad-based severance plan and accrued an
additional $7.0 million for severance benefits expected to be paid to
approximately 475 employees affected by the restructuring plan.
Amortization of goodwill and intangible assets was $31.4 million for the
six months ended June 30, 1997 compared with $32.8 million for the same period
in 1996.
Foreclosed assets generated a net expense of $4.5 million during the
first half of 1997 compared with a net expense of $16.6 million during the first
half of 1996. During 1997, the Company's yield on foreclosed assets improved and
substantial gains were recognized on sales of foreclosed property.
OPERATING EFFICIENCY RATIO. The Company's operating efficiency ratio - other
expense as a percentage of net interest income plus other income - was 57.4% for
the six months ended June 30, 1997 compared with 59.0% for the same period in
1996. The effect of increases in other expenses during 1997 was offset by
substantial increases in net interest income and other income during the first
six months of 1997.
NONBANKING SUBSIDIARY OPERATIONS. The Company's principal nonbanking subsidiary
is Aristar. During the first six months of 1997, the consumer finance line of
business had net income of $23.6 million, down from $33.3 million during the
same period in 1996. The decrease was the result of higher borrowing costs and
lower yields on consumer finance loans coupled with a continuation of credit
quality concerns for the market served by Aristar.
FINANCIAL POSITION
ASSETS. At June 30, 1997, due to the record lending activity during the period,
the Company's assets were $92.5 billion up 6% from $87.4 billion at year-end
1996.
INVESTMENT ACTIVITIES. Washington Mutual's investment portfolio at June 30, 1997
was $22.2 billion, a 8% increase from the year-end 1996 balance of $20.6
billion. The Company's mortgage-backed securities ("MBS") were $19.8 billion or
89% of the total investment portfolio at June 30, 1997.
MBS that the Company securitized from its own single-family residential
loan origination activity totaled $14.6 billion at June 30, 1997 with the
remaining $5.2 billion being purchased in the secondary market. As part of the
securitization process, the Company has from time to time retained the credit
risk on the loans underlying these securities. As of June 30, 1997, the Company
had full or limited recourse on $13.2 billion of loans underlying its U.S.
government agency MBS portfolio. Because of the Company's recourse obligations
in regard to a portion of its MBS portfolio, WMB and ASB have together taken an
impairment of $6.2 million and $11.5 million against their AFS and HTM MBS
portfolios to cover potential losses on the loans underlying the securities.
In conjunction with the Great Western merger, the Company has reclassified the
identified impairment on MBS where it has retained the credit risk from the
reserve for loan losses to MBS to conform the accounting policies of WMB and
ASB with that of GWB.
During the six months ended June 30, 1997, Washington Mutual securitized
with either full or limited recourse and retained $2.7 billion of loans and
purchased $198.5 million of MBS. Amortization of outstanding MBS principal
during the first half of 1997 totaled $1.1 billion.
3
<PAGE> 42
LOAN ORIGINATIONS. For the first half of 1997, total lending increased 31% to
$13.7 billion compared with $10.5 billion for the same period a year earlier.
The Company's growing franchise and aggressive marketing strategy together with
strong regional economies in its primary markets helped generate increases in
lending volumes in all loan categories.
Loan originations were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 1997 1996
------------------------------------------------------------------------
<S> <C> <C>
Single-family residential ("SFR") $10,134.2 $ 7,576.9
SFR custom construction 406.7 331.1
SFR builder construction 307.5 275.7
Multifamily residential 312.9 278.8
Nonresidential real estate 205.8 145.1
Consumer 1,075.2 806.1
Consumer finance 947.9 914.2
Commercial business 325.3 175.2
------------------------------------------------------------------------
$13,715.5 $10,503.1
========================================================================
</TABLE>
DEPOSITS. Total deposits decreased to $51.8 billion at June 30, 1997 from $52.7
billion at December 31, 1996. Retail money market and checking accounts - both
of which have the benefit of lower interest costs - increased $568.9 million
partially offsetting a $1.6 billion decline in retail time deposits.
Contributing to the increase in retail money market and checking accounts was
the acquisition of United Western, which added $299.9 million in total deposits.
Retail time deposits declined in part because the Company chose not to
aggressively price to maintain the 1996 year-end level. While the vast majority
of its 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.
BORROWINGS. Washington Mutual's primary sources of borrowing are securities sold
under agreements to repurchase, federal funds purchased and commercial paper,
and advances from the Federal Home Loan Banks ("FHLB") of Seattle and San
Francisco. These three borrowing sources totaled $11.9 billion, $3.4 billion and
$14.3 billion at June 30, 1997, compared with $12.0 billion, $2.2 billion and
$10.0 billion at year-end 1996, respectively. The exact mix at any given time is
dependent upon the market pricing of the various borrowing sources.
Specifically, due to relative pricing advantages, the Company primarily used
FHLB advances to fund its balance sheet growth during the first half of 1997.
In January 1997, the Company's trust subsidiary, Great Western Financial
Trust II issued $300.0 million of 8.206% Trust Originated Preferred Securities
("Preferred Securities II"). In connection with the subsidiary trust's issuance
of the preferred securities, Great Western issued to the subsidiary trust $309.0
million principal amount of its 8.206% subordinated deferrable interest notes,
due 2027 (the "subordinated notes"). The sole assets of the subsidiary trust are
and will be the subordinated notes. Great Western's obligations under the
subordinated notes and related agreements, taken together, constitute a full and
unconditional guarantee by Great Western of the subsidiary trust's obligations
under the preferred securities.
In June 1997, the Company's trust subsidiary, Washington Mutual Capital
I (the "Trust") issued $400.0 million of 8 3/8% Subordinated Capital Income
Securities ("Capital Securities"). In connection with the Trust's issuance of
the Capital Securities, WMI issued to the Trust $412.4 million principal amount
of its 8.375% Junior Subordinated Debentures, due 2027 (the "Subordinated
Debentures"). The sole assets of the Trust are and will be the Subordinated
Debentures. WMI's obligations under the Subordinated Debentures and related
agreements, taken
4
<PAGE> 43
together, constitute a full and unconditional guarantee by the Company of the
subsidiary trust's obligations under the capital securities.
INTEREST RATE RISK MANAGEMENT. Washington Mutual engages in a comprehensive
asset and liability management program that attempts to reduce the risk of
significant decreases in net interest income caused by interest rate changes.
One of the Company's strategies to reduce the effect of future movements in
interest rates is to increase the percentage of adjustable-rate assets in its
portfolio. A conventional measure of interest rate sensitivity for thrift
institutions is the one-year gap, which is calculated by dividing the difference
between assets maturing or repricing within one year and total liabilities
maturing or repricing within one year by total assets.
The Company's assets and liabilities that mature or reprice within one
year were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) JUNE 30, 1997 DECEMBER 31, 1996
-----------------------------------------------------------------------------------
<S> <C> <C>
Interest-sensitive assets $ 70,758 $ 66,698
Derivative instruments 2,296 2,857
Interest-sensitive liabilities (65,191) (66,759)
-----------------------------------------------------------------------------------
Net liability sensitivity $ 7,863 $ 2,796
===================================================================================
One-year gap 8.50% 3.20%
</TABLE>
ASSET QUALITY
Nonperforming assets decreased 4% to $771.8 million at June 30, 1997
compared with $805.1 million at December 31, 1996. Nonperforming assets by type
consisted of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) JUNE 30, 1997 DECEMBER 31, 1996
-------------------------------------------------------------------------------------
<S> <C> <C>
Residential real estate $487,424 $461,730
Custom construction 6,205 6,724
Builder construction 3,543 2,511
Apartment buildings 19,973 19,659
Other commercial real estate 11,993 14,616
Consumer and manufactured housing 19,948 23,067
Consumer finance 45,138 45,622
Commercial business 1,321 1,068
Foreclosed assets 170,762 222,884
Other nonperforming assets 5,555 7,232
-------------------------------------------------------------------------------------
Total nonperforming assets $771,862 $805,113
=====================================================================================
Nonperforming assets as a percentage of total assets 0.83% 0.92%
</TABLE>
Contributing to the reduction in nonperforming assets was a change
during the second quarter of 1997 in the classification measure to conform the
reporting of one of the Company's banking subsidiaries - Washington Mutual Bank
("WMB") - with that of its other banking subsidiaries - American Savings Bank
("ASB") and GWB - and other financial services companies.
As required by Statement of Financial Accounting Standards No. 114, the
Company evaluates all commercial real estate, builder construction and
commercial business loans for impairment. A loan is considered impaired when it
is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. At June 30, 1997, loans totaling
$423.3 million were impaired compared with $498.3 million at year-end 1996.
Impaired loans totaling $333.2 million had specific and allocated reserves of
$75.8 million.
5
<PAGE> 44
Impaired loans consisted of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) JUNE 30,1997 DECEMBER 31, 1996
--------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans included in nonperforming assets above $ 36,261 $ 45,632
Other impaired loans 387,110 452,624
--------------------------------------------------------------------------------------
Total impaired loans $423,371 $498,256
======================================================================================
</TABLE>
The average balance of impaired loans during the first six months of
1997 was $449.8 million and the Company recognized $28.9 million of related
interest income. Interest income is normally recognized on an accrual basis. If
the impaired loan is nonperforming, interest income is recorded only on the
receipt of cash.
PROVISION FOR LOAN LOSSES AND RESERVE FOR LOAN LOSSES. The provision for loan
losses for the six months ended June 30, 1997 was $103.8 million compared with
$114.0 million for the same period in 1996. The reserve for loan losses was
$666.1 million at June 30, 1997 compared with $677.1 million at December 31,
1996. Reserves charged off, net of recoveries, totaled $106.5 million for the
first six months of 1997 compared with $147.5 million for the same period in
1996. At June 30, 1997, the reserve for loan losses represented 112% of
nonperforming loans compared with 118% six months earlier.
Changes in the reserve for loan losses were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 1997 1996
-----------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of period $677.1 $598.1
Provision for loan losses 103.8 107.9
Reserves acquired through business combinations 10.9 --
Transfer of reserves for write down of MBS (17.7) --
Transfer of reserves to contingent liability (1.5) --
Loans charged-off:
Residential (56.2) (98.7)
Commercial real estate (14.3) (22.1)
Consumer (9.2) (4.5)
Consumer finance (37.9) (34.5)
Commercial business (0.2) (0.6)
-----------------------------------------------------------------------------------
(117.8) (160.4)
Recoveries of loans previously charged-off:
Residential 0.7 2.6
Commercial real estate 0.8 1.4
Consumer 2.2 0.5
Consumer finance 7.6 0.1
Commercial business -- 8.3
-----------------------------------------------------------------------------------
11.3 12.9
-----------------------------------------------------------------------------------
Balance, end of period $666.1 $558.5
===================================================================================
Annualized ratio of net charge-offs during the
period to average loans outstanding during the period 0.32% 0.53%
</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 designated as either specific or allocated to
reflect the loss exposure. The June 30, 1997 analysis of commercial real estate,
builder construction and commercial loans resulted in specific and allocated
reserves totaling $110.3 million. At December 31, 1996, the Company had specific
and allocated reserves of $118.7 million. The remaining reserve of $555.8
million at June 30, 1997 was unallocated and available for potential losses from
any of the Company's loans.
When determining the adequacy of the reserve for loan losses,
management has historically looked not only to those loans currently in its
loan portfolio, but also to any loan pool where the Company has a full or
limited recourse obligation resulting from securitization of its loans. With
the Great Western merger, the Company began recording losses on loans
repurchased from MBS where it had retained the credit risk as a writedown on
the security, rather than as a charge against the reserve for loan losses. A
writedown on the MBS is included as a component of other income. GWB had
adopted this accounting policy in 1996. Prior periods have been restated so
that chargeoffs on single-family residential loans are comparable period to
period.
Also, as part of the Great Western merger, the Company has reclassified
the identified impairment on MBS where it has retained the credit risk from the
reserve for loan losses to MBS to conform the accounting policies of WMB and
ASB with that of GWB. An impairment of $17.6 million was recorded through a
transfer from the reserve for loan losses. The impairment was based upon an
analysis at June 30, 1997 of the loans underlying MBS where the Company has
retained full or limited recourse. Because this reclassification was immaterial
to the Company's statement of financial position, prior periods have not been
restated. The impairment on MBS will be evaluated periodically in accordance
with credit-risk policy. Any subsequent impairment will be recorded as a
writedown to MBS.
6
<PAGE> 45
An analysis of the reserve for loan losses was as follows:
<TABLE>
<CAPTION>
(dollars in millions) JUNE 30, 1997 DECEMBER 31, 1996
--------------------------------------------------------------------------------
<S> <C> <C>
Specific and allocated reserves:
Commercial real estate $105.1 $117.4
Builder construction 1.9 --
Commercial business 3.3 1.3
--------------------------------------------------------------------------------
110.3 118.7
Unallocated reserves 555.8 558.4
--------------------------------------------------------------------------------
$666.1 $677.1
================================================================================
Total reserve for loan losses as a percentage of:
Nonperforming assets 86% 84%
Nonperforming assets, less foreclosed assets 112 118
</TABLE>
A reserve for losses on foreclosed assets is maintained for any
subsequent decline in the value of foreclosed property. The reserve for losses
on foreclosed assets was $6.1 million at June 30, 1997, compared with $7.1
million at December 31, 1996. The level is based upon a routine review of
foreclosed assets and the strength of national and local economies.
The Company also maintains a contingent liability to cover potential
losses on loans that have been sold to third parties where the Company has
retained full or limited recourse. At June 30, 1997, an additional $1.5 million
(for a total balance of $10.0 million) was set aside to cover losses on $2.2
billion of loans sold with full or limited recourse.
LIQUIDITY AND CAPITAL REQUIREMENTS
LIQUIDITY. Washington Mutual monitors its ability to meet short-term cash
requirements under both normal (operating) and extreme (contingent)
circumstances using guidelines established by its Board of Directors. The
operating liquidity ratio is used to ensure that normal short-term secured
borrowing capacity is sufficient to satisfy unanticipated cash needs. The
contingent liquidity ratio measures the ability to raise cash by liquidating
assets in the event of a very adverse business environment. At June 30, 1997,
the Company had substantial liquidity compared with its established guidelines.
The Company also computes ratios promulgated by the Federal Deposit
Insurance Corporation ("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 June 30, 1997, was within
the established FDIC guidelines.
Regulations promulgated by the Office of Thrift Supervision ("OTS")
require that the Company's federal savings bank subsidiaries maintain for
each calendar month an average daily balance of liquid assets at least equal to
5.00% of the prior month's average daily balance of net withdrawable deposits
plus borrowings due within one year. For each month during the first half of
1997, the liquidity ratio for each ASB, GWB and WMBfsb was above 5.00%.
To meet its immediate needs for funds as well as long-term lending
demands, Washington Mutual maintains various sources of liquid assets and
borrowing capabilities. At June 30, 1997, the Company's banking subsidiaries
were able to borrow approximately an additional $21.9 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 pay
dividends to the Company is influenced by legal, regulatory and economic
restrictions.
Because the low interest rate environment of recent years and
competition from non-regulated entities (such as mutual funds) has inhibited
consumer deposits, Washington Mutual has supported its growth through business
7
<PAGE> 46
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.
As presented in the Supplemental Consolidated Statements of Cash Flows,
the sources of liquidity vary between periods. The statement of cash flows
includes operating, investing and financing categories. Cash flows from
operating activities included net income for the first half of 1997 of $370.9
million, $176.9 million of noncash items and $145.5 million of other net cash
outflows from operating activities. During the six months ended June 30, 1997,
cash flows from investing activities included sales and principal payments on
securities and loans held for investment totaling $7.8 billion. Loans originated
and purchased for investment required $11.5 billion and $1.9 billion was used
for the purchase of available-for-sale securities. Cash flows from financing
activities consisted of the net change in deposit accounts and short-term
borrowings, the proceeds and repayments from both securities sold under
long-term agreements to repurchase and FHLB advances, and also the repayment of
long-term debt. During the six months ended June 30, 1997, the above mentioned
financing activities increased cash and cash equivalents by $4.8 billion on a
net basis. Cash and cash equivalents were $1.3 billion at June 30, 1997. (See
"Supplemental Consolidated Statements of Cash Flows".)
CAPITAL REQUIREMENTS. At June 30, 1997, WMB, ASB, GWB, and WMBfsb exceeded all
current regulatory capital requirements and were classified as well capitalized
institutions, the highest regulatory standard. The regulatory capital ratios of
WMB, ASB, GWB, and WMBfsb and minimum regulatory requirements to be categorized
as well capitalized were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------------------------------- WELL CAPITALIZED
WMB ASB GWB WMBFSB MINIMUM
---------------------------------------------------------------- ----------------
<S> <C> <C> <C> <C> <C>
Capital ratios:
Leverage 5.62% 5.26% 6.00% 6.11% 5.00%
Tier 1 risk-based 10.15 8.98 10.09 9.54 6.00
Total risk-based 10.97 10.89 11.39 10.63 10.00
</TABLE>
In addition, ASB, GWB and WMBfsb are required by the OTS to maintain
core capital of at least 3.00% of assets and tangible capital of at least 1.50%
of assets. All three banks satisfied this requirement at June 30, 1997.
8
<PAGE> 47
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, 1996 and 1995, 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, 1996. These supplemental consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements based on our audits. The supplemental consolidated
financial statements give retroactive effect to the merger of Great Western
Financial Corporation, with and into a subsidiary of Washington Mutual, Inc. on
July 1, 1997, 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 consolidated 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 statements of financial condition of Great Western Financial
Corporation as of December 31, 1996 and 1995, or the related statements of
operations, changes in stockholders' equity, and cash flows for the years ended
December 31, 1996, 1995, and 1994, which statements reflect total assets
constituting 49% and 51% of consolidated total assets as of December 31, 1996
and 1995, respectively, and total net income constituting 50%, 47% and 51% for
the years ended December 31, 1996, 1995 and 1994, respectively. Those statements
were audited by other auditors whose report, dated, January 22, 1997 (except as
to Note 28 to the consolidated financial statements, which is as of March 7,
1997) has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Great Western Financial Corporation for 1996, 1995 and
1994, is based solely on the report of such other auditors. We did not audit the
consolidated balance sheet of Keystone Holdings, Inc. and subsidiaries as of
December 31, 1995 or the related consolidated statements of earnings,
stockholder's equity, and cash flows for the years ended December 31, 1995, and
1994, which statements reflect total assets constituting 23% of consolidated
total assets as of December 31, 1995, and total net income constituting 16% and
12% for the years ended December 31, 1995 and 1994, 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 and 1994, 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 reports of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles applicable after the 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. 122, Accounting for
Mortgage Servicing Rights, on September 30, 1995.
Deloitte & Touche LLP
October 2, 1997
Seattle, Washington
<PAGE> 48
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
---------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE
AMOUNTS)
<S> <C> <C> <C>
INTEREST INCOME
Loans $4,621,153 $4,449,738 $3,950,702
Notes receivable - 58,841 141,039
Available-for-sale securities 1,310,781 694,957 414,042
Held-to-maturity securities 366,592 882,654 366,843
Other 88,564 72,181 56,225
----------- ----------- ------------
Total interest income 6,387,090 6,158,371 4,928,851
INTEREST EXPENSE
Deposits 2,240,302 2,351,903 1,802,965
Borrowings 1,573,841 1,508,115 839,841
----------- ----------- ------------
Total interest expense 3,814,143 3,860,018 2,642,806
----------- ----------- ------------
Net interest income 2,572,947 2,298,353 2,286,045
Provision for loan losses 392,435 251,424 327,068
----------- ----------- ------------
Net interest income after provision for loan
losses 2,180,512 2,046,929 1,958,977
OTHER INCOME
Depositor fees 282,468 233,879 185,958
Loan servicing fees 86,987 84,474 74,100
Securities and insurance commissions 175,483 168,939 206,203
Other operating income 88,836 71,932 111,529
Gain on sale of loans 44,897 11,024 29,180
Gain on sale of assets 17,832 34,739 88,079
Write-down of mortgage-backed securities (38,339) (19,651) (821)
Loss on sale of covered assets -- (37,399) --
Federal Deposit Insurance Corporation ("FDIC")
assistance on covered assets -- 55,630 --
----------- ----------- ------------
Total other income 658,164 603,567 694,228
OTHER EXPENSE
Salaries and employee benefits 819,965 793,971 829,684
Occupancy and equipment 321,142 309,368 320,287
Regulatory assessments 108,271 121,274 132,338
Savings Association Insurance Fund ("SAIF") special
assessment 312,552 -- --
Telecommunications and outsourced information
services 151,312 138,564 97,258
Other operating expense 405,244 351,952 368,919
Restructure expense 68,293 - -
Transaction-related expense 158,121 2,000 -
Amortization of intangible assets arising
from acquisitions 65,394 68,592 87,765
Foreclosed asset expense, net 18,305 17,165 47,097
----------- ----------- ------------
Total other expense 2,428,599 1,802,886 1,883,348
----------- ----------- ------------
Income before income taxes 410,077 847,610 769,857
Income taxes 141,220 273,006 265,180
Provision (benefit) for payments in lieu of taxes 25,187 7,887 (824)
----------- ----------- ------------
Income before minority interest 243,670 566,717 505,501
Minority interest in earnings of consolidated
subsidiaries 13,570 15,793 13,992
----------- ----------- ------------
Net Income $230,100 $550,924 $491,509
=========== =========== ============
Net Income Attributable to Common Stock $191,386 $507,325 $447,910
=========== =========== ============
Net income per common share:
Primary $0.81 $2.17 $1.98
Fully diluted 0.80 2.15 1.97
Weighted average number of common shares used to
calculate net income per common share:
Primary 237,513,322 233,344,444 226,637,879
Fully diluted 238,463,909 239,520,022 232,057,126
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
<PAGE> 49
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1995
--------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash $1,032,379 $1,526,550
Cash equivalents 632,976 551,700
Trading account securities 1,647 238
Available-for-sale securities, amortized
cost $15,913,440 and $20,337,573
Mortgage-backed securities 13,968,875 18,789,067
Other investments 2,126,468 1,960,433
Held-to-maturity securities, fair value
$4,545,125 and $5,204,768
Mortgage-backed securities 4,286,361 4,795,960
Other investments 192,695 288,496
Loans 61,497,847 54,108,904
Reserve for loan losses (677,141) (598,124)
--------------- -------------
60,820,706 53,510,780
Loans held for sale 333,262 569,409
Investment in Federal Home Loan Bank
("FHLB") stock 843,002 755,491
Foreclosed assets 222,883 286,706
Premises and equipment 1,034,813 1,057,415
Intangible assets arising from
acquisitions 419,500 484,840
Other assets 1,510,930 2,036,301
--------------- -------------
Total assets $87,426,497 $86,613,386
=============== =============
LIABILITIES
Deposits $52,666,914 $53,697,888
Annuities 878,057 855,503
Federal funds purchased and commercial paper 2,153,506 1,749,833
Securities sold under agreements to
repurchase 12,033,119 14,853,052
Advances from FHLBs 10,011,425 5,570,819
Other borrowings 3,209,694 2,996,062
Other liabilities 1,480,694 1,446,049
--------------- -------------
Total liabilities 82,433,409 81,169,206
Minority interest -- 80,000
Commitments and contingencies (Note 27) -- --
STOCKHOLDERS' EQUITY
Preferred stock, no par value: 10,000,000
shares authorized - 5,382,500 and
7,300,000 shares issued and outstanding:
Convertible liquidation preference -- 269,375
Nonconvertible liquidation preference 283,063 283,063
Common stock, no par value: 350,000,000
shares authorized - 250,230,644 and
243,239,258 shares issued and outstanding -- --
Capital surplus - common stock 1,657,284 1,517,807
Valuation reserve for available for sale
securities 118,625 297,148
Retained earnings 2,934,116 2,996,787
--------------- -------------
Total stockholders' equity 4,993,088 5,364,180
--------------- -------------
Total liabilities, minority interest
and stockholders' equity $87,426,497 $86,613,386
=============== =============
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
<PAGE> 50
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL
CAPITAL SURPLUS
# OF SHARES SURPLUS OFF-SET
------------------ CAPITAL CAPITAL NONCONVERTIBLE AGAINST
PREFERRED COMMON SURPLUS - SURPLUS - PREFERRED- NOTE
STOCK STOCK COMMON PREFERRED REDEMPTION RECEIVABLE
---------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 7,378 232,811 $1,367,649 $ 269,375 $285,001 $(167,000)
Establishment of valuation
reserve for available-
for-sale securities - - - - - -
Net income - - - - - -
Miscellaneous stock
transactions - 384 7,762 - - -
Cash dividends declared
on preferred stock - - - - - -
Cash dividends declared
on common stock - - - - - -
Adjustment in valuation
reserve for available-
for-sale securities - - - - - -
Common stock issued
through stock options
and employee stock plans - 680 14,896 - - -
Immaterial business
combination accounted
for as a pooling of
interests - 1,454 9,595 - - -
Tax benefit of
restricted stock award - - 785 - - -
Common stock issued
under dividend
reinvestment plan - 1,276 24,984 - - -
Amortization of
restricted stock - - - - - -
------- ------- --------- --------- -------- ---------
Balance at December 31, 1994 7,378 236,605 1,425,671 269,375 285,001 (167,000)
Net income - - - - - -
Miscellaneous stock
transactions - (1) (13) - - -
Cash dividends declared
on preferred stock - - - - - -
Cash dividends declared
on common stock - - - - - -
Adjustment in valuation
reserve for available-
for-sale securities - - - - - -
Common stock issued through
stock options and
employee stock plans - 1,173 21,424 - - -
Capital surplus previously
off-set against note rec. - - - - - 167,000
Immaterial business
combination accounted for
as a pooling of interests - 3,429 23,562 - - -
Repurchase of Series C and
Series E preferred stock (78) - - - (1,938) -
Tax benefit of restricted
stock award - - 387 - - -
Common stock issued under
dividend reinvestment plan - 2,055 47,150 - - -
Amortization of restricted
stock - - - - - -
Restricted stock awards
granted, net of
cancellations - (22) (374) - - -
------- ------- --------- --------- -------- ---------
Balance at December 31, 1995 7,300 243,239 1,517,807 269,375 283,063 -
Net income - - - - - -
Cash dividends declared
on preferred stock - - - - - -
Cash dividends declared
on common stock - - - - - -
Adjustment in valuation
reserve for available-
for-sale securities - - - - - -
Common stock issued
through stock options
and employee stock plans - 1,634 42,509 - - -
Redemption/conversion of
preferred stock (1,918) 12,999 268,270 (269,375) - -
Immaterial business
combination accounted
for as a pooling of
interests - 347 11,844 - - -
Common stock issued under
dividend reinvestment
plan - 92 2,547 - - -
Amortization of
restricted stock - - - - - -
Restricted stock awards
granted, net of
cancellations - (6) (130) - - -
Common stock acquired - (306) (8,831) - - -
Common stock repurchased
under repurchase plan - (5,850) (176,732) - - -
------- ------- ---------- --------- -------- ---------
Balance at December 31, 1996 5,382 250,231 $1,657,284 $ - $283,063 $ -
======= ======= ========== ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
VALUATION
RESERVE TOTAL
RETAINED FOR AFS STOCKHOLDERS'
EARNINGS SECURITIES EQUITY
------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1, 1994 $2,381,628 $ 52,308 $4,188,961
Establishment of valuation
reserve for available-
for-sale securities - 13,836 13,836
Net income 491,509 - 491,509
Miscellaneous stock
transactions (7,774) - (12)
Cash dividends declared
on preferred stock (43,599) - (43,599)
Cash dividends declared
on common stock (190,359) - (190,359)
Adjustment in valuation
reserve for available-
for-sale securities - (182,477) (182,477)
Common stock issued
through stock options
and employee stock plans - - 14,896
Immaterial business
combination accounted
for as a pooling of
interests 6,705 - 16,300
Tax benefit of
restricted stock award - - 785
Common stock issued
under dividend
reinvestment plan - - 24,984
Amortization of
restricted stock 3,798 - 3,798
--------- --------- -----------
Balance at December 31, 1994 2,641,908 (116,333) 4,338,622
Net income 550,924 - 550,924
Miscellaneous stock
transactions - - (13)
Cash dividends declared
on preferred stock (43,599) - (43,599)
Cash dividends declared
on common stock (182,670) - (182,670)
Adjustment in valuation
reserve for available-
for-sale securities - 413,481 413,481
Common stock issued through
stock options and
employee stock plans - - 21,424
Capital surplus previously
off-set against note rec. - - 167,000
Immaterial business
combination accounted for
as a pooling of interests 26,645 - 50,207
Repurchase of Series C and
Series E preferred stock (52) - (1,990)
Tax benefit of restricted
stock award - - 387
Common stock issued under
dividend reinvestment plan - - 47,150
Amortization of restricted
stock 3,257 - 3,257
Restricted stock awards
granted, net of
cancellations 374 - -
--------- --------- -----------
Balance at December 31, 1995 2,996,787 297,148 5,364,180
Net income 230,100 - 230,100
Cash dividends declared
on preferred stock (38,713) - (38,713)
Cash dividends declared
on common stock (258,013) - (258,013)
Adjustment in valuation
reserve for available-
for-sale securities - (178,523) (178,523)
Common stock issued
through stock options
and employee stock plans - - 42,509
Redemption/conversion of
preferred stock - - (1,105)
Immaterial business
combination accounted
for as a pooling of
interests - - 11,844
Common stock issued under
dividend reinvestment
plan - - 2,547
Amortization of
restricted stock 3,934 - 3,934
Restricted stock awards
granted, net of
cancellations 21 - (109)
Common stock acquired - - (8,831)
Common stock repurchased
under repurchase plan - - (176,732)
---------- --------- -----------
Balance at December 31, 1996 $2,934,116 $ 118,625 $4,993,088
========== ========= ===========
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
<PAGE> 51
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
---------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 230,100 $ 550,924 $ 491,509
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 392,435 251,424 327,068
(Gain) on sale of loans (44,897) (11,024) (29,180)
(Gain) on sale of assets (17,832) (34,739) (88,079)
Depreciation and amortization 182,694 181,192 197,965
FHLB stock dividend (57,176) (39,971) (37,986)
Write-down of mortgage backed securities 38,339 19,651 821
(Increase) decrease in trading account securities (1,409) 334 526
Origination of loans held for sale (3,386,093) (2,579,058) (1,521,542)
Sale of loans held for sale 3,622,240 2,317,031 1,968,346
Decrease (increase) in other assets 491,476 (553,018) (114,558)
Increase (decrease) in other liabilities 148,783 (177,059) (213,999)
----------- ----------- ------------
Net cash provided (used) by operating activities 1,598,660 (74,313) 980,891
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities (4,130,281) (3,897,102) (3,740,307)
Principal payments and maturities of
available-for-sale securities 2,342,963 1,315,050 1,241,143
Sales of available-for-sale securities 7,023,171 3,629,840 1,651,744
Purchases of held to maturity securities (3,414,473) (697,470) (2,429,586)
Principal payments and maturities of held-to-
maturity securities 4,019,873 1,653,413 1,283,101
Sales of loans 1,314,090 119,194 282,750
Principal payments on loans 7,651,371 6,889,663 7,785,602
Origination and purchase of loans (17,986,489) (16,271,872) (17,216,339)
Payments received on New West Federal Savings and
Loan Association ("New West") Note -- 1,682,040 1,569,018
Foreclosed asset expense, net 544,347 553,621 796,448
(Purchases) dispositions of
premises and equipment, net (94,698) (164,169) (55,367)
Cash acquired through acquisitions 3,506 69,358 40,679
----------- ----------- ------------
Net cash (used) by investing activities (2,726,620) (5,118,434) (8,791,114)
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in deposits (1,030,974) 1,652,935 (2,831,212)
Increase in annuities 22,554 56,325 85,795
Increase in federal funds and
commercial paper purchased 403,673 729,372 627,803
(Decrease) increase in securities sold under short
term agreements to repurchase (2,181,151) (1,049,527) 7,471,323
Proceeds from securities sold under long term
agreements to repurchase 4,011,148 5,347,579 2,517,503
Repayment of securities sold under long term
agreements to repurchase (4,649,930) (2,381,401) (260,713)
Proceeds from FHLB advances 24,676,544 5,472,178 10,234,451
Payments on FHLB advances (20,235,938) (4,217,336) (9,842,221)
Proceeds (repayments) from other borrowings 229,025 190,852 (83,854)
Repayments to minority interest (95,372) -- -
Common stock repurchased (176,732) -- -
Other capital transactions 38,944 70,215 44,451
Cash dividends paid (296,726) (226,269) (233,958)
----------- ----------- ------------
Net cash provided by financing operations 715,065 5,644,923 7,729,368
----------- ----------- ------------
(Decrease) increase in cash and cash equivalents (412,895) 452,176 (80,855)
Cash and cash equivalents at beginning of period 2,078,250 1,626,074 1,706,929
----------- ----------- -------------
Cash and cash equivalents at end of period $ 1,665,355 $ 2,078,250 $ 1,626,074
=========== =========== =============
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
<PAGE> 52
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
---------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
NONCASH INVESTING ACTIVITIES
Loans exchanged for mortgage-backed securities $ 920,072 $ 8,585,719 $5,685,670
Transfer to available-for-sale securities -- 10,844,168 2,127,890
Loans transferred to foreclosed assets 650,079 676,001 839,084
Loans originated to facilitate the sale of
foreclosed assets 145,315 152,059 185,001
Loans originated to refinance existing loans 1,227,974 908,486 1,340,063
Loans transferred to loans held for sale -- 621,267 --
CASH PAID DURING THE YEAR FOR
Interest on deposits 2,215,708 2,340,107 1,802,686
Interest on borrowings 1,549,354 1,483,695 784,512
Income taxes 269,900 159,468 203,828
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
<PAGE> 53
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
On July 1, 1997, Great Western Financial Corporation ("Great Western")
merged with and into a subsidiary of Washington Mutual, Inc. ("WMI" and together
with its subsidiaries "Washington Mutual" or the "Company"), and all of the
subsidiaries of Great Western, including Great Western Bank, a Federal Savings
Bank ("GWB") and Aristar, Inc. ("Aristar"), became subsidiaries of 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. 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.
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.
On December 20, 1996, Keystone Holdings, Inc. ("Keystone Holdings")
merged with and into Washington Mutual, and all of the subsidiaries of Keystone
Holdings, including American Savings Bank, F.A. ("ASB"), became subsidiaries of
the Company (the "Keystone Transaction"). The 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.
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 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 the Company'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
consumers and small and mid-sized businesses primarily throughout the Western
United States and Florida through its subsidiary operations. Financial services
of the Company include accepting deposits from the general public and making
residential loans, consumer loans, limited types of commercial real estate loans
(primarily loans secured by multi-family properties), and commercial business
loans which are offered principally through WMB, GWB, ASB and Washington Mutual
Bank fsb ("WMBfsb"). Through Aristar, the Company also conducts consumer finance
operations in 23 states. Washington Mutual also sells annuities and
<PAGE> 54
other insurance products, offers full service securities brokerage, and acts as
the investment advisor to and the distributor of mutual funds.
Derivative Instruments
The Company uses derivative instruments, such as interest rate exchange
agreements and interest rate cap agreements, forward sales of financial
instruments, financial futures and options to reduce its exposure to interest
rate risk. Interest rate exchange agreements and interest rate cap agreements
are used only if they have the effect of changing the interest rate
characteristics of the assets or liabilities to which they are designated. Such
effect is measured either through ongoing correlation or effectiveness tests.
Interest rate exchange agreements and interest rate cap agreements are
designated either against the available-for-sale portfolio or against deposits
and borrowings. Agreements designated against available-for-sale securities are
included at fair value in the available-for-sale portfolio and any
mark-to-market adjustments are reported with the change in value of the
available-for-sale portfolio. Interest rate exchange agreements and interest
rate cap agreements designated against deposits and borrowings are reported at
historical cost using settlement accounting.
The interest differential paid or received on interest rate exchange
agreements is recorded as an adjustment to interest income or interest expense.
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 premiums
are paid at the time interest rate exchange agreements are 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 deposits and borrowings. Such redesignations are recorded at 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. The fair value of options matched
against closed loans are included in the lower of cost or market analysis.
Changes in the fair value of options designated against the Company's loan
pipeline are deferred to the extent they qualify as hedges, otherwise they 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. 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 fair value.
<PAGE> 55
Additionally, to lock in prices on sales of loans originated for
mortgage banking activities, 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 are marked to market with the corresponding
gain or loss recognized in income.
Investment Securities
The Company accounts for investment and equity securities in the
following three categories: trading, held-to-maturity and available-for-sale.
Trading Securities
Trading securities are generally 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 a company 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. Other than temporary declines in fair value are recognized as a
reduction to current earnings.
The Company holds a small amount of tax exempt securities, but has
chosen not to report the applicable interest income and yield on a tax
equivalent basis.
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 some private-issue securities.
Private-issue securities include mortgage-backed securities ("MBS") and
collateralized mortgage obligations ("CMOs") 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 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 CMOs 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 CMOs
where the Company holds subordinated tranches, certain CMOs that have been
"resecuritized," and certain securities that contain a significant number of
jumbo, nonconforming loans. Other than temporary declines in fair value are
recognized as a reduction to current earnings.
<PAGE> 56
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 loans 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 generally ceases to accrue interest income on any loan that
becomes more than 90 days delinquent and reverses 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 is not being accrued
are referred to as loans on nonaccrual status.
On January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of
a Loan as modified by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures. 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 single family residential real estate,
consumer and consumer finance loans. Residential construction, commercial real
estate and commercial business loans 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 considered 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 position of the Company.
The Company has full recourse on certain loans that have been
securitized or sold.
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, 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.
<PAGE> 57
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; 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.
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.
Consumer finance subsidiaries are also reviewed on a systematic basis.
In evaluating the adequacy of the reserve, consideration is given to recent loan
loss experience and such other factors which, in management's judgment, deserve
current recognition in estimating losses. Non-real estate secured loans are
charged off based on the number of days contractually delinquent (180 days for
substantially all loans).
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.
Foreclosed Assets
Foreclosed assets include properties acquired through foreclosure that
are transferred 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 a reserve for losses. The amount the Company ultimately recovers from
foreclosed assets may differ substantially from 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.
Foreclosed commercial real estate 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 Financial Accounting Standards Board ("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 or securitize loans and retain
the servicing rights are required to allocate the total cost of the loans
between servicing rights and loans based on relative fair values if their values
can be estimated. In September 1995, the Company elected early adoption of SFAS
No. 122, as permitted by the Statement, and implemented it as of January 1,
1995.
Purchased servicing rights 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
servicing rights and the loans (without the servicing rights) based on relative
fair values and recorded in other assets. 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. "Short servicing" is recorded
in other liabilities in instances where the cost of servicing exceeds the
servicing fees received and amortized in proportion to, and over the period of,
estimated net servicing loss.
<PAGE> 58
The Company assesses impairment of the capitalized servicing rights
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 servicing rights are stratified based
on the following predominant risk characteristics of the underlying loans:
fixed-rate mortgage loans by coupon (less than 6%, 50 or 100 basis point
increments between 6% and 12% and greater than 12%); and adjustable-rate
mortgage loans ("ARMs") by index, such as the 11th District Cost of Funds Index
("COFI"), Treasury, or the London Interbank Offering Rate ("LIBOR").
In order to determine the fair value of the servicing rights, the
Company primarily uses a valuation model that calculates the present value of
future cash flows. Assumptions used in the valuation model include market
discount rates and anticipated prepayment speeds. The prepayment speeds are
determined from market sources for fixed-rate mortgages with similar coupons,
and prepayment reports for comparable ARMs. In addition, the Company uses market
comparables for estimates of the cost of servicing per loan, an inflation rate,
ancillary income per loan, and default rates.
Premises and Equipment
Land, buildings, leasehold improvements and equipment are carried at
amortized cost. Buildings and equipment are depreciated over their estimated
useful lives using the straight-line method. Leasehold improvements are
amortized over the shorter of their useful lives or lease terms.
Goodwill and Intangibles
Because of the earnings power or other identifiable values of certain
purchased companies or businesses the Company paid amounts in excess of
identifiable fair value for businesses and tangible assets acquired. Generally,
such amounts are being amortized by systematic charges to income (periods
ranging from six to 40 years) over a period no greater than the estimated
remaining life of the assets acquired or not exceeding the estimated average
remaining life of the existing deposit base assumed. The Company periodically
reviews intangibles to assess recoverability and impairment is recognized in
operations if permanent loss of value occurs.
Annuity and Insurance Accounting
The Company, through its subsidiaries offers various annuity, life and
casualty insurance products. 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 Supplemental 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
repurchase agreements are accounted for as financing arrangements, with the
obligation to repurchase securities sold reflected as a liability in the
Supplemental Consolidated Statements of Financial Position. The dollar amount of
securities underlying the agreements remain in the respective asset accounts.
<PAGE> 59
Trust Assets
Assets held by the Company in fiduciary or agency capacity for customers
are not included in the Supplemental Consolidated Statements of Financial
Position as such items are not assets of the Company. Assets totaling $85.8
million and $67.3 million as of December 31, 1996 and 1995 were held by the
Company in fiduciary or agency capacity
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. The Keystone Holdings returns included losses of ASB's
nominee, New West, incurred through October 24, 1995. Net operating losses of
New West incurred prior to that date are available for carryforward by ASB and
have been included in the schedule of net operating loss carryforwards
presented in Note 20. For periods subsequent to the merger with Keystone
Holdings, the Company will file a consolidated tax return that includes all of
its subsidiaries as of December 20, 1996.
Great Western and its subsidiaries will file separate consolidated tax
returns for periods prior to July 1, 1997. For periods subsequent to the merger
with Great Western, the Company will file a consolidated tax return that
includes all of its subsidiaries.
NOTE 2: BUSINESS COMBINATIONS
On January 31, 1996, the Company acquired Western Bank ("Western")
through a merger of Western with and into WMB. 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 5,865,235 shares of common stock to complete the
merger with Western. The merger was treated as a pooling-of-interests. The
financial information presented in this document reflects the
pooling-of-interests method of accounting for the merger of Western into the
Company. Accordingly, the assets, liabilities and stockholders' equity 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.
On December 20, 1996, WMI merged with Keystone Holdings. Keystone
Holdings was the indirect parent of ASB, a California-based federally chartered
savings bank. At November 30, 1996, Keystone Holdings had assets of $21.9
billion, deposits of $12.8 billion and stockholder's equity of $808.6 million.
The Company issued 47,883,333 shares of common stock to complete the merger with
Keystone Holdings. The merger was treated as a pooling-of-interests. The
financial information presented in this document reflects the
pooling-of-interests method of accounting for the merger of Keystone Holdings
into the Company. Accordingly, the assets, liabilities and stockholders' equity
of Keystone Holdings were recorded
<PAGE> 60
on the books of the resulting institution at their values 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 results of operations 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.
On July 1, 1997, a subsidiary of WMI merged with Great Western the
parent of GWB, a California-based federally chartered savings bank, and Aristar,
a consumer finance company. At July 1, 1997, Great Western had assets of $48.8
billion, deposits of $27.8 billion and stockholder's equity of $2.7 billion. The
Company issued 125,649,551 shares of common stock to complete the merger with
Great Western. The merger was treated as a pooling-of-interests. The financial
information presented in this document reflects the pooling-of-interests method
of accounting for the merger of Great Western into the Company. Accordingly,
under generally accepted accounting principles, the assets, liabilities and
stockholders' equity of Great Western were recorded on the books of the
resulting institution at their values as reported on the books of Great Western
immediately prior to the consummation of the merger with Great Western. No
goodwill was created in the merger with Great Western. This presentation
required the restatement of prior periods as if the companies had been combined
for all years presented. Certain amounts in Great Western's financial statements
have been restated to conform to WMI's presentation.
The following information represents the supplemental results of
operations of the Company, Great Western and Keystone Holdings for 1996, 1995
and 1994 on an individual as well as a 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 operating results of Western are included with those of Washington Mutual.
The supplemental results of operations were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------
WASHINGTON GREAT KEYSTONE
MUTUAL WESTERN HOLDINGS RESTATED
----------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total revenue $1,851,394 $3,631,137 $1,562,723 $7,045,254
Net income 223,934 115,822 (109,656) 230,100
Net income per common share:
Primary $2.82 - - $0.81
Fully diluted 2.73 - - 0.80
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------
WASHINGTON GREAT KEYSTONE
MUTUAL WESTERN HOLDINGS RESTATED
----------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total revenue $1,705,084 $3,629,263 $1,427,591 $6,761,938
Net income 199,801 261,022 90,101 550,924
Net income per common share:
Primary $2.68 - - $2.17
Fully diluted 2.59 - - 2.15
</TABLE>
<PAGE> 61
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------------------------------
WASHINGTON GREAT KEYSTONE
MUTUAL WESTERN HOLDINGS RESTATED
----------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total revenue $1,383,983 $3,099,941 $1,139,155 $5,623,079
Net income 181,322 251,234 58,953 491,509
Net income per common share:
Primary $2.54 - - $1.98
Fully diluted 2.46 - - 1.97
</TABLE>
NOTE 3: CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
--------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and demand deposits $1,032,379 $1,526,550
Cash equivalents:
Overnight investments 381,029 293,000
Repurchase agreements 250,000 257,000
Time deposits 1,947 1,700
---------- ----------
632,976 551,700
---------- ----------
$1,665,355 $2,078,250
========== ==========
</TABLE>
The Company purchases securities under agreements to resell ("repurchase
agreements") having terms of up to 90 days; however, they are typically
overnight investments. The Company generally takes possession of collateral
supporting repurchase agreements. The repurchase agreements were collateralized
by federal agency securities with market values at least two percent above the
face amounts of the repurchase agreements.
For the purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, overnight investments, repurchase
agreements 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 $149.7 million and $260.8
million at December 31, 1996 and 1995.
<PAGE> 62
NOTE 4: AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities classified by type and, for investment
securities, contractual maturity date consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE YIELD(1)
--------------------------------------------------------------
Investment securities: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. government and agency obligations:
Due within one year $ 257,884 $ 638 $ - $ 258,522 6.47%
Due after one year but
within five years 606,097 1,262 (1,896) 605,463 6.32
After five but within 10 years 11,527 150 (4) 11,673 6.79
After 10 years 2,671 18 (4) 2,685 6.92
----------- -------- --------- --------- ------
878,179 2,068 (1,904) 878,343 6.38
Corporate debt obligations:
Due within one year 321,308 98 (24) 321,382 5.67
Due after one year but
within five years 366,067 4,009 (657) 369,419 6.56
After five but within 10 years 228,241 3,589 (2,243) 229,587 7.14
After 10 years 117,260 3,472 (1,872) 118,860 7.44
----------- -------- --------- --------- ------
1,032,876 11,168 (4,796) 1,039,248 6.51
Equity securities:
Preferred stock 171,029 4,012 (831) 174,210 6.88
Other securities 34,621 175 (129) 34,667 5.99
----------- -------- --------- --------- ------
205,650 4,187 (960) 208,877 6.73
----------- -------- --------- --------- ------
2,116,705 17,423 (7,660) 2,126,468 6.48
Mortgage-backed securities:
U.S. government agency 12,541,352 231,349 (53,412) 12,719,289 6.89
Corporate 1,250,738 8,372 (11,338) 1,247,772 7.38
----------- -------- --------- --------- ------
13,792,090 239,721 (64,750) 13,967,061 6.93
Derivative instruments:
Interest rate exchange agreements - 265 (911) (646) -
Interest rate cap agreements 4,645 271 (2,456) 2,460 -
----------- -------- --------- --------- ------
4,645 536 (3,367) 1,814 -
----------- -------- --------- --------- ------
$15,913,440 $257,680 $(75,777) $16,095,343 6.87%
=========== ======== ========= =========== ======
</TABLE>
(1) Weighted average yield at end of year.
<PAGE> 63
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE YIELD(1)
-------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
Due within one year $ 384,151 $ 2,218 $ (247) $ 386,122 6.11%
Due after one year but
within five years 466,692 4,345 (189) 470,848 6.46
After five but within 10 years 19,118 324 (185) 19,257 6.72
After 10 years 60,314 121 (770) 59,665 7.02
----------- -------- --------- ----------- -------
930,275 7,008 (1,391) 935,892 6.36
Corporate debt obligations:
Due within one year 248,342 750 (117) 248,975 5.91
Due after one year but
within five years 271,060 8,336 (219) 279,177 7.53
After five but within 10 years 229,974 9,108 (829) 238,253 7.08
After 10 years 110,309 6,735 (150) 116,894 7.38
----------- -------- --------- ----------- -------
859,685 24,929 (1,315) 883,299 6.94
Equity securities:
Preferred stock 110,532 2,535 (2,310) 110,757 7.21
Other securities 30,430 173 (118) 30,485 6.10
----------- -------- --------- ----------- -------
140,962 2,708 (2,428) 141,242 6.97
----------- -------- --------- ----------- -------
1,930,922 34,645 (5,134) 1,960,433 6.66
Mortgage-backed securities:
U.S. government agency 16,591,264 434,336 (21,163) 17,004,437 7.05
Corporate 1,804,289 9,640 (26,867) 1,787,062 7.20
----------- -------- --------- ----------- -------
18,395,553 443,976 (48,030) 18,791,499 7.06
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) -
----------- -------- --------- ----------- -------
$20,337,573 $480,846 $(68,919) $20,749,500 7.03%
=========== ======== ========= =========== =======
</TABLE>
(1) Weighted average yield at end of year.
Proceeds from sales of investment securities in the available-for-sale
portfolio during 1996, 1995 and 1994 were $139.1 million, $626.2 million and
$513.1 million. The Company realized $1.9 million in gains and $799,000 in
losses on these sales during 1996. The Company realized $4.0 million in gains
and $2.2 million in losses on sales during 1995. Similarly, the Company realized
$3.0 million in gains and $800,000 in losses during 1994. Proceeds from sales of
MBS in the available-for-sale portfolio during 1996, 1995 and 1994 were $4.4
billion, $1.5 billion and $337.9 million. The Company realized $40.2 million in
gains and $33.3 million in losses on these sales during 1996 and $27.1 million
in gains and $7.8 million in losses on these sales during 1995. Similarly, the
Company realized $2.8 million in gains and $469,000 in losses on these sales
during 1994.
Available-for-sale MBS with an amortized cost and fair value of $11.4
billion at December 31, 1996 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.
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 an amortized cost of $10.8 billion and gross unrealized gains of
$225.6 million and gross unrealized losses of $28.2 million. No transfers
between the held-to-maturity and available-for-sale categories were made during
1996.
<PAGE> 64
At December 31, 1996, net unrealized gains on the available-for-sale
portfolio were $184.7 million and unrealized losses on the derivative
instruments designated against this portfolio were $2.8 million, resulting in a
combined net unrealized gain included as a separate component of stockholders'
equity (on an after-tax basis) of $118.6 million. At December 31, 1995, net
unrealized gains on the available-for-sale portfolio were $425.5 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 $297.1 million.
On December 31, 1996, the Company held $1.2 billion of private-issue
MBS and CMOs. Of that amount, 16% were of the highest investment grade (AAA),
75% were rated investment grade (AA or A), 6% were rated lowest investment grade
(BBB) and 3% were rated below investment grade (BB or below). During 1996, the
Company recognized $2.4 million in losses on securities in the below investment
grade portfolio. On December 31, 1995, the Company held $1.8 billion of
private-issue MBS and CMOs. Of that amount, 25% were of the highest investment
grade (AAA), 67% were rated investment grade (AA or A), 5% were rated lowest
investment grade (BBB) and 3% were rated below investment grade (BB or below).
During 1995, the Company recognized $8.4 million in losses on securities in the
below investment grade portfolio.
As of December 31, 1996, the Company had MBS with an amortized cost of
$409.2 million and a fair value of $407.4 million from a single issuer, the
Resolution Trust Corporation.
NOTE 5: HELD-TO-MATURITY SECURITIES
Held-to-maturity securities classified by type and, for investment
securities, contractual maturity date consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE YIELD(1)
-----------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
After five but within 10 years $ 6,629 $ 559 $ -- $ 7,188 8.25%
---------- -------- ----------- ---------- ----
6,629 559 -- 7,188 8.25
Corporate debt obligations:
Due within one year 6,607 2 -- 6,609 5.02
Due after one year but
within five years 41,486 2,432 (5) 43,913 8.90
After five but within 10 years 14,618 919 (23) 15,514 8.68
After 10 years 15,282 1,862 -- 17,144 9.19
---------- -------- ----------- ---------- ----
77,993 5,215 (28) 83,180 8.61
Municipal obligations(2):
Due after one year but
within five years 7,096 205 -- 7,301 6.24
After five but within 10 years 30,176 1,385 -- 31,561 6.70
After 10 years 70,801 2,028 (238) 72,591 6.02
---------- -------- ----------- ---------- ----
108,073 3,618 (238) 111,453 6.23
---------- -------- ----------- ---------- ----
192,695 9,392 (266) 201,821 7.28
Mortgage-backed securities:
U.S. government agency obligations 4,186,777 73,534 (7,781) 4,252,530 7.60
Corporate obligations 99,584 -- (8,810) 90,774 5.55
---------- -------- ----------- ---------- ----
4,286,361 73,534 (16,591) 4,343,304 7.56
---------- -------- ----------- ---------- ----
$4,479,056 $ 82,926 $(16,857) $4,545,125 7.55%
========== ======== =========== ========== ====
</TABLE>
(1) Weighted average yield at end of year.
(2) The Company holds a small amount of tax exempt securities, but has chosen
not to report the applicable interest income and yield on a tax equivalent
basis.
<PAGE> 65
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES 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
Due after one year 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(2):
Due within one year 1,090 1 -- 1,091 6.85
Due after one year 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 obligations 4,696,373 117,062 (3,381) 4,810,053 7.82
Corporate obligations 99,587 -- (7,010) 92,577 5.75
----------- ----------- ----------- ------------- ----
4,795,960 117,062 (10,391) 4,902,631 7.78
----------- ----------- ----------- ------------- ----
$5,084,456 $130,726 $(10,414) $5,204,768 7.72%
=========== =========== =========== ============= ====
</TABLE>
(1) Weighted average yield at end of year.
(2) The Company holds a small amount of tax exempt securities, but has chosen
not to report the applicable interest income and yield on a tax equivalent
basis.
Held-to-maturity MBS with an amortized cost of $3.9 billion and a fair
value of $3.9 billion at December 31, 1996 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 1996
and 1995.
Impairment charge-offs on MBS are reflected in the write down on MBS
shown as a charge to earnings in other income. Prior year amounts have been
reclassified to conform with the 1996 presentation. Write-downs on MBS were
$35.9 million for the year ended December 31, 1996, $11.3 million for the year
ended December 31, 1995 and $821,000 for the year ended December 31, 1994.
<PAGE> 66
NOTE 6: LOANS
Loans consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
----------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real Estate
Single family residential ("SFR") $ 48,689,404 $ 41,907,598
Residential construction 728,121 629,280
Commercial real estate 6,488,254 6,467,013
------------ ------------
55,905,779 49,003,891
Second mortgage and other consumer 2,371,086 2,473,651
Manufactured housing 1,028,192 885,181
Consumer finance 2,185,903 2,136,022
Commercial business 340,149 179,568
Reserve for loan losses (677,141) (598,124)
------------ ------------
$ 61,153,968 $ 54,080,189
============ ============
</TABLE>
Included in the table above are loans held for sale of $333.3 million
and $569.4 million at December 31, 1996 and 1995.
Nonaccrual loans totaled $575.0 million and $700.3 million at December
31, 1996 and 1995. If interest on these loans had been recognized, such income
would have been $53.5 million in 1996, $48.9 million for 1995 and $58.5 million
for 1994.
At December 31, 1996, loans totaling $498.3 million were impaired, of which
$402.1 million had allocated reserves of $79.7 million. The remaining $96.2
million had no reserves allocated to them. Of the $498.3 million of impaired
loans, $45.6 million were on nonaccrual status and $452.7 million were
performing but judged to be impaired. Similarly, at December 31, 1995, loans
totaling $417.6 million were impaired, of which $274.6 million had allocated
reserves of $61.8 million. The remaining $143.0 million had no reserves
allocated to them. Of the $417.6 million of impaired loans, $67.7 million were
on nonaccrual status and $349.9 million were performing but judged to be
impaired. The average balance of impaired loans during 1996 and 1995 was $479.2
million and $331.6 million and the Company recognized $30.7 million and $24.3
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 1996
and 1995.
<PAGE> 67
Loans, exclusive of reserve for loan losses, by geographic concentration were
as follows:
<TABLE>
<CAPTION>
CALIFORNIA WASHINGTON OREGON FLORIDA OTHER STATES TOTAL
---------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
SFR $29,014,429 $ 6,601,428 $ 3,462,981 $ 1,895,336 $ 7,715,230 $48,689,404
Residential construction 2,728 374,653 256,907 326 93,507 728,121
Apartment buildings 2,875,530 558,412 279,048 53,905 279,257 4,046,152
Other commercial real estate 1,327,368 683,205 118,253 52,907 260,369 2,442,102
----------- ----------- ----------- ----------- ----------- -----------
33,220,055 8,217,698 4,117,189 2,002,474 8,348,363 55,905,779
Second mortgage and other
consumer 219,381 1,178,797 551,165 32,946 388,797 2,371,086
Manufactured housing 118,415 458,175 236,247 -- 215,355 1,028,192
Consumer Finance 213,440 -- -- 236,321 1,736,142 2,185,903
Commercial business -- 126,841 212,112 -- 1,196 340,149
----------- ----------- ----------- ----------- ----------- -----------
$33,771,291 $ 9,981,511 $ 5,116,713 $ 2,271,741 $10,689,853 $61,831,109
=========== =========== =========== =========== =========== ===========
</TABLE>
Loans in California included $19.5 billion of loans in Southern California,
$11.4 billion of loans in Northern California, and $2.8 billion of loans in
Central California.
Loans, exclusive of reserve for loan losses, by repricing or maturity date
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
(DOLLARS IN THOUSANDS)
<S> <C>
Adjustable rate loans:
Due within one year $ 19,157,483
After one but within five years 5,359,891
After five but within 10 years 3,730,360
After 10 years 21,201,245
-------------
49,448,979
Fixed rate loans:
Due within one year 2,305,809
After one but within five years 4,475,005
After five but within 10 years 2,746,817
After 10 years 2,993,153
-------------
12,520,784
-------------
Deferred loan fees and premiums and discounts (138,654)
-------------
$ 61,831,109
=============
</TABLE>
In addition to loans the Company serviced for its own portfolio, it serviced
loans of $34.7 billion and $32.5 billion at December 31, 1996 and 1995 for U.S.
government agencies, institutions and private investors.
Loans of $18.0 billion at December 31, 1996 were pledged to secure advances
from FHLBs. Unamortized deferred loan fees were $162.0 million and $163.1
million at December 31, 1996 and 1995.
At December 31, 1996, the Company had $589.6 million in fixed-rate mortgage
loan commitments, $1,251.4 million in adjustable-rate mortgage loan commitments,
$655.0 million in residential construction loan commitments, $123.9 million in
commercial real estate loan commitments, $169.1 million in
<PAGE> 68
commercial business loan commitments, $978.8 million in undisbursed lines of
credit and $7.0 million in stand-by lines of credit.
NOTE 7: RESERVE FOR LOAN LOSSES
Changes in the reserve for loan losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
-----------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year $ 598,124 $ 683,040 $ 747,331
Provision for loan losses 392,435 251,424 327,068
Reserves added through business combinations 1,077 5,372 921
Loans charged-off:
SFR (232,653) (240,489) (278,786)
Residential construction (16) (125) (190)
Commercial real estate (36,354) (55,888) (69,816)
Manufactured housing, second mortgage and other (11,127) (8,905) (14,306)
consumer
Commercial business/credits (435) (813) (2,065)
Consumer finance (60,520) (62,206) (54,041)
--------- --------- ---------
(341,105) (368,426) (419,204)
Recoveries of loans previously charged-off:
Residential 5,693 3,891 3,942
Residential construction -- 47 --
Commercial real estate 3,425 5,286 5,110
Manufactured housing, second mortgage
and other consumer 1,221 951 1,861
Commercial business/credits 74 482 443
Consumer finance 16,197 16,057 15,568
--------- --------- ---------
26,610 26,714 26,924
--------- --------- ---------
Net charge-offs (314,495) (341,712) (392,280)
--------- --------- ---------
Balance, end of year $ 677,141 $ 598,124 $ 683,040
========= ========= =========
</TABLE>
In 1996 the Company provided an additional $125.0 million in loan loss
provision with the merger of Keystone Holdings. This additional loan loss
provision was provided principally because a number of Washington Mutual (prior
to the business combination with Keystone Holdings) credit administration and
asset management philosophies and procedures differed from those of ASB.
<PAGE> 69
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.
An analysis of the reserve for loan losses was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995
-------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Allocated reserves:
Multi-family residential and nonresidential $117,343 $ 66,397
real estate
Builder construction - 158
Commercial business 1,285 -
-------------------------------------
Total allocated reserves 118,628 66,555
Unallocated reserves 558,513 531,569
-------------------------------------
Total loan loss reserves $677,141 $598,124
=====================================
Total reserve for loan losses as a percentage of:
Nonperforming loans 118% 85%
Nonperforming assets 84 60
</TABLE>
NOTE 8: FORECLOSED ASSETS
Foreclosed assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
----------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Foreclosed assets $229,237 $322,649
Other repossessed assets 2,651 1,019
Reserve for losses (9,005) (36,962)
----------------------------
$222,883 $286,706
============================
</TABLE>
Changes in the reserve for losses on foreclosed assets were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1996 1995 1994
-------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year $ 36,962 $ 50,057 $ 82,758
Provision for losses on foreclosed assets (5,935) 12,023 27,491
Reserves charged-off, net of recoveries (22,022) (25,118) (60,192)
-------------------------------------------
$ 9,005 $ 36,962 $ 50,057
===========================================
</TABLE>
<PAGE> 70
Foreclosed assets operations were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1996 1995 1994
------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loss from operations $(40,538) $(29,435) $(28,738)
Gain on sale of foreclosed assets 16,298 24,293 9,132
Provision for foreclosed assets losses 5,935 (12,023) (27,491)
------------------------------------------
$(18,305) $(17,165) $(47,097)
==========================================
</TABLE>
NOTE 9: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995
-------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Furniture and equipment $ 745,795 $ 797,783
Buildings 845,262 853,781
Leasehold improvements 41,968 31,060
Land 169,782 168,382
Construction in progress 17,203 21,298
------------------------------
1,820,010 1,872,304
Accumulated depreciation (785,197) (814,889)
------------------------------
$1,034,813 $1,057,415
==============================
</TABLE>
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.
Depreciation expense for 1996, 1995 and 1994 was $117.3 million, $112.6
million and $110.2 million.
The Company leases various branch offices, office facilities and equipment
under capital and noncancelable operating leases which expire at various dates
through 2043. Some leases contain escalation provisions for adjustments in the
consumer price index and provide for renewal options for five - to - ten year
periods Rental expense, including amounts paid under month-to-month cancelable
leases, amounted to $102.4 million, $100.9 million and $99.7 million in 1996,
1995 and 1994.
<PAGE> 71
Future minimum net rental commitments, including maintenance and other
associated costs, for all noncancelable leases were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------
LAND & FURNITURE &
BUILDINGS EQUIPMENT
----------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Due within one year $ 88,565 $ 7,401
After one but within two years 79,320 5,465
After two but within three years 68,434 4,139
After three but within four years 61,036 878
After four but within five years 52,588 644
After five years 278,530 --
----------------------------------
$628,473 $18,527
==================================
</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 Company
periodically evaluates long-lived assets for impairment.
NOTE 10: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
-------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Branch acquisitions, net of amortization of $289,612 and
$251,890 $285,991 $323,713
Business combinations, net of amortization of $125,542
and $98,654 132,425 159,259
Other, net of amortization of $10,258 and $9,474 1,084 1,868
------------------------
$419,500 $484,840
========================
</TABLE>
NOTE 11: MORTGAGE SERVICING RIGHTS
Mortgage servicing rights are included in other assets and consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1996 1995 1994
--------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year $115,145 $ 71,489 $ 75,191
Additions 96,166 66,548 38,989
Sales (5,395) - (13,087)
Amortization (36,845) (22,010) (29,604)
Impairment of short servicing (1,643) - -
Impairment valuation allowance (2,158) (882) -
--------------------------------------
Balance, end of year $165,270 $115,145 $ 71,489
======================================
</TABLE>
With the adoption of SFAS No. 122, the Company provided a valuation allowance
for impairment of mortgage servicing rights. No write-downs to mortgage
servicing rights were recorded in 1996, 1995 and 1994. The balance of
<PAGE> 72
mortgage servicing rights included short servicing of $20.7 million, $21.2
million and $25.4 million at December 31, 1996, 1995 and 1994.
NOTE 12: DEPOSITS
Deposits consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
-------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Checking accounts:
Interest bearing $ 4,980,766 $ 5,194,668
Noninterest bearing 2,576,822 2,243,622
----------- -----------
7,557,588 7,438,290
Savings accounts 3,265,995 3,668,641
Money market deposit accounts 10,320,276 9,494,137
Time deposit accounts:
Due within one year 27,002,176 25,718,918
After one but within two years 2,525,843 5,245,809
After two but within three years 713,005 799,580
After three but within four years 631,922 618,541
After four but within five years 567,004 615,415
After five years 83,105 98,557
----------- -----------
31,523,055 33,096,820
----------- -----------
$52,666,914 $53,697,888
=========== ===========
</TABLE>
Time deposit accounts in amounts of $100,000 or more totaled $7.1 billion and
$6.6 billion at December 31, 1996 and 1995. At December 31, 1996, $2.4 billion
of these deposits mature within three months, $924.2 million mature in three to
six months, $2.3 billion mature in six months to one year, and $1.5 billion
mature after one year.
Financial data pertaining to the weighted average cost of deposits were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
--------------------------
<S> <C> <C> <C>
Weighted daily average interest
rate during the year 4.22% 4.40% 3.38%
</TABLE>
<PAGE> 73
NOTE 13: FEDERAL FUNDS PURCHASED AND COMMERCIAL PAPER
Federal funds purchased and commercial paper consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
-----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Federal funds purchased $1,681,000 $ 713,420
Commercial paper 472,506 1,036,413
---------- ----------
$2,153,506 $1,749,833
========== ==========
</TABLE>
The Company purchased federal funds from a variety of counterparties during
1996, 1995 and 1994. All federal funds purchased had maturities less than 12
months.
The Company issued commercial paper during 1996, 1995 and 1994. All
commercial paper issued has original maturities of less than 270 days.
Financial data pertaining to federal funds purchased and commercial paper was
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
--------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal funds purchased
Weighted average interest rate at end of year 5.78% 5.84% 6.29%
Weighted daily average interest rate during the year 5.37 6.16 4.18
Daily average balance of federal funds purchased $1,351,427 $ 721,015 $328,383
Maximum amount of federal funds purchased at
any month end 2,242,000 998,000 540,000
Interest expense during the year 72,639 44,413 13,726
Commercial paper
Weighted average interest rate at end of year 5.70% 5.88% 6.06%
Weighted daily average interest rate during the year 5.38 6.39 4.56
Daily average balance of commercial paper $699,409 $1,142,851 $431,021
Maximum amount of commercial paper issued at
any month end 967,962 1,551,200 887,514
Interest expense during the year 37,608 73,029 19,664
</TABLE>
<PAGE> 74
NOTE 14: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
-------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Reverse repurchase agreements $11,789,324 $14,461,137
Dollar repurchase agreements 243,795 391,915
----------- -----------
$12,033,119 $14,853,052
=========== ===========
</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. 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.
Securities underlying agreements with customers were held in a segregated
account by a safekeeping agent for the Company.
Scheduled maturities or repricing of securities sold under agreements to
repurchase were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
-------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Securities sold under agreements to repurchase:
Due within 30 days $ 5,662,338 $ 8,683,230
After 30 but within 90 days 5,455,639 3,671,623
After 90 but within 180 days 321,987 1,179,040
After 180 but within one year 99,067 814,655
After one year 494,088 504,504
----------- -----------
$12,033,119 $14,853,052
=========== ===========
</TABLE>
Financial data pertaining to securities sold under agreements to repurchase
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1995 1994
-------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Weighted average interest rate at end of year 5.50% 5.85% 5.89%
Weighted daily average interest rate during the year 5.51 6.07 4.78
Daily average of securities sold under agreements to repurchase $14,333,506 $14,910,830 $6,303,244
Maximum securities sold under agreements to repurchase at any month end 15,578,289 16,192,165 2,877,365
Interest expense during the year 790,483 904,698 300,820
</TABLE>
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, was issued in June 1996 and established, among
other things, new criteria for determining whether a transfer of financial
assets in exchange for cash or other consideration should be accounted for as a
sale or as a pledge of collateral in a secured borrowing. As issued, SFAS No.
125 is effective for all transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. In December
1996, the FASB issued SFAS No. 127, Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125. In general, SFAS No. 127 defers for one
year the effective date of
<PAGE> 75
certain provisions of SFAS No. 125. The Company will implement SFAS No. 125, as
amended by SFAS No. 127 as required. The adoption is not anticipated to have a
material impact on the results of operations or financial position of the
Company
NOTE 15: ADVANCES FROM FHLBs
As members of the FHLB of Seattle and the FHLB of San Francisco, WMB, WM
Life, WMBfsb, GWB and ASB maintain credit lines that are percentages of their
total regulatory assets, subject to collateralization requirements. Advances are
collateralized in aggregate by all FHLB stock owned, by deposits with the FHLB,
and by certain mortgages or deeds of trust and securities of the U.S. government
and agencies thereof.
Scheduled maturities of FHLB advances were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1996 1995
--------------------------------------------------------
RANGES OF RANGES OF
INTEREST INTEREST
AMOUNT RATES AMOUNT RATES
--------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due within one year $ 7,388,583 4.38%-8.45% $ 3,291,674 4.74%-8.54%
After one but within two years 1,698,891 5.30 -8.50 1,333,843 4.38 -8.45
After two but within three years 267,889 6.17 -8.53 654,642 5.59 -8.50
After three but within four years 59,397 4.98 -9.34 57,000 8.50 -8.63
After four but within five years 450,000 5.40 -5.51 55,137 6.25 -9.34
After five years 146,665 2.80 -8.65 178,523 2.80 -8.65
----------- ----------- ----------- -----------
$10,011,425 $ 5,570,819
=========== =========== =========== ===========
</TABLE>
Financial data pertaining to FHLB advances were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
----------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Weighted average interest rate at end of year 5.51% 5.73% 5.71%
Weighted daily average interest rate
during the year 5.56 5.65 5.41
Daily average of FHLB advances $ 6,506,669 $ 3,725,704 $ 4,272,925
Maximum FHLB advances at any month end 10,011,425 5,570,819 5,422,891
Interest expense during the year 361,695 210,324 231,037
</TABLE>
<PAGE> 76
NOTE 16: OTHER BORROWINGS
Other borrowings consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1996 1995
-------------------------- ----------------------------
AMOUNT INTEREST RATE AMOUNT INTEREST RATE
---------- ------------- ----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Subordinated floating rate notes, due
1998, LIBOR plus 2.875% $ 10,000 8.41% $ 20,500 8.81%
Series C floating rate notes, due 2000,
LIBOR plus 1.375% 175,000 6.91% 175,000 7.31
Series B 9.60% Notes, due 1999 169,000 9.60 169,000 9.60
Senior Notes due 1996 -- -- 104,995 6.25-8.75
Senior Notes due 1997 352,229 7.38-9.50 351,965 7.38-9.50
Senior Notes due 1998 399,728 5.75-8.60 399,564 5.75-8.60
Senior Notes due 1999 199,890 6.75-7.88 99,864 6.75-7.88
Senior Notes due 2000 473,706 6.12-6.38 323,873 6.12-6.38
Senior Notes due 2001 349,704 6.75-7.75 149,917 6.75-7.75
Senior Notes due 2002 199,410 8.60 199,321 8.60
Senior notes, due 2005 148,007 7.25 147,845 7.25
Subordinated notes, due 1998 99,948 8.88 99,920 8.88
Subordinated notes, due 1999 162,912 10.25-10.50 379,340 10.25-10.50
Subordinated notes, due 2001 149,708 9.88 149,658 9.88
Notes payable, due 1998 74,111 8.16 74,482 8.16
Notes payable, due 2006 98,650 6.63 -- --
Other 47,691 7.60-10.70 50,818 7.60-10.70
---------- -----------
3,109,694 2,896,062
Company-obligated manditorily
redeemable preferred securities
of the Company's subsidiary
trust, holding solely
$103,092,800 aggregate principle
amount of 8.25% subordinated
deferrable interest notes,
due 2025, of the Company 100,000 100,000
---------- ------------
$3,209,694 $ 2,996,062
========== ============
</TABLE>
In December 1996, Washington Mutual entered into two Revolving Credit
Facilities (the "Facilities"): a $100.0 million 364-day facility and a $100.0
million four-year facility. Chase Manhattan Bank is the administrative agent for
the Facilities. At December 31, 1996, no monies had been drawn. However, in
January 1997, $150.0 million was drawn for the redemption of debt securities
mentioned above and in February 1997, another $20.0 million was drawn. The
remaining proceeds of the Facilities are available for general corporate
purposes, including providing capital at a subsidiary level.
In December 1995, Great Western Financial Trust I (the "subsidiary trust"), a
wholly owned subsidiary of Great Western, issued $100.0 million of 8.25% Trust
Originated Preferred Securities (the "preferred securities"). In connection with
the subsidiary trust's issuance of preferred securities, Great Western issued to
the subsidiary trust $103.1 million principal amount of its 8.25% subordinated
deferrable interest notes, due 2025 (the "subordinated notes"). The sole assets
of the subsidiary trust are and will be the subordinated notes. Great Western's
obligations under the subordinated notes and related agreements, taken together,
constitute a full and unconditional guarantee by the Company of the subsidiary
trust's obligations under the preferred securities.
<PAGE> 77
NOTE 17: RESTRUCTURING CHARGES
In 1996, prior to the business combination with Washington Mutual, GWB
implemented restructuring initiatives designed to improve it's competitive
position, accelerate expense reduction and enhance future revenue growth by
streamlining operations, making efficient use of premises and modernizing its
systems platform. The components of the restructuring charge involve severance
and write-off of premises and equipment. The restructuring initiatives were
planned to be completed by the end of 1997. As a result of the business
combination with Washington Mutual, some of GWB's planned restructuring
initiatives have been suspended.
The results of operations in 1996 reflect a $68.3 million restructuring
charge. Expenses of approximately $21.2 million were applied to the liability in
1996.
Restructuring activity consisted of the following:
<TABLE>
<CAPTION>
1996 BALANCE
RESTRUCTURING 1996 DECEMBER 31,
ACCRUAL ACTIVITY 1996
----------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Severance $17,036 $ (2,776) $14,260
Premises 29,456 -- 29,456
Equipment 21,801 (18,388) 3,413
------- -------- -------
$68,293 $(21,164) $47,129
======= ======== =======
</TABLE>
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 ARMs
and the purchase of adjustable-rate MBS; the sale of fixed-rate residential
mortgage loan production or fixed-rate MBS; and the use of derivative
instruments, such as interest rate exchange agreements, interest rate cap
agreements, cash flow swap agreements, put options and forward sales contracts.
As of December 31, 1996, interest-sensitive assets of $66.7 billion and
interest-sensitive liabilities of $66.8 billion were scheduled to mature or
reprice within one year. At December 31, 1996, the Company had entered into
interest rate exchange agreements, interest rate swap agreements, interest rate
cap agreements and forward sales contracts with notional values of $9.4 billion.
Without these instruments the Company's one-year gap at December 31, 1996 would
have been a negative 0.37% as opposed to a positive gap of 3.20%.
The Company from time to time uses put options to hedge its exposure to
increasing interest rates with respect to its fixed rate loan commitments. Put
options grant the Company, for a premium payment, the right to sell to the
writer a specified financial instrument at a predetermined price for a
predetermined period of time. The cost is recorded in other assets and amortized
to gains and losses on loan sales over the life of the hedged assets. Realized
gains from options contracts are recorded at the time the hedged instrument
expires. The Company had no open positions at December 31, 1996 and 1995
respectively.
The Company's credit risk exposure in the event of nonperformance by the
counterparty is the loss of potential gains on the exercise of the option. The
Company's exposure to risk of accounting loss is limited to the premium paid for
the option.
<PAGE> 78
The Company uses forward sales contracts to hedge its exposure to
increasing interest rates with respect to its fixed rate loan commitments. The
notional amount of the forward sales contract was $8.0 million and $60.7 million
at December 31, 1996 and 1995, respectively. Forward sales contracts are used to
sell specific financial instruments (fixed-rate loans) at a future date for a
specified price. Gains or losses are recognized at the time the contracts mature
and are recorded as a component of gain on mortgages.
Interest rate exchange agreements, cash flow swap agreements, interest rate
cap agreements, put options and forward sales contracts 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 various derivative 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. The Company does not invest in 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.
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 1996, the Company did not terminate
any interest rate exchange agreements, cash flow swaps or interest rate cap
agreements.
Scheduled maturities of interest rate exchange agreements were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------------
NOTIONAL SHORT TERM LONG TERM CARRYING FAIR VALUE
AMOUNT RECEIPT RATE(1) PAYMENT RATE VALUE
--------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Designated against available-for-sale securities:
Due within one year $ 200,000 5.56% 6.83% $ (799) $ (799)
After one but within two years 300,000 5.60 6.05 (112) (112)
After two but within three years 200,000 5.87 6.09 265 265
Designated against deposits and borrowings:
Due within one year 578,948 7.34 6.24 (498) 6,924
After one but within two years 506,533 5.45 6.04 52 (1,839)
After two but within three years 282,600 5.43 7.79 -- (11,255)
After three years 502,800 5.72 5.45 -- 18,066
------------- ------ ---- ------- --------
$2,570,881 5.98% 6.23% $(1,092) $11,250
============= ====== ==== ======= ========
</TABLE>
- ----------
(1) The terms of each agreement have specific LIBOR 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.
<PAGE> 79
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------
NOTIONAL SHORT TERM LONG TERM CARRYING FAIR VALUE
AMOUNT RECEIPT RATE(1) PAYMENT RATE 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 557,990 7.47 6.00 (277) 5,756
After one but within two years 602,188 7.05 6.31 (518) (2,162)
After two but within three years 385,033 6.01 6.33 112 (8,424)
After three years 261,000 7.10 8.27 - (7,793)
---------- ---- ---- -------- ----------
$2,971,211 6.11% 5.87% $(12,350) $ (24,470)
========== ==== ==== ======== ==========
</TABLE>
- ----------
(1) The terms of each agreement have specific LIBOR 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.
Financial data pertaining to interest rate exchange agreements were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
--------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Weighted average net effective cost (benefit)
at end of year 0.24% (0.24)% 0.62%
Weighted average net effective cost (benefit)
during the year (0.26) (0.45) 1.56
Monthly average notional amount of interest rate
exchange agreements $ 2,882,041 $ 3,049,803 $ 3,094,760
Maximum notional amount of interest rate exchange
agreements at any month end 3,436,157 3,208,681 3,365,491
Net cost included with interest expense on
deposits during the year (14,471) (9,260) 20,469
Net cost included with interest expense on
borrowings during the year 9,951 5,889 29,181
Net (benefit) included with interest income on
available-for-sale securities during the year (2,984) (10,495) (1,316)
</TABLE>
<PAGE> 80
Scheduled maturities of interest rate cap agreements were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------
NOTIONAL STRIKE SHORT-TERM CARRYING FAIR
AMOUNT RATE RECEIPT RATE)1) VALUE VALUE
-----------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Designated against available for sale securities:
Due within one year(2) $ 875,000 5.85% 5.89% $ 499 $ 499
After one but within two years(3) 650,000 6.17 5.60 1,961 1,961
Designated against deposits and borrowings:
Due within one year(4) 3,001,000 6.12 5.61 707 2
After one but within two years(5) 565,500 7.89 5.49 1,881 798
After two but within three years(6) 855,750 7.17 5.16 5,814 1,396
After three years(7) 832,750 8.06 5.04 9,131 1,215
---------- ---- ---- ------- ------
$6,780,000 6.61% 5.51% $19,993 $5,871
========== ==== ==== ======= ======
</TABLE>
- ----------
(1) The terms of each agreement have specific LIBOR or COFI 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 $600.0 million notional amount with a weighted average cap ceiling
of 7.75%.
(3) Includes $650.0 million notional amount with a weighted average cap ceiling
of 7.56%.
(4) Includes $45.0 million notional amount with a weighted average cap ceiling
of 9.50%.
(5) Includes $240.0 million notional amount with a weighted average cap ceiling
of 7.83% and $150.0 million notional amount with a weighted average floor of
5.50%.
(6) Includes $839.8 million notional amount with a weighted average cap ceiling
of 8.77%.
(7) Includes $571.8 million notional amount with a weighted average cap ceiling
of 9.49%.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------
NOTIONAL STRIKE SHORT-TERM CARRYING FAIR
AMOUNT RATE RECEIPT RATE(1) VALUE VALUE
--------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <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(8) 1,359,000 8.05 5.27 15,122 1,101
---------- ---- ---- ------- ----------
$9,774,000 7.14% 5.64%$ 27,106 $ 8,785
========== ==== ==== ======= ==========
</TABLE>
<PAGE> 81
- ----------
(1) The terms of each agreement have specific LIBOR or COFI 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%.
Changes in interest rate exchange agreements and interest rate cap agreements
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------
INTEREST INTEREST
RATE RATE
EXCHANGE CAP
AGREEMENTS AGREEMENTS
---------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Notional balance, beginning of year $2,971,211 $9,774,000
Purchases 670,160 3,805,500
Maturities (1,070,490) (6,799,500)
----------- ----------
Notional balance, end of year $2,570,881 $6,780,000
=========== ==========
</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, 1996
---------------------------------------
LOSS ON
AVAILABLE- LOSS ON
FOR-SALE DEPOSITS AND
SECURITIES BORROWINGS LOSS
---------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1997 $(3,612) $(1,663) $(5,275)
1998 (1,033) (1,237) (2,270)
1999 -- (51) (51)
---------- -------- --------
Unamortized deferred loss $(4,645) $(2,951) $(7,596)
========== ======== ========
</TABLE>
<PAGE> 82
Financial data pertaining to interest rate cap agreements were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Monthly average notional amount of interest
rate cap agreements $ 10,433,750 $ 6,363,000 $ 2,557,625
Maximum notional amount of interest rate cap
agreements at any month end 12,514,500 9,774,000 3,584,000
Net cost included with interest expense on
deposits during the year 6,206 7,875 2,257
Net cost included with interest expense on
borrowings during the year 2,162 415 565
Net (benefit) cost included with interest
income on available-for-sale securities
during the year (4,686) (5,340) 1,365
</TABLE>
NOTE 19: GAIN ON SALE OF ASSETS
Gain on sale of assets consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Trading account securities $ 31 $ 529 $ 45
Available for sale securities 8,009 21,056 4,509
Gain (loss) on sale of branches -- (1,500) 62,248
Gain on sale of leases 811 14,909 1,507
Mortgage servicing rights 4,030 -- 20,396
Premises and equipment (460) (1,458) (1,270)
Recognition of deferred gain on
sale of Mutual Travel, Inc. 4,100 -- --
Other 1,311 1,203 644
-------- -------- --------
$ 17,832 $ 34,739 $ 88,079
======== ======== ========
</TABLE>
NOTE 20: INCOME TAXES
The provision for income taxes from continuing operations consisted of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
-----------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current income tax expense $ 166,713 $197,515 $247,052
Deferred income tax (benefit) expense (25,493) 75,491 18,128
========= ======== ========
$ 141,220 $273,006 $265,180
========= ======== ========
</TABLE>
In determining taxable income for years prior to 1996, savings banks were
allowed bad debt deductions based on a percentage of taxable income or on actual
experience. Each year, savings banks selected whichever method resulted in the
most tax savings. The Company primarily used the experience method in 1995 and
1994. Effective with the adoption of SFAS No. 109, Accounting for Income Taxes,
this bad debt deduction is no longer treated as a permanent difference.
The recently enacted Small Business Job Protection Act of 1996 (the "Job
Protection Act") requires that qualified thrift institutions, such as WMB, GWB,
ASB and WMBfsb, generally recapture, for federal income tax purposes, that
portion
<PAGE> 83
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 1997.
Accordingly, Washington Mutual will have to pay approximately $4.2 million
(based upon current federal income tax rates) in additional federal income taxes
each year of the six-year period 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.
In addition, the Company will also be required to recapture its post-1987
additions to its tax 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
Job Protection 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, 1996.
The significant components of the Company's net deferred tax asset
(liability) were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
----------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,269,124 $ 1,632,230
Book loan loss reserves 277,360 224,332
Purchase accounting adjustments 20,153 41,343
Deferred losses 41,757 --
Other 254,001 244,506
1,862,395 2,142,411
----------- -----------
Valuation allowance (1,192,676) (1,150,206)
----------- -----------
Deferred tax asset, net of valuation allowance 669,719 992,205
Deferred tax liabilities:
Tax bad debt reserves 63,193 467,125
FHLB stock dividends 155,629 123,686
Financial leases 70,035 74,772
Deferred loan fees 229,538 235,774
Deferred gains 172,733 189,741
Purchase accounting adjustments 18,098 26,644
Other 173,820 163,018
883,046 1,280,760
----------- -----------
Net deferred tax liability $ (213,327) $ (288,555)
=========== ===========
</TABLE>
The valuation allowances of $1.2 billion at December 31, 1996 and 1995
included $45.8 million and $130.6 million related to payments in lieu of taxes
which are expected to arise from the realization of the net deferred tax asset.
These valuation allowances represented the excess of the gross deferred tax
asset over the sum of the taxes and the payments in lieu of taxes related to:
(i) projected future taxable income; (ii) reversing taxable temporary
differences; and (iii) tax planning strategies.
The increase in the valuation allowance of $42.5 million during the year
ended December 31, 1996 was due primarily to adjustments for anticipated use of
net operating losses and a change in state tax rates.
Due to Section 382 of the Internal Revenue Code, most of the value of the net
operating loss carryforward deductions of Keystone Holdings and its subsidiaries
was eliminated due to the Keystone 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 for ASB) will
be greatly reduced.
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 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
<PAGE> 84
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.
Federal and state income tax net operating loss carryforwards due to expire
under current law during the years indicated were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
FEDERAL STATE
-------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1999 $ -- $ 140
2000 1,497 613,382
2001 140 599,241
2002 278 557,803
2003 1,544,396 --
2004 784,195 --
2005 700,619 --
2007 12,780 --
2008 37,460 --
-------------------------
$3,081,365 $1,770,566
=========================
</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, 1996 and 1995 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, 1996
--------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Deferred tax (liability), beginning of year $(288,555)
Tax effect of valuation adjustment on
available-for-sale securities 47,519
Deferred income tax benefit 25,493
Other adjustments 2,216
---------
Deferred tax liability, end of year $(213,327)
=========
</TABLE>
<PAGE> 85
Reconciliations between income taxes computed at statutory rates and income
taxes included in the Consolidated Statements of Income were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Income taxes computed at statutory rates $ 155,657 $ 322,412 $ 293,842
Tax effect of:
Utilization of tax losses of New West (nominee of ASB) (31,200) (17,482) (55,100)
Amortization of goodwill and other intangible assets 7,865 10,430 11,973
Change in tax laws and rates 9,397 -- --
State franchise tax, net of federal tax benefit (38,616) 3,899 (2,890)
Increase in base year reserve amount (706) (16,318) (11,605)
Valuation allowance change from prior year 33,073 (7,114) 48,241
Dividends received deduction (2,460) (987) (506)
Tax exempt income (2,309) (1,973) (1,680)
Reversal of taxes previously provided -- (2,533) (11,789)
Low income housing -- (5,065) --
Adjustment of deferred tax rate (2,239) 422 (813)
Restructuring adjustments 9,321 -- --
Other 3,437 (12,685) (4,493)
---------------------------------------
Income taxes included in the Supplemental
Consolidated Statements of Income $ 141,220 $ 273,006 $ 265,180
=======================================
</TABLE>
NOTE 21: PAYMENTS IN LIEU OF TAXES
Keystone Holdings and certain of its affiliates are parties to a tax related
agreement (the "Assistance Agreement") with a predecessor of the FSLIC
Resolution Fund ("FRF") which generally provides that 75.0% of most of the
federal tax savings and approximately 19.5% 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. Capital Holdings and
New American Capital, Inc., subsidiaries of Keystone Holdings, as income and
expenses of ASB, and (iii) for years ending on or before December 31, 1994, to
recognize approximately 36.0% 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,
----------------------------
1996 1995 1994
----------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Federal $ 4,006 $3,450 $(137)
State 21,181 4,437 (687)
----------------------------
$25,187 $7,887 $(824)
============================
</TABLE>
<PAGE> 86
NOTE 22: STOCKHOLDERS' EQUITY
Common Stock
Cash dividends paid per share were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, (1)
----------------------------------
1996 1995 1994
----------------------------------
<S> <C> <C> <C>
First quarter $0.21 $0.19 $0.16
Second quarter 0.22 0.19 0.17
Third quarter 0.23 0.19 0.18
Fourth quarter 0.24 0.20 0.19
</TABLE>
- ----------
(1) Does not include amounts paid by acquired companies prior to business
combinations.
Prior to the business combination with Washington Mutual, acquired companies
paid total common cash dividends of $193.0 million, $133.6 million and $148.1
million in 1996, 1995 and 1994.
In addition to being influenced by legal, regulatory and economic
restrictions, Washington Mutual's ability to pay dividends is also predicated on
the ability of its subsidiaries to declare and pay dividends to WMI. These
subsidiaries are subject to legal, regulatory and debt covenant restrictions on
their ability to pay dividends.
Retained earnings of the Company at December 31, 1996 included a pre-1988
thrift bad debt reserve for tax purposes of $1.2 billion 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 or if any of the
banking subsidiaries no longer qualifies as a bank, the Company will incur a
federal income tax liability, at the then prevailing corporate tax rate, to the
extent of such subsidiary's pre-1988 thrift bad debt reserve.
On October 16, 1990, the Company's Board of Directors adopted a shareholder
rights plan and declared a dividend of one right for each outstanding share of
common stock to shareholders of record on October 31, 1990. The rights have
certain anti-takeover effects. They are intended to discourage coercive or
unfair takeover tactics and to encourage any potential acquirer to negotiate a
price fair to all shareholders. The rights may cause substantial dilution to an
acquiring party that attempts to acquire the Company on terms not approved by
the Board of Directors, but they will not interfere with any friendly merger or
other business combination. The plan was not adopted in response to any specific
effort to acquire control of the Company.
As part of the business combination with Keystone Holdings, 8,000,000 shares
of common stock, with an assigned value of $41.625 per share, were issued to an
escrow for the benefit of the general and limited partners of Keystone Holdings
and the FRF. Shares will be released from the Litigation Escrow, if and only to,
the extent that Washington Mutual receives net cash proceeds from certain
litigation that Keystone Holdings and certain of its subsidiaries were pursuing
against the United States, which litigation became an asset of the Company in
the Keystone Transaction.
Preferred Stock
In May 1991, the Company issued 2,587,500 depository shares, each
representing a one-fifth interest in a share of 8.75% Cumulative Convertible
Preferred Stock ("Convertible Preferred Stock"). The Convertible Preferred Stock
had a liquidation value of $250 per share. The Convertible Preferred Stock was
redeemable prior to May 1, 1996. Each share of Convertible Preferred Stock,
$1.00 par value, was redeemable at the option of the Company, in whole or in
part, at prices declining to $250 per share on or after May 1, 2001, from
$260.94 per share on or after May 1, 1996, plus accrued and unpaid dividends.
Each share of Convertible Preferred Stock was convertible at the option of the
holder into shares of common stock of the Company at a conversion price of
$20.40 per share of common stock, subject to adjustment in certain events.
Dividends were cumulative from the date of issue and were payable quarterly. In
September 1996, substantially all of the depository shares were converted to
approximately 5,666,000 shares of common stock.
<PAGE> 87
In September 1992, Great Western issued 6,600,000 depository shares,
each representing a one-tenth interest in a share of 8.30% Cumulative Preferred
Stock ("Cumulative Preferred Stock"). The Cumulative Preferred Stock has a
liquidation value of $250 per share. Each share of Cumulative Preferred Stock,
$1.00 par value, is redeemable at the option of the Company on or after
November 1, 1997, at $250 per share, plus accrued and unpaid dividends.
Dividends are cumulative from the date of issue and are payable quarterly.
Dividends have been declared and paid in all quarters since issuance. On July
1, 1997, in connection with the acquisition of Great Western by the Company,
each outstanding share of Cumulative Preferred Stock was converted into one
share of Washington Mutual, Inc. 8.30% Cumulative Preferred Stock, Series F
("Series F Preferred Stock"). The terms, preferences, limitations, privileges
and rights of the Series F Preferred Stock are substantially identical to those
of the Cumulative Preferred Stock. As in the case of the Cumulative Preferred
Stock, each share of Series F Preferred Stock is represented by depository
shares (the "New Washington Mutual Depository Shares"), each representing a
one-tenth interest in a share of the Series F Preferred Stock. The Company has
issued a notice of redemption with a redemption date of November 1, 1997.
In December 1992, the Company issued 2,800,000 shares of 9.12% Noncumulative
Perpetual Preferred Stock, Series C ("Series C Preferred Stock"), at $25 per
share for net proceeds of $67.4 million. The Series C Preferred 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 Series C Preferred 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
the Series C Preferred Stock.
Also in December 1992, the Company issued 1,400,000 shares of $6.00
Noncumulative Convertible Perpetual Preferred Stock, Series D ("Series D
Preferred Stock"), at $100 per share for net proceeds of $136.4 million. The
Series D Preferred Stock had a liquidation preference of $100 per share plus
dividends accrued and unpaid for the then current dividend period. The Series D
Preferred Stock was convertible at a rate of 3.870891 shares of common stock per
share of Series D Preferred Stock. Dividends were at an annual rate of $6.00 per
share. Prior to December 31, 1996, substantially all of the Series D Preferred
Stock was converted into shares of common stock and the Company redeemed the
remaining shares.
In September 1993, the Company issued 2,000,000 shares of 7.60% Noncumulative
Perpetual Preferred Stock, Series E ("Series E Preferred Stock"), at $25 per
share for net proceeds of $48.2 million. The Series E Preferred 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 Series E Preferred 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
the Series E Preferred Stock.
In December 1988, a subsidiary of Keystone Holdings issued $80.0 million of
Cumulative Redeemable Preferred Stock. The Cumulative Redeemable Preferred Stock
was presented as a minority interest in the Company's Consolidated Financial
Statements at December 31, 1995. The Cumulative Redeemable Preferred Stock was
redeemed on December 20, 1996.
The Series C Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock are senior to common stock as to dividends and liquidation, but they do
not confer general voting rights.
NOTE 23: 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 any dilutive outstanding convertible preferred stock.
<PAGE> 88
Information used to calculate earnings per share was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------
1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net income $230,100 $550,924 $491,509
Preferred stock dividends:
Series C Preferred Stock (6,276) (6,384) (6,384)
Series E Preferred Stock (3,743) (3,800) (3,800)
Series D Preferred Stock (8,400) (8,400) (8,400)
8.30% Cumulative Preferred Stock (5) (13,695) (13,695) (13,695)
8.75% Convertible Preferred Stock (6) (6,600) (11,320) (11,320)
----------------------------------------------------
Net income attributable to primary common stock $191,386 $507,325 $447,910
====================================================
Net income $230,100 $550,924 $491,509
Preferred stock dividends:
Series C Preferred Stock (6,276) (6,384) (6,384)
Series E Preferred Stock (3,743) (3,800) (3,800)
Series D Preferred Stock (1) (8,400) -- --
8.30% Cumulative Preferred Stock (5) (13,695) (13,695) (13,695)
8.75% Convertible Preferred Stock (2) (6) (6,600) (11,320) (11,320)
----------------------------------------------------
Net income attributable to fully diluted common stock $191,386 $515,725 $456,310
====================================================
Average common shares used to calculate earnings per share(3)(4):
Primary 237,513,322 233,344,444 226,637,879
Fully diluted 238,463,909 239,520,022 232,057,126
</TABLE>
- ----------
(1) In 1996, for purposes of calculating fully diluted earnings per share, the
assumed conversion of the Series D Preferred Stock was anti-dilutive.
(2) In 1996, 1995 and 1994, for purposes of calculating fully diluted earnings
per share, the assumed conversion of the 8.75% Cumulative Convertible
Preferred Stock was anti-dilutive.
(3) As part of the business combination with Keystone Holdings, 8,000,000 shares
of common stock, with a assigned value of $41.625 per share, were issued to
an escrow for the benefit of the general and limited partners of Keystone
Holdings and the FRF and their transferees. The Company will use the
treasury stock method to determine the effect of the shares upon the
Company's financial statements. At December 31, 1996, the dilutive effect of
the 8,000,000 shares of common stock on primary and fully diluted earnings
per share was minimal.
(4) If the conversion of the Series D Preferred Stock and the 8.75% Convertible
Preferred Stock had taken place on January 1, 1996, primary earnings per
common share for 1996 would have been $0.84.
(5) On July 1, 1997, each share of Cumulative Preferred Stock was converted into
one share of Series F Preferred Stock. The terms, preferences limitations,
privileges and rights of the
<PAGE> 89
Series F Preferred Stock are substantially identical to those of the
Preferred Stock. As in the case of the Cumulative Preferred Stock, each
share of Series F Preferred Stock is represented by depository shares each
representing a one-tenth interest in a share of the Series F Preferred
Stock.
(6) In September 1996, the Company called for the redemption of the Convertible
Preferred Stock. In the third quarter of 1996, 2,561,642 depository shares,
or 512,328 shares, were converted to 6,278,421 shares of common stock with a
conversion price of $20.40 per share while 19,058 depository shares, or
3,812 shares, were redeemed for cash totaling $994,589 or $260.94 per share.
In the second quarter of 1996, 6,800 depository shares, or 1,360 shares,
were converted to 16,666 shares of common stock totaling $340,000, or $20.40
per share.
NOTE 24: 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 GWB,
ASB and WMBfsb are subject to the Office of Thrift Supervision ("OTS") capital
requirements. WM Life is subject to National Association of Insurance
Commissioners ("NAIC") capital requirements.
The capital adequacy requirements are quantitative measures established by
regulation that require GWB, WMB, ASB and WMBfsb to maintain minimum amounts and
ratios of capital. The FDIC requires WMB to maintain minimum ratios of Tier 1
and total capital to risk-weighted assets as well as Tier 1 capital to average
assets. The OTS requires GWB, ASB and WMBfsb to maintain minimum ratios of total
capital to risk-weighted assets, as well as ratios of core capital and tangible
capital to total assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
created a statutory framework that increased the importance of meeting
applicable capital requirements. For GWB, WMB, ASB and WMBfsb, FDICIA
established 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 that implement this statutory framework. Under these regulations, an
institution is treated as well capitalized if its ratio of total capital to
risk-weighted assets is 10.00% or more, its ratio of core capital to
risk-weighted assets is 6.00% or more, its ratio of core capital to adjusted
total assets is 5.00% or more and it is not 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%, a Tier 1 risk-based capital ratio of not less than 4.00%, and a
leverage ratio of not less than 4.00%. Any institution which is neither well
capitalized nor adequately capitalized will be considered undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective action
requirements, regulatory controls and restrictions which become more extensive
as an institution becomes more severely undercapitalized. Failure by GWB, WMB,
ASB or WMBfsb to comply with applicable capital requirements would, if
unremedied, result in restrictions on their activities and lead to enforcement
actions against WMB by the FDIC or against GWB, ASB or WMBfsb by the OTS,
including, but not limited to, the issuance of a capital directive to ensure the
maintenance of required capital levels. FDICIA requires the federal banking
regulators to take prompt corrective action with respect to depository
institutions that do not meet minimum capital requirements. Additionally, FDIC
or OTS approval of any regulatory application filed for their review may be
dependent on compliance with capital requirements.
<PAGE> 90
The actual regulatory capital ratios calculated for GWB, WMB, ASB and WMBfsb,
along with the minimum capital amounts and ratios for capital adequacy purposes
and to be categorized as well capitalized under the regulatory framework for
prompt corrective action were as follows:
<TABLE>
<CAPTION>
MINIMUM TO BE
CATEGORIZED AS
MINIMUM WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES(1) PROVISIONS
---------------------- ----------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996:
GWB
Total capital to risk-weighted assets $2,688,715 11.23% $1,901,485 8.00% $2,376,857 10.00%
Tier I capital to risk-weighted assets 2,322,464 9.77 n.a. n.a. 1,426,114 6.00
Tier I capital to average assets 2,327,236 5.85 n.a. n.a. 1,987,458 5.00
Core capital to total assets 2,327,236 5.85 1,192,475 3.00 n.a. n.a.
Tangible capital to total assets 2,327,236 5.85 596,238 1.50 n.a. n.a.
WMB
Total capital to risk-weighted assets 1,320,577 11.09 952,810 8.00 1,191,013 10.00
Tier I capital to risk-weighted assets 1,224,620 10.28 476,405 4.00 714,608 6.00
Tier I capital to average assets 1,224,620 5.76 850,027 4.00 1,062,533 5.00
ASB
Total capital to risk-weighted assets (2) 1,395,814 10.92 1,022,484 8.00 1,278,105 10.00
Tier I capital to risk-weighted assets 1,137,311 8.90 n.a. n.a. 766,863 6.00
Tier I capital to average assets 1,137,311 5.17 n.a. n.a. 1,099,506 5.00
Core capital to total assets 1,137,311 5.17 659,704 3.00 n.a. n.a.
Tangible capital to total assets 1,136,202 5.17 329,835 1.50 n.a. n.a.
WMBfsb
Total capital to risk-weighted assets 71,327 11.58 49,285 8.00 61,607 10.00
Tier I capital to risk-weighted assets 64,707 10.50 n.a. n.a. 36,964 6.00
Tier I leverage capital to average assets 64,707 6.90 n.a. n.a. 46,923 5.00
Core capital to total assets 64,707 6.90 28,154 3.00 n.a. n.a.
Tangible capital to total assets 64,707 6.90 14,077 1.50 n.a. n.a.
</TABLE>
<PAGE> 91
<TABLE>
<CAPTION>
MINIMUM TO BE
CATEGORIZED AS
MINIMUM WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES(1) PROVISIONS
----------------------- ----------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- --------- ---------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1995:
GWB
Total capital to risk-weighted assets $2,695,824 11.81% $2,008,232 8.00% $2,510,290 10.00%
Tier I capital to risk-weighted assets 2,360,614 9.40 n.a. n.a. 1,506,174 6.00
Tier I capital to average assets 2,365,971 5.66 n.a. n.a. 2,089,681 5.00
Core capital to total assets 2,365,971 5.66 1,253,809 3.00 n.a. n.a.
Tangible capital to total assets 2,365,971 5.66 626,905 1.50 n.a. n.a.
WMB
Total capital to risk-weighted assets 1,280,948 11.58 885,259 8.00 1,106,573 10.00
Tier I capital to risk-weighted assets 1,184,144 10.70 442,629 4.00 663,944 6.00
Tier I capital to average assets 1,184,144 5.72 828,789 4.00 1,035,987 5.00
ASB
Total capital to risk-weighted assets(2) 1,131,295 10.12 894,190 8.00 1,117,738 10.00
Tier I capital to risk-weighted assets 1,049,987 9.39 n.a. n.a. 670,643 6.00
Tier I leverage capital to average assets 1,049,987 5.41 n.a. n.a. 970,949 5.00
Core capital to total assets 1,049,987 5.41 582,569 3.00 n.a. n.a.
Tangible capital to total assets 1,046,658 5.39 291,235 1.50 n.a. n.a.
WMBfsb
Total capital to risk-weighted assets(2) 49,620 12.64 31,401 8.00 39,252 10.00
Tier I capital to risk-weighted assets 44,696 11.39 n.a. n.a. 23,551 6.00
Tier I leverage capital to average assets 44,696 6.76 n.a. n.a. 33,065 5.00
Core capital to total assets 44,696 6.76 19,839 3.00 n.a. n.a.
Tangible capital to total assets 44,696 6.76 9,920 1.50 n.a. n.a.
</TABLE>
- ----------
(1) Regulatory requirements listed under this column are not the same as capital
adequacy requirements under prompt corrective action provisions.
(2) The OTS requires institutions to maintain Tier 1 capital of not less than
one-half of total capital.
<PAGE> 92
Management believes, as of December 31, 1996, that GWB, WMB, ASB and WMBfsb
individually met all capital adequacy requirements to which they were subject.
Additionally, as of December 31, 1996 and December 31, 1995, the most recent
notification from the FDIC (for WMB) and the OTS (for GWB, ASB and WMBfsb)
individually categorized GWB, WMB, ASB and WMBfsb as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, a bank must maintain minimum total risk-based, Tier 1 risk-based,
Tier 1 leverage ratios as set forth in the table above. There are no conditions
or events since that notification that management believes have changed GWB's,
WMB's, ASB's and WMBfsb's category.
Federal law requires that the federal banking agencies' risk-based capital
guidelines take into account various factors including interest rate risk,
concentration of credit risk, risks associated with nontraditional activities,
and the actual performance and expected risk of loss of multi-family mortgages.
In 1994, the federal banking agencies jointly revised their capital standards to
specify that concentration of credit and nontraditional activities are among the
factors that the agencies will consider in evaluating capital adequacy. In that
year, the OTS and FDIC amended their risk-based capital standards with respect
to the risk weighting of loans made to finance the purchase or construction of
multi-family residences. The OTS adopted final regulations adding an interest
rate risk component to the risk-based capital requirements for savings
associations (such as GWB, ASB and WMBfsb), although implementation of the
regulation has been delayed. Management believes that the effect of including
such an interest rate risk component in the calculation of risk-adjusted capital
will not cause GWB, ASB or WMBfsb to cease to be well capitalized. In June 1996,
the FDIC and certain other federal banking agencies (not including the OTS)
issued a joint policy statement providing guidance on prudent interest rate risk
management principles. The agencies stated that they would determine banks'
interest rate risk on a case-by-case basis, and would not adopt a standardized
measure or establish an explicit minimum capital charge for interest rate risk.
WM Life is subject to risk-based capital requirements developed by the NAIC.
The NAIC 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, 1996, WM Life's actual capital was 663% of its
required regulatory risk-based level.
NOTE 25: STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE 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 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 generally
similar 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.
On April 26, 1988, Great Western's stockholders approved the adoption of the
1988 Stock Option and Incentive Plan ("the 1988 plan"). Options are granted at
the market value of the common stock on the date of grant. The 1988 plan
consists of two separate plans: the Key Employee Program under which options
(both incentive and nonqualified), stock appreciation rights, dividend
equivalents and certain other
<PAGE> 93
performance and incentive awards may be granted to officers, key employees and
certain other individuals; and the Non-employee Director Program under which
non-qualified options will be automatically granted to non-employee directors
under certain circumstances. Options may be exercised either by payment of cash,
or the optionee may deliver WMI common stock of an equivalent market value at
the date of exercise. The exercise price of each option equals the market price
of the Company's stock on the date of grant, and an option's maximum term is 10
years. As of July 1, 1997, no further grants will be made to this plan.
Stock options are generally exercisable on a phased-in schedule over three to
five years, depending upon the date of grant, and expire 10 years from the grant
date. At December 31, 1996, options to purchase 4,505,386 shares were fully
exercisable.
Stock options granted, exercised, or terminated were as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE FAIR VALUE
NUMBER OF PRICE OF OPTION
OPTION OF OPTION SHARES
SHARES SHARES GRANTED
------------ ------------ ------------
<S> <C> <C> <C>
Outstanding December 31, 1993 5,925,276 $16.82
Granted in 1994 2,250,656 19.40
Exercised in 1994 (360,469) 14.36
Forfeited in 1994 (188,874) 20.09
------------ ------
Outstanding December 31, 1994 7,626,589 17.65
Granted in 1995 823,012 20.01 $5.62
Exercised in 1995 (925,468) 16.58
Forfeited in 1995 (279,312) 20.10
------------ ------
Outstanding December 31, 1995 7,244,821 18.01
Granted in 1996 4,406,339 31.48 9.10
Exercised in 1996 (1,156,121) 18.07
Forfeited in 1996 (195,752) 21.30
------------ ------
Outstanding December 31, 1996 10,299,287 $23.70
============ ======
</TABLE>
<PAGE> 94
Financial data pertaining to outstanding stock options were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
EXERCISE
NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER OF PRICE OF
RANGES OF OPTION REMAINING EXERCISE PRICE EXERCISABLE EXERCISABLE
EXERCISE PRICES SHARES CONTRACTUAL LIFE OF OPTION SHARES OPTION SHARES OPTION SHARES
----------------- ---------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 6.03 - $ 8.44 404,375 3.7 years $ 8.07 404,375 $ 8.07
11.52 - 17.29 1,030,934 2.7 14.68 1,030,934 14.68
17.50 - 26.25 6,158,680 7.0 21.29 3,070,078 19.38
26.53 - 38.50 2,093,298 9.8 32.72 -- --
42.62 - 42.75 612,000 10.0 42.64 -- --
---------- ----------- ------- ----------- -------
10,299,287 7.2 years $23.70 4,505,387 $17.29
========== =========== ======= =========== =======
</TABLE>
Under the terms of the employee stock purchase plan, an employee can purchase
WMI common stock at a 15% discount without paying brokerage fees or commissions
on purchases. The Company pays for the program's administrative expenses. The
plan is open to all employees who are at least 18 years old, have completed at
least one year of service, and work at least 20 hours per week. Participation
can be by either payroll deduction or lump sum payments with a maximum annual
contribution of 10% of employees previous year's eligible cash compensation.
Under the employee stock purchase plan, dividends are automatically reinvested.
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
("APB") Opinion 25, Accounting for Stock Issued to Employees but they are now
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 Opinion 25. Accordingly, no compensation cost has
been recognized for its stock option plan and its employee stock purchase plan.
Had compensation cost for the Company's compensation plans been determined
consistent with SFAS 123, the Company's net income available to fully diluted
common stock and fully diluted earning per share would have been reduced to the
pro forma amounts indicated below:
<PAGE> 95
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net income attributable to common stock:
Primary:
As reported $191,386 $507,325
Pro forma 186,568 506,503
Fully diluted:
As reported 191,386 515,725
Pro forma 186,568 514,903
Net income per common share:
Primary:
As reported $0.81 $2.17
Pro forma 0.79 2.17
Fully diluted:
As reported 0.80 2.15
Pro forma 0.78 2.15
</TABLE>
The compensation expense included in the pro forma net income attributable to
fully diluted common stock and fully diluted earnings per share is not likely to
be representative of the effect on reported net income for future years because
options vest over several years and additional awards generally are made each
year.
The fair value of options granted under the Company's stock option plan is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1996 and 1995:
annual dividend yield of 2.5% for both years; expected volatility of 23.99% for
1996 and 24.71% for 1995; risk-free interest rates of 5.78% for 1996 and 7.28%
for 1995; and expected lives of five years for both years.
NOTE 26: EMPLOYEE BENEFITS PROGRAMS
Washington Mutual maintains a noncontributory cash balance defined benefit
pension plan (the "Pension Plan") for substantially all eligible employees. ASB
provided a substantially similar plan (the "ASB 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 Pension
Plan on a current basis to the extent deductible under federal income tax
regulations. The combined net periodic pension cost for the plans was $2.1
million, $2.0 million and $1.3 million for 1996,
<PAGE> 96
1995 and 1994; the weighted average discount rate was 7.25% for 1996 and 1995
and 8.00% for 1994; the long-term rate of return on assets was 8.00% for 1996,
1995 and 1994; and the assumed rate of increase in future compensation levels
was 6.00% for all years presented. The plan's assets consist primarily of listed
common stocks, U.S. government obligations, asset-backed securities, corporate
debt obligations, and annuity contracts.
Great Western maintains a substantially similar plan (the "Great Western
Plan"). In 1996, the Great Western Plan was converted from a final average pay
plan to a cash balance plan, under which participants' accounts are credited
with pay-related contributions and interest. It is the Company's policy to fund
the plan on a current basis to the extent deductible under federal income tax
regulations The net periodic pension cost for the Great Western Plan was $0.4
million, $7.6 million and $10.2 million for 1996, 1995 and 1994; the weighted
average discount rate was 7.81%, 8.25%, and 7.75% for 1996, 1995 and 1994; the
long-term rate of return on assets was 9.0% for all three years presented; and
the assumed rate of increase in future compensation levels was 5.25% for 1996
and 5.5% for both 1995 and 1994. The plan's assets consist primarily of listed
common stocks, U.S. government obligations, asset-backed securities, corporate
debt obligations, and annuity contracts.
At the termination date of the ASB plan, all participants' accrued benefits
became fully vested. The net assets of the ASB plan were allocated as
prescribed by the Employee Retirement Income Security Act of 1974 and the
Pension Benefit Guaranty Corporation and their related regulations. All
participants received full benefits. The termination resulted in a settlement
under SFAS No. 88, Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits. ASB recognized a
gain of $1.7 million as a result of the settlement. The benefit obligation was
settled in 1996.
The plans' status and amounts recognized in the Company's financial
statements were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Benefit obligations:
Vested benefits $(214,687) $(211,644)
Nonvested benefits (12,571) (6,883)
--------- ---------
Accumulated benefit obligation (227,258) (218,527)
Effect of future compensation increases (1,168) (1,598)
--------- ---------
Projected benefit obligation (228,426) (220,125)
Plan assets at fair value 307,168 273,806
--------- ---------
Plan assets in excess of projected benefit obligation 78,742 53,681
Unrecognized (gain) loss due to past experience
different from assumptions (7,800) (2,103)
Unrecognized prior service cost (29,221) 2,093
Unrecognized net asset at transition being
recognized over 18.6 years (2,918) (3,300)
Unrecognized net gain 10,103 20,467
--------- ---------
Prepaid pension asset $ 48,906 $ 70,838
========= =========
</TABLE>
The assumptions used in determining the actuarial present value of the
projected benefit obligation at December 31 were: weighted average discount rate
7.5% for 1996 and 1995 and 8.25% for 1994; rate of increase in future
compensation level was 5.25% for 1996 and 1995 and 5.5% for 1994; and expected
long-term rate of return on plan assets was 9.0% for all years presented.
Net periodic pension expense for the Plans included the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the period $ 12,294 $ 12,600 $ 14,352
Interest cost on projected benefit obligation 16,953 18,196 17,364
Actual (gain) loss on Plan assets (27,253) (28,534) (15,067)
Amortization and deferral, net 517 7,348 (5,138)
-------- -------- --------
$ 2,511 $ 9,610 $ 11,511
======== ======== ========
</TABLE>
<PAGE> 97
During 1994, the defined benefit pension plan acquired in the acquisition of
Pacific First was merged into the Company's Pension Plan. The fair value of the
Pacific First plan assets exceeded the projected benefit obligation, and the
accrued pension cost was reduced by $10.8 million.
The Company sponsors unfunded defined benefit postretirement plans that
provide medical and life insurance coverage to eligible employees and dependents
based on age and length of service. Medical coverage options are the same as
available to active employees. The cost of the plan coverage for retirees and
their qualifying dependents is based upon a point system that combines age and
years of service which results, generally, in lower costs to retirees in
conjunction with higher accumulated points within limits. Postretirement
benefits, such as retiree health benefits, are accrued during the years an
employee provides services.
The funded status of these benefits were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation $(57,836) $(58,484)
Unrecognized transition obligation 2,356 2,503
Unrecognized (gain) (4,782) (764)
-------- --------
Prepaid postretirement liability $(60,262) $(56,745)
======== ========
</TABLE>
Net periodic postretirement expense included the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost $2,445 $2,513 $2,569
Interest cost 3,998 4,240 4,052
Amortization of transition obligation 147 147 147
Curtailment gain (580) (570) --
------ ------ ------
$6,010 $6,330 $6,768
====== ====== ======
</TABLE>
Net periodic postretirement expense was calculated using the following
assumptions: the weighted average discount rate was 7.5% for all years
presented; and the medical trend rate was expected to increase at a rate of 9.0%
in 1996, and 8.0% in 1997 thereafter decreasing 1% per year until a stable 5.0%
medical inflation rate is reached in 2000. The effect of a 1.00% increase in the
trend rates is not significant.
Great Western has unfunded retirement restoration plans for employees whose
benefits under the principal funded plan are reduced because of compensation
deferral elections or limitations under federal tax laws. At December 31, 1996,
the projected benefit obligation for these plans was $3.7 million.
Great Western sponsors a nonqualified, unfunded, Supplemental Executive
Retirement Plan ("SERP")for certain senior officers and a nonqualified unfunded
directors' retirement plan. Great Western has purchased cost recovery life
insurance, primarily with one carrier, on the lives of the participants of the
supplemental executive retirement plan, directors' retirement plan and deferred
compensation plan and it is sole owner and beneficiary of said policies. The
amount of coverage is designed to provide sufficient revenues to fund said
plans. The net cash surrender value of this life insurance, recorded in other
assets, was $180.3 million at December 31, 1996 and $163.7 million at December
31, 1995, and net premium income related to insurance purchased was $8.4 million
in 1996, $6.8 million in 1995 and $2.6 million in 1994.
<PAGE> 98
ASB maintains a SERP, the SERP is a nonqualified, 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 ASB Plan.
Washington Mutual maintains a retirement savings and investment plan for
substantially all eligible employees that allows participants to make
contributions by salary deduction equal to 15.00% or less of their salary
pursuant to Section 401(k) of the Internal Revenue Code. ASB maintains a
substantially similar plan. Employees' contributions vest immediately. The
Company's partial matching contributions vest over five years.
Great Western maintains a savings plan for substantially all eligible
employees that allows participants to make contributions equal to 14.00% or less
of their salary pursuant to Section 401(k) of the Internal Revenue Code. The
Company's partial matching contributions vest over three years.
Great Western provides an optional deferred compensation plan for certain
employees. Eligible employees can defer a portion of their compensation and
Great Western agrees to pay interest on the balance of funds deferred. An
enhanced rate is paid on funds deferred over three years.
In 1990, ASB implemented a Phantom Share Plan (the "PSP") for the benefit of
certain of its officers. As a result of the Keystone Transaction, the phantom
shares became immediately exercisable and ASB incurred an expense of $12.0
million in December 1996.
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.
Total employee benefit plan expense was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net periodic pension expense $ 2,511 $ 9,610 $11,511
Net periodic postretirement expense 6,010 6,330 6,768
Company's contributions to savings plan 21,934 19,163 22,137
SERP expense 6,494 5,821 6,490
STI expense 3,609 3,247 2,219
Restricted stock pension expense 4,736 3,958 4,844
Retirement restoration plan pension expense 587 945 213
Deferred compensation expense 3,341 3,175 3,009
------- ------- -------
$49,222 $52,249 $57,191
======= ======= =======
</TABLE>
NOTE 27: 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.
<PAGE> 99
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 settlement agreements 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 completed its audit of
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.
As part of the Keystone Transaction, 8,000,000 shares of common stock, with
an assigned value of $41.6125 per share (the "Litigation Escrow Shares"), were
issued to an escrow for the benefit of the general and limited partners of
Keystone Holdings and the FRF and their transferees (the "Litigation Escrow").
Shares will be released from the Litigation Escrow if and only to the extent
that Washington Mutual receives net cash proceeds from certain litigation that
Keystone Holdings and certain of its subsidiaries are pursuing against the
United States (the "Case"), which litigation became an asset of the Company in
the Keystone Transaction. Upon Washington Mutual's receipt of net cash proceeds
from a judgment or settlement of the Case, if any ("Case Proceeds"), all or part
of the Litigation Escrow Shares will be released, 64.9% to the general and
limited partners of Keystone Holdings and 35.1% to the FRF. The number of
Litigation Escrow Shares released will be equal to the Case Proceeds, reduced by
certain tax and litigation-related expenses, divided by $41.6125. If not all of
the Litigation Escrow Shares are distributed prior to the expiration of the
Litigation Escrow, any remaining Litigation Escrow Shares will be returned to
Washington Mutual for cancellation. The Litigation Escrow expires the earlier of
the date that is the sixth anniversary of the Keystone Transaction or that the
Litigation Escrow Shares are released. In general, the Litigation Escrow will be
automatically extended to 10 years if, prior to the sixth anniversary of the
Keystone Transaction, there has been any judgment or final settlement in the
Case granted or entered in favor of Washington Mutual or any of its
subsidiaries.
The operations of the Company are significantly influenced by general
economic conditions, by the related monetary and fiscal policies of the federal
government, and by the regulatory policies of financial institution regulatory
authorities. Deposit flows and cost of funds are influenced by interest rates on
competing investments and general market rates of interest. Lending and other
investment activities are affected by the demand for mortgage financing and
consumer and other types of loans, which in turn are affected by the interest
rates at which such financing may be offered and other factors affecting the
supply of housing and the availability of funds.
<PAGE> 100
NOTE 28: SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The results of operations on a quarterly basis have been restated to give
effect to the business combination with Great Western Financial Corporation.
Results of operations on a quarterly basis were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER
------------------------------------ -----------------------------------
WASHINGTON GREAT WASHINGTON GREAT
MUTUAL WESTERN RESTATED MUTUAL WESTERN RESTATED
---------- -------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Interest income $764,622 $825,240 $1,589,862 $776,269 $808,617 $1,584,886
Interest expense 477,620 472,642 950,262 476,508 454,994 931,502
-------- -------- ---------- -------- -------- ----------
Net interest income 287,002 352,598 639,600 299,761 353,623 653,384
Provision for loan losses 19,910 36,021 55,931 19,396 32,566 51,962
Other income 58,594 85,792 144,386 60,893 90,221 151,114
Other expense 183,657 283,575 467,232 189,040 280,707 469,747
-------- -------- ---------- -------- -------- ----------
Income before income taxes and minority interest 142,029 118,794 260,823 152,218 130,571 282,789
Income taxes 49,695 47,500 97,195 49,151 51,300 100,451
Minority interest in earnings of consolidated subsidiary 3,527 -- 3,527 3,450 -- 3,450
-------- -------- ---------- -------- -------- ----------
Net income $ 88,807 $ 71,294 $ 160,101 $ 99,617 $ 79,271 $ 178,888
======== ======== ========== ======== ======== ==========
Net income attributable to common stock $ 84,202 $ 65,040 $ 149,242 $ 95,013 $ 73,029 $ 168,042
======== ======== ========== ======== ======== ==========
Net income per common share
Primary $ 0.75 $ 0.63 $ 0.84 $ 0.71
Fully diluted 0.74 0.62 0.83 0.70
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------------------
THIRD QUARTER FOURTH QUARTER
---------------------------------- --------------------------------------
Washington Great Washington Great
Mutual Western Restated Mutual Western Restated
---------- --------- ----------- ------------- -------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Interest income $797,694 $ 801,486 $ 1,599,180 $ 810,651 $802,511 $ 1,613,162
Interest expense 501,074 461,742 962,816 503,027 466,536 969,563
-------- --------- ----------- ------------- -------- -----------
Net interest income 296,620 339,744 636,364 307,624 335,975 643,599
Provision for loan losses 15,269 41,671 56,940 141,702 85,900 227,602
Other income 69,016 82,995 152,011 76,378 134,275 210,653
Other expense 320,089 449,343 769,432 343,370 378,818 722,188
-------- --------- ----------- ------------- -------- -----------
Income before income taxes and minority interest 30,278 (68,275) (37,997) (101,070) 5,532 (95,538)
Income taxes 12,963 (28,400) (15,437) (16,202) 400 (15,802)
Minority interest in earnings of consolidated subsidiary 3,527 -- 3,527 3,066 -- 3,066
-------- --------- ----------- ------------- -------- -----------
Net income $ 13,788 $ (39,875) $ (26,087) $ (87,934) $ 5,132 $ (82,802)
======== ========= =========== ============= ======== ===========
Net income attributable to common stock $ 9,183 $ (44,250) $ (35,067) $ (92,539) $ 1,708 $ (90,831)
======== ========= =========== ============= ======== ===========
Net income per common share
Primary $ 0.08 $ (0.15) $ (0.81) $ (0.38)
Fully diluted 0.08 (0.15) (0.81) (0.38)
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER
------------------------------------- ------------------------------------
Washington Great Washington Great
Mutual Western Restated Mutual Western Restated
---------- -------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Interest income $673,182 $757,336 $1,430,518 $720,743 $809,119 $1,529,862
Interest expense 446,644 449,974 896,618 483,078 497,064 980,142
-------- -------- ---------- -------- -------- ----------
Net interest income 226,538 307,362 533,900 237,665 312,055 549,720
Provision for loan losses 21,669 47,145 68,814 18,489 40,811 59,300
Other income 60,221 84,696 144,917 50,244 90,773 141,017
Other expense 176,755 272,929 449,684 181,833 278,781 460,614
-------- -------- ---------- -------- -------- ----------
Income before income taxes and minority interest 88,335 71,984 160,319 87,587 83,236 170,823
Income taxes 20,716 28,500 49,216 22,672 32,800 55,472
Minority interest in earnings of consolidated subsidiary 3,948 -- 3,948 3,948 -- 3,948
-------- -------- ---------- -------- -------- ----------
Net income $ 63,671 $ 43,484 $ 107,155 $ 60,967 $ 50,436 $ 111,403
======== ======== ========== ======== ======== ==========
Net income attributable to common stock $ 59,025 $ 37,230 $ 96,255 $ 56,321 $ 44,182 $ 100,503
======== ======== ========== ======== ======== ==========
Net income per common share
Primary $ 0.60 $ 0.42 $ 0.62 $ 0.43
Fully diluted 0.58 0.42 0.60 0.43
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------------------
THIRD QUARTER FOURTH QUARTER
------------------------------------- ------------------------------------
Washington Great Washington Great
Mutual Western Restated Mutual Western Restated
---------- -------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Interest income $751,981 $839,995 $1,591,078 $770,180 $835,835 $1,606,015
Interest expense 495,556 505,498 1,001,054 498,158 484,046 982,204
-------- -------- ---------- -------- -------- ----------
Net interest income 256,425 334,497 590,922 272,022 351,789 623,811
Provision for loan losses 17,302 43,167 60,469 16,914 45,927 62,841
Other income 48,358 88,124 136,482 57,766 123,385 181,151
Other expense 173,114 266,119 439,233 177,675 275,680 453,355
-------- -------- ---------- -------- -------- ----------
Income before income taxes and minority interest 114,367 113,335 227,702 135,199 153,567 288,766
Income taxes 33,079 44,800 77,879 43,326 55,000 98,326
Minority interest in earnings of consolidated subsidiary 3,948 -- 3,948 3,949 -- 3,949
-------- -------- ---------- -------- -------- ----------
Net income $ 77,340 $ 68,535 $ 145,875 $ 87,924 $ 98,567 $ 186,491
======== ======== ========== ======== ======== ==========
Net income attributable to common stock $ 72,694 $ 62,281 $ 134,975 $ 83,278 $ 92,313 $ 175,591
======== ======== ========== ======== ======== ==========
Net income per common share
Primary $ 0.66 $ 0.58 $ 0.71 $ 0.74
Fully diluted 0.64 0.57 0.69 0.73
</TABLE>
<PAGE> 102
NOTE 29: 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,
---------------------------------------------------------------
1996 1995
---------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 1,665,355 $ 1,665,355 $ 2,078,250 $ 2,078,250
Trading account securities 1,647 1,647 238 238
Available-for-sale securities 16,093,529 16,093,529 20,751,932 20,751,932
Held-to-maturity securities 4,479,056 4,545,126 5,084,456 5,204,768
Investment in FHLB stock 843,002 843,002 755,491 755,491
Mortgage servicing rights 165,270 213,121 115,145 123,270
Loans, exclusive of reserve for loan losses 61,831,109 61,849,717 54,678,313 54,602,961
------------ ------------ ------------ ------------
85,078,968 85,211,497 83,463,825 83,516,910
Financial liabilities:
Deposits 52,666,914 52,779,563 53,697,888 53,898,792
Annuities 878,057 878,057 855,503 855,503
Federal funds purchased and commercial
paper 2,153,506 2,153,506 1,749,833 1,749,906
Securities sold under agreements to
repurchase 12,033,119 12,050,518 14,853,052 14,853,498
Advances from the FHLB 10,011,425 10,028,513 5,570,819 5,588,002
Other borrowings 3,209,694 3,385,876 2,996,062 3,201,870
------------ ------------ ------------ ------------
80,952,715 81,276,033 79,723,157 80,147,571
Derivative instruments(1):
Interest rate exchange agreements:
Designated against available-for-sale
securities (646) (646) (11,847) (11,847)
Designated against deposits and
borrowings (446) 11,896 (683) (12,623)
Interest rate cap agreements:
Designated against available-for-sale
securities 2,460 2,460 9,415 9,415
Designated against deposits and
borrowings 17,533 3,411 17,691 (630)
------------ ------------ ------------ ------------
18,901 17,121 14,576 (15,685)
Standby letters of credit (42) (62)
Forward sales contracts 83 384
Off-balance sheet loan commitments -- 7,714 -- 16,683
------------ ------------ ------------ ------------
Net financial instruments $ 4,145,154 $ 3,960,340 $ 3,755,244 $ 3,370,659
============ ============ ============ ============
</TABLE>
- ----------
(1) See Note 18: Interest Rate Risk Management.
<PAGE> 103
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument as of December 31, 1996 and 1995:
Cash and cash equivalents -- The carrying amount represented fair value.
Trading account securities -- Fair values were based on quoted market prices.
Available-for-sale securities -- Fair values were based on quoted market
prices or dealer quotes. If a quoted market price was not available, fair value
was estimated using quoted market prices for similar securities. In certain
circumstances, the fair value of servicing spreads on securitized loans is also
included.
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.
Investment in FHLB stock -- The carrying amount represented fair value.
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 and commercial paper -- Federal funds purchased were
valued using the discounted cash flow method. The discount rate was equal to the
rate currently offered on similar borrowings. The carrying amount of commercial
paper represented fair value.
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 FHLBs -- 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.
Standby letters of credit -- The fair value of standby letters of credit is
based on the estimated cost to terminate or otherwise settle the obligations
with the counterparties at the reporting date.
<PAGE> 104
Forward sales contracts -- The fair value of forward sales contracts
purchased as a hedge of fixed rate commitments and commitments to fund real
estate loans is estimated using current market prices adjusted for various risk
factors and market volatility.
Off-balance sheet loan commitments -- Loan commitments are commitments the
Company made to borrowers at locked-in rates. The fair value of loan commitments
was estimated based on current levels of interest rates versus the committed
interest rates. The balance shown represents the differential between committed
value and fair value.
<PAGE> 105
NOTE 30: SUPPLEMENTAL 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.
SUPPLEMENTAL STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD OF
AUGUST 17, 1994
(INCEPTION) TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
---------------------------- ---------------
1996 1995 1994
----------- ----------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INTEREST INCOME
Available-for-sale securities $ 6,777 $ 8,033 $ 1,641
Cash equivalents 5,378 471 44
----------- ----------- ---------------
Total interest income 12,155 8,504 1,685
INTEREST EXPENSE
Deposits (683) -- --
Borrowings 15,079 9,072 884
Total interest expense 14,396 9,072 884
----------- ----------- ---------------
Net interest (expense) income (2,241) (568) 801
OTHER INCOME
Equity in net earnings of
subsidiaries(1) 248,123 554,652 135,369
Other operating income 122 8 --
(Loss) on sale of other assets -- (171) --
----------- ----------- ---------------
Total other income 248,245 554,489 135,369
OTHER EXPENSE
Salaries and employee benefits 3,561 2,716 --
Occupancy and equipment 11 1 --
Other operating expense 18,013 3,289 228
Amortization of goodwill 629 -- --
----------- ----------- ---------------
Total other expense 22,214 6,006 228
----------- ----------- ---------------
Income before income taxes 223,790 547,915 135,942
Income tax (benefit) expenses (8,105) (865) 201
----------- ----------- ---------------
Net income(1) $231,895 $548,780 $135,741
=========== =========== ===============
</TABLE>
- ----------
(1) Contains intercompany transactions eliminated upon consolidation.
<PAGE> 106
SUPPLEMENTAL STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 109,356 $ 90,096
Available-for-sale securities 82,033 99,932
Loans 92,083 147,867
Investment in subsidiaries(1) 4,940,159 5,274,432
Other assets 12,917 929
---------- ----------
Total assets $5,236,548 $5,613,256
========== ==========
LIABILITIES
Securities sold under agreements to repurchase $ 68,326 $ 82,481
Other borrowings 148,007 147,845
Other liabilities 12,230 5,647
---------- ----------
Total liabilities 228,563 235,973
STOCKHOLDERS' EQUITY
Preferred stock, no par value: 10,000,000 shares
authorized -- 5,382,500 and 6,782,500 shares issued and
outstanding -- --
Common stock, no par value: 350,000,000 shares
authorized -- 250,230,644 and 243,239,258 issued and
outstanding -- --
Capital surplus - preferred stock(1) 273,141 413,141
Capital surplus - common stock(1) 1,772,053 1,761,951
Valuation reserve for available-for-sale securities 1,156 2,390
Valuation reserve for available-for-sale
securities -- subsidiaries 117,469 294,758
Retained earnings(1) 2,844,166 2,905,043
---------- ----------
Total stockholders' equity 5,007,985 5,377,283
---------- ----------
Total liabilities and stockholders' equity $5,236,548 $5,613,256
========== ==========
</TABLE>
- ----------
(1) Contains intercompany transactions eliminated upon consolidation.
<PAGE> 107
SUPPLEMENTAL STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD OF
YEAR ENDED DECEMBER 31, AUGUST 17, 1994
------------------------------ (INCEPTION) TO
1996 1995 DECEMBER 31, 1994
------------ ------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income(1) $ 231,895 $ 548,780 $ 135,741
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
(Increase) decrease in interest receivable (69) 80 (693)
Increase in interest payable 530 3,167 884
(Decrease) in income taxes payable (8,105) (865) (1,151)
Equity in undistributed earnings of
subsidiaries (248,123) (554,652) (135,369)
(Increase) decrease in other assets (16,619) 9,910 39
Increase in other liabilities 14,867 720 252
--------- --------- ---------
Net cash (used) provided by operating activities (25,624) 7,140 (297)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities -- -- (111,984)
Principal payments of available-for-sale
securities 16,118 12,594 4,486
Principal repayments on loans 147,867
Origination and purchases of loans (92,083) (147,867) --
Investment in subsidiary (170,000)
Dividends received from subsidiaries 280,026 136,521 --
Acquisition of wholly owned subsidiary(1) -- -- (82,877)
--------- --------- ---------
Net cash provided (used) by investing
activities 181,928 1,248 (190,375)
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in securities sold under
agreements to repurchase (14,155) (1,848) 84,329
Proceeds of other borrowings -- 147,845 --
Issuance of common stock through stock options and
employee stock plans 20,604 8,379 994
Repurchase of preferred stock -- (1,990) --
Conversion of preferred stock to common stock (107) -- --
Cash dividends paid (143,386) (76,581) --
Contribution from wholly owned subsidiaries(1) -- -- 111,252
--------- --------- ---------
Net cash (used) provided by financing activities (137,044) 75,805 196,575
--------- --------- ---------
Increase in cash and cash equivalents 19,260 84,193 5,903
Cash and cash equivalents at beginning of year 90,096 5,903 --
--------- --------- ---------
Cash and cash equivalents at end of year $ 109,356 $ 90,096 $ 5,903
========= ========= =========
</TABLE>
- ----------
(1) Contains intercompany transactions eliminated upon consolidation.
<PAGE> 108
NOTE 31: SUBSEQUENT EVENTS
BUSINESS COMBINATIONS
On June 13, 1997, the shareholders of Washington Mutual voted to approve
the issuance of Washington Mutual common stock in connection with a proposed
merger pursuant to which Great Western will merge with and into New American
Capital, Inc. a wholly owned subsidiary of Washington Mutual. The merger was
completed July 1, 1997. At July 1, 1997, Great Western had assets of $43.8
billion, deposits of $27.8 billion and stockholder's equity of $2.7 billion.
In connection with the closing of the merger with Great Western, the
Company recorded pretax transaction-related expenses of $355.9 million in the
third quarter of 1997. (This brings the total of such expenses for the first
nine months of 1997 to $424.9 million.) As anticipated, the largest of these
expense categories were severance and management payments and facilities and
equipment impairment.
Additionally, the Company has begun to implement its plan to sell
approximately $1.1 billion of residential mortgage loans from GWB's portfolio
which the Company had previously identified as having both high loan-to-value
ratios and borrowers whose credit history is marginal. These loans are being
transferred to a special purpose corporation which will issue two classes of
securities. One class will be subordinated to the other, thereby providing
credit enhancement to the first class. When this securitization is completed
in the fourth quarter of 1997, the securities will be placed in the Company's
available-for-sale or trading portfolios, as management deems appropriate. The
securities may subsequently be sold, from time to time, based upon management's
future judgment of market conditions and execution capabilities. As a result of
the foregoing process, the identified loans have been classified as held for
sale as of September 30, 1997 and marked to the lower of cost or market with a
charge to earnings of approximately $100.0 million.
In addition to the transaction-related charges and the market
adjustment of the loans, during he first nine months of 1997 the Company
recorded $116.5 million in tax benefits related to the exercise of options
under the Great Western stock option plan. This benefit was recorded directly
as an increase to stockholders' equity as the options were exercised. The net
after-tax effect upon stockholders' equity of all adjustments from
merger-related activity was a reduction of $267.9 million.
On January 15, 1997, Washington Mutual acquired United Western Financial
Group, Inc. ("United Western") of Salt Lake City and its United Savings Bank and
Western Mortgage Loan Corporation subsidiaries for $79.5 million in cash. At
January 15, 1997, United Western had assets of $404.1 million, deposits of
$299.9 million, and stockholders' equity of $53.7 million. The acquisition of
United Western was treated as a purchase for accounting purposes. Accordingly on
January 15, 1997, the assets and liabilities and stockholders' equity of United
Western were recorded on the books of the Company at their respective fair
market values at the time of the consummation of the acquisition of United
Western. Goodwill, the excess of the purchase price over the net fair value of
the assets and liabilities, including identified intangible assets, was recorded
at $4.2 million. Amortization of goodwill over a 10-year period will result in a
charge to earnings of approximately $420,000 per year.
FINANCING MATTERS
On January 27, 1997, Great Western Financial Trust II (the "subsidiary
trust II"), a wholly-owned subsidiary of Great Western, issued $300.0 million of
8.206% Trust Originated Preferred Securities (the "preferred securities II").
In connection with the subsidiary trust II's issuance of the preferred
securities II, Great Western issued to the subsidiary trust II $309.0 million
principal amount of its 8.206% subordinated deferrable interest notes, due 2027
(the "subordinated notes II"). The sole assets of the subsidiary trust II are
and will be the subordinated notes II. Great Western's obligations under the
subordinated notes II and related agreements, taken together, constitute a full
and unconditional guarantee by Great Western of the subsidiary trust II's
obligations under the preferred securities II.
On May 31, 1997, Washington Mutual Capital I (the "Trust"), a
wholly-owned subsidiary of Washington Mutual, Inc., issued $400.0 million of
8.375% Subordinated Capital Income Securities (the "Capital Securities"). In
connection with the Trust's issuance of the Capital Securities, Washington
Mutual, Inc. issued to the Trust $412.0 million principal amount of its 8.375%
Junior Subordinated Debentures, due 2027 (the "Subordinated Debentures"). The
sole assets of the Trust are and will be the Subordinated Debentures. Washington
Mutual, Inc.'s obligations under the Subordinated Debentures and related
agreements, taken together, constitute a full and unconditional guarantee by the
Company of the Trust's obligations under the preferred securities.
On September 16, 1997 the Board of Directors approved a resolution to
redeem all of the issued and outstanding shares of 8.30% Cumulative Preferred
Stock, Series F. The Company has issued a notice of redemption with a
redemption date of November 1, 1997.
<PAGE> 109
LEGAL MATTERS
On February 3, 1997, Great Western received preliminary approval in
Federal Court of a $17.2 million settlement reached with plaintiffs in
connection with the sale of uninsured investment products. Final approval of the
settlement is set for April 14, 1997.
EMPLOYEE BENEFITS
Effective February 25, 1997, prior to being acquired by the Company,
Great Western approved a Broad Based Plan (the Plan) for eligible employees who
are not covered by an existing severance plan and are not offered a comparable
position by an acquiring company or whose employment is terminated within 12
months of a change in control, as defined by the Plan. The minimum pay will
equate to six months with the maximum of 18 months obtainable under the Plan. As
a result of the adoption of the Plan, Great Western will record an increase to
the restructuring liability in the first quarter of 1997 of approximately $10
million.
AMENDMENTS TO THE ARTICLES OF INCORPORATION
On July 8, 1997, 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 350,000,000 shares to
800,000,000 shares.
DISPOSAL OF SUBSIDIARY
On September 3, 1997, Washington Mutual signed a definitive agreement to
sell WM Life, Inc., a wholly-owned insurance subsidiary of the Company to SAFECO
Corporation. The transaction is valued at $140.0 million. The sale is subject to
the approvals or non-objections of state insurance regulators and federal
antitrust regulators. The transaction is expected to completed in the fourth
quarter of 1997.
<PAGE> 110
UNAUDITED SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
as of June 30, 1997 and 1996
<PAGE> 111
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended June 30,
- ------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1997 1996
- ------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Interest income
Loans $2,505,301 $2,250,323
Available-for-sale securities 543,222 698,237
Held-to-maturity securities 196,928 188,090
Other 40,314 38,098
- ------------------------------------------------------------------------------------------------
Total interest income 3,285,765 3,174,748
Interest expense
Deposits 1,081,280 1,131,189
Borrowings 891,558 750,575
- ------------------------------------------------------------------------------------------------
Total interest expense 1,972,838 1,881,764
- ------------------------------------------------------------------------------------------------
Net interest income 1,312,927 1,292,984
Provision for loan losses 103,809 107,893
- ------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,209,118 1,185,091
Other income
Depositor fees 174,978 131,957
Loan servicing fees 43,084 40,884
Securities and insurance commissions 91,013 87,361
Other operating income 56,273 39,979
Gain on sale of loans 13,499 13,980
Gain (loss) on sale of assets 9,973 (4,176)
Write-down of mortgage-backed securities (12,422) (14,485)
- ------------------------------------------------------------------------------------------------
Total other income 376,398 295,500
Other expense
Salaries and employee benefits 411,563 421,550
Occupancy and equipment 158,847 159,562
Regulatory assessments 17,204 56,439
Telecommunications and outsourced information services 86,073 70,510
Other operating expense 199,585 177,994
Transaction-related expense 58,026 1,500
Amortization of goodwill and other intangible assets 31,446 32,789
Foreclosed asset expense, net 4,544 16,635
- ------------------------------------------------------------------------------------------------
Total other expense 967,288 936,979
- ------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 618,228 543,612
Income taxes 238,780 173,430
Provision for payments in lieu of taxes 8,616 24,216
- ------------------------------------------------------------------------------------------------
Income before minority interest 370,832 345,966
Minority interest in earnings of consolidated subsidiaries - 6,977
- ------------------------------------------------------------------------------------------------
Net income $370,832 $338,989
================================================================================================
Net income attributable to common stock $358,974 $317,283
================================================================================================
Net income per common share:
Primary $1.45 $1.34
Fully diluted 1.44 1.32
Dividends declared per common share 0.51 0.43
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
<PAGE> 112
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(dollars in thousands) June 30, 1997 Dec. 31, 1996
---------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 964,478 $ 1,032,379
Cash equivalents 375,901 632,976
Trading account securities 1,170 1,647
Available-for-sale securities, amortized cost $15,750,753 and $15,913,440
Mortgage-backed securities 13,619,914 13,968,875
Other investments 2,254,479 2,126,468
Held-to-maturity securities, fair value $6,368,539 and $4,545,125
Mortgage-backed securities 6,178,431 4,286,361
Other investments 195,019 192,695
Loans 65,031,098 61,497,847
Reserve for loan losses (666,057) (677,141)
---------------------------------
64,365,041 60,820,706
Loans held for sale 434,303 333,262
Investment in FHLB stock 881,040 843,002
Foreclosed assets 174,786 222,883
Premises and equipment 1,028,864 1,034,813
Intangible assets arising from acquisitions 391,729 419,500
Other assets 1,669,320 1,510,930
---------------------------------
Total assets $ 92,534,475 $ 87,426,497
=================================
LIABILITIES
Deposits $ 51,768,113 $ 52,666,914
Annuities 888,454 878,057
Federal funds purchased and commercial paper 3,441,374 2,153,506
Securities sold under agreements to repurchase 11,871,883 12,033,119
Advances from FHLBs 14,296,469 10,011,425
Other borrowings 3,452,037 3,209,694
Other liabilities 1,574,457 1,480,694
---------------------------------
Total liabilities 87,292,787 82,433,409
STOCKHOLDERS' EQUITY
Preferred stock, no par value: 10,000,000 shares authorized -
5,382,500 and 5,382,500 shares issued and outstanding:
Nonconvertible liquidation preference 283,063 283,063
Common stock, no par value: 350,000,000 shares authorized -
252,013,170 and 250,230,644 shares issued and outstanding -- --
Capital surplus - common stock 1,717,198 1,657,284
Valuation reserve for available-for-sale securities 80,986 118,625
Retained earnings 3,160,441 2,934,116
---------------------------------
Total stockholders' equity 5,241,688 4,993,088
---------------------------------
Total liabilities and stockholders' equity $ 92,534,475 $ 87,426,497
=================================
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
<PAGE> 113
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Number of Shares
--------------------- Common
Preferred Common Capital
(in thousands) Stock Stock Surplus
---------------------------------------
(Unaudited)
<S> <C> <C> <C>
Balance at December 31, 1996 5,382 250,231 $ 1,657,284
Net income -- -- --
Cash dividends on common stock -- -- --
Cash dividends on preferred stock -- -- --
Common stock issued through stock
options and employee stock plans -- 2,689 91,104
Common stock issued under dividend
reinvestment plan -- 20 847
Common stock acquired -- (908) (32,016)
Miscellaneous stock transactions -- -- --
Adjustment in valuation reserve
for available-for-sale securities -- -- --
Restricted stock activity, net -- (19) (21)
--------------------------------------
Balance at June 30, 1997 5,382 252,013 $ 1,717,198
=======================================
Balance at December 31, 1995 7,300 243,239 $ 1,517,807
Net income -- -- --
Cash dividends on common stock -- -- --
Cash dividends on preferred stock -- -- --
Common stock issued through stock
options and employee stock plans -- 542 11,598
Common stock issued under dividend
reinvestment plan -- 34 878
Common stock acquired -- (201) (5,229)
Conversion of preferred stock to common (2) 15 340
Miscellaneous stock transactions -- -- --
Adjustment in valuation reserve
for available-for-sale securities -- -- --
Restricted stock activity, net -- (6) (130)
---------------------------------------
Balance at June 30, 1996 7,298 243,623 $ 1,525,264
=======================================
</TABLE>
<TABLE>
<CAPTION>
Convertible Non convertible Valuation Total
Preferred Preferred Retained Reserve for Stockholders'
(in thousands) Stock Stock Earnings Securities Equity
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $-- $ 283,063 $ 2,934,116 $ 118,625 $ 4,993,088
Net income -- -- 370,873 -- 370,873
Cash dividends on common stock -- -- (133,128) -- (133,128)
Cash dividends on preferred stock -- -- (11,855) -- (11,855)
Common stock issued through stock
options and employee stock plans -- -- -- -- 91,104
Common stock issued under dividend
reinvestment plan -- -- -- -- 847
Common stock acquired -- -- -- -- (32,016)
Miscellaneous stock transactions -- -- 108 -- 108
Adjustment in valuation reserve
for available-for-sale securities -- -- -- (37,639) (37,639)
Restricted stock activity, net -- -- 327 -- 306
--------------------------------------------------------------------------
Balance at June 30, 1997 $-- $ 283,063 $ 3,160,441 $ 80,986 $ 5,241,688
==========================================================================
Balance at December 31, 1995 $ 269,375 $ 283,063 $ 2,996,787 $ 297,148 $ 5,364,180
Net income -- -- 338,989 -- 338,989
Cash dividends on common stock -- -- (156,856) -- (156,856)
Cash dividends on preferred stock -- -- (21,706) -- (21,706)
Common stock issued through stock
options and employee stock plans -- -- -- -- 11,598
Common stock issued under dividend
reinvestment plan -- -- -- -- 878
Common stock acquired -- -- -- -- (5,229)
Conversion of preferred stock to common (350) -- -- -- (10)
Miscellaneous stock transactions -- -- -- -- --
Adjustment in valuation reserve
for available-for-sale securities -- -- -- (274,533) (274,533)
Restricted stock activity, net -- -- 1,993 -- 1,863
--------------------------------------------------------------------------
Balance at June 30, 1996 $ 269,025 $ 283,063 $ 3,159,207 $ 22,615 $ 5,259,174
==========================================================================
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
<PAGE> 114
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
(dollars in thousands) 1997 1996
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES (unaudited)
<S> <C> <C>
Net income $370,873 $338,989
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 103,809 107,893
(Gain) on sale of loans (13,942) (13,980)
(Gain) loss on sale of assets (9,973) 4,176
Depreciation and amortization 85,723 95,444
FHLB stock dividend (25,104) (38,572)
Write-down of mortgage backed securities 12,422 14,485
Decrease (increase) in trading account securities 477 (3,477)
Origination of loans held for sale (2,224,732) (1,391,626)
Sale of loans held for sale 2,123,691 1,379,363
(Increase) decrease in other assets (137,318) 341,228
Increase in other liabilities 116,297 239,970
------------ -----------
Net cash provided by operating activities 402,223 1,073,893
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities (1,854,614) (2,483,721)
Principal payments and maturities of available-for-sale securities 929,684 1,571,434
Sales of available-for-sale securities 1,619,278 2,891,543
Purchases of held-to-maturities securities (19,773) (888,563)
Principal payments and maturities of held-to-maturity securities 235,094 1,165,471
Sales of loans 53,409 534,831
Principal payments on loans 5,009,082 4,254,966
Origination and purchases of loans (11,566,859) (8,674,949)
REO operations, net 234,846 271,356
(Purchases) dispositions of premises and equipment, net (48,327) (43,961)
------------ -----------
Net cash (used) by investing activities (5,408,180) (1,401,593)
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) in deposits (898,801) (949,651)
Increase in annuities 10,397 10,846
Increase (decrease) in federal funds and commercial paper purchased 1,287,868 (34,803)
(Decrease) in securities sold under short-term agreements to
repurchase (3,016,656) (1,223,726)
Proceeds from securities sold under long-term agreements to
repurchase 3,954,254 574,081
Repayment of securities sold under long-term agreements to
repurchase (1,098,834) (202,672)
Proceeds from FHLB advances 22,980,633 8,992,910
Payments on FHLB advances (18,695,589) (7,418,126)
Proceeds (repayments) from other borrowings 242,343 106,155
Other capital transactions 60,349 9,100
Cash dividends paid (144,983) (178,562)
------------ -----------
Net cash provided by financing activities 4,680,981 (314,448)
------------ -----------
(Decrease) in cash and cash equivalents (324,976) (642,148)
Cash and cash equivalents at beginning of period 1,665,355 2,078,250
------------ -----------
Cash and cash equivalents at end of period $ 1,340,379 $ 1,436,102
============ ===========
</TABLE>
<PAGE> 115
SUPPLEMENTAL DISCLOSURES RELATED TO THE SUPPLEMENTAL
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
- -----------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
NONCASH INVESTING ACTIVITIES
Loans exchanged for mortgage-backed securities and held for
investment $2,696,300 $920,072
Loans transferred to foreclosed assets 231,966 338,731
Loans originated to facilitate the sale of foreclosed properties -- 75,614
Loans originated to refinance existing loans 628,210 590,529
CASH PAID DURING THE PERIOD FOR
Interest on deposits 1,068,831 1,094,051
Interest on borrowings 871,111 740,260
Income taxes 157,628 157,552
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
<PAGE> 116
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING ADJUSTMENTS
The information included in the supplemental consolidated statements of
financial position as of June 30, 1997 and December 31, 1996 and the
supplemental consolidated statements of income, stockholders' equity and cash
flows of Washington Mutual, Inc. ("Washington Mutual" or the "Company") for the
quarter and six months ended June 30, 1997 and 1996 reflect all adjustments,
including only normal recurring adjustments, which are, in the opinion of
management, necessary for a fair statement of the results for the period
presented.
2. EARNINGS PER SHARE
Primary earnings per common share have been calculated by dividing net
income, after deducting dividends on preferred stock, by the weighted average
number of shares outstanding for the period. Fully diluted earnings per common
share assume conversion of the outstanding convertible preferred stock.
Information used to calculate earnings per share was as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
- -----------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
DATA USED TO COMPUTE PER SHARE AMOUNTS
Net income $370,873 $338,989
Preferred stock dividends:
Noncumulative Perpetual, Series C (3,138) (3,138)
Noncumulative Perpetual, Series E (1,872) (1,872)
Noncumulative Convertible Perpetual, Series D - (4,200)
Convertible (Great Western) - (5,648)
Nonconvertible cumulative, Series F (Great Western) (6,848) (6,848)
- -----------------------------------------------------------------------------------------------
Net income available to primary common stock $359,015 $317,283
===============================================================================================
Net income $370,873 $338,989
Preferred stock dividends:
Noncumulative Perpetual, Series C (3,138) (3,138)
Noncumulative Perpetual, Series E (1,872) (1,872)
Nonconvertible cumulative, Series F (Great Western) (6,848) (6,848)
- -----------------------------------------------------------------------------------------------
Net income available to fully diluted common stock $359,015 $327,131
===============================================================================================
Average common shares outstanding:
Primary 247,375,744 236,951,504
Fully diluted 249,055,435 248,175,044
</TABLE>
In February 1997, the Financial Accounting Standards Board ("FASB")
adopted Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
per Share. SFAS No. 128 specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock or potential common stock such as options, warrants, convertible
securities or contingent stock agreements if those securities trade in a public
market. This standard specifies computation and presentation requirements for
both basic EPS and, for entities with complex capital structures, diluted EPS.
SFAS No. 128 is effective for reporting periods ending after December 15, 1997
and early adoption of the standard is not permitted. The adoption of SFAS No.
128 will have no material impact on the Company's results of operations on a per
share basis.
<PAGE> 117
3. CAPITAL STRUCTURE
In February 1997, FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure. SFAS No. 129 establishes standards for disclosing
information about an entities capital structure. Effective for periods ending
after December 31, 1997, the Company does not anticipate the adoption of SFAS
No. 129 to have a material impact on its financial position or results of
operations.
4. COMPREHENSIVE INCOME
In June 1997, FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 is effective for periods beginning after December 15, 1997 and
requires disclosure of comprehensive income and its components. Comprehensive
income includes all changes in equity during a period except those resulting
from investments by owners and distributions to owners. The Company does not
anticipate the adoption of SFAS No. 130 to have a material impact on its
financial position or results of operations.
5. SEGMENT DISCLOSURES
In June 1997, FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 is effective for periods
beginning after December 15, 1997 and requires disclosure of results of
operations and other key information, such as products and services, geographic
operations and major customers, by key operating segments. The Company does not
anticipate the adoption of SFAS No. 131 to have a material impact on its
financial position or results of operations.
6. SUBSEQUENT EVENT
In connection with the closing of the merger with Great Western, the
Company recorded pretax transaction-related expenses of $366.9 million in the
third quarter of 1997. (This brings the total of such expenses for the first
nine months of 1997 to $424.9 million.) As anticipated, the largest of these
expense categories are severance and management payments and facilities and
equipment impairment.
Additionally, the company has begun to implement its plan to sell
approximately $1.1 billion of residential mortgage loans from GWB's portfolio
which the Company had previously identified as having both high loan-to-value
ratios and borrowers whose credit history is marginal. these loans are being
transferred to a special purpose corporation which will issue two classes of
securities. One class will be subordinated to the other, thereby providing
credit enhancement to the first class. When this securitization is completed,
in the fourth quarter of 1997, the securities will be placed in the Company's
available-for-sale or trading portfolios, as management deems appropriate. The
securities may subsequently be sold, from time to time, based upon management's
future judgment of market conditions and execution capabilities. As a result of
the foregoing process, the identified loans have been classified as held for
sale as of September 30, 1997 and marked to the lower of cost or market with a
charge to earnings of approximately $100.0 million.
In addition to the transaction-related charges and the market
adjustment of the loans, during he first nine months of 1997 the Company
recorded $116.5 million in tax benefits related to the exercise of options
under the great western stock option plan. This benefit was recorded directly
as an increase to stockholders' equity as the options were exercised. The net
after-tax effect upon stockholders' equity of all adjustments from
merger-related activity was a reduction of $267.9 million.
On September 3, 1997, Washington Mutual signed a definitive agreement to
sell WM Life Co., a wholly-owned subsidiary of the Company to SAFECO
Corporation. The transaction is valued at $140.0 million. The sale is subject to
the approvals or non-objection of state insurance regulators and federal
antitrust regulators. The transaction is expected to completed in the fourth
quarter of 1997.
On September 16, 1997, Washington Mutual's Board of Directors approved a
resolution to redeem all of the issued and outstanding shares of 8.30%
Cumulative Preferred Stock, Series F. The Company has issued a notice of
redemption with a redemption date of November 1, 1997.
<PAGE> 118
Independent Auditors' Consent
The Board of Directors
Washington Mutual, Inc.
as successor to
Keystone Holdings, Inc.
We consent to the incorporation by reference on Form 8-K of Washington Mutual,
Inc. dated October 10, 1997, as amended by Form 8-K/A dated October 23, 1997,
of our report dated January 26, 1996, except as to Note 27 to the consolidated
financial statements, which is as of February 8, 1996, with respect to the
consolidated balance sheet of Keystone Holdings, Inc. and subsidiaries as of
December 31, 1995, and the related consolidated statements of earnings,
stockholder's equity, and cash flows for each of the years in the two-year
period ended December 31, 1995, which report appears in the Annual Report on
Form 10-K/A of Washington Mutual, Inc., dated April 25, 1997.
KPMG Peat Marwick LLP
Los Angeles, California
October 23, 1997
<PAGE> 119
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
Washington Mutual, Inc. on Form S-3 and related Prospectus of our report dated
February 14, 1997, appearing on Form 10-K as amended by Form 10-K/A dated April
25, 1997 and our report dated October 2, 1997 on the Supplemental Consolidated
Financial Statements of Washington Mutual, Inc. appearing on Form 8-K dated
October 10, 1997, as amended by Form 8-K/A dated October 23, 1997.
We also consent to the reference to us under the heading "Experts" in such
Registration Statement and Prospectus.
/s/DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
October 23, 1997
