<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20529
FORM 10-K/A
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO :
COMMISSION FILE NUMBER 0-25188
WASHINGTON MUTUAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
WASHINGTON 91-1653725
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1201 THIRD AVENUE 98101
SEATTLE, WASHINGTON (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 461-2000
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------------------------------------------------------------------------
<S> <C>
Common Stock The Nasdaq Stock Market
9.12% Noncumulative Perpetual Preferred Stock, Series C The Nasdaq Stock Market
7.60% Noncumulative Perpetual Preferred Stock, Series E The Nasdaq Stock Market
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. YES X NO __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of January 31, 1997:
COMMON STOCK -- $5,625,829,311(1)
(1) Does not include any value attributable to 8,000,000 shares that are held in
escrow and not traded.
The number of shares outstanding of the issuer's classes of common stock as
of January 31, 1997:
COMMON STOCK -- 126,272,191(2)
(2) Includes the 8,000,000 shares held in escrow.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held April 15, 1997, are incorporated by reference into Part
III.
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<PAGE> 2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto presented elsewhere in
this report.
GENERAL
Washington Mutual is a regional financial services company committed to
serving consumers and small and mid-sized businesses throughout the Western
United States. 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. Washington
Mutual also underwrites and sells annuities, sells other insurance products,
offers full service securities brokerage, and acts as the investment advisor to
and the distributor of mutual funds.
The Keystone Transaction. In December 1996, Keystone Holdings merged with
and into Washington Mutual, and all of the subsidiaries of Keystone Holdings,
including ASB, became subsidiaries of the Company. ASB will remain an operating
subsidiary of the Company. The Keystone Transaction was accounted for as a
pooling-of-interests. The financial information presented herein has been
restated as if the respective companies had been combined for all periods
presented. Accordingly, unless otherwise noted, all references to Washington
Mutual or the Company refer to the combined entity, including Keystone Holdings.
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, 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 FDIC as manager of the FRF, prior to consummation of the Keystone
Transaction. New West was subsequently liquidated.
The Company anticipates that it will consolidate certain head office
functions and back office operations of ASB. The Company anticipates achieving
certain cost savings from such consolidations. However, the Company expects the
actual level of expenses to rise modestly as a result of anticipated growth in
ASB's residential lending and other consumer banking activities. In addition,
the Company will pursue opportunities to acquire other California operations. If
successful, the Company anticipates a further rise in expenses.
Other Acquisition Activity. In recent years, Washington Mutual has
continued to expand its operations through business combinations with other
financial institutions with locations in Washington, Oregon, Utah, and Montana.
Beginning in 1995, Washington Mutual took steps to diversify its operations into
commercial banking. In August 1995, the Company acquired Enterprise, a
Seattle-area commercial bank, and in January 1996, acquired Western, a
commercial bank with branch operations throughout Oregon. Each of these
transactions was accounted for as a pooling-of-interests.
RESULTS OF OPERATIONS
Washington Mutual's 1996 net income of $114.3 million was down from $289.9
million in 1995 and $240.3 million in 1994. Earnings for 1996 were reduced by
$294.6 million due to an after-tax charge of $209.8 million for
transaction-related expenses resulting from the Keystone Transaction, and by a
third quarter after-tax charge of $84.8 million representing the Company's
portion of the one-time assessment paid by savings institutions and banks
nationally to recapitalize the SAIF. Fully diluted earnings per share were $0.85
in 1996, compared with $2.42 in 1995 and $2.06 in 1994. Washington Mutual's
return on average assets for 1996 equaled 0.27%, down from 0.73% in 1995 and
0.69% in 1994. Its return on common stockholders'
30
<PAGE> 3
equity for 1996 was 4.39%, also down from 13.73% in 1995 and 12.95% 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 and a corresponding
pressure on net interest income in 1994 and 1995. Certain short-term interest
rates decreased 25 basis points in mid-1995 and again in December 1995,
resulting in an improved operating environment for the Company during 1996 and
1995 over 1994.
Net Interest Income. Net interest income for 1996 of $1.2 billion
increased 20% from $992.7 million in 1995, which in turn was 3% higher than the
$960.1 million earned during 1994. The net interest margin (which measures the
Company's net interest income as a percentage of average interest-earning
assets) for 1996 was 2.89%, compared with 2.62% in 1995 and 2.90% in 1994. The
1996 increase in net interest income and margin reflected the effect of two
primary factors. First, average interest-earning assets of $41.2 billion
increased 9% 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 2.75% for 1996 from 2.53% 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 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.
The net interest spread rose to 2.75% during 1996 from 2.53% for 1995.
Although long-term interest rates were generally higher during 1996 when
compared with 1995, the Company's yield on loans and investments dropped 6 basis
points to 7.64% during 1996, compared with 7.70% 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 4.89% for 1996, from 5.17% during 1995. In addition
to the favorable interest rate environment, the Company's cost of funds was
positively affected by a change in its deposit mix. Maturing time deposit
accounts were replaced, in part, with lower interest-cost money market and
checking accounts.
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 2.82% in
1994 to 2.53% 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 5.17% from 4.11% during 1994. The
yield on interest-earning assets during 1995 increased to only 7.70% from 6.93%
during 1994 because long-term interest rates did not increase as much as
short-term rates. The Company also was not in a position to take full advantage
of the increase in long-term interest rates because a sizable portion of its
earning assets were fixed rate during this period. The net interest spread
declined to 2.53% for 1995 from 2.82% in 1994.
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 ARMs,
particularly its ARMs indexed to 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 17: Interest Rate Risk Management."
31
<PAGE> 4
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)........ $14,327,183 7.05% $1,009,723 $11,260,051 7.06% $ 795,444 $ 8,790,748 5.64% $ 495,556
New West Note......... 723,800 8.13 58,841 2,346,753 6.01 141,039
Loans(4).............. 26,903,243 7.95 2,139,513 25,877,673 7.97 2,061,801 21,987,836 7.54 1,658,818
----------- ---- ---------- ----------- ---- ---------- ----------- ---- ----------
Total
interest-earning
assets.......... 41,230,426 7.64 3,149,236 37,861,524 7.70 2,916,086 33,125,337 6.93 2,295,413
Other assets.......... 1,771,424 1,841,038 1,744,338
----------- ----------- -----------
Total assets...... $43,001,850 $39,702,562 $34,869,675
=========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Checking accounts... $ 2,449,233 1.00 24,578 $ 2,389,793 1.20 28,672 $ 2,424,250 1.22 29,530
Savings and money
market accounts... 7,115,008 3.40 242,023 6,648,539 3.94 261,958 6,107,997 2.74 167,091
Time deposits....... 14,482,419 5.48 794,222 15,242,445 5.54 844,188 14,557,602 4.51 656,045
----------- ---- ---------- ----------- ---- ---------- ----------- ---- ----------
Total deposits.... 24,046,660 4.41 1,060,823 24,280,777 4.67 1,134,818 23,089,849 3.69 852,666
Borrowings:
Annuities........... 812,185 5.01 40,658 801,129 5.58 44,716 734,969 4.51 33,143
Federal funds
purchased......... 847,690 5.46 46,269 305,468 5.30 16,188 -- -- --
Securities sold
under agreements
to repurchase..... 8,987,234 5.51 495,483 7,749,929 6.23 482,698 4,328,894 4.68 202,677
Advances from the
FHLB.............. 4,655,111 5.57 259,243 3,482,200 5.81 202,422 3,962,913 5.38 213,259
Other
interest-bearing
liabilities....... 675,507 8.25 55,753 558,320 7.63 42,594 397,307 8.46 33,613
----------- ---- ---------- ----------- ---- ---------- ----------- ---- ----------
Total
borrowings...... 15,977,727 5.62 897,406 12,897,046 6.11 788,618 9,424,083 5.12 482,692
----------- ---- ---------- ----------- ---- ---------- ----------- ---- ----------
Total
interest-bearing
liabilities..... 40,024,387 4.89 1,958,229 37,177,823 5.17 1,923,436 32,513,932 4.11 1,335,358
---- ---------- ---- ---------- ---- ----------
Other liabilities..... 486,701 367,702 458,350
----------- ----------- -----------
Total
liabilities..... 40,511,088 37,545,525 32,972,282
Stockholders'
equity.............. 2,490,762 2,157,037 1,897,393
----------- ----------- -----------
Total liabilities
and
stockholders'
equity.......... $43,001,850 $39,702,562 $34,869,675
=========== =========== ===========
Net interest spread
and net interest
income.............. 2.75% $1,191,007 2.53% $ 992,650 2.82% $ 960,055
==== ========== ==== ========== ==== ==========
Net interest margin... 2.89% 2.62% 2.90%
</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. 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.
32
<PAGE> 5
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 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....................... $216,155 $ (1,876) $214,279 $ 157,735 $142,153 $299,888
New West Note..................... (58,841) -- (58,841) (167,731) 85,533 (82,198)
Loans(3).......................... 81,552 (3,840) 77,712 305,959 97,024 402,983
-------- -------- -------- --------- -------- --------
Total interest income........ 238,866 (5,716) 233,150 295,963 324,710 620,673
INTEREST EXPENSE
Deposits:
Checking accounts............... 734 (4,828) (4,094) (417) (441) (858)
Savings and money market
accounts..................... 21,029 (40,964) (19,935) 15,877 78,990 94,867
Time deposits................... (41,748) (8,218) (49,966) 32,067 156,076 188,143
-------- -------- -------- --------- -------- --------
Total deposit expense........ (19,985) (54,010) (73,995) 47,527 234,625 282,152
Borrowings:
Annuities....................... 627 (4,685) (4,058) 3,178 8,395 11,573
Federal funds purchased......... 29,582 499 30,081 16,188 -- 16,188
Securities sold under agreements
to repurchase................ 45,540 (32,755) 12,785 197,482 82,539 280,021
Advances from the FHLB.......... 64,912 (8,091) 56,821 (31,996) 21,159 (10,837)
Other........................... 9,467 3,692 13,159 11,855 (2,874) 8,981
-------- -------- -------- --------- -------- --------
Total borrowing expense...... 150,128 (41,340) 108,788 196,707 109,219 305,926
-------- -------- -------- --------- -------- --------
Total interest expense....... 130,143 (95,350) 34,793 244,234 343,844 588,078
-------- -------- -------- --------- -------- --------
Net interest income............... $108,723 $ 89,634 $198,357 $ 51,729 $(19,134) $ 32,595
======== ======== ======== ========= ======== ========
</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. 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.
33
<PAGE> 6
Other Income. Other income was $259.3 million in 1996, up from $208.3
million in 1995 and $220.8 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..................................... $102,597 $ 79,017 $ 45,255
Loan servicing fees................................ 41,303 29,315 23,247
Securities, annuities and other fees............... 53,350 49,679 65,248
Other operating income............................. 36,419 31,035 39,630
Gain on sale of loans.............................. 19,729 1,717 23,488
Gain (loss) on sale of other assets................ 5,866 (655) 23,926
Loss on sale of covered assets..................... -- (37,399) --
FDIC assistance on covered assets.................. -- 55,630 --
-------- -------- --------
Total other income............................... $259,264 $208,339 $220,794
======== ======== ========
</TABLE>
Depositor fees of $102.6 million in 1996 increased substantially from fees
of $79.0 million in 1995 and $45.3 million in 1994. The increases reflected a
revised fee structure on checks drawn on nonsufficient funds and overdraft fees
combined with an aggressive marketing campaign that substantially increased the
number of checking accounts. The number of retail checking accounts grew to
863,837 in 1996 from 743,852 in 1995 and 611,482 in 1994. The primary component
of this growth was noninterest-bearing checking accounts, which management
considers the core accounts of its consumer banking strategy. Checking accounts
are an attractive means of providing low-cost deposits, producing added fee
income and generating opportunities to sell the Company's other products and
services. 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 to assure
the profitability of its revised fee structure.
Loan servicing fees were $41.3 million in 1996, up from $29.3 million in
1995 and $23.2 million in 1994. Included in the 1996 increase was $1.4 million
of additional loan servicing fees booked in September 1996 resulting from a
change of accounting method related to the loan servicing system. 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 48% from 1995 due primarily to the
securitization and sale of residential loans. Loans serviced for others totaled
$23.0 billion at December 31, 1996. The increase in the portfolio of loans
serviced for others to $21.4 billion at December 31, 1995, from $15.3 billion at
the end of 1994 was due 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.............................. $ 71,918 $ 53,155 $ 43,665
Amortization of mortgage servicing rights.......... (30,615) (23,840) (20,418)
-------- -------- --------
Loan servicing fees.............................. $ 41,303 $ 29,315 $ 23,247
======== ======== ========
</TABLE>
Securities, annuities and other fees were principally generated by the
Company's nonbanking subsidiaries and totaled $53.4 million for 1996, compared
with $49.7 million for 1995 and $65.2 million for 1994. During 1994, Mutual
Travel Inc. ("Mutual Travel"), the Company's travel agency subsidiary, recorded
$14.2 million of service fees. With the sale of Mutual Travel in March 1995,
fees recorded by the company amounted to
34
<PAGE> 7
only $3.6 million for 1995. The lower level of service fees during 1995 was also
the result of lower than anticipated sales activity at Murphey Favre.
Other operating income during 1996 was $36.4 million, compared with $31.0
million in 1995 and $39.6 million in 1994. The majority of other operating
income was derived from loan-related fees.
Gain on sale of loans totaled $19.7 million in 1996, compared with $1.7
million in 1995 and $23.5 million in 1994. Most of the gains recognized during
1996 were the result of selling $2.0 billion of fixed-rate loans as part of the
Company's program of selling fixed-rate loan production with the objective of
reducing the effect of future movements in interest rates. 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 the Company's
credit card portfolio with a book value of $151.9 million.
The balance of mortgage servicing rights increased to $140.7 million at
December 31, 1996, from $104.5 million at the end of 1995 and $70.9 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
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. As a result, gains on the sale of loans were $17.4 million more
in 1996 than would have been recognized under prior accounting policies.
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......................... $104,495 $ 70,911 $ 66,031
Additions........................................ 74,398 58,306 38,385
Sales............................................ (5,395) -- (13,087)
Amortization..................................... (30,615) (23,840) (20,418)
Valuation allowance.............................. (2,158) (882) --
-------- -------- --------
Balance, end of year............................... $140,725 $104,495 $ 70,911
======== ======== ========
</TABLE>
Gain (loss) on sale of other assets consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Securities transactions............................... $(2,617) $ (400) $ 4,156
Mortgage servicing rights............................. 4,030 -- 20,396
Premises and equipment................................ (958) (1,458) (1,270)
Recognition of deferred gain on sale of Mutual
Travel.............................................. 4,100 -- --
Other................................................. 1,311 1,203 644
------- ------- -------
Total gain (loss) on sale of assets................. $ 5,866 $ (655) $23,926
======= ======= =======
</TABLE>
Net gains on the sale of other assets of $5.9 million during 1996 included
the recognition of a $4.1 million previously deferred gain on the March 1995
sale of Mutual Travel; a $4.0 million gain on the sale of mortgage servicing
rights related to $586.8 million of loans serviced for others; and a $2.6
million net loss on securities transactions. The net loss on the sale of
securities were incurred in connection with the Company's strategy to
35
<PAGE> 8
reduce its exposure to movements in interest rates. See "-- Net Interest Income"
and "-- Interest Rate Risk Management." During 1995, the net loss of $655,000 on
the sale of other assets was primarily due to an $8.4 million write-down
recorded due to credit quality deterioration on certain MBS partially offset by
gains generated through the sale of fixed-rate MBS. Included in gains on the
sale of other assets in 1994 of $23.9 million was the recognition of a $20.4
million gain on the sale of mortgage servicing rights related to $1.9 billion of
loans serviced for others.
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 $1.0 billion, compared with
$700.5 million in 1995 and $695.5 million in 1994. Included in other expense in
1996 were transaction-related expenses of $158.1 million resulting from the
Keystone Transaction and the one-time SAIF recapitalization assessment of $124.2
million.
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............................ $ 336,065 $ 313,304 $ 315,424
Occupancy and equipment................................... 124,278 110,981 102,403
Regulatory assessments.................................... 43,171 54,909 54,887
SAIF special assessment................................... 124,193 -- --
Data processing fees...................................... 40,733 36,538 33,862
Other operating expense................................... 159,541 143,794 146,463
Transaction-related expense............................... 158,121 2,000 --
Amortization of goodwill and other intangible assets...... 27,672 28,306 29,076
REO operations............................................ 11,530 10,682 13,402
---------- -------- --------
Total other expense..................................... $ 1,025,304 $ 700,514 $ 695,517
========== ======== ========
</TABLE>
Salaries and employee benefits increased to $336.1 million during 1996 from
$313.3 million during 1995 and $315.4 million during 1994 due primarily to
increases in staffing levels in commercial banking, consumer financial centers
and loan administration. Full-time equivalent employees were 8,322 at December
31, 1996, up from 7,903 at year-end 1995. The increase in full-time equivalent
employees was moderated by the sale of the Company's item processing operation
and outsourcing of functions in the information systems and property management
departments during 1996. The number of full-time equivalent employees at the end
of 1995 was virtually unchanged from 7,915 at the end of 1994.
The increase in occupancy and equipment expense to $124.3 million in 1996
from $111.0 million in 1995 and $102.4 million in 1994 was primarily due to the
growth in the number of consumer financial centers, an expansion of head office
facilities and technology upgrades.
Regulatory assessments (excluding the one-time SAIF recapitalization
assessment) decreased to $43.2 million from $54.9 million in both 1995 and 1994,
reflecting a reduction in the assessment rate on the portion of the Company's
deposits insured through the BIF. Although total deposits outstanding increased
in 1995, the increase in deposit balances was offset by a reduction in the
premium rate for BIF-insured deposits.
On September 30, 1996, President Clinton signed legislation intended in
part to recapitalize the SAIF and to reduce the gap between SAIF premiums and
BIF premiums. The legislation provided for a special one-time assessment on
SAIF-insured deposits that were held as of March 31, 1995, including certain
deposits acquired after that date. The assessment was designed to bring the
SAIF's reserve ratio to the legally required level of $1.25 for every $100 in
insured deposits. Prior to this legislation, deposits of Washington Mutual
36
<PAGE> 9
subsidiaries insured through the SAIF were subject to regular FDIC assessments
of 23 cents per $100 of insured deposits per year. Beginning in January 1997,
deposits of well-capitalized institutions insured through the SAIF are subject
to regular FDIC assessments of 6.48 cents per $100 per year, while deposits of
well-capitalized institutions insured through the BIF are subject to regular
FDIC assessments of 1.30 cents per $100 per year.
Washington Mutual's special assessment on deposits held by WMB, ASB and
WMBfsb resulted in a pretax charge of $124.2 million, which was taken in the
quarter ended September 30, 1996. Based on current levels of deposits,
Washington Mutual estimates that the reduction in the regular assessment on its
SAIF deposits beginning in 1997 should result in annual savings of approximately
$31 million.
Data processing fees in 1996 were $40.7 million, compared with $36.5
million in 1995 and $33.9 million in 1994. The year-to-year increase reflected
the continued use of outsourced data processing services.
Other operating expense increased to $159.5 million in 1996 from $143.8
million in 1995 and $146.5 million (inclusive of a $5.0 million expense for a
legal settlement) in 1994. See "-- Nonbanking Subsidiary Operations." Increases
in 1996 were due in part to higher telecommunications expenses and professional
fees associated with process reengineering projects. In general, other operating
expense tends to rise with the increased size of the Company.
Transaction-related expenses in 1996 associated with the Keystone
Transaction 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. As
part of the merger with Olympus Capital Corporation in 1995, the Company
recorded transaction-related expenses of $2.0 million.
Goodwill and other intangible assets have resulted from business
combinations accounted for as purchase transactions. Goodwill and other
intangible assets are amortized using the straight-line method over the period
that is expected to be benefited. The acquisition of Pacific First Bank, A
Federal Savings Bank in the second quarter of 1993 was the most significant of
such business combinations and resulted in the creation of $178.2 million in
goodwill and other intangible assets to be amortized over 10 years. The
amortization of goodwill and other intangible assets was $27.7 million in 1996,
compared with $28.3 million in 1995 and $29.1 million in 1994.
The expense from REO operations included provisions for REO losses of $7.1
million in 1996, $10.5 million in 1995 and $15.5 million in 1994. The provision
for REO losses mostly reflected credit problems in California. See "-- Asset
Quality -- Provision for Loan Losses and Reserve for Loan Losses." In general,
REO 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. See "Business -- Taxation."
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 two
years ended December 31, 1995 has ranged from approximately 28% to 30%, compared
to a normal corporate tax rate of 35%.
37
<PAGE> 10
The provision for income taxes of $95.6 million for 1996 represented an
effective tax rate of 43%. 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 "Consolidated Financial Statements -- Note 19: 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 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. For a description of the Company's
principal nonbanking subsidiaries, see "Business -- Washington Mutual's
Operating Subsidiaries."
Nonbanking subsidiary results of operations were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
WM Life................................................... $16,269 $14,292 $12,482
ASB Financial............................................. 12,616 10,599 11,245
Composite Research........................................ 3,364 2,967 2,854
ASB Insurance............................................. 1,690 1,100 --
Murphey Favre............................................. 1,461 437 (2,249)
Mutual Travel............................................. -- 229 1,178
Other..................................................... 4,520 (644) (23)
------- ------- -------
Net income before amortization of goodwill and other
intangible assets, elimination of intercompany
transactions, and income taxes ("pretax operating
income")................................................ 39,920 28,980 25,487
Amortization of goodwill and other intangible assets...... 106 932 1,501
------- ------- -------
Net income before elimination of intercompany transactions
and income taxes........................................ $39,814 $28,048 $23,986
======= ======= =======
</TABLE>
Pretax operating income for 1996 was $39.9 million, compared with $29.0
million in 1995 and $25.5 million in 1994.
WM Life improved its pretax operating income to $16.3 million during 1996
from $14.3 million in 1995 and $12.5 million in 1994. Most of the increase
during 1996 was due to higher net interest income resulting from growth in net
interest-earning assets funded in part by $79.3 million in advances from the
FHLB outstanding at the end of 1996. The improvement in earnings in 1995
primarily reflected asset growth funded by annuity sales. Annuities outstanding
at year-end 1995 were up 7% to $855.5 million from $799.2 million at the end of
1994 due to a high level of surrenders of annuity contracts. Annuities rose a
modest 3% during 1996 to end the year at $878.1 million.
ASB Financial had pretax operating income of $12.6 million in 1996, an
increase of 19%, compared with $10.6 million during 1995, primarily as a result
of greater securities sales. Higher sales commissions and salary expense,
related to higher securities commission revenues, resulted in a decrease in
pretax operating income in 1995 from $11.2 million in 1994.
Composite Research's pretax operating income improved slightly to $3.4
million during 1996 from $3.0 million during 1995 and $2.9 million during 1994.
Assets of the Composite Group of mutual funds, managed by Composite Research,
were $1.4 billion at December 31, 1996, $1.3 billion at year-end 1995 and $1.1
billion at December 31, 1994. The differences in asset balances are primarily
due to fluctuations in market valuation of the mutual fund assets.
38
<PAGE> 11
Pretax operating income for ASB Insurance for 1996 totaled $1.7 million,
compared with $1.1 million for 1995. ASB Insurance began operations in 1995.
Murphey Favre posted pretax operating income of $1.5 million during 1996,
compared with $437,000 during 1995. During 1996, Murphey Favre recorded a $1.7
million charge resulting from a legal settlement. Lower sales reduced pretax
operating income to $437,000 in 1995. The pretax net loss of $2.2 million in
1994 resulted primarily from the $5.0 million expense of a legal settlement.
The results of operations during 1996 for other nonbanking subsidiaries
included the recognition of a previously deferred gain of $4.1 million on the
1995 sale of Mutual Travel. In March 1995, Washington Mutual sold Mutual Travel
to a company whose principal shareholders were Mutual Travel's management team.
The sales price resulted in a pretax gain of $4.1 million, which was recognized
in 1996.
REVIEW OF FINANCIAL POSITION
Assets. At December 31, 1996, the Company's assets were $44.6 billion, an
increase of 6% from $42.0 billion at December 31, 1995. During 1995, total
assets grew $4.5 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 $12.0
billion at December 31, 1996 declined 22% from the December 31, 1995 balance of
$15.4 billion. Contributing to the decline were paydowns of investment
securities and the Company's decision to continue the restructuring of its
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."
At December 31, 1996, the Company's investment portfolio included $9.1
billion of available-for-sale securities, $2.9 billion of held-to-maturity
securities (with a fair value of $2.9 billion), and $1.6 million of trading
account securities. MBS constituted $10.5 billion or 87% of the total investment
portfolio.
The Company's investment portfolio increased 76% to $15.4 billion at
December 31, 1995 from $8.7 billion a year earlier, primarily due to the
Company's retention of $6.6 billion of loans which it securitized. Also in 1995,
Washington Mutual leveraged its capital through purchases of investment
securities. These purchases were funded mostly through borrowings. By leveraging
the balance sheet through the use of these wholesale activities, Washington
Mutual generated additional net interest income.
At December 31, 1995, the Company's investment portfolio included $12.2
billion of available-for-sale securities, $3.2 billion of held-to-maturity
securities (with a fair value of $3.3 billion), and $238,000 of trading account
securities. During 1995, the 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 $4.9
billion of its held-to-maturity securities into the available-for-sale category
on December 1, 1995. Of the securities transferred, over half were fixed-rate
securities. See "Business -- Asset and Liability Management."
Loans. Total loans outstanding at December 31, 1996 were $30.3 billion, up
from $24.2 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.
39
<PAGE> 12
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................... $22,660,715 $17,303,305 $17,766,215 $13,828,459 $11,734,594
Residential construction...... 723,645 615,814 549,271 430,215 366,808
Commercial real estate........ 3,810,968 3,487,574 4,699,220 4,515,449 3,194,184
Manufactured housing, second
mortgage and other
consumer................... 3,158,741 2,841,854 2,573,327 2,403,169 1,431,834
Commercial business........... 340,149 179,568 129,048 131,468 118,717
----------- ----------- ----------- ----------- -----------
Total loans................ $30,694,218 $24,428,115 $25,717,081 $21,308,760 $16,846,137
========== ========== ========== ========== ==========
Loans as a percentage of total
loans:
Residential................... 74% 71% 69% 65% 70%
Residential construction...... 2 2 2 2 2
Commercial real estate........ 13 14 18 21 19
Manufactured housing, second
mortgage and other
consumer................... 10 12 10 11 8
Commercial business........... 1 1 1 1 1
--- --- --- --- ---
Total loans................ 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
Loans originated 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):
Fixed rate........................................... $ 3,708,874 $2,365,603 $1,040,035
Adjustable rate...................................... 6,240,190 4,455,740 5,288,231
Residential construction:
Custom............................................... 779,698 583,658 705,655
Speculative.......................................... 510,047 352,169 328,521
Apartment buildings..................................... 504,531 348,942 618,201
Other commercial real estate............................ 267,043 166,987 136,749
----------- ---------- ----------
Total real estate loans.............................. 12,010,383 8,273,099 8,117,392
Consumer:
Second mortgage and other consumer...................... 953,952 722,871 776,176
Manufactured housing.................................... 334,721 274,115 277,358
----------- ---------- ----------
Total consumer loans................................. 1,288,673 996,986 1,053,534
Commercial business....................................... 348,400 167,830 128,539
----------- ---------- ----------
Total loans originated............................... $13,647,456 $9,437,915 $9,299,465
=========== ========== ==========
Residential refinances to total residential
originations............................................ 38.71% 42.14% 48.31%
</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. While refinancings increased again during the second
half of 1995 and during 1996 as market interest rates declined, they were
overshadowed by the rise in loans to purchase homes. Loans to purchase homes
accounted for $6.0 billion of residential originations during 1996
40
<PAGE> 13
while refinancing activity produced $3.9 billion of loans, compared with the
previous year's $3.9 billion of loans to purchase homes and $2.9 billion of
refinance activity. In addition, of the total residential loans originated in
1996, 63% were adjustable rate -- about the same as in 1995. The decline in
apartment building originations from 1994 to 1995 was due to a management
decision at ASB to reduce lending volumes in that product line.
Deposits. Total deposits were $24.1 billion at December 31, 1996, compared
with $24.5 billion at the end of 1995.
Deposits consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Checking accounts:
Interest bearing...................................... $ 2,138,782 $ 2,111,124 $ 2,342,407
Noninterest bearing................................... 841,180 665,205 499,282
----------- ----------- -----------
2,979,962 2,776,329 2,841,689
Savings accounts........................................ 1,660,376 1,905,659 2,224,784
MMDAs................................................... 5,181,685 4,667,884 3,502,981
Time deposit accounts:
Due within one year................................... 12,159,123 12,696,186 10,496,491
After one but within two years........................ 1,011,934 1,410,809 2,780,944
After two but within three years...................... 647,988 409,580 765,219
After three but within four years..................... 333,234 243,541 293,167
After four but within five years...................... 102,681 258,415 293,522
After five years...................................... 3,158 94,557 145,209
----------- ----------- -----------
14,258,118 15,113,088 14,774,552
----------- ----------- -----------
Total deposits..................................... $24,080,141 $24,462,960 $23,344,006
=========== =========== ===========
</TABLE>
Time deposits decreased during 1996 because management chose not to be
aggressive in their repricing. Partially offsetting the $855.0 million decline
in time deposits were increases in the level of money market and checking
accounts. Both of these products have the benefit of lower interest costs,
although there may be a less predictable timeframe for the availability of these
funds. While money market and checking accounts are demand accounts, these
accounts 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..................... $(1,550,305) $ (432,942) $(1,236,514)
Increase due to acquired deposits................... 106,663 417,078 211,537
Increase due to interest credited................... 1,060,823 1,134,818 852,666
----------- ----------- -----------
(Decrease) increase in total deposits.......... $ (382,819) $ 1,118,954 $ (172,311)
=========== =========== ===========
Total deposits at end of period..................... $24,080,141 $24,462,960 $23,344,006
Weighted average rate for the period................ 4.41% 4.69% 3.69%
</TABLE>
41
<PAGE> 14
Borrowings and Annuities. Washington Mutual's borrowings primarily take the
form of federal funds purchased, securities sold under agreements to repurchase
and advances from the FHLBs of Seattle and San Francisco. See
"Business -- Sources of Funds -- Borrowings and Annuities." 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......................... 1,052,000 433,420 --
Securities sold under agreements to
repurchase.................................... 7,835,453 7,984,756 6,637,346
Advances from the FHLB.......................... 7,241,492 4,715,739 4,128,977
Other borrowings................................ 676,986 590,217 381,066
----------- ----------- -----------
Total borrowings.............................. $17,683,988 $14,579,635 $11,946,567
=========== =========== ===========
</TABLE>
In August 1995, the Company filed a registration statement with the SEC for
the offering, on a delayed or continuous basis, of up to $250.0 million of debt
securities, of which $100.0 million remains available.
In 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. In general, SFAS No. 127 defers for one
year the effective date 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.
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 provision for loan losses during
1996 was $201.5 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
42
<PAGE> 15
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, the provision for loan
losses for 1996 included $76.5 million of charges, which was substantially
unchanged from the $75.0 million in 1995, reflecting the fact that the dollar
amounts of nonperforming assets were substantially the same in both periods. The
balance of the reserve for loan losses was $363.4 million or 110.29% of
nonperforming assets at December 31, 1996, compared with $235.3 million or
69.42% of nonperforming assets at December 31, 1995.
The provision for loan losses during 1995 was $75.0 million, compared with
$122.0 million in 1994 and $158.7 million in 1993. The 1995 provision reflected
a decline in the level of nonperforming assets, particularly California
residential and apartment building real estate loans. The 1994 provision
reflected a significant decline in the levels of certain nonperforming assets,
but was increased from levels otherwise indicated by $12.5 million related to
losses resulting from the Northridge, California earthquake in January 1994.
The provision for loan losses of $158.7 million during 1993 was virtually
unchanged from 1992's level of $158.5 million. During 1991, California's general
economic indicators, including employment, consumer confidence and the value of
residential real estate, began to deteriorate. These trends continued through
1992 and 1993. In response to these trends, the Company increased its reserve
for loan losses through the provision for loan losses during those years and
tightened underwriting standards at ASB. Management believes that the stricter
underwriting standards initiated at ASB in the latter part of 1991 and 1992 have
helped to alleviate the level of loan delinquencies, despite the recessionary
conditions that existed in California. The delinquency experience of loans
originated by ASB subsequent to 1992 has been significantly less than that of
those originated prior to 1992. Management believes that the high rate of
delinquencies in prior years' originations can be attributed to a subsequently
discontinued limited documentation program offered by ASB during 1989 and 1990,
as well as the general decline in the value of residential real estate that
resulted in the deterioration of many borrowers' equity. The loan loss provision
in 1992 and 1993 was also affected by the increase in the size of the loan
portfolio, and in 1993, caution about the quality of the loans acquired from
Pacific First.
Integral to determining the level of the provision for loan losses in any
given year is an analysis of actual loss experience and plans for problem loan
administration and resolution. Loan charge-offs, net of recoveries for 1996
totaled $74.4 million, which was less than the level of net charge-offs of $90.1
million in 1995, $123.0 million in 1994, $139.3 million in 1993, and $114.7
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 three years. Although charge-offs had been higher,
commercial real estate delinquencies as a percentage of the total commercial
real estate loan portfolio had declined significantly, contributing to the lower
overall provision for loan losses. At year-end 1992, commercial credits, which
consisted primarily of high-yield bonds, declined to $14.0 million from $22.2
million at the end of the previous year. This decline was mostly due to $6.6
million in sales during the year. However, by the end of 1992, nonperforming
assets in this portfolio had increased to $8.5 million from $360,000 one year
earlier. This increase in nonperforming credits was anticipated by management.
43
<PAGE> 16
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.............. $235,275 $244,989 $245,062 $179,612 $130,423
Provision for loan losses............... 201,512 74,987 122,009 158,728 158,537
Reserves added through business
combinations.......................... 1,077 5,372 921 46,000 5,321
Loans charged-off:
Residential........................... (53,993) (57,147) (89,637) (93,799) (77,815)
Residential construction.............. (16) (125) (190) (297) (937)
Commercial real estate................ (21,752) (33,149) (26,835) (26,967) (19,377)
Manufactured housing, second mortgage
and other consumer................. (6,639) (6,888) (10,544) (16,964) (17,017)
Commercial business/credits........... (435) (813) (2,065) (3,065) (1,321)
-------- -------- -------- -------- --------
(82,835) (98,122) (129,271) (141,092) (116,467)
Recoveries of loans previously
charged-off:
Residential........................... 4,437 2,393 2,522 45 17
Residential construction.............. -- 47 -- -- --
Commercial real estate................ 3,197 4,426 2,186 889 571
Manufactured housing, second mortgage
and other consumer................. 705 701 1,117 768 313
Commercial business/credits........... 74 482 443 112 897
-------- -------- -------- -------- --------
8,413 8,049 6,268 1,814 1,798
-------- -------- -------- -------- --------
Net charge-offs......................... (74,422) (90,073) (123,003) (139,278) (114,669)
-------- -------- -------- -------- --------
Balance, end of year.................... $363,442 $235,275 $244,989 $245,062 $179,612
======== ======== ======== ======== ========
Net charge-offs as a percentage of
average loans......................... 0.28% 0.35% 0.56% 0.70% 0.69%
</TABLE>
As part of the process of determining the adequacy of the reserve for loan
losses, management reviews the loan portfolio for specific weaknesses. A portion
of the reserve is then allocated to reflect the identified loss exposure.
Residential real estate and consumer loans are not individually analyzed for
impairment and loss exposure because of the significant number of loans and
their relatively small individual balances. Residential construction, commercial
real estate and commercial business loans were evaluated individually for
impairment. Allocated reserves at the end of 1996 increased significantly to
$78.3 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 may exist in
the remainder of the loan portfolio but has yet to be identified. In determining
the adequacy of unallocated reserves, management considers changes in the size
and composition of the loan portfolio, historical loan loss experience, current
and anticipated economic conditions, and the Company's credit administration and
asset management philosophies and procedures.
44
<PAGE> 17
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>
Allocated reserves:
Commercial real estate............ $ 77,054 $ 16,488 $ 20,025 $ 22,833 $ 22,496
Residential construction.......... -- 158 1,327 1,503 1,219
Commercial business/credits....... 1,285 -- -- 1,718 5,597
-------- -------- -------- -------- --------
Total allocated reserves....... 78,339 16,646 21,352 26,054 29,312
Unallocated reserves................ 285,103 218,629 223,637 219,008 150,300
-------- -------- -------- -------- --------
Total loan loss reserves....... $363,442 $235,275 $244,989 $245,062 $179,612
======== ======== ======== ======== ========
Total reserve for loan losses as a
percentage of:
Nonperforming loans............... 160.52% 110.04% 87.22% 72.74% 54.58%
Nonperforming assets.............. 110.29 69.42 58.52 46.91 31.98
</TABLE>
A reserve for REO losses is maintained for any subsequent decline in the
value of foreclosed property. The reserve for REO losses was $7.1 million at
December 31, 1996, compared with $10.1 million at December 31, 1995. The level
is based upon a routine review of the REO portfolio and the strength of national
and local economies.
Classified Assets. The following table sets forth the Company's classified
assets, which consist of nonaccrual loans, loans under foreclosure, REO and
performing loans (including substandard troubled debt restructurings) and
securities that exhibit credit quality weaknesses. When and if loans sold on a
recourse basis are nonperforming, they are included in nonaccrual loans. See
"Consolidated Financial Statements -- Note 1: Summary of Significant Accounting
Policies."
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Nonaccrual loans and loans under foreclosure........................... $226,412 $213,802
REO.................................................................... 103,111 125,101
-------- --------
Total nonperforming assets........................................... 329,523 338,903
Troubled debt restructurings (classified as substandard)............... 82,048 85,483
Other classified assets................................................ 136,442 129,264
-------- --------
Total classified assets.............................................. $548,013 $553,650
======== ========
</TABLE>
Nonperforming assets decreased to 0.74% of total assets at December 31,
1996 or $329.5 million, compared with $338.9 million or 0.81% of total assets at
December 31, 1995. Nonperforming assets decreased 19% to $338.9 million at the
end of 1995, from $418.7 million at the end of 1994. At December 31, 1996,
nonperforming assets in California accounted for 63% of total nonperforming
assets, down from 75% and 83% at the ends of 1995 and 1994. The decline in
nonperforming assets since 1992 was largely a result of a tightening of
underwriting standards at ASB beginning in mid-1991. Declining market rents and
occupancy rates in certain areas of Los Angeles that were negatively affected by
the economic environment during the three years ended December 31, 1995, as well
as the Los Angeles riots in 1992 and the Northridge earthquake in January 1994,
contributed to higher charge-offs in the apartment loan portfolio in 1994 and
1995, thereby reducing the level of nonperforming apartment loans. See
" -- Provision for Loan Losses and Reserve for Loan Losses."
45
<PAGE> 18
Nonperforming assets and troubled debt restructurings consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans and loans under
foreclosure:
Real estate loans:
Residential............................ $180,438 $158,040 $172,136 $233,618 $253,888
Residential construction............... 9,235 9,550 4,640 8,527 5,856
Apartment buildings.................... 7,642 23,300 70,944 53,474 37,059
Other commercial real estate........... 6,555 12,663 23,549 20,516 14,883
-------- -------- -------- -------- --------
Total real estate loans.............. 203,870 203,553 271,269 316,135 311,686
Second mortgage and other consumer
loans.................................. 13,199 7,502 6,969 14,783 7,218
Manufactured housing loans................ 8,275 1,923 1,643 2,207 1,571
Commercial business loans/credits......... 1,068 824 1,018 3,785 8,580
-------- -------- -------- -------- --------
Total nonperforming loans............ 226,412 213,802 280,899 336,910 329,055
REO, net of REO reserves.................... 103,111 125,101 137,767 185,492 232,568
-------- -------- -------- -------- --------
Total nonperforming assets........... $329,523 $338,903 $418,666 $522,402 $561,623
======== ======== ======== ======== ========
Troubled debt restructurings................ $112,287 $ 90,623 $ 54,583 $ 68,670 $104,538
Nonperforming assets as a percentage of
total assets.............................. 0.74% 0.81% 1.12% 1.55% 2.03%
</TABLE>
Nonperforming assets by geographic concentration were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------------
OTHER
CALIFORNIA WASHINGTON OREGON UTAH STATES TOTAL
---------- ---------- ------- ------ ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential............... $ 119,524 $ 42,119 $ 9,516 $1,908 $ 7,371 $180,438
Residential
construction........... -- 5,823 2,143 1,130 139 9,235
Apartment buildings....... 5,840 1,759 -- -- 43 7,642
Other commercial real
estate................. 1,979 1,718 227 -- 2,631 6,555
-------- ------- ------- ------ ------- --------
Total real estate
loans................ 127,343 51,419 11,886 3,038 10,184 203,870
Second mortgage and other
consumer loans............ 1,605 5,514 3,010 278 2,792 13,199
Manufactured housing
loans..................... -- 3,893 1,818 330 2,234 8,275
Commercial business loans... -- 193 691 -- 184 1,068
-------- ------- ------- ------ ------- --------
Total nonperforming
loans................ 128,948 61,019 17,405 3,646 15,394 226,412
REO......................... 82,862 25,019 461 160 1,753 110,255
REO reserves................ (7,144)
-------- ------- ------- ------ ------- --------
Total nonperforming
assets............... $ 211,810 $ 86,038 $17,866 $3,806 $17,147 $329,523
======== ======= ======= ====== ======= ========
Nonperforming assets by
state as a percentage of
total nonperforming
assets.................... 63% 26% 5% 1% 5% 100%
</TABLE>
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 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, the value of the underlying collateral, and
current economic conditions. SFAS No. 114 also applies to all loans that are
46
<PAGE> 19
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. At December 31, 1996, the Company had $112.3 million of
restructured loans of which $82.0 million, though performing, were considered to
be impaired. Troubled debt restructurings that were not considered to be
impaired were restructured prior to 1995 and have been performing according to
the terms of the restructure in the year subsequent to the restructure.
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, any substandard loan,
whether or not performing, with an allocated reserve and certain troubled debt
restructurings. 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 $317.3 million were impaired, of which
$260.7 million had allocated reserves of $42.9 million. The remaining $56.6
million were either nonperforming or previously written down and had no reserves
allocated to them. Of the $317.3 million of impaired loans, $22.7 million were
on nonaccrual status or under foreclosure. The average balance of impaired loans
during 1996 was $302.6 million and the Company recognized $14.6 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 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
------------------------------------------------------
GROSS LOAN PRINCIPAL NET LOAN ALLOCATED
AMOUNT CHARGED-OFF AMOUNT RESERVES
---------- ----------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonaccrual loans and loans under foreclosure:
With allocated reserves...................... $ 10,909 $ 400 $ 10,509 $ 3,079
Without allocated reserves................... 15,792 3,552 12,240 --
-------- ------ -------- -------
26,701 3,952 22,749 3,079
Troubled debt restructurings:
With allocated reserves...................... 45,248 -- 45,248 7,960
Without allocated reserves................... 37,368 569 36,799 --
-------- ------ -------- -------
82,616 569 82,047 7,960
Other impaired loans:
With allocated reserves...................... 205,563 645 204,918 31,851
Without allocated reserves................... 12,437 4,833 7,604 --
-------- ------ -------- -------
218,000 5,478 212,522 31,851
-------- ------ -------- -------
Total impaired loans...................... $327,317 $ 9,999 $317,318 $ 42,890
======== ====== ======== =======
</TABLE>
At December 31, 1995, loans totaling $169.1 million were impaired, of which
$91.7 million had allocated reserves of $16.6 million. The remaining $77.4
million were either nonperforming or previously written down and had no reserves
allocated to them. Of the $169.1 million of impaired loans, $26.7 million were
on
47
<PAGE> 20
nonaccrual status or under foreclosure, and $142.3 million (including $57.1
million of troubled debt restructurings) 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
------------------------------------------------------
GROSS LOAN PRINCIPAL NET LOAN ALLOCATED
AMOUNT CHARGED-OFF AMOUNT RESERVES
---------- ----------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonaccrual loans and loans under foreclosure:
With allocated reserves...................... $ 9,853 $ 1,224 $ 8,629 $ 2,192
Without allocated reserves................... 19,226 1,113 18,113 --
-------- ------- -------- -------
29,079 2,337 26,742 2,192
Troubled debt restructurings:
With allocated reserves...................... 16,917 -- 16,917 3,115
Without allocated reserves................... 40,733 516 40,217 --
-------- ------- -------- -------
57,650 516 57,134 3,115
Other impaired loans:
With allocated reserves...................... 66,161 33 66,128 11,339
Without allocated reserves................... 25,665 6,600 19,065 --
-------- ------- -------- -------
91,826 6,633 85,193 11,339
-------- ------- -------- -------
Total impaired loans...................... $178,555 $ 9,486 $169,069 $ 16,646
======== ======= ======== =======
</TABLE>
INTEREST RATE RISK MANAGEMENT
Washington Mutual engages in a comprehensive asset and liability management
program that attempts to reduce the risk of significant decreases in net
interest income caused by interest rate changes. One of the Company's strategies
to reduce the effect of future movements in interest rates is to increase the
percentage of adjustable-rate assets in its portfolio. During 1996, the Company
securitized and then sold the majority of the fixed-rate loans it originated,
while retaining nearly all of its adjustable-rate loan production. In addition,
as part of the restructuring strategy initiated in late 1995, the Company
purchased adjustable-rate assets and sold fixed-rate mortgage-backed securities.
The Company still, however, has short-term volatility of net interest income
because of 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 and interest rate cap
agreements, to reduce the negative effect that rising rates could have on net
interest income. Derivative instruments, if not used appropriately, can subject
a company to unintended financial exposure. 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 event of
48
<PAGE> 21
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 "Consolidated Financial Statements -- Note 17: 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 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......................................... $30,613,301 $27,732,380
Derivative instruments designated against assets.................. 1,150,000 1,825,000
Interest-sensitive liabilities.................................... (34,984,865) (31,469,960)
Derivative instruments designated against liabilities............. 1,598,400 832,000
----------- -----------
Net liability sensitivity....................................... $(1,623,164) $(1,080,580)
=========== ===========
One-year gap...................................................... (3.64)% (2.57)%
</TABLE>
At the end of 1996, Washington Mutual's one-year gap was a negative 3.64%,
compared with a negative 2.57% at the end of 1995. While the Company's
consolidated one-year gap at December 31, 1996 was fairly neutral, WMB's and
ASB'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 were COFI ARM
products, its one-year gap at the end of 1996 was a positive 12.85%. At December
31, 1996, the Company had entered into interest rate exchange agreements and
interest rate cap agreements with notional values of $9.1 billion. Without these
instruments, the Company's one-year gap at December 31, 1996, would have been a
negative 9.81% as opposed to a negative 3.64%. See "Consolidated Financial
Statements -- Note 17: Interest Rate Risk Management" for a discussion of the
use of derivative instruments.
49
<PAGE> 22
Interest sensitivity analysis by maturity or repricing period 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..... $ 831,063 $ -- $ -- $ 1,647 $ -- $ -- $ 832,710
Available-for-sale securities.... 4,528,217 2,276,537 176,759 712,406 586,049 831,306 9,111,274
Held-to-maturity securities...... 2,673,283 1,445 12,144 35,495 51,698 86,282 2,860,347
Loans:
Real estate.................... 15,533,194 3,674,232 1,524,297 3,918,552 2,280,039 2,561,670 29,491,984
Manufactured housing, second
mortgage and other
consumer..................... 335,209 215,226 137,456 154,309 82,017 35,200 959,417
Commercial business............ 259,559 26,872 11,549 19,733 2,832 -- 320,545
Loan loss reserve and deferred
fees......................... -- -- -- -- -- (441,170) (441,170)
----------- ----------- ----------- ---------- ---------- ---------- -----------
Total loans................ 16,127,962 3,916,330 1,673,302 4,092,594 2,364,888 2,155,700 30,330,776
----------- ----------- ----------- ---------- ---------- ---------- -----------
Total interest-earning
assets................... 24,160,525 6,194,312 1,862,205 4,842,142 3,002,635 3,073,288 43,135,107
Other assets..................... 258,464 -- -- -- -- 1,158,354 1,416,818
----------- ----------- ----------- ---------- ---------- ---------- -----------
Total assets............... 24,418,989 6,194,312 1,862,205 4,842,142 3,002,635 4,231,642 44,551,925
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.............. 25,968,989 5,794,312 912,205 4,642,142 3,002,635 4,231,642 44,551,925
INTEREST-BEARING LIABILITIES
Deposits:
Checking accounts.............. 418,979 -- -- -- -- 2,560,983 2,979,962
Savings and money market
accounts..................... 5,912,490 -- -- -- -- 929,571 6,842,061
Time deposits.................. 4,059,401 8,071,838 1,390,843 653,931 77,810 4,295 14,258,118
----------- ----------- ----------- ---------- ---------- ---------- -----------
Total deposits............. 10,390,870 8,071,838 1,390,843 653,931 77,810 3,494,849 24,080,141
Annuities........................ 87,806 263,417 263,417 263,417 -- -- 878,057
Federal funds purchased.......... 1,052,000 -- -- -- -- -- 1,052,000
Securities sold under agreements
to repurchase.................. 7,513,466 321,987 -- -- -- -- 7,835,453
Advances from the FHLB........... 5,639,504 1,296,546 153,509 104,710 5,306 41,917 7,241,492
Other interest-bearing
liabilities.................... 346,549 882 73,314 7,726 248,223 292 676,986
----------- ----------- ----------- ---------- ---------- ---------- -----------
Total interest-bearing
liabilities.............. 25,030,195 9,954,670 1,881,083 1,029,784 331,339 3,537,058 41,764,129
Other liabilities and
stockholders' equity........... -- -- -- -- -- 2,787,796 2,787,796
----------- ----------- ----------- ---------- ---------- ---------- -----------
Total liabilities and
stockholders' equity..... 25,030,195 9,954,670 1,881,083 1,029,784 331,339 6,324,854 44,551,925
Derivative instruments affecting
interest sensitivity:
Interest rate exchange
agreements:
Designated against deposits and
short-term borrowings........ (1,269,400) 286,500 337,500 636,200 9,200 -- --
Interest rate cap agreements:
Designated against deposits and
short-term borrowings........ (615,500) -- 254,000 361,500 -- -- --
----------- ----------- ----------- ---------- ---------- ---------- -----------
Total effect of derivative
instruments.............. (1,884,900) 286,500 591,500 997,700 9,200 -- --
----------- ----------- ----------- ---------- ---------- ---------- -----------
Total liabilities,
stockholders' equity and
derivative instruments... 23,145,295 10,241,170 2,472,583 2,027,484 340,539 6,324,854 44,551,925
----------- ----------- ----------- ---------- ---------- ---------- -----------
Net asset (liability)
sensitivity.............. $ 2,823,694 $(4,446,858) $(1,560,378) $2,614,658 $2,662,096 $ (2,093,212) $ --
=========== =========== =========== ========== ========== ========== ===========
Net asset (liability)
sensitivity as a
percentage of total
assets................... 6.34% (9.98)% (3.50)% 5.86% 5.98% (4.70)% 0.00%
Cumulative net asset (liability)
sensitivity $ 2,823,694 $(1,623,164) $(3,183,542) $ (568,884) $2,093,212 $ -- $ --
Cumulative net asset (liability)
sensitivity as a percentage of
total assets................... 6.34% (3.64)% (7.14)% (1.28)% 4.70% 0.00% 0.00%
</TABLE>
50
<PAGE> 23
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.
Washington Mutual adopted, as required, SFAS No. 115. This statement
requires investment and equity securities to be segregated into three
categories: trading, held-to-maturity and available-for-sale.
The available-for-sale portfolio is maintained as a source of investment
income as well as potential liquidity should it be necessary for the Company to
raise cash or reduce its asset size. Because the available-for-sale portfolio is
required to be carried at fair value, its carrying value fluctuates with changes
in market factors, primarily interest rates. This portfolio is substantially
composed of MBS, of which 84% have adjustable rates and the remainder have fixed
rates. In an attempt to modify the interest flows on these securities, as well
as protect against market value changes, certain interest rate exchange
agreements and interest rate cap agreements have been designated to the
available-for-sale portfolio. The effect of such agreements in a rising interest
rate environment is to shorten the effective repricing period of the underlying
assets. Specifically, as short-term interest rates increase, the overall yield
of the portfolio rises. However, the yield is constrained by periodic and
lifetime interest rate adjustment limits or caps on the underlying
adjustable-rate assets and also by the very nature of the fixed-rate assets in
the portfolio. The Company, therefore, seeks to shorten the repricing period by
entering into interest rate cap agreements that are intended to provide an
additional layer of interest rate protection against the effect of the periodic
and lifetime interest rate adjustment limits or caps and fixed-rate securities
in the portfolio. Through the use of specific interest rate cap 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
--------------------------------------------------------------------
DUE WITHIN AFTER ONE
DUE WITHIN 4-12 BUT WITHIN AFTER
0-3 MONTHS MONTHS TWO YEARS TWO YEARS TOTAL
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Principal amount of
securities.................... $4,528,217 $2,276,537 $ 176,759 $2,064,802 $9,046,315
Effect of derivative
instruments................... 2,225,000 -- (159,126) (2,065,874) --
---------- ---------- --------- ---------- ----------
Principal amount of securities
after effect of derivative
instruments................... $6,753,217 $2,276,537 $ 17,633 $ (1,072) $9,046,315
========== ========== ========= ========== ==========
</TABLE>
51
<PAGE> 24
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
--------------------------------------------------------------------
DUE WITHIN AFTER ONE
DUE WITHIN 4-12 BUT WITHIN AFTER
0-3 MONTHS MONTHS TWO YEARS TWO YEARS TOTAL
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Principal amount of
securities.................... $4,528,217 $2,276,537 $ 176,759 $2,064,802 $9,046,315
Effect of derivative
instruments................... 700,000 -- -- (700,000) --
---------- ---------- -------- ---------- ----------
Principal amount of securities
after effect of derivative
instruments................... $5,228,217 $2,276,537 $ 176,759 $1,364,802 $9,046,315
========== ========== ======== ========== ==========
</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
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...................... $25,030,195 $ 9,954,670 $2,074,149 $4,703,521 $41,762,535
Effect of derivative
instruments..................... (6,897,400) 3,460,500 963,000 2,473,900 --
----------- ----------- ---------- ---------- -----------
Amount of deposits and borrowings
after effect of derivative
instruments..................... $18,132,795 $13,415,170 $3,037,149 $7,177,421 $41,762,535
=========== =========== ========== ========== ===========
</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...................... $25,030,195 $ 9,954,670 $2,074,149 $4,703,521 $41,762,535
Effect of derivative
instruments..................... (1,642,400) 459,500 397,500 785,400 --
----------- ----------- ---------- ---------- -----------
Amount of deposits and borrowings
after effect of derivative
instruments..................... $23,387,795 $10,414,170 $2,471,649 $5,488,921 $41,762,535
=========== =========== ========== ========== ===========
</TABLE>
52
<PAGE> 25
LIQUIDITY
Liquidity management focuses on the need to meet both short-term funding
requirements and long-term growth objectives. The long-term growth objectives of
the Company are to attract and retain stable consumer deposit relationships and
to maintain stable sources of wholesale funds. Because the low interest rate
environment of recent years inhibited consumer deposits, Washington Mutual has
supported its growth through business combinations with other financial
institutions and by increasing its use of wholesale borrowings. Should the
Company not be able to increase deposits either internally or through
acquisitions, its ability to grow would be dependent upon, and to a certain
extent limited by, its borrowing capacity.
Washington Mutual monitors its ability to meet short-term cash requirements
using guidelines established by its Board of Directors. The operating liquidity
ratio is used to ensure that normal short-term secured borrowing capacity is
sufficient to satisfy unanticipated cash needs. The volatile dependency ratio
measures the degree to which the Company depends on wholesale funds maturing
within one year weighted by the dependability of the source. At 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 ASB and WMBfsb maintain for
each calendar month an average daily balance of liquid assets at least equal to
5.00 percent of the prior month's average daily balance of net withdrawable
deposits plus borrowings due within one year. At December 31, 1996, the
liquidity ratio for ASB was 5.04% and for WMBfsb it was 8.29%.
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 $114.3 million, $252.5 million for noncash items
and $129.8 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 available-for-sale securities and loans held for investment totaling $9.7
billion. New loans originated and purchased for investment required $11.4
billion, and $1.8 billion was used for the purchase of available-for-sale
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 $2.7
billion on a net basis. Cash and cash equivalents were $831.1 million at
December 31, 1996. See "Consolidated Financial Statements -- Consolidated
Statements of Cash Flows."
At December 31, 1996, the Company was in position to obtain an additional
$9.7 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.
53
<PAGE> 26
CAPITAL REQUIREMENTS
At December 31, 1996, Washington Mutual's banking subsidiaries exceeded all
current regulatory capital requirements and were categorized as well
capitalized, the highest regulatory standard.
The regulatory capital ratios of WMB, ASB and WMBfsb and minimum regulatory
requirements to be categorized as well capitalized were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 WELL-
---------------------- CAPITALIZED
WMB ASB WMBFSB MINIMUM
----- ----- ------ -----------
<S> <C> <C> <C> <C>
Capital ratios:
Leverage................................................... 5.76% 5.17% 6.90% 5.00%
Tier 1 risk-based.......................................... 10.28 8.90 10.50 6.00
Total risk-based........................................... 11.09 10.92 11.58 10.00
</TABLE>
In addition, ASB and WMBfsb 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. Both ASB and WMBfsb satisfied this requirement at December 31, 1996.
See "Business -- Regulation and Supervision."
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.
54
<PAGE> 27
SIGNATURES BY REGISTRANT
Pursuant to the requirements of the Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on April 22, 1997.
WASHINGTON MUTUAL, INC.
/s/ KERRY K. KILLINGER
--------------------------------------
Kerry K. Killinger
President and Chief Executive Officer
55
<PAGE> 28
CONSOLIDATED FINANCIAL STATEMENTS OF
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996, 1995 AND 1994
Independent Auditors' Report........................................................ 57
Consolidated Statements of Income for the years ended December 31, 1996, 1995 and
1994............................................................................. 59
Consolidated Statements of Financial Position as of December 31, 1996 and 1995...... 60
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1996, 1995 and 1994.............................................................. 61
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994......................................................................... 62
Notes to Consolidated Financial Statements.......................................... 64
</TABLE>
56
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF WASHINGTON MUTUAL, INC.:
We have audited the accompanying consolidated statements of financial
position of Washington Mutual, Inc. and subsidiaries ("the Company") as of
December 31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated
financial statements give retroactive effect to the merger of Washington Mutual,
Inc. and Keystone Holdings, Inc., which has been accounted for as a pooling of
interests as described in Note 2 to the consolidated financial statements. 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 47% of
consolidated total assets as of December 31, 1995, and total net income
constituting 31% and 25% 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 report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
such 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.
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 sig
Deloitte & Touche LLP
February 14, 1997
Seattle, Washington
57
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Keystone Holdings, Inc.:
We have audited 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 (not presented separately
herein). These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Keystone
Holdings, Inc. and subsidiaries as of December 31, 1995, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Los Angeles, California
January 26, 1996, except as to note 27
to the consolidated financial statements,
which is as of February 8, 1996
58
<PAGE> 31
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
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.............................................. $2,139,513 $2,061,801 $1,658,818
Note receivable.................................... -- 58,841 141,039
Available-for-sale securities...................... 782,737 381,633 258,678
Held-to-maturity securities........................ 220,673 409,063 235,709
Cash equivalents................................... 6,313 4,748 1,169
------- ------- -------
Total interest income............................ 3,149,236 2,916,086 2,295,413
INTEREST EXPENSE
Deposits........................................... 1,060,823 1,134,818 852,666
Borrowings......................................... 897,406 788,618 482,692
------- ------- -------
Total interest expense........................... 1,958,229 1,923,436 1,335,358
------- ------- -------
Net interest income........................... 1,191,007 992,650 960,055
Provision for loan losses.......................... 201,512 74,987 122,009
------- ------- -------
Net interest income after provision for loan
losses...................................... 989,495 917,663 838,046
OTHER INCOME
Depositor fees..................................... 102,597 79,017 45,255
Loan servicing fees................................ 41,303 29,315 23,247
Securities, annuities and other fees............... 53,350 49,679 65,248
Other operating income............................. 36,419 31,035 39,630
Gain on sale of loans.............................. 19,729 1,717 23,488
Gain (loss) on sale of other assets................ 5,866 (655) 23,926
Loss on sale of covered assets..................... -- (37,399) --
Federal Deposit Insurance Corporation ("FDIC")
assistance on covered assets..................... -- 55,630 --
------- ------- -------
Total other income............................ 259,264 208,339 220,794
OTHER EXPENSE
Salaries and employee benefits..................... 336,065 313,304 315,424
Occupancy and equipment............................ 124,278 110,981 102,403
Regulatory assessments............................. 43,171 54,909 54,887
SAIF special assessment............................ 124,193 -- --
Data processing fees............................... 40,733 36,538 33,862
Other operating expense............................ 159,541 143,794 146,463
Transaction-related expense........................ 158,121 2,000 --
Amortization of goodwill and other intangible
assets........................................... 27,672 28,306 29,076
Real estate owned ("REO") operations............... 11,530 10,682 13,402
------- ------- -------
Total other expense........................... 1,025,304 700,514 695,517
------- ------- -------
Income before income taxes and minority
interest.................................... 223,455 425,488 363,323
Income taxes....................................... 70,420 111,906 109,880
Provision (benefit) for payments in lieu of
taxes............................................ 25,187 7,887 (824)
------- ------- -------
Income before minority interest............... 127,848 305,695 254,267
Minority interest in earnings of consolidated
subsidiaries..................................... 13,570 15,793 13,992
------- ------- -------
Net Income......................................... $ 114,278 $ 289,902 $ 240,275
======= ======= =======
Net Income Attributable to Common Stock............ $ 95,859 $ 271,318 $ 221,691
======= ======= =======
Net income per common share:
Primary.......................................... $0.85 $2.47 $2.09
Fully diluted.................................... 0.85 2.42 2.06
</TABLE>
See Notes to Consolidated Financial Statements
59
<PAGE> 32
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents......................................... $ 831,063 $ 983,833
Trading account securities........................................ 1,647 238
Available-for-sale securities, amortized cost $9,050,960 and
$11,919,009..................................................... 9,111,274 12,154,725
Held-to-maturity securities, fair value $2,922,552 and
$3,262,850...................................................... 2,860,347 3,197,720
Loans, net of reserve for loan losses............................. 30,103,386 24,109,136
Loans held for sale............................................... 227,390 83,704
REO............................................................... 103,111 125,101
Premises and equipment............................................ 482,391 452,743
Goodwill and other intangible assets.............................. 133,509 161,127
Other assets...................................................... 697,807 758,295
----------- -----------
Total assets................................................. $44,551,925 $42,026,622
=========== ===========
LIABILITIES
Deposits:
Checking accounts............................................... $ 2,979,962 $ 2,776,329
Savings and money market deposit accounts....................... 6,842,061 6,573,543
Time deposit accounts........................................... 14,258,118 15,113,088
----------- -----------
Total deposits............................................... 24,080,141 24,462,960
Annuities......................................................... 878,057 855,503
Federal funds purchased........................................... 1,052,000 433,420
Securities sold under agreements to repurchase.................... 7,835,453 7,984,756
Advances from the Federal Home Loan Bank ("FHLB")................. 7,241,492 4,715,739
Other borrowings.................................................. 676,986 590,217
Other liabilities................................................. 389,908 362,323
----------- -----------
Total liabilities............................................ 42,154,037 39,404,918
Minority interest................................................. -- 80,000
Contingencies (Note 26)........................................... -- --
STOCKHOLDERS' EQUITY
Preferred stock, no par value: 10,000,000 shares
authorized -- 4,722,500 and 6,122,500 shares issued and
outstanding..................................................... -- --
Common stock, no par value: 350,000,000 shares
authorized -- 126,142,285 and 119,687,860 shares issued and
outstanding..................................................... -- --
Capital surplus................................................... 952,747 920,406
Valuation reserve for available-for-sale securities............... 41,666 188,715
Retained earnings................................................. 1,403,475 1,432,583
----------- -----------
Total stockholders' equity................................... 2,397,888 2,541,704
----------- -----------
Total liabilities, minority interest and stockholders'
equity...................................................... $44,551,925 $42,026,622
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
60
<PAGE> 33
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL
NUMBER OF SHARES SURPLUS VALUATION
------------------- OFFSET AGAINST RESERVE TOTAL
PREFERRED COMMON CAPITAL NOTE RETAINED FOR AFS STOCKHOLDERS'
STOCK STOCK SURPLUS RECEIVABLE EARNINGS SECURITIES EQUITY
--------- ------- -------- -------------- ---------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994.............. 6,200 113,457 $862,949 $ (167,000) $1,039,954 $ 29,657 $1,765,560
Establishment of valuation reserve for
available-for-sale
securities -- Washington Mutual,
Inc................................... -- -- -- -- -- 13,836 13,836
Net income.............................. -- -- -- -- 240,275 -- 240,275
Miscellaneous stock transactions........ -- 384 7,762 -- (7,774) -- (12)
Cash dividends paid on preferred
stock................................. -- -- -- -- (18,584) -- (18,584)
Cash dividends paid on common stock..... -- -- -- -- (67,835) -- (67,835)
Adjustments in valuation reserve for
available-for-sale securities......... -- -- -- -- -- (104,742) (104,742)
Common stock issued through stock
options and employee stock plans...... -- 426 10,038 -- -- -- 10,038
Immaterial business combination
accounted for as a
pooling-of-interests.................. -- 1,454 9,595 -- 6,705 -- 16,300
------ ------- -------- --------- ---------- --------- ----------
BALANCE AT DECEMBER 31, 1994............ 6,200 115,721 890,344 (167,000) 1,192,741 (61,249) 1,854,836
Net income.............................. -- -- -- -- 289,902 -- 289,902
Miscellaneous stock transactions........ -- (1) (13) -- -- -- (13)
Cash dividends paid on preferred
stock................................. -- -- -- -- (18,584) -- (18,584)
Cash dividends paid on common stock..... -- -- -- -- (57,997) -- (57,997)
Adjustments in valuation reserve for
available-for-sale securities......... -- -- -- -- -- 249,964 249,964
Common stock issued through stock
options and employee stock plans...... -- 539 8,379 -- -- -- 8,379
Capital surplus previously offset
against note receivable............... -- -- -- 167,000 -- -- 167,000
Repurchase of Series C and Series E
preferred stock....................... (77) -- (1,866) -- (124) -- (1,990)
Immaterial business combination
accounted for as a
pooling-of-interests.................. -- 3,429 23,562 -- 26,645 -- 50,207
------ ------- -------- --------- ---------- --------- ----------
BALANCE AT DECEMBER 31, 1995............ 6,123 119,688 920,406 -- 1,432,583 188,715 2,541,704
Net income.............................. -- -- -- -- 114,278 -- 114,278
Cash dividends paid on preferred
stock................................. -- -- -- -- (18,418) -- (18,418)
Cash dividends paid on common stock..... -- -- -- -- (124,968) -- (124,968)
Adjustments in valuation reserve for
available-for-sale securities......... -- -- -- -- -- (147,049) (147,049)
Common stock issued through stock
options and employee stock plans...... -- 692 20,604 -- -- -- 20,604
Redemption/conversion of Series D
preferred stock....................... (1,400) 5,415 (107) -- -- -- (107)
Immaterial business combination
accounted for as a
pooling-of-interests.................. -- 347 11,844 -- -- -- 11,844
------ ------- -------- --------- ---------- --------- ----------
BALANCE AT DECEMBER 31, 1996............ 4,723 126,142 $952,747 $ -- $1,403,475 $ 41,666 $2,397,888
====== ======= ======== ========= ========== ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements
61
<PAGE> 34
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
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............................................ $ 114,278 $ 289,902 $ 240,275
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses........................... 201,512 74,987 122,009
(Gain) on sale of loans............................. (19,729) (1,717) (23,488)
(Gain) loss on sale of other assets................. (5,866) 655 (23,926)
Loss on sale of covered assets...................... -- 37,399 --
FDIC assistance on covered assets................... -- (55,630) --
REO operations...................................... 11,530 10,682 13,402
Depreciation and amortization....................... 85,741 54,361 58,939
FHLB stock dividend................................. (34,744) (23,155) (22,108)
(Increase) decrease in trading account securities... (1,404) 749 691
Origination of loans held for sale.................. (1,964,072) (822,025) (263,055)
Sales of loans held for sale........................ 2,005,610 1,127,076 764,710
(Increase) in interest receivable................... (9,881) (58,902) (28,800)
(Decrease) increase in interest payable............. (4,767) 31,027 22,159
(Decrease) increase in income taxes payable......... (10,575) 38,683 40,205
Decrease (increase) in other assets................. 91,563 (88,951) 10,757
Increase (decrease) in other liabilities............ 37,394 (23,527) (65,641)
---------- ---------- ----------
Net cash provided by operating activities........ 496,590 591,614 846,129
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of available-for-sale securities................ 4,370,458 1,673,853 499,719
Purchases of available-for-sale securities............ (1,817,811) (2,312,072) (1,480,421)
Principal payments and maturities of
available-for-sale securities....................... 1,339,910 817,048 545,753
Purchases of held-to-maturity securities.............. (3,414,473) (697,470) (1,931,537)
Principal payments and maturities of held-to-maturity
securities.......................................... 3,744,147 885,205 1,109,796
Sales of loans........................................ 55,188 84,197 221,069
Principal payments of loans........................... 3,972,002 3,067,145 3,332,483
Origination and purchases of loans.................... (11,446,810) (8,562,080) (8,666,382)
Payments received on New West Federal Savings and Loan
Association ("New West") Note....................... -- 1,682,040 1,569,018
Sales and operations of REO........................... 142,404 150,530 201,138
Sales of premises and equipment....................... 2,064 4,871 2,211
Purchase of premises and equipment.................... (84,985) (102,877) (58,396)
Purchase of mortgage servicing rights................. (16,243) (38,270) (37,605)
Cash acquired through acquisitions.................... 3,506 68,358 40,679
---------- ---------- ----------
Net cash (used) by investing activities.......... (3,150,643) (3,279,522) (4,652,475)
</TABLE>
62
<PAGE> 35
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in deposits....................... $ (480,059) $ 707,375 $ (380,297)
Increase in annuities................................. 22,554 56,325 85,795
Increase in federal funds purchased................... 622,000 433,420 --
(Decrease) increase in securities sold under
short-term agreements to repurchase................. (1,475,122) (186,833) 2,289,611
Proceeds from securities sold under long-term
agreements to repurchase............................ 2,497,407 2,872,557 1,391,682
Repurchase of securities sold under long-term
agreements to repurchase............................ (1,175,008) (1,408,127) (260,713)
Proceeds from FHLB advances........................... 14,332,232 4,710,333 8,209,790
Repayments of FHLB advances........................... (11,804,037) (4,123,336) (7,698,071)
Proceeds (repayments) of other borrowings............. 179,230 210,397 (3,488)
Repayments to minority interest....................... (95,372) -- --
Other capital transactions, net....................... 20,844 (1,298) 14,742
Cash dividends paid................................... (143,386) (76,581) (96,419)
---------- ---------- ----------
Net cash provided by financing activities........ 2,501,283 3,194,232 3,552,632
---------- ---------- ----------
(Decrease) increase in cash and cash
equivalents.................................... (152,770) 506,324 (253,714)
Cash and cash equivalents at beginning of year... 983,833 477,509 731,223
---------- ---------- ----------
Cash and cash equivalents at end of year......... $ 831,063 $ 983,833 $ 477,509
========== ========== ==========
NONCASH INVESTING ACTIVITIES
Loans exchanged for mortgage-backed securities........ $ 896,976 $6,588,124 $ 183,269
Implementation of new accounting standard -- reclass
to available-for-sale portfolio..................... -- -- 2,127,890
Transfer of securities to the available-for-sale
portfolio........................................... -- 4,924,168 --
Real estate acquired through foreclosure.............. 231,681 255,028 334,499
Loans originated to facilitate the sale of REO........ 68,995 65,693 92,415
Loans transferred to loans held for sale.............. 214,991 621,267 --
CASH PAID DURING THE YEAR FOR
Interest on deposits.................................. 1,068,198 1,125,226 851,546
Interest on borrowings................................ 893,190 762,000 458,033
Income taxes.......................................... 111,948 73,130 92,172
DIVIDENDS DECLARED AND PAYABLE IN DIFFERENT YEARS
Common stock dividends................................ -- -- (10,000)
</TABLE>
See Notes to Consolidated Financial Statements
63
<PAGE> 36
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Washington
Mutual, Inc. ("WMI" and together with its subsidiaries "Washington Mutual" or
the "Company"). WMI was formed in August 1994 by the Company's predecessor,
Washington Mutual Savings Bank ("WMSB"), a Washington state-chartered savings
bank, in connection with the reorganization of WMSB into a holding company
structure. The reorganization was completed in November 1994 through the merger
of WMSB into 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 throughout the Western United States 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, ASB and Washington Mutual Bank fsb ("WMBfsb").
Washington Mutual, through other subsidiaries, also issues and markets annuity
contracts and is the investment advisor to and distributor of mutual funds.
Washington Mutual diversified its business mix by merging WMB with
Enterprise Bank of Bellevue, Washington ("Enterprise"), a Seattle-area
commercial bank in 1995 and Western Bank of Coos Bay, Oregon ("Western"),
Oregon's largest community-based commercial bank in 1996.
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
64
<PAGE> 37
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
historic cost.
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.
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.
65
<PAGE> 38
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Trading Securities
Trading securities are purchased and held principally for the purpose of
reselling them within a short period of time. Their unrealized gains and losses
are included in earnings.
Held-To-Maturity Securities
Investments classified as held-to-maturity are accounted for at amortized
cost, but 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. In 1996, in an effort to reduce the aforementioned
risks, the Company instituted a policy of performing a credit review on each
individual security prior to purchase. Such a review includes consideration of
the collateral characteristics, borrower payment histories and information
concerning loan delinquencies and losses of the underlying collateral. After a
security is purchased, similar information is monitored on a periodic basis.
Furthermore, the Company has established internal guidelines limiting the
geographic concentration of the underlying collateral.
Loans
Loans held for investment are stated at the principal amount outstanding,
net of deferred loan fees and any discounts or premiums on purchased loans. The
deferred fees, discounts and premiums are amortized using the interest method
over the estimated life of the loan. The Company sells residential fixed-rate
loans in the secondary market. At the date of origination, the loans so
designated and meeting secondary market guidelines are identified as 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.
66
<PAGE> 39
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management ceases to accrue interest income on any loan that becomes 90
days or more 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 residential real estate and consumer
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. Securitized MBS may or may not be held as part of the Company's
investment portfolio.
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.
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.
67
<PAGE> 40
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Commercial real estate loans are considered by the Company to have somewhat
greater risk of uncollectibility than residential real estate loans due to the
dependency on income production or future development of the real estate.
The ultimate recovery of all loans is susceptible to future market factors
beyond the Company's control. These factors may result in losses or recoveries
differing significantly from those provided in the financial statements.
REO
REO includes properties acquired through foreclosure that are transferred
to REO at the lower of cost or fair value, less estimated selling costs, which
represents the new recorded basis of the property. Subsequently, properties are
evaluated and any additional declines in value are provided for in the REO
reserve for losses. The amount the Company ultimately recovers from REO 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.
Commercial REO that is managed and operated by the Company is depreciated
using the straight-line method over the property's estimated useful life.
Mortgage Servicing Rights
In May 1995, the 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. The cost relating to purchased and originated servicing is
capitalized and amortized in proportion to, and over the period of, estimated
future net servicing income.
The Company assesses impairment of the capitalized 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%, 1% 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"). The amount of impairment recognized is the
amount by which the capitalized mortgage servicing rights for a stratum exceed
their fair value.
In order to determine the fair value of the servicing rights, the Company
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.
68
<PAGE> 41
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Annuity and Insurance Accounting
WM Life Insurance, Inc. ("WM Life") is an Arizona-domiciled life insurance
company. WM Life is authorized under state law to issue annuities in seven
states. In addition, WM Life owns Empire Life Insurance Co. ("Empire"), which is
currently licensed under state law to issue annuities in 28 states. WM Life
currently issues fixed and variable flexible premium deferred annuities, single
premium fixed deferred annuities and single premium immediate annuities. Empire
currently issues fixed flexible premium deferred annuities and single premium
immediate annuities. Both companies conduct business through licensed
independent agents. The majority of such agents are employees of affiliates of
the Company and operate in the Company's financial centers. Currently, annuities
are primarily issued in Washington and Oregon.
The Company defers certain costs, such as commissions and the expenses of
underwriting and issuing policies, that are involved in acquiring new annuity
and life insurance business. These costs, which are included in other assets in
the accompanying Consolidated Statements of Financial Position, are amortized
over the lives of the policies in relation to the estimated gross profit.
Annuities equal the policy value as defined in the policy contract as of the
balance sheet date.
Securities Sold Under Agreements to Repurchase
The Company enters into sales of securities under agreements to repurchase
the same ("reverse repurchase agreements") or similar ("dollar repurchase
agreements") securities. Reverse repurchase agreements and dollar repurchase
agreements are accounted for as financing arrangements, with the obligation to
repurchase securities sold reflected as a liability in the Consolidated
Statements of Financial Position. The dollar amount of securities underlying the
agreements remain in the respective asset accounts.
Trust Assets
Assets held by the Company in fiduciary or agency capacity for customers
are not included in the Consolidated 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
69
<PAGE> 42
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
carryforward by ASB and have been included in the schedule of net operating loss
carryforwards presented in Note 19.
For periods subsequent to the merger with Keystone Holdings, the Company
will file a consolidated tax return that includes all of its subsidiaries. For
California franchise tax purposes, ASB joins in the filing of a combined return
with its subsidiaries and with ASB Real Estate Group, Inc. ("AREG"). AREG
formerly managed certain real estate related assets of New West and is now
inactive as a result of a restructuring transaction in 1993.
NOTE 2: BUSINESS COMBINATIONS
On April 28, 1995, Washington Mutual merged with Olympus Capital
Corporation of Salt Lake City, Utah ("Olympus"), the holding company of Olympus
Bank, a Federal Savings Bank ("Olympus Bank"). At the merger date, Olympus (on a
consolidated basis) had assets of $391.4 million, deposits of $278.6 million and
stockholders' equity of $37.2 million. Olympus Bank operated 11 branches in Utah
and Montana. Under the terms of the transaction, Olympus Bank merged into
WMBfsb. The merger was treated as a pooling-of-interests. Due to the immaterial
nature of the transaction, prior-period information has not been restated as if
the companies had been combined.
On August 31, 1995, Washington Mutual acquired Enterprise through a merger
of Enterprise with and into WMB. Enterprise, a Seattle-based commercial bank
specializing in lending to small and mid-size businesses, had assets of $153.8
million, deposits of $138.5 million and stockholders' equity of $14.0 million on
August 31, 1995. The merger was treated as a pooling-of-interests. Due to the
immaterial nature of the transaction, prior-period information has not been
restated as if the companies had been combined.
On January 31, 1996, the Company acquired 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, under generally accepted accounting
principles, 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.
70
<PAGE> 43
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following information represents the results of operations of the
Company and Western for 1995 and 1994 on an individual as well as a combined
basis. This information does not necessarily indicate the results that would
have been obtained, nor are they necessarily indicative of the future operations
of the combined companies. The supplemental results of operations were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER SHARE
AMOUNTS)
<S> <C> <C>
Washington Mutual:
Total revenue..................................... $1,625,451 $1,315,651
---------- ----------
Net income........................................ $ 190,624 $ 172,304
========== ==========
Net income per common share:
Primary........................................... $2.68 $2.54
Fully diluted..................................... 2.59 2.46
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Western:
Total revenue..................................... $71,383 $61,401
------- -------
Net income........................................ $ 9,177 $ 9,018
======= =======
</TABLE>
The restated results of operations were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER SHARE
AMOUNTS)
<S> <C> <C>
Washington Mutual and Western:
Total revenue..................................... $1,696,834 $1,377,052
---------- ----------
Net income........................................ $ 199,801 $ 181,322
========== ==========
Net income per common share:
Primary........................................... $2.59 $2.45
Fully diluted..................................... 2.51 2.38
</TABLE>
On November 30, 1996, WMI merged with Utah Federal Savings Bank ("Utah
FSB") by merging Utah FSB with and into WMBfsb. At November 30, 1996, Utah FSB,
which was an Ogden-based institution, had assets of $122.1 million, deposits of
$106.7 million and stockholders' equity of $12.0 million. The merger was
accounted for as a pooling-of-interests. Due to the immaterial nature of the
transaction, the Company has not restated prior-period information as if the
companies had been combined.
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, under generally accepted accounting principles,
the assets, liabilities and stockholders' equity of Keystone Holdings were
recorded 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
71
<PAGE> 44
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
prior periods as if the companies had been combined for all years presented.
Certain amounts in Keystone Holdings' financial statements have been restated to
conform to WMI's presentation.
The following information represents the results of operations of the
Company 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 pro forma results of
Keystone Holdings have been adjusted to (i) eliminate earnings attributable to
the warrant holders and (ii) reflect the preferred stock dividends to related
parties as minority interest. The supplemental results of operations were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C>
Washington Mutual:
Total revenue........................ $1,845,777 $1,696,834 $1,377,052
---------- ---------- ----------
Net income........................... $ 223,761 $ 199,801 $ 181,322
========== ========== ==========
Net income per common share:
Primary.............................. $2.82 $2.59 $2.45
Fully diluted........................ 2.73 2.51 2.38
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Keystone Holdings:
Total revenue........................ $1,562,723 $1,427,591 $1,139,155
---------- ---------- ----------
Net income........................... $ (109,656) $ 90,101 $ 58,953
========== ========== ==========
</TABLE>
The restated results of operations were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C>
Washington Mutual and Keystone
Holdings:
Total revenue........................ $3,408,500 $3,124,425 $2,516,207
---------- ---------- ----------
Net income........................... $ 114,278 $ 289,902 $ 240,275
========== ========== ==========
Net income per common share:
Primary.............................. $0.85 $2.47 $2.09
Fully diluted........................ 0.85 2.42 2.06
</TABLE>
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, under generally accepted accounting
principles, the assets and liabilities 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
indentified intangible assets, was recorded at $4.2 million.
72
<PAGE> 45
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amortization of goodwill over a 10-year period will result in a charge to
earnings of approximately $420,000 per year.
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............................... $781,185 $689,258
Cash equivalents:
Overnight investments................................ 48,031 293,000
Time deposits........................................ 1,847 1,575
-------- --------
49,878 294,575
-------- --------
$831,063 $983,833
======== ========
</TABLE>
For the purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, overnight investments and time deposits.
Generally, time deposits are short term, with an original maturity of three
months or less.
Federal Reserve Board regulations require depository institutions to
maintain certain minimum reserve balances. Included in cash and demand deposits
were required deposits at the Federal Reserve of $22.9 million and $107.9
million at December 31, 1996 and 1995.
73
<PAGE> 46
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4: AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities classified by type and contractual maturity
date consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE YIELD(1)
---------- ---------- ---------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
Due after one but within five years..... $ 271,426 $ 58 $ (1,680) $ 269,804 6.62%
After five but within 10 years.......... 2,042 107 (2) 2,147 8.15
After 10 years.......................... 595 14 -- 609 6.58
---------- -------- -------- ---------- ----
274,063 179 (1,682) 272,560 6.63
Corporate debt obligations:
Due after one but within five years..... 129,469 3,164 (283) 132,350 7.54
After five but within 10 years.......... 167,294 2,764 (2,229) 167,829 7.12
After 10 years.......................... 98,693 3,354 (1,832) 100,215 7.64
---------- -------- -------- ---------- ----
395,456 9,282 (4,344) 400,394 7.39
Equity securities:
Preferred stock......................... 171,029 4,012 (831) 174,210 6.88
FHLB stock(2)........................... 465,056 -- -- 465,056 7.06
Other stock............................. 18 3 -- 21 --
---------- -------- -------- ---------- ----
636,103 4,015 (831) 639,287 7.01
---------- -------- -------- ---------- ----
1,305,622 13,476 (6,857) 1,312,241 7.05
Mortgage-backed securities:
U.S. government agency:
Due within one year..................... 308 -- (2) 306 4.89
After one but within five years......... 390,317 7,899 (817) 397,399 7.20
After five but within 10 years.......... 161,475 5,118 (2) 166,591 7.35
After 10 years.......................... 6,361,044 72,337 (31,890) 6,401,491 6.98
---------- -------- -------- ---------- ----
6,913,144 85,354 (32,711) 6,965,787 7.00
Private issue/corporate:
Due after five but within 10 years...... 24,175 791 (97) 24,869 7.59
After 10 years.......................... 803,374 7,581 (4,392) 806,563 7.73
---------- -------- -------- ---------- ----
827,549 8,372 (4,489) 831,432 7.73
---------- -------- -------- ---------- ----
7,740,693 93,726 (37,200) 7,797,219 7.08
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 --
---------- -------- -------- ---------- ----
$9,050,960 $107,738 $(47,424) $9,111,274 7.08%
========== ======== ======== ========== ====
</TABLE>
- ---------------
(1) Weighted average yield at end of year.
(2) FHLB stock is carried at cost and is evaluated by the Company for
impairment.
74
<PAGE> 47
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE YIELD(1)
----------- ---------- ---------- ----------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
Due within one year................... $ 65,120 $ -- $ (64) $ 65,056 4.72%
After one but within five years....... 184,837 526 (29) 185,334 6.48
After five but within 10 years........ 9,755 41 (125) 9,671 7.23
After 10 years........................ 59,813 121 (770) 59,164 7.02
----------- -------- -------- ----------- ----
319,525 688 (988) 319,225 6.24
Corporate debt obligations:
Due within one year................... 1,502 10 -- 1,512 8.27
After one but within five years....... 136,447 7,492 (205) 143,734 8.70
After five but within 10 years........ 181,038 8,237 (819) 188,456 7.02
After 10 years........................ 97,755 6,626 (98) 104,283 7.50
----------- -------- -------- ----------- ----
416,742 22,365 (1,122) 437,985 7.69
Equity securities:
Preferred stock....................... 110,532 2,535 (2,311) 110,756 7.21
FHLB stock(2)......................... 414,389 -- -- 414,389 6.74
Other stock........................... 5 3 -- 8 --
----------- -------- -------- ----------- ----
524,926 2,538 (2,311) 525,153 6.84
----------- -------- -------- ----------- ----
1,261,193 25,591 (4,421) 1,282,363 6.98
Mortgage-backed securities:
U.S. government agency:
Due within one year................... 5 -- -- 5 9.23
After one but within five years....... 467,226 14,883 (497) 481,612 7.64
After five but within 10 years........ 236,497 14,338 (86) 250,749 7.84
After 10 years........................ 8,713,086 226,286 (19,214) 8,920,158 6.93
----------- -------- -------- ----------- ----
9,416,814 255,507 (19,797) 9,652,524 6.99
Private issue/corporate:
Due after five but within 10 years.... 18,614 901 (258) 19,257 7.14
After 10 years........................ 1,211,290 8,739 (17,016) 1,203,013 7.37
----------- -------- -------- ----------- ----
1,229,904 9,640 (17,274) 1,222,270 7.37
----------- -------- -------- ----------- ----
10,646,718 265,147 (37,071) 10,874,794 7.03
Derivative instruments:
Interest rate exchange agreements........ (848) 2,225 (13,224) (11,847) --
Interest rate cap agreements............. 11,946 -- (2,531) 9,415 --
----------- -------- -------- ----------- ----
11,098 2,225 (15,755) (2,432) --
----------- -------- -------- ----------- ----
$11,919,009 $ 292,963 $ (57,247) $12,154,725 7.03%
=========== ======== ======== =========== ====
</TABLE>
- ---------------
(1) Weighted average yield at end of year.
(2) FHLB stock is carried at cost and is evaluated by the Company for
impairment.
Proceeds from sales of investment securities in the available-for-sale
portfolio during 1996 and 1995 were $139.1 million and $626.2 million. The
Company realized $1.9 million in gains and $799,000 in losses on these sales
during 1996. Similarly, the Company realized $4.0 million in gains and $2.2
million in losses on sales during 1995. Proceeds from sales of MBS in the
available-for-sale portfolio during 1996 and 1995 were
75
<PAGE> 48
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$3.9 billion and $1.0 billion. The Company realized $31.4 million in gains and
$35.1 million in losses on these sales during 1996 and $13.5 million in gains
and $16.2 million in losses on these sales during 1995.
Available-for-sale MBS with an amortized cost of $6.0 billion and a fair
value of $6.0 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 $4.9 billion and gross unrealized gains of
$82.6 million and gross unrealized losses of $28.2 million. No transfers between
the held-to-maturity and available-for-sale categories were made during 1996.
At December 31, 1996, net unrealized gains on the available-for-sale
portfolio were $63.1 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 $41.7 million. At December 31, 1995, net unrealized gains on
the available-for-sale portfolio were $249.2 million and unrealized losses on
the derivative instruments designated against this portfolio were $13.5 million,
resulting in a combined net unrealized gain included as a separate component of
stockholders' equity (on an after-tax basis) of $188.7 million.
On December 31, 1996, the Company held $831.4 million of private-issue MBS
and CMOs. Of that amount, 20% were of the highest investment grade (AAA), 66%
were rated investment grade (AA or A), 9% were rated lowest investment grade
(BBB) and 5% 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 $1.2 billion of
private-issue MBS and CMOs. Of that amount, 33% were of the highest investment
grade (AAA), 55% were rated investment grade (AA or A), 8% were rated lowest
investment grade (BBB) and 4% 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
$249.7 million and a fair value of $249.6 million from a single issuer, the
Resolution Trust Corporation.
76
<PAGE> 49
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5: HELD-TO-MATURITY SECURITIES
Held-to-maturity securities classified by type and contractual maturity
date consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE YIELD(1)
---------- ---------- ---------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
Due after five but within 10 years...... $ 6,629 $ 559 $ -- $ 7,188 8.25%
Corporate debt obligations:
Due within one year..................... 6,607 2 -- 6,609 5.02
After one 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 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 (237) 72,592 6.02
---------- ------- ----- ---------- ----
108,073 3,618 (237) 111,454 6.23
---------- ------- ----- ---------- ----
192,695 9,392 (265) 201,822 7.28
Mortgage-backed securities
U.S. government agency:
Due after 10 years...................... 2,667,652 53,078 -- 2,720,730 7.33
---------- ------- ----- ---------- ----
$2,860,347 $ 62,470 $ (265) $2,922,552 7.33%
========== ======= ===== ========== ====
</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.
77
<PAGE> 50
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE YIELD(1)
---------- ---------- ---------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and agency obligations:
Due within one year..................... $ 19,693 $ -- $ -- $ 19,693 5.24%
After five but within 10 years.......... 6,592 906 -- 7,498 8.09
---------- ------- ----- ---------- ----
26,285 906 -- 27,191 6.03
Corporate debt obligations:
Due within one year..................... 98,969 -- (9) 98,960 5.70
After one but within five years......... 31,173 2,895 (2) 34,066 8.66
After five but within 10 years.......... 22,586 2,472 (3) 25,055 8.37
After 10 years.......................... 17,162 2,310 (9) 19,463 8.91
---------- ------- ----- ---------- ----
169,890 7,677 (23) 177,544 7.00
Municipal obligations(2):
Due within one year..................... 1,090 1 -- 1,091 6.85
After one but within five years......... 1,658 89 -- 1,747 7.44
After five but within 10 years.......... 36,202 2,083 -- 38,285 6.88
After 10 years.......................... 53,371 2,908 -- 56,279 6.37
---------- ------- ----- ---------- ----
92,321 5,081 -- 97,402 6.60
---------- ------- ----- ---------- ----
288,496 13,664 (23) 302,137 6.78
Mortgage-backed securities
U.S. government agency:
Due after 10 years...................... 2,909,224 54,833 (3,344) 2,960,713 7.44
---------- ------- ----- ---------- ----
$3,197,720 $ 68,497 $ (3,367) $3,262,850 7.38%
========== ======= ===== ========== ====
</TABLE>
- ---------------
(1) Weighted average yield at end of year.
(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 $2.7 billion and a fair
value of $2.7 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.
78
<PAGE> 51
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6: LOANS
Loans consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real Estate:
Residential..................................... $22,660,715 $17,303,305
Residential construction........................ 723,645 615,814
Commercial real estate.......................... 3,810,968 3,487,574
----------- -----------
27,195,328 21,406,693
Second mortgage and other consumer................ 2,144,942 1,974,673
Manufactured housing.............................. 1,013,799 867,181
Commercial business............................... 340,149 179,568
Reserve for loan losses........................... (363,442) (235,275)
----------- -----------
$30,330,776 $24,192,840
=========== ===========
</TABLE>
Included in the table above are loans held for sale of $227.4 million and
$83.7 million at December 31, 1996 and 1995.
Nonaccrual loans totaled $226.4 million and $213.8 million at December 31,
1996 and 1995. If interest on these loans had been recognized, such income would
have been $15.0 million in 1996 and $10.8 million for 1995. At December 31, 1996
and 1995, the Company had troubled debt restructurings of $112.3 million and
$90.6 million. During 1996 and 1995, these troubled debt restructurings returned
a yield of 8.83% and 8.13%, thereby contributing $9.0 million and $5.9 million
to interest income. Had these loans not been restructured and interest accrued
at their original rates, the additional interest income would not have been
material.
At December 31, 1996, loans totaling $317.3 million were impaired, of which
$260.7 million had allocated reserves of $42.9 million. The remaining $56.6
million were previously written down and had no reserves allocated to them. Of
the $317.3 million of impaired loans, $22.7 million were on nonaccrual status
and $294.6 million (including $82.0 million of troubled debt restructurings)
were performing but judged to be impaired. Similarly, at December 31, 1995,
loans totaling $169.1 million were impaired, of which $91.7 million had
allocated reserves of $16.6 million. The remaining $77.4 million were previously
written down and had no reserves allocated to them. Of the $169.1 million of
impaired loans, $26.7 million were on nonaccrual status and $142.3 million
(including $57.1 million of troubled debt restructurings) were performing but
judged to be impaired. The average balance of impaired loans during 1996 and
1995 was $302.6 million and $177.6 million and the Company recognized $14.6
million and $12.4 million of related interest income. Interest income on
impaired loans is normally recognized on the accrual basis, unless the loan is
more than 90 days past due, in which case interest income is recorded on the
cash basis. An immaterial amount of interest income was recorded on the cash
basis during 1996 and 1995.
79
<PAGE> 52
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loans, exclusive of reserve for loan losses, by geographic concentration
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------------------
CALIFORNIA WASHINGTON OREGON OTHER TOTAL
----------- ---------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate:
Residential..................... $13,154,086 $6,601,428 $1,890,021 $1,015,180 $22,660,715
Residential construction........ -- 374,653 256,637 92,355 723,645
Apartment buildings............. 1,617,747 558,412 272,060 110,552 2,558,771
Other commercial real estate.... 366,062 683,205 94,295 108,635 1,252,197
----------- ---------- ---------- ---------- -----------
15,137,895 8,217,698 2,513,013 1,326,722 27,195,328
Second mortgage and other
consumer........................ 96,992 1,178,797 551,165 317,988 2,144,942
Manufactured housing.............. 104,022 458,175 236,247 215,355 1,013,799
Commercial business............... -- 126,841 212,112 1,196 340,149
----------- ---------- ---------- ---------- -----------
$15,338,909 $9,981,511 $3,512,537 $1,861,261 $30,694,218
=========== ========== ========== ========== ===========
</TABLE>
Loans in California included $5.2 billion of loans in the Los Angeles area,
$5.0 billion of loans in the San Francisco Bay area, $1.7 billion of loans in
Orange County, and $3.4 billion of loans in other California areas.
Loans, exclusive of reserve for loan losses, deferred loan fees and
premiums and discounts, by maturity or repricing date were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Adjustable-rate loans:
Due within one year................................... $18,637,483
After one but within five years....................... 2,710,891
After five but within 10 years........................ 122,360
After 10 years........................................ 25,428
-----------
21,496,162
Fixed-rate loans:
Due within one year................................... 1,406,809
After one but within five years....................... 3,055,005
After five but within 10 years........................ 2,242,817
After 10 years........................................ 2,571,153
-----------
9,275,784
-----------
$30,771,946
===========
</TABLE>
In addition to loans the Company serviced for its own portfolio, it
serviced loans of $23.0 billion and $21.4 billion at December 31, 1996 and 1995
for U.S. government agencies, institutions and private investors.
Loans of $9.8 billion at December 31, 1996 were pledged to secure advances
from the FHLB. Unamortized deferred loan fees were $101.1 million and $75.1
million at December 31, 1996 and 1995.
At December 31, 1996, the Company had $488.4 million in fixed-rate mortgage
loan commitments, $570.9 million in adjustable-rate mortgage loan commitments,
$650.6 million in residential construction loan commitments, $114.1 million in
commercial real estate loan commitments, $169.1 million in commercial business
loan commitments and $681.8 million in undisbursed lines of credit.
80
<PAGE> 53
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7: RESERVE FOR LOAN LOSSES
Changes in the reserve for loan losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year................. $235,275 $244,989 $245,062
Provision for loan losses.................. 201,512 74,987 122,009
Reserves added through business
combinations............................. 1,077 5,372 921
Loans charged-off:
Residential.............................. (53,993) (57,147) (89,637)
Residential construction................. (16) (125) (190)
Commercial real estate................... (21,752) (33,149) (26,835)
Manufactured housing, second mortgage and
other consumer........................ (6,639) (6,888) (10,544)
Commercial business...................... (435) (813) (2,065)
-------- -------- --------
(82,835) (98,122) (129,271)
Recoveries of loans previously charged-off:
Residential.............................. 4,437 2,393 2,522
Residential construction................. -- 47 --
Commercial real estate................... 3,197 4,426 2,186
Manufactured housing, second mortgage and
other consumer........................ 705 701 1,117
Commercial business...................... 74 482 443
-------- -------- --------
8,413 8,049 6,268
-------- -------- --------
Net charge-offs............................ (74,422) (90,073) (123,003)
-------- -------- --------
Balance, end of year....................... $363,442 $235,275 $244,989
======== ======== ========
</TABLE>
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.
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.
81
<PAGE> 54
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
An analysis of the reserve for loan losses was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Allocated reserves:
Commercial real estate............................... $ 77,054 $ 16,488
Residential construction............................. -- 158
Commercial business.................................. 1,285 --
-------- --------
78,339 16,646
Unallocated reserves................................... 285,103 218,629
-------- --------
$363,442 $235,275
======== ========
Total reserve for loan losses as a percentage of:
Nonperforming loans.................................. 160.52% 110.04%
Nonperforming assets................................. 110.29 69.42
</TABLE>
NOTE 8: REO
REO consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Real estate acquired through foreclosure............... $107,604 $134,195
Other repossessed assets............................... 2,651 1,018
Reserve for losses..................................... (7,144) (10,112)
-------- --------
$103,111 $125,101
======== ========
</TABLE>
Changes in the REO reserve for losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
-------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year.................. $ 10,112 $ 8,135 $ 13,330
Provision for REO losses.................... 7,125 10,523 15,491
Reserves charged-off, net of recoveries..... (10,093) (8,546) (20,686)
-------- -------- --------
$ 7,144 $10,112 $ 8,135
======== ======== ========
</TABLE>
REO operations were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating expense.......................... $ (6,043) $ (3,457) $ (2,977)
Net gain on sale of REO.................... 1,638 3,298 5,066
Provision for REO losses................... (7,125) (10,523) (15,491)
-------- -------- --------
$(11,530) $(10,682) $(13,402)
======== ======== ========
</TABLE>
82
<PAGE> 55
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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................................ $246,954 $243,527
Buildings.............................................. 331,988 363,894
Leasehold improvements................................. 59,812 54,683
Construction in progress............................... 4,052 8,080
-------- --------
642,806 670,184
Accumulated depreciation............................... (241,360) (296,779)
-------- --------
401,446 373,405
Land................................................... 80,945 79,338
-------- --------
$482,391 $452,743
======== ========
</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 $42.3 million, $41.3
million and $38.4 million.
The Company has noncancelable operating leases for financial centers,
office facilities and equipment. Rental expense, including amounts paid under
month-to-month cancelable leases, amounted to $43.4 million, $40.4 million and
$44.5 million in 1996, 1995 and 1994.
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................................. $ 32,787 $ 7,401
After one but within two years...................... 30,318 5,465
After two but within three years.................... 27,752 4,139
After three but within four years................... 25,741 878
After four but within five years.................... 20,112 644
After five years.................................... 83,201 --
-------- -------
$ 219,911 $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.
83
<PAGE> 56
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
Washington Mutual Bank, net of amortization of $125,542
and $98,654.......................................... $132,425 $159,259
Murphey Favre, Inc. and Composite Research & Management
Co., net of amortization of $10,125 and $9,389....... 732 1,468
Other, net of amortization of $133 and $85............. 352 400
-------- --------
$133,509 $161,127
======== ========
</TABLE>
Goodwill and other intangible assets result from business combinations
accounted for as a purchase of assets and an assumption of liabilities. Other
intangible assets primarily consist of core deposit intangibles and covenants
not-to-compete resulting from acquisitions of thrift branch systems. Goodwill
and other intangible assets are amortized using the straight-line method over
the period that is expected to be benefited, which ranges from three to 10
years. The average remaining amortization period at December 31, 1996 was
approximately five years. The Company periodically evaluates goodwill and other
intangible assets for impairment.
NOTE 11: MORTGAGE SERVICING RIGHTS
Mortgage servicing rights are included in other assets and consisted of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year................. $104,495 $ 70,911 $ 66,031
Additions................................ 74,398 58,306 38,385
Sales.................................... (5,395) -- (13,087)
Amortization............................. (30,615) (23,840) (20,418)
Impairment valuation allowance........... (2,158) (882) --
-------- -------- --------
Balance, end of year....................... $140,725 $104,495 $ 70,911
======== ======== ========
</TABLE>
With the adoption of SFAS No. 122, the Company provided a valuation
allowance for impairment of mortgage servicing rights. No write-downs were
recorded in 1996, 1995 and 1994.
84
<PAGE> 57
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12: DEPOSITS
Deposits consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Checking accounts:
Interest bearing................................ $ 2,138,782 $ 2,111,124
Noninterest bearing............................. 841,180 665,205
----------- -----------
2,979,962 2,776,329
Savings accounts.................................. 1,660,376 1,905,659
Money market deposit accounts..................... 5,181,685 4,667,884
Time deposit accounts:
Due within one year............................. 12,131,239 12,696,186
After one but within two years.................. 1,390,843 1,410,809
After two but within three years................ 295,005 409,580
After three but within four years............... 266,922 243,541
After four but within five years................ 92,004 258,415
After five years................................ 82,105 94,557
----------- -----------
14,258,118 15,113,088
----------- -----------
$24,080,141 $24,462,960
=========== ===========
</TABLE>
Time deposit accounts in amounts of $100,000 or more totaled $3.1 billion
at both December 31, 1996 and 1995. At December 31, 1996, $506.3 million of
these deposits mature within three months, $211.2 million mature in three to six
months, $1.4 billion mature in six months to one year, and $1.0 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............................................. 4.41% 4.69% 3.69%
</TABLE>
NOTE 13: FEDERAL FUNDS PURCHASED
The Company purchased federal funds from a variety of counterparties during
1996 and 1995. All federal funds purchased had maturities of 30 days or less,
with the majority maturing in one day. As of December 31, 1996 and 1995, the
balance of federal funds purchased was $1.1 billion and $433.4 million.
Financial data pertaining to federal funds purchased 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....................................... 5.99% 5.83% --%
Weighted daily average interest rate during
the year................................... 5.39 5.98 --
Daily average balance of federal funds
purchased.................................. $ 857,889 $270,861 $ --
Maximum amount of federal funds purchased at
any month end.............................. 1,474,000 998,000 --
Interest expense during the year............. 46,269 16,188 --
</TABLE>
85
<PAGE> 58
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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....................... $7,591,658 $7,592,841
Dollar repurchase agreements........................ 243,795 391,915
---------- ----------
$7,835,453 $7,984,756
========== ==========
</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>
Due within 30 days.................................. $3,202,302 $5,225,817
After 30 but within 90 days......................... 4,311,164 1,764,074
After 90 but within 180 days........................ 321,987 490,361
After one year...................................... -- 504,504
---------- ----------
$7,835,453 $7,984,756
========== ==========
</TABLE>
Financial data pertaining to securities sold under agreements to repurchase
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..................................... 5.53% 5.92% 5.94%
Weighted daily average interest rate during
the year................................. 5.53 6.14 4.69
Daily average of securities sold under
agreements to repurchase................. $8,960,288 $7,859,948 $4,318,592
Maximum securities sold under agreements to
repurchase at any month end.............. 9,453,202 8,647,814 6,637,346
Interest expense during the year........... 495,483 482,698 202,677
</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, 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. In general, SFAS No. 127 defers for one
year the effective date 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.
86
<PAGE> 59
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15: ADVANCES FROM THE FHLB
As members of the FHLB, WMB, WM Life, WMBfsb, and ASB maintain credit lines
that are percentages of their total regulatory assets, subject to
collateralization requirements. As members of the FHLB of Seattle, WMB's, WM
Life's and WMBfsb's advances are collateralized in aggregate by all FHLB stock
owned, by deposits with the FHLB, and by certain mortgages or deeds of trust and
securities of the U.S. government and agencies thereof. As a member of the FHLB
of San Francisco, ASB's advances are collateralized by all FHLB stock owned and
certain mortgages and deeds of trust.
Scheduled maturities of advances from the FHLB were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1996 1995
------------------------ ------------------------
RANGES OF RANGES OF
INTEREST INTEREST
AMOUNT RATES AMOUNT RATES
---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due within one year...................... $5,376,850 4.38%-8.45% $2,545,594 4.74%-8.54%
After one but within two years........... 1,144,891 5.30 -8.50 1,331,000 4.38 -8.45
After two but within three years......... 67,889 6.45 -8.53 545,642 5.59 -8.50
After three but within four years........ 55,197 6.25 -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 -8.65 181,366 2.80 -8.65
---------- ----------
$7,241,492 $4,715,739
========== ==========
</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% 5.76% 5.72%
Weighted daily average interest rate
during the year...................... 5.57 5.72 5.38
Daily average of FHLB advances......... $4,651,883 $3,539,006 $3,966,494
Maximum FHLB advances at any month
end.................................. 7,241,492 4,715,739 4,560,891
Interest expense during the year....... 259,243 202,422 213,259
</TABLE>
87
<PAGE> 60
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
Series C Floating Rate Notes, due
2000............................ $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 2005............ 148,007 7.25 147,845 7.25
Subordinated notes, due 2006...... 98,650 6.63 -- --
Notes payable, due 1998........... 74,111 8.16 74,482 8.16
Subordinated notes, due 1998...... 10,000 8.41 20,500 8.81
Other............................. 2,218 -- 3,390 --
-------- --------
$676,986 $590,217
======== ========
</TABLE>
In March 1995, the Company completed the private placement of $175.0
million of its Series C Floating Rate Notes ("Series C Notes"). Interest on the
Series C Notes accrued at the three-month LIBOR plus 1.375%, reset on a
quarterly basis. The Series C Notes were redeemed in January 1997.
In January 1992, the Company completed the private placement of $169.0
million of its Series B 9.60% Notes ("Series B Notes"). The Series B Notes were
redeemed in January 1997.
In August 1995, the Company filed a registration statement with the
Securities and Exchange Commission for the offering, on a delayed or continuous
basis, of up to $250.0 million of debt securities, of which $100.0 million
remains available. In August 1995, the Company issued $150.0 million of senior
notes bearing an interest rate of 7.25%. The notes may not be redeemed prior to
maturity.
In February 1996, the Company issued $100.0 million of subordinated notes
bearing an interest rate of 6.625%.
In 1993, the Company assumed a $75.0 million note payable bearing an
interest rate of 8.16% to the City of Tampa. The City of Tampa issued capital
improvement revenue bonds in 1988 and invested a portion of the receipts with
Pacific First Bank, A Federal Savings Bank ("Pacific First"). The note is
subject to periodic withdrawals.
In October 1993, the Company issued $20.5 million of subordinated notes.
The subordinated notes accrued interest at a rate equal to the three-month LIBOR
plus 2.875%. In December 1996, $10.5 million of the notes were redeemed and the
remaining $10.0 million were redeemed in January 1997.
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.
NOTE 17: 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
88
<PAGE> 61
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fixed-rate residential mortgage loan production or fixed-rate MBS; and the use
of derivative instruments, such as interest rate exchange agreements and
interest rate cap agreements.
As of December 31, 1996, interest-sensitive assets of $31.8 billion and
interest-sensitive liabilities of $33.4 billion were scheduled to mature or
reprice within one year. At December 31, 1996, the Company had entered into
interest rate exchange agreements and interest rate cap agreements with notional
values of $9.1 billion. Without these instruments the Company's one-year gap at
December 31, 1996 would have been a negative 9.81% as opposed to a negative
3.64%.
Interest rate exchange agreements and interest rate cap agreements expose
the Company to credit risk in the event of nonperformance by counterparties to
such agreements. This risk consists primarily of the termination value of
agreements where the Company is in a favorable position. The Company controls
the credit risk associated with its interest rate exchange agreements and
interest rate cap agreements through counterparty credit review, counterparty
exposure limits and monitoring procedures.
The Company's use of derivative instruments reduces the negative effect
that changing interest rates may have on net interest income. The Company uses
such instruments to reduce the volatility of net interest income over an
interest rate cycle. 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 1994, the Company terminated
interest rate exchange agreements with a notional value of $370.0 million for
deferred gains of $1.4 million and deferred losses of $4.8 million. During 1994,
the Company terminated interest rate cap agreements with a notional value of
$375.0 million and deferred gains of $860,000 were recorded. During 1996, the
Company did not terminate any interest rate exchange agreements 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
AMOUNT RECEIPT RATE(1) PAYMENT RATE VALUE FAIR 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........... 200,000 5.87 6.09 265 265
Designated against deposits and
borrowings:
Due within one year.................. 459,500 5.71 6.60 -- (2,908)
After one but within two years....... 397,500 5.43 6.25 -- (2,581)
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
---------- ---- ---- ------ ---------
$2,342,400 5.62% 6.34% $ (646) $ 676
========== ==== ==== ====== =========
</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.
89
<PAGE> 62
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------------
NOTIONAL SHORT-TERM LONG-TERM CARRYING
AMOUNT RECEIPT RATE(1) PAYMENT RATE VALUE FAIR 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........... 300,000 6.05 5.92 (5,244) (5,244)
After three years.................... 200,000 6.88 5.88 (3,987) (3,987)
Designated against deposits and
borrowings:
Due within one year.................. 495,000 6.95 6.08 -- 2,385
After one but within two years....... 484,500 5.96 6.62 -- (8,461)
After two but within three years..... 276,000 6.04 6.75 -- (8,746)
After three years.................... 261,000 7.10 8.27 -- (7,793)
---------- ---- ---- -------- --------
$2,681,500 6.26% 6.38% $(11,847) $ (34,462)
========== ==== ==== ======== ========
</TABLE>
- ---------------
(1) The terms of each agreement have specific 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.
Scheduled maturities of interest rate cap agreements were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------
NOTIONAL STRIKE SHORT-TERM CARRYING
AMOUNT RATE RECEIPT RATE(1) VALUE FAIR 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%.
90
<PAGE> 63
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<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>
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>
- ---------------
(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............. $ 2,681,500 $ 9,774,000
Purchases..................................... 668,400 3,805,500
Maturities.................................... (1,007,500) (6,799,500)
----------- -----------
Notional balance, end of year................... $ 2,342,400 $ 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>
91
<PAGE> 64
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 at end of year..... 0.73% 0.12% 0.42%
Weighted average net effective cost during the year.... 0.28 -- 1.44
Monthly average notional amount of interest rate
exchange agreements.................................. $2,598,250 $2,749,167 $2,803,750
Maximum notional amount of interest rate exchange
agreements at any month end.......................... 3,146,400 2,901,500 3,058,500
Net cost included with interest expense on deposits
during the year...................................... (70) 3,540 13,286
Net cost included with interest expense on borrowings
during the year...................................... 10,320 6,842 28,426
Net (benefit) included with interest income on
available-for-sale securities during the year........ (2,984) (10,495) (1,316)
</TABLE>
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 18: GAIN (LOSS) ON SALE OF OTHER ASSETS
Gain (loss) on sale of other 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................. (2,648) (929) 4,111
Mortgage servicing rights..................... 4,030 -- 20,396
Premises and equipment........................ (958) (1,458) (1,270)
Recognition of deferred gain on sale of travel
subsidiary.................................. 4,100 -- --
Other......................................... 1,311 1,203 644
------ ------ -------
$ 5,866 $ (655) $23,926
====== ====== =======
</TABLE>
92
<PAGE> 65
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19: 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.................. $96,613 $ 92,315 $ 94,452
Deferred income tax (benefit) expense....... (26,193) 19,591 15,428
------- -------- --------
$70,420 $111,906 $109,880
======= ======== ========
</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 percentage 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, ASB
and WMBfsb, generally recapture, for federal income tax purposes, that portion
of the balance of their tax bad debt reserves that exceeds the December 31, 1987
balance, with certain adjustments. Such recaptured amounts are to be generally
taken into ordinary income ratably over a six-year period beginning in 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.
93
<PAGE> 66
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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......................... 173,116 106,828
Purchase accounting adjustments................. 20,153 41,343
Deferred losses................................. 41,757 --
Other........................................... 55,892 59,468
---------- ----------
1,560,042 1,839,869
Valuation allowance............................... (1,192,676) (1,150,206)
---------- ----------
Deferred tax asset, net of valuation allowance.... 367,366 689,663
Deferred tax liabilities:
Tax bad debt reserves........................... 63,193 467,125
FHLB stock dividends............................ 68,901 60,636
Deferred loan fees.............................. 41,416 32,958
Deferred gains.................................. 52,365 50,947
Purchase accounting adjustments................. 18,098 26,644
Other........................................... 83,925 63,546
---------- ----------
327,898 701,856
---------- ----------
Net deferred tax asset (liability)................ $ 39,468 $ (12,193)
========== ==========
</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.
As of December 31, 1996, the Company's net deferred tax asset was $39.5
million. In order to fully realize the net deferred tax asset, ASB will need to
generate future taxable income of approximately $342.1 million prior to the
expiration of its tax net operating losses, which begin to expire in 1999. 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 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 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.
94
<PAGE> 67
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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............... $(12,193)
Tax effect of valuation adjustment on available-for-sale
securities........................................... 23,211
Deferred income tax benefit............................. 26,193
Other adjustments....................................... 2,257
--------
Deferred tax asset, end of year........................... $ 39,468
========
</TABLE>
95
<PAGE> 68
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income taxes computed at statutory rates........... $ 78,209 $148,920 $127,163
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...................................... 6,372 6,631 6,688
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.... 42,470 (7,114) 48,241
Dividends received deduction.................. (2,460) (987) (506)
Tax exempt income............................. (2,309) (1,973) (1,680)
Restructuring adjustments..................... 9,321 -- --
Other......................................... 9,339 (3,670) (431)
------- -------- --------
Income taxes included in the Consolidated
Statements of Income............................. $ 70,420 $111,906 $109,880
======= ======== ========
</TABLE>
NOTE 20: 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
------- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal........................................ $ 4,006 $3,450 $(137)
State.......................................... 21,181 4,437 (687)
------- ------ -----
$25,187 $7,887 $(824)
======= ====== =====
</TABLE>
96
<PAGE> 69
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 21: 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 $60.0 million, $8.9 million and
$25.6 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 and regulatory 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 $450.0 million for which no federal
income taxes had been provided. In the future, if this thrift bad debt reserve
is used for any purpose other than to absorb bad debt losses 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 $42.75 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 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.
97
<PAGE> 70
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, New Capital 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
30, 1995. The Cumulative Redeemable Preferred Stock was redeemed on December 20,
1996.
The Series C Preferred Stock and Series E Preferred Stock are senior to
common stock as to dividends and liquidation, but they do not confer general
voting rights.
98
<PAGE> 71
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 22: 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 outstanding convertible preferred stock.
Information used to calculate earnings per share was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income.............................................. $114,278 $289,902 $240,275
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)
-------- -------- --------
Net income attributable to primary common stock......... $ 95,859 $271,318 $221,691
======== ======== ========
Net income.............................................. $114,278 $289,902 $240,275
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)(1) -- --
-------- -------- --------
Net income attributable to fully diluted common stock... $ 95,859 $279,718 $230,091
======== ======== ========
Average common shares used to calculate earnings per
share(2)(3):
Primary............................................... 112,858,781 109,944,477 106,245,127
Fully diluted......................................... 113,138,724 115,363,724 111,664,374
</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) As part of the business combination with Keystone Holdings, 8,000,000 shares
of common stock, with a assigned value of $42.75 per share, were issued to
an escrow for the benefit of the general and limited partners of Keystone
Holdings and the FRF 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.
(3) If the conversion of the Series D Preferred Stock had taken place on January
1, 1996, primary earnings per common share for 1996 would have been $0.88.
NOTE 23: REGULATORY CAPITAL REQUIREMENTS
WMI is not subject to any regulatory capital requirements. However, each of
its subsidiary depository and insurance institutions is subject to various
capital requirements. WMB is subject to the FDIC capital requirements while ASB
and WMBfsb are subject to the Office of Thrift Supervision ("OTS") capital
requirements. 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 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 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 WMB, ASB and
99
<PAGE> 72
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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 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.
100
<PAGE> 73
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The actual regulatory capital ratios calculated for 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:
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 leverage 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(2)...................... 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.
DECEMBER 31, 1995:
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.
101
<PAGE> 74
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management believes, as of December 31, 1996, that WMB, ASB and WMBfsb
individually met all capital adequacy requirements to which they were subject.
Additionally, as of December 31, 1996, the most recent notification from the
FDIC (for WMB) and the OTS (for ASB and WMBfsb) individually categorized 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 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 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 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 24: 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.
Stock options are generally exercisable on a phased-in schedule over three
years and expire 10 years from the grant date. At December 31, 1996, options to
purchase 884,464 shares were fully exercisable.
102
<PAGE> 75
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock options granted, exercised, surrendered or terminated were as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
WEIGHTED AVERAGE FAIR VALUE OF
NUMBER OF EXERCISE PRICE OPTION SHARES
OPTION SHARES OF OPTION SHARES GRANTED
------------- ---------------- ----------------
<S> <C> <C> <C>
Outstanding January 1, 1994.................. 1,140,340 $11.24
Granted in 1994............................ 191,631 22.27
Exercised in 1994.......................... (106,399) 7.96
--------- ------
Outstanding December 31, 1994................ 1,225,572 13.17
Granted in 1995............................ 416,618 17.47 $ 4.87
Exercised in 1995.......................... (290,981) 13.60
Terminated in 1995......................... (49,848) 22.07
--------- ------
Outstanding December 31, 1995................ 1,301,361 14.71
Granted in 1996............................ 1,029,000 36.94 9.13
Exercised in 1996.......................... (212,222) 12.69
Surrendered in 1996........................ (6,750) 5.86
Terminated in 1996......................... (47,166) 27.08
--------- ------
Outstanding December 31, 1996................ 2,064,223 $25.85
========= ======
</TABLE>
Financial data pertaining to outstanding stock options were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE
EXERCISE
PRICE
WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER OF OF
RANGES OF NUMBER OF REMAINING EXERCISE PRICE EXERCISABLE EXERCISABLE
EXERCISE PRICES OPTION 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
12.33 - 17.29 144,929 5.3 12.95 144,929 12.95
20.19 - 22.75 524,419 7.3 21.50 335,160 21.76
27.75 - 30.00 327,500 9.1 27.82 -- --
30.94 - 42.75 663,000 10.0 41.98 -- --
--------- ---------- ------ ------- ------
2,064,223 7.6 years $25.85 884,464 $ 14.06
========= ========== ====== ======= ======
</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
103
<PAGE> 76
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<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.................................... $95,859 $271,318
Pro forma...................................... 93,241 270,728
Fully diluted:
As reported.................................... $95,859 $279,718
Pro forma...................................... 93,241 279,128
Net income per common share:
Primary:
As reported.................................... $0.85 $2.47
Pro forma...................................... 0.83 2.46
Fully diluted:
As reported.................................... $0.85 $2.42
Pro forma...................................... 0.83 2.41
</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 25: 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 Pension Plan and the
ASB Plan was $2.1 million, $2.0 million and $1.3 million for 1996, 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 Pension Plan's assets consist primarily of listed
common stocks, U.S. government obligations, 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 plan were allocated as prescribed by
the Employee Retirement Income Security Act of 1974 and
104
<PAGE> 77
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Pension Plan's funded 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...................................................... $(44,659) $(46,628)
Nonvested benefits................................................... (3,178) (2,367)
-------- --------
Accumulated benefit obligation......................................... (47,837) (48,995)
Effect of future compensation increases................................ (1,168) (1,598)
-------- --------
Projected benefit obligation........................................... (49,005) (50,593)
Plan assets at fair value.............................................. 65,823 61,722
-------- --------
Plan assets in excess of projected benefit obligation.................. 16,818 11,129
Unrecognized (gain) loss due to past experience different from
assumptions.......................................................... (7,800) (2,103)
Unrecognized prior service cost........................................ (352) 2,093
Unrecognized net asset at transition being recognized over 18.6
years................................................................ (2,918) (3,300)
-------- --------
Prepaid pension asset................................................ $ 5,748 $ 7,819
======== ========
</TABLE>
The combined net periodic pension expense 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................. $ 4,083 $ 3,240 $ 2,952
Interest cost on projected benefit obligation..................... 3,172 3,930 3,383
Actual (gain) loss on plan assets................................. (7,690) (12,831) 615
Amortization and deferral, net.................................... 2,506 7,679 (5,675)
------- -------- -------
$ 2,071 $ 2,018 $ 1,275
======= ======== =======
</TABLE>
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.
In addition, the Company currently provides eligible retired employees with
access to medical coverage on the same basis as active employees and provides
certain other health care insurance benefits to a limited number of retired
employees. Postretirement benefits, such as retiree health benefits, are accrued
during the years an employee provides services.
105
<PAGE> 78
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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............. $(5,736) $(5,484)
Unrecognized transition obligation........................ 2,356 2,503
Unrecognized (gain)....................................... (36) (36)
------- -------
Prepaid postretirement liability........................ $(3,416) $(3,017)
======= =======
</TABLE>
Net periodic postretirement expense included the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost........................................... $249 $206 $220
Interest cost.......................................... 384 344 322
Amortization of transition obligation.................. 147 147 147
---- ---- ----
$780 $697 $689
==== ==== ====
</TABLE>
Net periodic postretirement expense was calculated using the following
assumptions: the weighted average discount rate was 7.25% for 1996 and 1995 and
8.00% for 1994; and the medical trend rate was 13.00% for 1993 and declines
steadily to 6.00% by the year 2000. The effect of a 1.00% increase in the trend
rates is not significant.
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.
ASB implemented a Supplemental Executive Retirement Plan ("SERP") in 1990.
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.
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.
Washington Mutual uses grants of restricted stock as a component of
compensation to provide a long-term incentive for creation of shareholder value
and to encourage the recipient to remain at Washington Mutual.
106
<PAGE> 79
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.................. $ 2,071 $ 2,018 $ 1,275
Net periodic postretirement expense........... 780 697 689
Company's contributions to savings plan....... 12,381 10,027 12,374
SERP expense.................................. 2,161 1,590 1,900
STI expense................................... 3,609 3,247 2,219
Restricted stock expense...................... 911 701 1,046
------- ------- -------
$21,913 $18,280 $19,503
======= ======= =======
</TABLE>
NOTE 26: CONTINGENCIES
The Company has certain litigation and negotiations in progress resulting
from activities arising from normal operations. In the opinion of management,
none of these matters is likely to have a material adverse effect on the
Company's financial position.
As part of the administration and oversight of the Assistance Agreement and
other agreements among ASB, certain of its affiliates and the FDIC, the FDIC has
a variety of review and audit rights, including the right to review and audit
computations of payments in lieu of taxes. ASB and certain of its affiliates
have entered into 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 $42.75 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 $42.75. 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.
107
<PAGE> 80
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 27: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The results of operations on a quarterly basis have been restated to give
effect to the business combination with Keystone Holdings. Results of operations
on a quarterly basis were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER
-------------------------------- --------------------------------
WASHINGTON KEYSTONE WASHINGTON KEYSTONE
MUTUAL HOLDINGS RESTATED MUTUAL HOLDINGS RESTATED
---------- -------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Interest income..................... $415,420 $349,202 $764,622 $418,751 $357,518 $776,269
Interest expense.................... 244,425 233,195 477,620 240,607 235,901 476,508
-------- -------- -------- -------- -------- --------
Net interest income................. 170,995 116,007 287,002 178,144 121,617 299,761
Provision for loan losses........... 2,912 17,977 20,889 2,913 17,203 20,116
Other income........................ 36,762 20,248 57,010 36,752 21,872 58,624
Other expense....................... 110,092 71,002 181,094 114,687 71,364 186,051
-------- -------- -------- -------- -------- --------
Income before income taxes and
minority interest................. 94,753 47,276 142,029 97,296 54,922 152,218
Income taxes........................ 35,224 14,471 49,695 35,937 13,214 49,151
Minority interest in earnings of
consolidated subsidiary........... -- 3,527 3,527 -- 3,450 3,450
-------- -------- -------- -------- -------- --------
Net income.......................... $ 59,529 $ 29,278 $ 88,807 $ 61,359 $ 38,258 $ 99,617
======== ======== ======== ======== ======== ========
Net income attributable to common
stock............................. $ 54,924 $ 29,278 $ 84,202 $ 56,755 $ 38,258 $ 95,013
======== ======== ======== ======== ======== ========
Net income per common share:
Primary........................... $0.76 $0.75 $0.79 $0.84
Fully diluted..................... 0.74 0.74 0.76 0.83
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------
THIRD QUARTER FOURTH QUARTER
-------------------------------- --------------
WASHINGTON KEYSTONE
MUTUAL HOLDINGS RESTATED WMI
---------- -------- -------- --------------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Interest income...................................... $424,086 $373,608 $797,694 $810,651
Interest expense..................................... 244,707 256,367 501,074 503,027
-------- -------- -------- --------
Net interest income.................................. 179,379 117,241 296,620 307,624
Provision for loan losses............................ 2,913 14,220 17,133 143,374
Other income......................................... 42,792 25,396 68,188 75,442
Other expense........................................ 154,630 162,767 317,397 340,762
-------- -------- -------- --------
Income before income taxes and minority interest..... 64,628 (34,350) 30,278 (101,070)
Income taxes......................................... 24,454 (11,491) 12,963 (16,202)
Minority interest in earnings of consolidated
subsidiary......................................... -- 3,527 3,527 3,066
-------- -------- -------- --------
Net income........................................... $ 40,174 $(26,386) $ 13,788 $(87,934)
======== ======== ======== ========
Net income attributable to common stock.............. $ 35,569 $(26,386) $ 9,183 $(92,539)
======== ======== ======== ========
Net income per common share:
Primary............................................ $0.49 $0.08 $(0.81)
Fully diluted...................................... 0.49 0.08 (0.81)
</TABLE>
108
<PAGE> 81
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER
-------------------------------- ---------------------------------
WASHINGTON KEYSTONE WASHINGTON KEYSTONE
MUTUAL HOLDINGS RESTATED MUTUAL HOLDINGS RESTATED
---------- -------- -------- ---------- --------- --------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Interest income...................... $367,447 $305,735 $673,182 $390,016 $ 330,727 $720,743
Interest expense..................... 218,374 228,270 446,644 240,585 242,493 483,078
-------- -------- -------- -------- -------- --------
Net interest income.................. 149,073 77,465 226,538 149,431 88,234 237,665
Provision for loan losses............ 2,800 18,869 21,669 2,850 15,664 18,514
Other income......................... 28,855 29,188 58,043 29,554 18,315 47,869
Other expense........................ 103,081 71,496 174,577 106,332 73,101 179,433
-------- -------- -------- -------- -------- --------
Income before income taxes and
minority interest.................. 72,047 16,288 88,335 69,803 17,784 87,587
Income taxes......................... 26,797 (6,081) 20,716 22,030 642 22,672
Minority interest in earnings of
consolidated subsidiary............ -- 3,948 3,948 -- 3,948 3,948
-------- -------- -------- -------- -------- --------
Net income........................... $ 45,250 $ 18,421 $ 63,671 $ 47,773 $ 13,194 $ 60,967
======== ======== ======== ======== ======== ========
Net income attributable to common
stock.............................. $ 40,604 $ 18,421 $ 59,025 $ 43,127 $ 13,194 $ 56,321
======== ======== ======== ======== ======== ========
Net income per common share:
Primary............................ $0.60 $0.55 $0.62 $0.51
Fully diluted...................... 0.58 0.54 0.60 0.51
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------
THIRD QUARTER FOURTH QUARTER
-------------------------------- ---------------------------------
WASHINGTON KEYSTONE WASHINGTON KEYSTONE
MUTUAL HOLDINGS RESTATED MUTUAL HOLDINGS RESTATED
---------- -------- -------- ---------- --------- --------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Interest income..................... $405,638 $346,343 $751,981 $415,859 $ 354,321 $770,180
Interest expense.................... 248,844 246,712 495,556 252,921 245,237 498,158
-------- -------- -------- -------- -------- --------
Net interest income................. 156,794 99,631 256,425 162,938 109,084 272,022
Provision for loan losses........... 2,800 14,557 17,357 2,700 14,747 17,447
Other income........................ 28,280 18,033 46,313 31,185 24,929 56,114
Other expense....................... 102,530 68,484 171,014 105,712 69,778 175,490
-------- -------- -------- -------- -------- --------
Income before income taxes and
minority interest................. 79,744 34,623 114,367 85,711 49,488 135,199
Income taxes........................ 28,056 5,023 33,079 30,621 12,705 43,326
Minority interest in earnings of
consolidated subsidiary........... -- 3,948 3,948 -- 3,949 3,949
-------- -------- -------- -------- -------- --------
Net income.......................... $ 51,688 $ 25,652 $ 77,340 $ 55,090 $ 32,834 $ 87,924
======== ======== ======== ======== ======== ========
Net income attributable to common
stock............................. $ 47,042 $ 25,652 $ 72,694 $ 50,444 $ 32,834 $ 83,278
======== ======== ======== ======== ======== ========
Net income per common share:
Primary........................... $0.66 $0.66 $0.71 $0.75
Fully diluted..................... 0.64 0.64 0.69 0.73
</TABLE>
NOTE 28: 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
109
<PAGE> 82
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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................. $ 831,063 $ 831,063 $ 983,833 $ 983,833
Trading account securities................ 1,647 1,647 238 238
Available-for-sale securities............. 9,109,460 9,109,460 12,157,157 12,157,157
Held-to-maturity securities............... 2,860,347 2,922,552 3,197,720 3,262,850
Mortgage servicing rights................. 140,725 169,183 104,495 109,950
Loans, exclusive of reserve for loan
losses................................. 30,786,473 30,932,973 24,428,115 24,788,750
----------- ----------- ----------- -----------
43,729,715 43,966,878 40,871,558 41,302,778
Financial liabilities:
Deposits.................................. 24,080,141 24,225,124 24,462,960 24,624,673
Annuities................................. 878,057 878,057 855,503 855,503
Federal funds purchased................... 1,052,000 1,052,000 433,420 433,493
Securities sold under agreements to
repurchase............................. 7,835,453 7,852,852 7,984,756 7,985,202
Advances from the FHLB.................... 7,241,492 7,256,785 4,715,739 4,732,366
Other borrowings.......................... 676,985 688,579 590,217 612,240
----------- ----------- ----------- -----------
41,764,128 41,953,397 39,042,595 39,243,477
Derivative instruments(1):
Interest rate exchange agreements:
Designated against available-for-sale
securities........................... (646) (646) (11,847) (11,847)
Designated against deposits and
borrowings........................... -- 1,322 -- (22,615)
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)
----------- ----------- ----------- -----------
19,347 6,547 15,259 (25,677)
Off-balance sheet loan commitments.......... -- (19) -- 3,595
----------- ----------- ----------- -----------
Net financial instruments................... $ 1,984,934 $ 2,020,009 $ 1,844,222 $ 2,037,219
=========== =========== =========== ===========
</TABLE>
- ---------------
(1) See Note 17: Interest Rate Risk Management.
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.
110
<PAGE> 83
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Available-for-sale securities -- Fair values were based on quoted market
prices or dealer quotes. If a quoted market price was not available, fair value
was estimated using quoted market prices for similar securities.
Held-to-maturity securities -- Fair values were based on quoted market
prices or dealer quotes. If a quoted market price was not available, fair value
was estimated using quoted market prices for similar securities.
Loans -- Loans were priced using the discounted cash flow method. The
discount rate used was the rate currently offered on similar products.
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.
Deposits -- The fair value of checking accounts, savings accounts and money
market accounts was the amount payable on demand at the reporting date. For time
deposit accounts, the fair value was determined using the discounted cash flow
method. The discount rate was equal to the rate currently offered on similar
products. Core deposit intangibles are not included.
Annuities -- The carrying amount represented fair value.
Federal funds purchased -- These were valued using the discounted cash flow
method. The discount rate was equal to the rate currently offered on similar
borrowings.
Securities sold under agreements to repurchase -- These were valued using
the discounted cash flow method. The discount rate was equal to the rate
currently offered on similar borrowings.
Advances from the FHLB -- These were valued using the discounted cash flow
method. The discount rate was equal to the rate currently offered on similar
borrowings.
Other borrowings -- These were valued using the discounted cash flow
method. The discount rate was equal to the rate currently offered on similar
borrowings.
Derivative instruments -- The fair value for interest rate exchange
agreements was determined using dealer quotations, when available, or the
discounted cash flow method. The market prices for similar instruments were used
to value interest rate cap agreements.
Off-balance sheet loan commitments -- Loan commitments are commitments the
Company made to borrowers at locked-in rates. The fair value of loan commitments
was estimated based on current levels of interest rates versus the committed
interest rates. The balance shown represents the differential between committed
value and fair value.
NOTE 29: 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.
111
<PAGE> 84
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD OF
YEAR ENDED DECEMBER AUGUST 17, 1994
31, (INCEPTION) TO
--------------------- 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)............... 132,301 293,630 13,103
Other operating income.................................. 122 8 --
(Loss) on sale of other assets.......................... -- (171) --
-------- -------- --------
Total other income.................................... 132,423 293,467 13,103
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......................... 107,968 286,893 13,676
Income tax (benefit) expenses........................... (8,105) (865) 201
-------- -------- --------
Net income(1)........................................... $116,073 $287,758 $13,475
======== ======== ========
</TABLE>
- ---------------
(1) Contains intercompany transactions eliminated upon consolidation.
112
<PAGE> 85
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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)......................................... 2,344,959 2,451,956
Other assets.......................................................... 12,917 929
---------- ----------
Total assets........................................................ $2,641,348 $2,790,780
========== ==========
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 -- 4,722,500 and 6,122,500 shares issued and
outstanding......................................................... -- --
Common stock, no par value: 350,000,000 shares
authorized -- 126,255,891 and 119,801,466 outstanding............... -- --
Capital surplus(1).................................................... 1,061,890 1,029,549
Valuation reserve for available-for-sale securities................... 1,156 2,390
Valuation reserve for available-for-sale securities -- subsidiaries... 40,510 186,325
Retained earnings(1).................................................. 1,309,229 1,336,543
---------- ----------
Total stockholders' equity.......................................... 2,412,785 2,554,807
---------- ----------
Total liabilities and stockholders' equity.......................... $2,641,348 $2,790,780
========== ==========
</TABLE>
- ---------------
(1) Contains intercompany transactions eliminated upon consolidation.
113
<PAGE> 86
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER PERIOD OF
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)....................................... $ 116,073 $ 287,758 $ 13,475
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................................... (132,301) (293,630) (13,103)
(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................................... (195,624) 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 payments of 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................................... 351,928 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.
114
<PAGE> 87
WASHINGTON MUTUAL, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- --------------------------------------------------------------- ----------------
<S> <C> <C>
2.1* Agreement for Reorganization between the Registrant and
Washington Mutual, dated October 19, 1994.
3.1 Restated Articles of Incorporation of the Registrant, as
amended (the "Articles").
3.2 Bylaws of the Registrant (Incorporated by reference to the
Washington Mutual, Inc. Annual Report to the Securities and
Exchange Commission on Form 10-K for the year ended December
31, 1995. File No. 0-25188).
4.1* Article II, Sections D(2), D(3), and D(4) of the Articles,
which define the rights of holders of the Series C Preferred
Stock and the Series E Preferred Stock (filed together with
Exhibit 3.1 hereto).
4.2* Rights Agreement, dated October 16, 1990.
4.3* Amendment No. 1 to Rights Agreement, dated October 31, 1994.
4.4* Supplement to Rights Agreement, dated November 29, 1994.
4.5 Form of Indenture between the Registrant and Harris Trust and
Savings Bank, as Trustee for the Debt Securities (Incorporated
by reference to Washington Mutual, Inc. Registration Statement
on Form S-3, registration no. 33-93850).
4.6 First Supplemental Indenture dated November 26, 1996 and Second
Supplemental Indenture dated January 6, 1997 to the Indenture
between Washington Mutual, Inc. and Harris Trust and Savings
Bank, as Trustee, dated August 25, 1995, affecting the rights
of the holders of the Registrant's Senior Notes.
10.1* Washington Mutual 1994 Stock Option Plan.
10.2* Amended and Restated Incentive Stock Option Plan.
10.3* Amended and Restated Washington Mutual Restricted Stock Plan
(1986).
10.4* Washington Mutual Employees' Stock Purchase Program.
10.5* Washington Mutual Retirement Savings and Investment Plan.
10.6* Washington Mutual Employee Service Award Plan.
10.7 Supplemental Employee's Retirement Plan for Salaried Employees
of Washington Mutual.
10.8 Washington Mutual Supplemental Executive Retirement
Accumulation Plan.
10.9 Deferred Compensation Plan for Directors and Certain Highly
Compensated Employees.
10.10 Deferred Compensation Plan for Certain Highly Compensated
Employees.
10.11 Employment Contract of Kerry K. Killinger.
10.12 Employment Contract for Executive Officers.
10.13* Lease Agreement between Third and University Limited
Partnership and Washington Mutual Savings Bank, dated September
1, 1988.
</TABLE>
115
