<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended March 31, 1998.
or
[_] Transaction 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)
WASHINGTON 91-1653725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 THIRD AVENUE, SEATTLE, WASHINGTON 98101
(Address of principal executive offices) (Zip Code)
(206) 461-2000
(Registrant's telephone number, including area code)
(Former name, address and fiscal year, if changed since last report)
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 past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the issuer's classes of common stock as of
April 30, 1998.
COMMON STOCK - 258,060,967
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<TABLE>
WASHINGTON MUTUAL, INC.
MARCH 31, 1998 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Part I
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Income--
Three months ended March 31, 1998 and March 31, 1997............................ 1
Consolidated Statements of Financial Position--
March 31, 1998 and December 31, 1997............................................ 2
Consolidated Statements of Stockholders' Equity--
Three months ended March 31, 1998 and March 31, 1997............................ 3
Consolidated Statements of Cash Flows--
Three months ended March 31, 1998 and March 31, 1997............................ 4
Notes to the Consolidated Financial Statements.................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
General........................................................................... 8
Results of Operations............................................................. 8
Review of Financial Position......................................................13
Asset Quality.....................................................................18
Market Risk and Asset/Liability Management........................................22
Liquidity.........................................................................23
Capital Adequacy..................................................................24
Impact of Recently Adopted Accounting Standards...................................24
Subsequent Events.................................................................24
Part II
Item 1. Legal Proceedings...............................................................25
Item 6. Exhibits and Reports on Form 8-K................................................25
(a) Exhibits.................................................................25
(b) Reports on Form 8-K......................................................25
</TABLE>
i
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
INTEREST INCOME
Loans ....................................................... $ 1,357,305 $ 1,236,568
Available-for-sale securities ............................... 206,095 71,395
Held-to-maturity securities ................................. 234,403 271,582
Cash equivalents and other .................................. 28,849 35,871
----------- -----------
Total interest income ..................................... 1,826,652 1,615,416
INTEREST EXPENSE
Deposits .................................................... 515,901 537,488
Borrowings .................................................. 597,878 418,386
----------- -----------
Total interest expense .................................... 1,113,779 955,874
----------- -----------
Net interest income ........................................... 712,873 659,542
Provision for loan losses ..................................... 45,343 53,810
----------- -----------
Net interest income after provision for loan losses ........... 667,530 605,732
OTHER INCOME
Depositor and other retail banking fees .................... 92,308 82,673
Loan servicing fees ........................................ 14,821 23,176
Loan related income ........................................ 15,125 12,508
Securities fees and commissions ............................ 38,582 36,381
Insurance fees and commissions ............................. 11,849 12,599
Gain on sale of loans and leases ........................... 15,444 8,795
Gain on sale of other assets ............................... 3,321 7,165
Write down of loans securitized and retained ............... (7,266) (6,250)
Other operating income ..................................... 9,645 11,204
----------- -----------
Total other income ....................................... 193,829 188,251
OTHER EXPENSE
Salaries and employee benefits .............................. 189,439 203,267
Occupancy and equipment ..................................... 72,296 80,584
Telecommunications and outsourced information services ...... 49,188 43,226
Regulatory assessments ...................................... 9,477 8,643
Transaction-related expense ................................. 8,650 33,721
Amortization of intangible assets arising from acquisitions . 14,701 15,763
Foreclosed asset expense .................................... 876 3,642
Other operating expenses .................................... 97,591 106,250
----------- -----------
Total other expense ....................................... 442,218 495,096
----------- -----------
Income before income taxes .................................... 419,141 298,887
Income taxes ................................................ 158,469 114,803
Provision for payments in lieu of taxes ...................... 4,201 4,309
----------- -----------
NET INCOME .................................................... $ 256,471 $ 179,775
=========== ===========
Net income attributable to common stock ....................... $ 254,733 $ 173,847
=========== ===========
Net income per common share:
Basic ....................................................... $ 1.02 $ 0.72
Diluted ..................................................... 1.02 0.71
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE> 4
<TABLE>
<CAPTION>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
MARCH 31, DECEMBER 31,
1998 1997
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash ........................................................ $ 1,037,192 $ 1,285,222
Cash equivalents ............................................ 27,015 275,668
Trading securities .......................................... 130,912 23,364
Available-for-sale securities,
amortized cost $16,126,556 and $11,258,232.............. 15,057,318 10,188,107
Mortgage-backed securities ("MBS")
Investment securities ..................................... 1,189,932 1,185,815
Held-to-maturity securities,
fair value $12,612,245 and $12,699,653
MBS ....................................................... 12,368,181 12,659,217
Investment securities ..................................... 124,375 120,397
Loans
Loans held in portfolio ................................... 68,188,583 67,124,935
Loans held for sale ....................................... 1,286,547 685,716
Reserve for loan losses ................................... (673,172) (670,494)
------------ ------------
Total loans ............................................. 68,801,958 67,140,157
Investment in Federal Home Loan Banks ("FHLBs") ............. 1,103,629 1,059,491
Foreclosed assets ........................................... 198,597 205,272
Premises and equipment ...................................... 966,237 937,198
Intangible assets arising from acquisitions ................. 341,939 356,650
Mortgage servicing rights ................................... 221,695 215,360
Other assets ................................................ 1,554,928 1,329,181
------------ ------------
Total assets ............................................ $103,123,908 $96,981,099
============ ============
LIABILITIES
Deposits
Checking accounts ......................................... $ 8,382,782 $ 7,914,375
Savings accounts and money market deposit accounts ........ 15,404,138 14,940,045
Time deposit accounts ..................................... 27,526,132 28,131,597
------------ ------------
Total deposits .......................................... 51,313,052 50,986,017
Federal funds purchased and commercial paper ................ 4,208,718 2,928,282
Reverse repurchase agreements ............................... 14,414,500 12,279,040
Advances from FHLBs ......................................... 20,858,731 20,301,963
Trust preferred securities .................................. 800,000 800,000
Other borrowings ............................................ 2,714,490 2,689,362
Other liabilities ........................................... 3,377,418 1,687,364
------------ ------------
Total liabilities ......................................... 97,686,909 91,672,028
STOCKHOLDERS' EQUITY
Preferred stock, no par value: 10,000,000 shares authorized
1,970,000 and 4,722,500 shares issued and outstanding,
liquidation preference .................................... 49,250 118,063
Common stock, no par value: 800,000,000 shares authorized --
257,887,741 and 257,560,018 shares issued and outstanding . --- ---
Capital surplus - common stock .............................. 1,957,552 1,943,294
Accumulated other comprehensive income ...................... 137,128 134,610
Retained earnings ........................................... 3,293,069 3,113,104
------------ ------------
Total stockholders' equity .............................. 5,436,999 5,309,071
------------ ------------
Total liabilities and stockholders' equity .............. $103,123,908 $96,981,099
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
2
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<TABLE>
<CAPTION>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
PREFERRED STOCK
Balance, beginning of period ........................... $ 118,063 $ 283,063
Redemption of Preferred Stock, Series C................. (68,813) --
----------- -----------
Balance, end of period .................................. 49,250 283,063
CAPITAL SURPLUS - COMMON STOCK
Balance, beginning of period ........................... 1,943,294 1,664,870
Common stock issued through stock options, restricted
stock grants and employee stock plans, including tax
benefits............................................... 14,186 32,806
Common stock issued under dividend reinvestment plan ... 72 847
Common stock repurchased ............................... -- (32,008)
----------- -----------
Balance, end of period ................................. 1,957,552 1,666,515
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of period ........................... 134,610 118,625
Other comprehensive income ............................. 2,518 (89,764)
----------- -----------
Balance, end of period ................................. 137,128 28,861
RETAINED EARNINGS
Balance, beginning of period ........................... 3,113,104 2,926,530
Net income ............................................. 256,471 179,775
Cash dividends declared on preferred stock ............. (1,738) (5,928)
Cash dividends declared on common stock ................ (74,768) (65,819)
----------- -----------
Balance, end of period ................................. 3,293,069 3,034,558
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ............................ $ 5,436,999 $ 5,012,997
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MARCH 31, MARCH 31,
1998 1997
----------- ------------
(NUMBER OF SHARES IN THOUSANDS)
<S> <C> <C>
PREFERRED STOCK
Balance, beginning of period ........................ 4,723 5,383
Redemption of Preferred Stock, Series C ............. (2,753) --
-------- --------
Balance, end of period .............................. 1,970 5,383
======== ========
COMMON STOCK
Balance, beginning of period ........................ 257,560 250,231
Common stock issued through stock options, restricted
stock grants and employee stock plans, including
tax benefits ..................................... 327 995
Common stock issued under dividend reinvestment plan 1 20
Common stock acquired ............................... -- (901)
-------- --------
Balance, end of period .............................. 257,888 250,345
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 6
<TABLE>
<CAPTION>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................ $ 256,471 $ 179,775
Adjustments to reconcile net income to net cash provided by
operating activities:
Provisions for loan losses .................................... 45,343 53,810
(Gain) on sale of loans and leases ............................ (15,444) (8,795)
(Gain) on sale of other assets ................................ (3,321) (7,165)
Depreciation and amortization ................................. 34,524 43,441
Stock dividends from FHLBs .................................... (17,709) (13,263)
Write downs of loans securitized and retained ................. 7,266 6,250
(Increase) in trading securities .............................. -- (1,157)
Originations of loans held for sale ........................... (3,026,777) (1,071,240)
Sales of loans held for sale .................................. 2,441,390 988,798
(Increase) in other assets .................................... (229,532) (125,236)
(Decrease) increase in other liabilities ...................... (126,001) 160,499
----------- -----------
Net cash (used) provided by operating activities ........... (633,790) 205,717
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities ........................ (5,662,666) (959,594)
Principal payments and maturities of available-for-sale securities 2,278,426 475,304
Sales of available-for-sale securities ............................ 296,661 882,548
Purchases of held-to-maturity securities .......................... (4,110) (3,386)
Principal payments and maturities of held-to-maturity securities .. 428,258 120,893
Sales of loans .................................................... 8,482 9,515
Originations of loans, net of principal payments .................. (1,442,490) (2,414,181)
Proceeds from sale of foreclosed assets ........................... 89,736 137,511
Purchases of premises and equipment, net........................... (48,956) (6,389)
----------- -----------
Net cash (used) by investing activities .................... (4,056,659) (1,757,779)
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED
-----------------------------
MARCH 31, MARCH 31,
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits ............................... $ 327,035 $ (210,090)
(Decrease) in annuities ....................................... -- (216)
Increase in federal funds purchased and commercial paper ...... 1,280,436 363,436
Increase (decrease) in short-term reverse repurchase agreements 2,005,890 (908,735)
Proceeds from long-term reverse repurchase agreements ......... 603,243 1,356,254
Repayments of long-term reverse repurchase agreements ......... (473,673) (435,834)
Proceeds from FHLB advances ................................... 15,380,261 11,270,989
Repayments of FHLB advances ................................... (14,823,493) (10,080,753)
Proceeds from trust preferred securities ...................... -- 300,000
Proceeds (repayments) from other borrowings ................... 25,128 (275,513)
Common stock repurchase ....................................... -- (32,008)
Common stock issued ........................................... 14,258 33,653
Redemption of preferred stock ................................. (68,813) --
Cash dividends paid ........................................... (76,506) (71,747)
------------ ------------
Net cash provided by financing activities ..................... 4,193,766 1,309,436
------------ ------------
(Decrease) in cash and cash equivalents ....................... (496,683) (242,626)
Cash and cash equivalents, beginning of period ................ 1,560,890 1,665,355
------------ ------------
Cash and cash equivalents, end of period ...................... $ 1,064,207 $ 1,422,729
============ ============
NONCASH INVESTING ACTIVITIES
Loans exchanged for MBS ....................................... $ 137,090 $ 66,862
Loans exchanged for trading securities ........................ 107,544 --
Real estate acquired through foreclosure ...................... 97,351 108,321
Loans originated to facilitate the sale of foreclosed assets .. 14,290 20,938
Loans originated to refinance existing loans .................. 1,407,683 288,624
CASH PAID DURING THE PERIOD FOR
Interest on deposits .......................................... 508,571 525,238
Interest on borrowings ........................................ 588,992 436,598
Income taxes .................................................. 66,033 957
</TABLE>
5
<PAGE> 8
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: EARNINGS PER SHARE ("EPS")
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
Information used to calculate EPS was as follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------
March 31, 1998 March 31, 1997
--------------------------------- ----------------------------------
Per Per
Income Shares Share Income Shares Share
(numerator) (denominator) Amounts (numerator) (denominator) Amounts
---------- ------------ ------- ---------- ------------ -------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income.................... $256,471 $179,775
Less: preferred stock dividends (1,738) (5,928)
-------- --------
Income available to common
shareholders............... 254,733 249,708,312 $1.02 173,847 241,876,355 $0.72
Diluted EPS:
Effect of dilutive securities:
Stock options.............. 1,017,031 3,307,817
-------- ----------- -------- -----------
Income available to common
shareholders and assumed
conversions................. $254,733 250,725,343 $1.02 $173,847 245,184,172 $0.71
======== =========== ========= ===========
</TABLE>
NOTE 2: COMPREHENSIVE INCOME
Washington Mutual, Inc. ("Washington Mutual" or the "Company") adopted
Statement of Financial Accounting Standards ("SFAS") No. 130 Reporting
Comprehensive Income, effective January 1, 1998. The standard requires that
comprehensive income and its components be disclosed in the financial
statements. The Company's comprehensive income includes all items which comprise
net income plus the unrealized holding gains on available-for-sale securities.
For the three months ended March 31, 1998 and 1997, the Company's comprehensive
income was as follows:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
March 31, 1998 March 31, 1997
-------------- --------------
(dollars in thousands)
<S> <C> <C>
Net income.................. $256,471 $179,775
Other comprehensive income.. 2,518 (89,764)
-------- ---------
Total comprehensive income $258,989 $ 90,011
======== =========
</TABLE>
NOTE 3: THE AHMANSON MERGER
On March 17, 1998, Washington Mutual and H.F. Ahmanson & Company
("Ahmanson") announced the signing of a definitive merger agreement that would
create the nation's seventh-largest banking institution, based on total 1997
year-end assets of approximately $150 billion. Under the agreement, each share
of Ahmanson stock is to be exchanged for 1.12 shares of Washington Mutual common
stock. Subsequent to the signing of the agreement, the Company declared a
3-for-2 stock split. When such stock split becomes effective, each share of
Ahmanson common stock will convert into the right to receive 1.68 shares of
Washington Mutual common stock. The Ahmanson merger is expected to be accounted
for as a pooling of interests.
6
<PAGE> 9
NOTE 4: STOCK SPLIT
On April 20, 1998, the Company's Board of Directors declared a 3-for-2
common stock split in the form of a 50% stock dividend payable on June 1, 1998
to shareholders of record as of May 18, 1998.
NOTE 5: SEGMENT REPORTING
SFAS No. 131 Disclosures About Segments of an Enterprise and Related
Information was issued in June 1997 and redefined how operating segments are
determined. SFAS No. 131 requires disclosure of certain financial and
descriptive information about a company's operating segments. This statement was
adopted on January 1, 1998, and did not impact the results of operations or
financial position of the Company.
7
<PAGE> 10
ITEM 2. 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.
GENERAL
Washington Mutual, Inc. ("Washington Mutual," "WMI" or the "Company") is
a financial services company committed to serving consumers and small and
mid-sized businesses. The Company's banking subsidiaries, Washington Mutual
Bank, FA ("WMBFA"), Washington Mutual Bank ("WMB") and Washington Mutual Bank
fsb ("WMBfsb"), accept deposits from the general public, make residential loans,
consumer loans, and commercial real estate loans (primarily loans secured by
multi-family properties) and engage in certain commercial banking activities.
The Company's consumer finance operations provide real estate secured loans,
direct installment loans and related credit insurance services and purchase
retail installment contracts. Washington Mutual also markets annuities and
other insurance products, offers full service securities brokerage, and acts
as the investment advisor to and the distributor of mutual funds.
The Keystone Transaction. In December 1996, Keystone Holdings, Inc.
("Keystone Holdings") merged with and into Washington Mutual (the "Keystone
Transaction") and all of the subsidiaries of Keystone Holdings, including
American Savings Bank, F.A. ("ASB"), became subsidiaries of the Company.
The Great Western Merger. On July 1, 1997, Great Western Financial
Corporation ("GWFC") merged with and into New American Capital, Inc. ("NACI"), a
wholly-owned subsidiary of the Company (the "Great Western Merger"), and all of
the subsidiaries of GWFC, including Great Western Bank, a Federal Savings Bank
("GWB") and Aristar, Inc. ("Aristar") became subsidiaries of NACI. On October 1,
1997, GWB was merged with and into ASB; simultaneously the name of ASB was
changed to Washington Mutual Bank, FA.
The Ahmanson Merger. On March 17, 1998, Washington Mutual and H.F.
Ahmanson & Company ("Ahmanson") announced the signing of a definitive merger
agreement that would create the nation's seventh-largest banking institution,
based on total 1997 year-end assets of approximately $150 billion. Under the
agreement each share of Ahmanson stock is to be exchanged for 1.12 shares of
Washington Mutual common stock. Subsequent to the signing of the agreement, the
Company declared a 3-for-2 stock split. When such stock split becomes effective,
each share of Ahmanson common stock will convert into the right to receive 1.68
shares of Washington Mutual common stock. The Ahmanson merger is expected to be
accounted for as a pooling of interests.
The merger, which requires regulatory approval and the approval of both
companies' shareholders, is expected to close during the latter part of 1998.
Special meetings for the shareholders of both companies to consider the
transaction are expected to be held in the third quarter of 1998. The Company
expects to merge Ahmanson's subsidiary, Home Savings of America, FSB, into
WMBFA.
RESULTS OF OPERATIONS
Overview. The Company's net income for first quarter 1998 was $256.5
million compared with $179.8 million for first quarter 1997. The Company's net
income for first quarter 1998 was reduced by pretax charges of $8.7 million for
transaction-related expenses in connection with the Great Western Merger. The
Company's first quarter 1997 net income was reduced by pretax charges of $33.7
million in transaction-related expense related to the Great Western Merger.
Net Interest Income. Net interest income for the first quarter of 1998
was $712.9 million, an increase from $659.5 million in the first quarter of
1997. The net interest margin for the first quarter of 1998 was 2.96% compared
with 3.08% in the first quarter of 1997. (The net interest margin measures the
Company's annualized net interest income as a percentage of average earning
assets.)
8
<PAGE> 11
The first quarter 1998 increase in net interest income was due to a 13%
rise in average earning assets to $94.93 billion from $84.21 billion in the
first quarter of 1997, which more than offset the decline in the net interest
spread to 2.78% in first quarter 1998 from 2.91% in first quarter 1997. (The net
interest spread is the difference between the Company's yield on assets and its
cost of funds.) To a certain extent, the Company's net interest spread is
affected by changes in the yield curve. During the first quarter of 1998, the
difference between the yield on a three month U.S. Treasury bill and a 10-year
U.S. government note averaged 53 basis points compared with 160 basis points for
the same period a year earlier.
Selected average financial balances and the net interest spread and
margin were as follows:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
March 31, March 31,
1998 1997
----------- -----------
(dollars in thousands)
<S> <C> <C>
Selected Average Balances:
Loans .............................. $68,217,014 $62,674,428
Investments ........................ 26,708,295 21,538,930
----------- -----------
Total interest earning assets .... 94,925,309 84,213,358
Deposits ........................... 50,769,603 52,363,008
Borrowings ......................... 40,733,951 28,853,943
----------- -----------
Total interest bearing liabilities 91,503,554 81,216,951
Total assets ....................... 98,880,487 86,879,354
Stockholders' equity ............... 5,349,788 5,004,857
</TABLE>
<TABLE>
<S> <C> <C>
Net Interest Spread:
Yield on loans ...................... 7.98% 7.91%
Yield on investments ................ 7.03 7.04
Combined yield on earning assets... 7.71 7.68
Cost of deposits .................... 4.12 4.16
Cost of borrowings .................. 5.95 5.88
Combined cost of funds ............ 4.93 4.77
Net interest spread ................. 2.78 2.91
Net interest margin ................. 2.96 3.08
</TABLE>
9
<PAGE> 12
Other Income. Other income was $193.8 million for first quarter 1998
compared with other income of $188.3 million for first quarter 1997.
Other income consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
March 31, March 31,
1998 1997
--------- ---------
(dollars in thousands)
<S> <C> <C>
Depositor and other retail banking fees:
Checking account and money market deposit accounts ("MMDAs")
charges................................................... $ 77,656 $ 65,920
ATM transaction fees ....................................... 5,576 6,436
Other ...................................................... 9,076 10,317
--------- ---------
Total depositor and other retail banking fees ............ 92,308 82,673
Loan servicing fees .......................................... 14,821 23,176
Loan related income .......................................... 15,125 12,508
Securities fees and commissions .............................. 38,582 36,381
Insurance fees and commissions ............................... 11,849 12,599
Gain on sale of loans and leases:
Gain on sale of mortgage loans ............................. 15,277 7,253
Gain on sale of student loans .............................. 167 827
Gain on sale of leases ..................................... -- 715
--------- ---------
Total gain on sale of loans and leases ................... 15,444 8,795
Gain on sale of other assets:
Gain (loss) on sale of premises and equipment .............. (94) 6,840
Gain on sale of available-for-sale securities .............. 3,415 233
Gain on sale of trading securities ......................... -- 92
--------- ---------
Total gain on sale of other assets ....................... 3,321 7,165
Write down of loans securitized and retained ................. (7,266) (6,250)
Other operating income ....................................... 9,645 11,204
--------- ---------
Total other income ....................................... $ 193,829 $ 188,251
========= =========
</TABLE>
Depositor and other retail banking fees of $92.3 million for the three
months ended March 31, 1998 increased from $82.7 million for the three months
ended March 31, 1997. The increase reflected an expanded collection of
nonsufficient funds ("NSF") charges and overdraft protection charges on checking
accounts and MMDAs and an increase in the number of checking accounts.
The growth in depositor and other retail banking fees has been offset
somewhat by 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 such losses incurred.
Loan servicing fees of $14.8 million declined 36% from $23.2 million in
the first quarter of 1997. The decline reflected an increase in the amortization
of mortgage servicing rights by approximately $5.0 million during the first
quarter of 1998 compared with the first quarter of 1997. The increased
amortization was due to the higher rate of prepayment in the loan servicing
portfolio.
10
<PAGE> 13
For the first quarter of 1998, the Company had a net gain on the sale of
loans and leases of $15.4 million compared with $8.8 million for the quarter
ended March 31, 1997. Due to the increase in fixed-rate loan production
resulting from the relatively low interest rate environment, the Company sold
$2.31 billion of fixed-rate single family residential ("SFR") loans.
Included in the gain on sale of premises and equipment for first quarter
1997 was the $4.2 million gain associated with the sale of branch premises at
GWB.
Impairment charge offs on mortgage-backed securities ("MBS") are
reported in the line item -- Write down of loans securitized and retained -- as
a charge to earnings in other income. Write downs on loans securitized and
retained were $7.3 million for first quarter 1998 up from $6.3 million for the
quarter ended March 31, 1997. The increase in write-downs was due to an increase
in the size of the MBS with recourse portfolio.
Other Expense. Other expense for first quarter 1998 totaled $442.2
million compared with $495.1 million for first quarter 1997.
Other expense consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
March 31, March 31,
1998 1997
------------ -----------
(dollars in thousands)
<S> <C> <C>
Salaries and employee benefits............................... $189,439 $203,267
Occupancy and equipment:
Premises and equipment..................................... 53,940 59,246
Data processing............................................ 18,356 21,338
--------- ---------
Total occupancy and equipment............................ 72,296 80,584
Telecommunications and outsourced information services....... 49,188 43,226
Regulatory assessments....................................... 9,477 8,643
Transaction-related expense.................................. 8,650 33,721
Amortization of intangible assets arising from acquisitions.. 14,701 15,763
Foreclosed asset expense..................................... 876 3,642
Other operating expenses:
Advertising and promotion.................................. 20,517 16,392
Postage.................................................... 12,702 12,339
Operating losses and settlements........................... 11,662 13,627
Professional fees.......................................... 7,943 14,546
Office supplies............................................ 4,925 5,114
Other...................................................... 39,842 44,232
---------- ---------
Total other operating expenses........................... 97,591 106,250
---------- ---------
Total other expense...................................... $442,218 $495,096
======== ========
</TABLE>
As a result of the Great Western Merger, the Company recorded
transaction-related expense of $8.7 million for first quarter 1998 and $33.7
million for first quarter 1997. For first quarter 1998, the majority of the
charges were for one time nonrecurring incremental costs associated with
combining entities, which are being expensed as incurred. These charges were
partially offset by a pre-tax reduction of $8.3 million in the estimate of
contract exit fees. For first quarter 1997, the majority of transaction-related
expense were for various investment banking and legal fees.
Salaries and employee benefits decreased to $189.4 million for the first
quarter of 1998 from $203.3 million for the first quarter of 1997. Full-time
equivalent employees ("FTE") were 19,207 at March 31, 1998 compared with 20,149
at March 31, 1997. The decrease in FTEs was primarily due to employee
separations in connection with the Great Western Merger and the restructuring
plan at GWFC. However, this decrease was mitigated by increasing staffing levels
throughout the Company to support its growth.
11
<PAGE> 14
The Company expected total staff reductions related to the Keystone
Transaction and the Great Western Merger (inclusive of the GWFC restructuring
plan) of approximately 2,850. As of March 31, 1998, approximately 2,050 employee
separations had occurred under these plans.
Prior to the proposed Ahmanson merger, offices used by the Company on
the Chatsworth campus were being consolidated in order to make more efficient
use of building space. The Company had anticipated that approximately 565,000
square feet, located predominately in six buildings, would become available for
sub-leasing to third parties. However, as a result of the proposed Ahmanson
merger, it is now anticipated that the Chatsworth Campus will be utilized by the
Company.
Reconciliation of the transaction-related expense and accrual activity
during 1998 was as follows:
<TABLE>
<CAPTION>
1998 Activity Three Months
December 31, 1997 Charged March 31, 1998 Ended
Accrued Against Accrued March 31, 1998
Balance Accrual Balance Period Costs
----------------- ------------- ------------ ----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Severance............. $ 93,104 $(21,792) $ 71,312 $ --
Premises.............. 57,304 (3,552) 53,752 --
Legal, underwriting
and other direct
transaction costs.... 742 (271) 471 --
Contract cancellation
costs............... 33,699 (10,060) 23,639 (7,190)
Other................. 11,243 (3,540) 7,703 15,840
-------- --------- -------- -------
Total............. $196,092 $(39,215) $156,877 $ 8,650
======== ========= ======== =======
</TABLE>
Year 2000. Washington Mutual is implementing a program to test and
document the readiness of its electronic systems, programs and processes to
recognize properly the year 2000. While the Company does not believe that the
process of making its systems, programs and processes ready for year 2000 will
result in a material cost, it is expected that a substantial amount of
management and staff time will be required on the year 2000 project. In
addition, the Federal Financial Institutions Examinations Council (the "FFIEC")
issues periodic guidelines that clarify federal regulatory requirements for the
testing and documentation of the readiness of an insured depository
institution's electronic systems, programs and processes to recognize properly
the year 2000. The FFIEC has recently published guidelines that require
additional date testing of systems, programs and processes. These recent
guidelines will cause the Company to perform additional work and incur
additional expense in order to be in complete compliance with regulatory
requirements. There can be no assurance that such recent guidelines will not
require additional work or cause the Company to incur additional expenses beyond
those that are currently contemplated by Washington Mutual or delay the
completion of Washington Mutual's Year 2000 preparations. In addition, there can
be no assurance that the FFIEC or other federal regulators will not issue new
regulatory requirements that require additional work by the Company and, if
issued, that new regulatory requirements will not increase the cost or delay the
completion of Washington Mutual's Year 2000 preparations. No assurance can be
given that the completion of the year 2000 project will proceed as anticipated
or that the results of operations of the Company will not be adversely affected
by difficulties and delays in these projects.
Taxation. Income taxes include federal and applicable state income
taxes. The provision for income taxes was $162.7 million for the first quarter
1998, which represented an effective tax rate of 38.81% as compared with a
39.85% effective tax rate for first quarter 1997.
12
<PAGE> 15
Consumer Finance Operations. During first quarter 1998, the consumer
finance line of business had net income of $12.3 million, up from $10.7 million
in first quarter 1997. Contributing to the improvement was a 5% increase in the
loan portfolio and the corresponding increase in interest income. Nonperforming
assets were slightly higher in the first quarter 1998, compared with the first
quarter 1997, but showed an improvement from year-end 1997. The increase in
charge offs and loan loss provision reflected, in part, the growth of the
loan portfolio and a continued high level of personal bankruptcies. The loan
loss provision increased to $18.0 million in first quarter of 1998 from $15.4
million in first quarter of 1997.
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
1998 1997
-------- --------
(dollars in thousands)
<S> <C> <C>
Consumer finance operations:
Net interest income................................. $68,142 $61,828
Provision for loan losses........................... 18,000 15,400
Other income........................................ 10,462 9,971
Other expense....................................... 40,110 38,569
------- -------
Net income before income taxes...................... 20,494 17,830
Income taxes........................................ 8,200 7,100
------- -------
Net income........................................ $12,294 $10,730
======= =======
</TABLE>
REVIEW OF FINANCIAL POSITION
Assets. At March 31, 1998, the Company's assets were $103.12 billion, an
increase of 6% from $96.98 billion at December 31, 1997. Most of the growth
during the first quarter of 1998 resulted from the purchase of agency MBS in the
secondary market. The Company's loan portfolio grew only slightly as first
quarter 1998 loan originations were offset by principal paydowns and sales. It
is the Company's current practice to sell the majority of its fixed-rate loan
production.
Interest-earning assets. The Company's interest-earning assets consisted
of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
(dollars in thousands)
<S> <C> <C>
Cash equivalents ............... $ 27,015 $ 275,668
Securities:
Trading securities ........... 130,912 23,364
Available-for-sale securities:
MBS ........................ 15,057,318 10,188,107
Investment securities ...... 1,189,932 1,185,815
Held-to-maturity securities:
MBS ........................ 12,368,181 12,659,217
Investment securities ...... 124,375 120,397
------------ ------------
28,870,718 24,176,900
Loans:
Loans held in portfolio ...... 68,188,583 67,124,935
Loans held for sale .......... 1,286,547 685,716
Reserve for loan losses ...... (673,172) (670,494)
------------ ------------
68,801,958 67,140,157
Investment in FHLBs ............ 1,103,629 1,059,491
------------ ------------
$ 98,803,320 $ 92,652,216
============ ============
</TABLE>
13
<PAGE> 16
Securities. The Company's trading, available-for-sale and
held-to-maturity securities consisted of the following (at carrying value):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
(dollars in thousands)
<S> <C> <C>
Agency MBS....................................... $25,224,625 $20,781,456
Private-issue MBS................................ 2,328,736 2,088,248
U.S. government and agency securities .......... 550,940 530,566
Corporate debt securities........................ 471,979 478,823
Municipal securities............................. 104,129 100,150
Equity securities................................ 191,245 196,673
----------- -----------
28,871,654 24,175,916
Derivative instruments........................... (936) 984
----------- -----------
$28,870,718 $24,176,900
=========== ===========
</TABLE>
The Company's securities portfolio increased by $4.69 billion during
the first three months of 1998 due to the purchase of agency MBS in the
secondary market. The majority of these purchases were placed in the
available-for-sale portfolio. Securities classified as trading increased by
$107.5 million due to securitization of loans, which were subsequently sold in
second quarter of 1998.
At March 31, 1998, 87% of MBS in the Company's securities portfolio were
adjustable rate. Of the securities indexed to an adjustable rate, 73% were
indexed to the Cost of Funds Index ("COFI") of the Eleventh District Federal
Home Loan Bank ("FHLB"), 20% to U.S. Treasury indices, and 7% to LIBOR. The
remaining 13% of MBS were fixed rate.
14
<PAGE> 17
Loans. Total loans (exclusive of the reserve for loan losses) at March
31, 1998 were $69.48 billion, up from $67.81 billion at December 31, 1997.
Changes in the loan balances are primarily driven by originations of new loans,
prepayments of existing loans, scheduled repayments of principal, loan
securitizations and sales.
Loans (exclusive of the reserve for loan losses) consisted of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
(dollars in thousands)
<S> <C> <C>
Loans:
Real estate loans:
SFR............................................ $54,876,334 $53,431,451
SFR construction............................... 874,108 877,449
Apartment buildings............................ 4,169,206 4,187,580
Other commercial real estate................... 2,381,430 2,425,961
----------- -----------
62,301,078 60,922,441
Manufactured housing, second mortgage and
other consumer................................. 4,097,491 3,806,337
Consumer finance................................. 2,271,688 2,309,407
Commercial business.............................. 804,873 772,466
----------- -----------
$69,475,130 $67,810,651
=========== ===========
Loans as a percentage of total loans
(exclusive of the reserve for loans losses):
SFR.............................................. 79% 79%
SFR construction................................. 1 1
Apartment buildings.............................. 6 6
Other commercial real estate..................... 3 4
Manufactured housing, second mortgage and other
consumer...................................... 7 6
Consumer finance................................. 3 3
Commercial business.............................. 1 1
--- ---
100% 100%
=== ===
</TABLE>
Real estate loans by product type were as follows:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
------------------------- -----------------------------
Percent of Percent of
Total Real Total Real
Amount Estate Loans Amount Estate Loans
----------- ------------- ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Short-term adjustable-rate mortgages ("ARMSs"):
COFI......................................... $30,856,139 50% $32,108,461 53%
MTA.......................................... 2,273,204 4 1,602,123 3
CMT.......................................... 3,644,600 6 3,800,156 6
Other........................................ 4,516,731 7 4,553,499 7
----------- --- ----------- ---
41,290,674 67 42,064,239 69
Medium-term ARMs:
CMT.......................................... 4,153,825 6 4,135,947 7
COFI......................................... 1,141,788 2 1,244,357 2
MTA.......................................... 3,688,721 6 2,880,587 5
----------- --- ----------- ---
8,984,334 14 8,260,891 14
Fixed-rate mortgages........................... 12,026,070 19 10,597,311 17
----------- --- ----------- ---
$62,301,078 100% $60,922,441 100%
=========== === =========== ===
Number of real estate loans.................... 517,093 513,417
</TABLE>
Short-term ARMs reprice within a year or less. Medium-term ARMs have an
initial fixed rate for more than one year and then convert to short-term ARMs.
15
<PAGE> 18
Loan originations were as follows:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
March 31, March 31,
1998 1997
---------- ----------
(dollars in thousands)
<S> <C> <C>
Real estate loans:
SFR:
Adjustable rate................................ $2,962,108 $2,631,727
Fixed rate..................................... 3,964,732 1,369,450
---------- ----------
6,926,840 4,001,177
SFR construction:
Custom......................................... 152,721 168,342
Builder........................................ 149,482 157,169
Apartment buildings.............................. 123,061 134,589
Other commercial real estate..................... 99,606 86,400
---------- ----------
524,870 546,500
Manufactured housing............................. 55,510 62,885
Second mortgage and other consumer............... 391,268 376,814
Consumer finance................................. 513,621 463,914
Commercial business.............................. 212,930 148,404
---------- ----------
1,173,329 1,052,017
---------- ----------
$8,625,039 $5,599,694
========== ==========
</TABLE>
SFR originations by product type were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
---------------------------------------------
Percent Percent
of of
Amount Category Total
---------- --------- -------
(dollars in thousands)
<S> <C> <C> <C>
Short-term ARMs:
MTA.......................... $ 908,333 65% 13%
COFI......................... 323,021 23 5
CMT.......................... 133,551 10 2
Other........................ 23,434 2 --
---------- --- ---
1,388,339 100% 20
===
Medium-term ARMs:
MTA.......................... 1,002,951 64% 14
CMT.......................... 388,416 25 6
Other........................ 182,402 11 3
---------- --- ---
1,573,769 100% 23
===
Fixed-rate mortgages........... 3,964,732 57
---------- ---
$6,926,840 100%
========== ===
</TABLE>
The strong housing market and attractive interest rates led to record
loan production which included a significant amount of refinance activity during
first quarter 1998. As a result of borrower preference for fixed-rate mortgages,
fixed-rate loan production accounted for 57% of total SFR originations in first
quarter 1998 compared with 34% in first quarter 1997.
Interest-bearing liabilities. The Company uses customer deposits and
wholesale borrowings to fund its operations. Due to increased market competition
for customer deposits, the Company has increasingly relied on wholesale
borrowings to fund its asset growth.
16
<PAGE> 19
Deposits. Total deposits were $51.31 billion at March 31, 1998, up from
$50.99 billion at December 31, 1997.
Deposits consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- ------------
(dollars in thousands)
<S> <C> <C>
Checking accounts:..............................
Interest bearing.............................. $ 4,372,614 $4,380,133
Noninterest bearing........................... 4,010,168 3,534,242
----------- -----------
8,382,782 7,914,375
Savings accounts................................ 3,359,470 3,267,732
MMDAs........................................... 12,044,668 11,672,313
Time deposit accounts:
Due within one year........................... 23,501,379 23,411,811
After one but within two years................ 2,439,377 2,746,532
After two but within three years.............. 543,696 879,090
After three but within four years............. 566,433 546,680
After four but within five years.............. 393,093 462,110
After five years.............................. 82,154 85,374
----------- -----------
27,526,132 28,131,597
----------- -----------
$51,313,052 $50,986,017
=========== ===========
</TABLE>
Time deposit accounts in amounts of $100,000 or more totaled $6.08
billion at March 31, 1998 and $5.74 billion at December 31, 1997. At March 31,
1998, $1.98 billion of these deposits mature within three months, $1.42 billion
mature in three to six months, $1.77 billion mature in six months to one year,
and $912.0 million mature after one year.
The absence of significant growth in deposits reflected the competitive
environment of banking institutions and the wide array of investment
opportunities available to consumers. While time deposit accounts have declined
as a percentage of total deposits, MMDAs and checking accounts have increased as
a percentage of total deposits. These latter two products have the benefit of
lower interest costs compared with time deposit accounts. Even though MMDAs and
checking accounts are liquid, they are considered by the Company to be the core
relationship with its customers. In the aggregate, the Company views these core
accounts to be a more stable source of long-term funding.
While the vast majority of its deposits are retail in nature, the
Company does engage in certain wholesale activities, primarily accepting time
deposits from political subdivisions and public agencies. The Company considers
wholesale deposits to be an alternative borrowing source rather than a customer
relationship, and as such, their levels are determined by management's decisions
as to the most economic funding sources.
Borrowings. The Company's borrowings primarily take the form of federal
funds purchased, commercial paper, reverse repurchase agreements and advances
from the FHLBs of Seattle and San Francisco. The exact mix at any given time is
dependent upon the market pricing of the individual borrowing sources.
Borrowings consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ -------------
(dollars in thousands)
<S> <C> <C>
Federal funds purchased and commercial paper .... $ 4,208,718 $ 2,928,282
Reverse repurchase agreements.................... 14,414,500 12,279,040
Advances from FHLBs.............................. 20,858,731 20,301,963
Trust preferred securities....................... 800,000 800,000
Other borrowings................................. 2,714,490 2,689,362
----------- -----------
$42,996,439 $38,998,647
=========== ===========
</TABLE>
17
<PAGE> 20
The following summarizes borrowings by date of maturity as of March 31,
1998:
<TABLE>
<CAPTION>
Due within After one
one year year Total
------------- ------------ -----------
(dollars in thousands)
<S> <C> <C> <C>
Federal funds purchased and commercial paper.... $ 4,208,718 $ -- $ 4,208,718
Reverse repurchase agreements................... 8,465,412 5,949,088 14,414,500
Advances from FHLBs............................. 6,047,000 14,811,731 20,858,731
Trust preferred securities...................... -- 800,000 800,000
Other borrowings................................ 734,758 1,979,732 2,714,490
----------- ----------- ----------
$19,455,888 $23,540,551 $42,996,439
=========== =========== ===========
</TABLE>
To fund the growth in mortgage lending and the purchase of agency MBS on
the secondary market, the Company utilized wholesale borrowings which resulted
in an increase of $4.00 billion in borrowing at March 31, 1998 compared with
December 31, 1997. Specifically, due to relative pricing advantages, the Company
increased its borrowings primarily through the use of reverse repurchase
agreements and federal funds during the quarter.
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 an adequate reserve for loan losses inherent in the Company's loan
portfolio. The Company's determination of the level of the reserve and,
correspondingly, the provision for loan losses rests upon various judgments and
assumptions, including current and anticipated economic conditions, the
underlying quality of the loan portfolio, prior loan loss experience, the
Company's credit administration and asset management philosophy and procedures,
and the regulatory examination process. The Company has an Officer's Loan
Committee ("OLC") that reports to the Board of Directors and continuously
reviews loan quality. The Company also has its internal staff regularly review
the classification of commercial loans and report such classifications to the
OLC. These reviews assist management in establishing reserve levels.
Examinations by the Company's primary regulators generally occur annually and
target various activities of the Company, including specific segments of the
loan portfolio. As a result of the Company's analysis discussed above, the
Company's reserve and provision declined from $688.0 million and $53.8 million
in first quarter 1997 to $673.2 million and $45.3 million in first quarter 1998.
18
<PAGE> 21
Changes in the reserve for loan losses were as follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
1998 1997
-------- --------
(dollars in thousands)
<S> <C> <C>
Balance, beginning of period........... $670,494 $677,141
Provision for loan losses.............. 45,343 53,810
Reserves added through business
combinations......................... -- 8,261
Loans charged off:
SFR.................................. (15,205) (27,112)
Commercial real estate............... (3,623) (5,348)
Manufactured housing, second
mortgage and other consumer........ (6,580) (4,646)
Consumer finance..................... (22,105) (19,239)
Commercial business.................. (1,031) (125)
-------- --------
(48,544) (56,470)
Recoveries of loans previously charged off:
SFR.................................. 419 278
Commercial real estate............... 658 438
Manufactured housing, second
mortgage and other consumer........ 385 372
Consumer finance..................... 4,273 4,139
Commercial business.................. 144 47
-------- --------
5,879 5,274
-------- --------
Net charge offs........................ (42,665) (51,196)
-------- --------
Balance, end of period................. $673,172 $688,016
======== ========
</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 either specified or allocated to reflect the
identified loss exposure. SFR and consumer loans are not individually analyzed
for impairment and loss exposure because of the significant number of loans and
their relatively small individual balances. Commercial real estate, commercial
business and builder construction loans are evaluated individually for
impairment. At March 31, 1998, the Company had specific or allocated reserves
totaling $87.6 million. Specific and allocated reserves were $90.5 million at
December 31, 1997.
Unallocated reserves are established for loss exposure that is not yet
identified but may exist in the remainder of the loan portfolio. In determining
the adequacy of unallocated reserves, management considers changes in the size
and composition of the loan portfolio, historical loan loss experience, current
and anticipated economic conditions, and the Company's credit administration and
asset management philosophies and procedures.
An analysis of the reserve for loan losses was as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- --------
(dollars in thousands)
<S> <C> <C>
Specific and allocated reserves:
Commercial real estate...................... $ 80,348 $ 84,969
Commercial business......................... 5,230 3,277
Builder construction........................ 2,009 2,207
-------- --------
87,587 90,453
Unallocated reserves.......................... 585,585 580,041
-------- --------
$673,172 $670,494
======== ========
Total reserve for loan losses as a percentage of:
Nonaccrual loans............................ 111% 112%
Nonperforming assets........................ 84 83
</TABLE>
19
<PAGE> 22
The Company considers the reserve for loan losses of $673.2 million
adequate to cover losses inherent in the loan portfolio at March 31, 1998.
However, no assurance can be given that the Company will not, in any particular
period, sustain loan losses that are sizable in relation to the amount reserved,
or that subsequent evaluation of the loan portfolio, in light of the factors
then prevailing, including economic conditions and the Company's ongoing
examination process and that of its regulators, will not require significant
increases in the reserve for loan losses.
In addition to reviewing the adequacy of the reserve for loan losses,
management also reviews any loan pool where the Company has a recourse
obligation resulting from securitization of its loans. The Company has recorded
an impairment to cover potential losses on this portfolio. At March 31, 1998,
the Company had securitized $14.68 billion of loans with recourse. The related
impairment totaled $38.0 million at March 31, 1998.
The Company also maintains a contingent liability to cover potential
losses on recourse MBS and loans that have been sold with recourse to third
parties. At March 31, 1998, the Company had sold $1.86 billion of recourse MBS
and loans sold with recourse, and the contingent liability totaled $9.8 million,
which the Company considers adequate to cover estimated future losses.
Both the impairment and contingent liability are evaluated periodically
and any subsequent adjustments are recorded as a write down on loans
securitized and retained. Increases to the contingent liability for off balance
sheet items are recorded as gains on sales of loans and leases.
Delinquent Assets. The Company regularly reviews its portfolio of
accruing and performing loans for delinquencies. Loans with two or three
delinquent payments were as follows:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
--------------------- ----------------------
Percent Percent
of of
Amount Portfolio Amount Portfolio
-------- --------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Delinquent loans(1):
SFR............................ $536,570 0.77% $499,638 0.73%
SFR construction............... 10,007 1.14 9,143 1.04
Commercial real estate......... 18,948 0.25 30,685 0.34
Manufactured housing........... 26,397 2.44 24,647 2.28
Second mortgage and other
consumer..................... 32,670 1.08 55,121 2.02
Consumer finance............... 61,024 2.69 68,814 2.98
Commercial business............ 2,752 0.34 1,013 0.13
-------- --------
$688,368 0.81 $689,061 0.81
======== ========
</TABLE>
______________
(1) Loans that have been securitized or sold for which the Company
retains the credit risk are also included.
20
<PAGE> 23
Nonperforming Assets. Assets considered to be nonperforming include
nonaccrual loans and securities, foreclosed assets and real estate held for
investment properties that do not generate sufficient income to meet return on
investment criteria. When loans securitized or sold on a recourse basis are
nonperforming, they are included in nonaccrual loans. Management's
classification of a loan as nonaccrual does not necessarily indicate that the
principal of the loan is uncollectable in whole or in part. Loans are generally
placed on nonaccrual status when they are four payments or more past due.
Nonperforming assets were $802.6 million or 0.78% of total assets at
March 31, 1998 compared with $806.7 million or 0.83% of total assets at December
31, 1997.
Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(dollars in thousands)
<S> <C> <C>
Nonaccrual loans:
Real estate loans:
SFR................................... $480,518 $469,127
SFR construction...................... 11,385 10,413
Apartment buildings................... 16,440 17,296
Other commercial real estate.......... 21,274 25,825
--------- --------
529,617 522,661
Manufactured housing.................. 11,526 11,127
Second mortgage and other consumer.... 11,743 14,071
Consumer finance...................... 48,719 50,930
Commercial business................... 2,429 2,585
--------- --------
604,034 601,374
Foreclosed assets......................... 198,597 205,272
--------- --------
$802,631 $806,646
========= ========
Nonperforming assets as a percentage of total assets 0.78% 0.83%
</TABLE>
The increase in consumer finance delinquencies, charge offs and loan
loss provision reflected, in part, the growth of the portfolio but also a
decline in the credit quality of the portfolio.
Impaired Loans. Commercial real estate, commercial business and builder
construction loans are individually evaluated for impairment. A loan in one of
these categories is considered impaired when it is (i) probable that a creditor
will be unable to collect all amounts due according to the contractual terms of
the loan agreement, or (ii) a substandard loan, whether or not performing.
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.
At March 31, 1998, loans totaling $519.4 million were impaired, of which
$442.2 million had allocated reserves of $87.6 million. The remaining $77.1
million were either nonperforming or previously written down and had no reserves
allocated to them. Of the $519.4 million of impaired loans, $41.8 million were
on nonaccrual status.
21
<PAGE> 24
The amount of impaired loans and the related allocate reserve for loan
losses were as follows:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
--------------------- --------------------
Loan Allocated Loan Allocated
Amount Reserves Amount Reserves
-------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Nonaccrual loans:
With allocated reserves........ $ 23,804 $ 6,979 $ 33,980 $ 7,760
Without allocated reserves..... 18,035 -- 15,481 --
-------- ------- -------- -------
41,839 6,979 49,461 7,760
Other impaired loans:
With allocated reserves........ 418,446 80,608 420,662 82,693
Without allocated reserves..... 59,077 -- 81,160 --
-------- ------- -------- -------
477,523 80,608 501,822 82,693
-------- ------- -------- -------
Total impaired loans.......... $519,362 $87,587 $551,283 $90,453
======== ======= ======== =======
</TABLE>
MARKET RISK AND ASSET/LIABILITY MANAGEMENT
The long-run profitability of the Company depends not only on the
success of the services it offers to its customers and the credit quality of its
loans and securities, but also the extent to which its earnings are unaffected
by changes in interest rates. The Company 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 without unduly
penalizing current earnings. A key component of this program is the origination
and retention of short-term and adjustable-rate assets whose repricing
characteristics more closely match the repricing characteristics of the
Company's liabilities. At the same time, the Company's policy is to sell most
fixed-rate loan originations.
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>
March 31, December 31,
1998 1997
------------ -------------
(dollars in thousands)
<S> <C> <C>
Interest-sensitive assets............................... $78,872,975 $ 74,938,422
Derivative instruments designated against assets........ 300,000 1,450,000
Interest-sensitive liabilities.......................... (76,271,914) (70,204,799)
Derivative instruments designated against liabilities... 608,800 1,078,400
----------- -----------
Net asset sensitivity................................. $ 3,509,861 $ 7,262,023
=========== ===========
One-year gap............................................ 3.40% 6.50%
</TABLE>
While the one-year gap helps provide some information about a financial
institution's interest sensitivity, it does not predict the trend of future
earnings. The Company uses financial modeling to forecast earnings under
different interest-rate projections. Although this modeling is very helpful in
managing interest-rate risk, it does require significant assumptions for the
projection of loan prepayment rates, loan origination volumes and liability
funding sources that may prove to be inaccurate. The 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.
22
<PAGE> 25
Asset and Liability Strategy.
The Company's asset/liability strategy is to reduce the risk of
significant decreases in net interest income caused by interest-rate changes
without unduly penalizing current earnings. The implementation of strategies to
reduce interest-rate risk, however, generally has a negative effect on earnings.
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 this strategy, the
Company actively manages asset and liability maturities. An inherent
characteristic of the Company's deposit structure is customers' preference for
liquidity. This is apparent from the fact that at March 31, 1998 the Company's
MMDAs accounted for $12.04 billion or 23% of total deposits, and time deposit
accounts with maturities less than one year totaled $23.43 billion or 46% of
total deposits. Because its principal funding source of deposits is
interest-rate sensitive, the Company's primary asset strategy is to originate
and retain ARMs in the portfolio. During the first quarter of 1998 and 1997, the
Company either sold or securitized and then sold the majority of the fixed-rate
loans it originated, while retaining most of its ARM production. At March 31,
1998, 87% of the Company's total MBS and 81% of the Company's total loan
portfolio had adjustable rates.
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 March 31, 1998, the Company had substantial liquidity compared with
its established guidelines.
WMB monitors its liquidity position as measured by certain predetermined
ratios established by the FDIC as benchmarks for liquidity management. At March
31, 1998, WMB's ratios were above the minimums established by its Board of
Directors. Regulations promulgated by the OTS require that the Company's federal
savings banks maintain, for each calendar month, certain liquidity ratios. At
March 31, 1998, each of the Company's federal savings banks' liquidity ratios
was in excess of the regulatory minimums.
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 first quarter 1998 of $256.5 million, $69.4 million for
noncash items offset by $959.7 million of other net cash flows used in operating
activities. Cash flows from investing activities consisted mainly of both
proceeds from and purchases of securities, and loan principal repayments and
loan originations. For the first quarter 1998, cash flows from investing
activities included sales and principal payments on securities and loans held
for investment totaling $3.01 billion. Loans originated, net of principal
payments, required $1.44 billion, and $5.67 billion was used for the purchase of
securities. Cash flows from financing activities consisted of the net change in
the Company's deposit accounts and short-term borrowings, the proceeds and
repayments from both long-term reverse repurchase agreements and FHLB advances,
and also the issuance of long-term debt. For the first quarter 1998, the above
mentioned financing activities increased cash and cash equivalents by $4.32
billion on a net basis. Cash and cash equivalents were $1.06 billion at March
31, 1998. See "Consolidated Financial Statements -- Consolidated Statements of
Cash Flows."
At March 31, 1998, the Company was in a position to obtain approximately
$28.00 billion in additional borrowings primarily through the use of
collateralized borrowings and deposits of public funds using unpledged MBS and
other wholesale sources.
23
<PAGE> 26
CAPITAL ADEQUACY
The Company's capital (stockholders' equity) was $5.44 billion at March 31, 1998
and $5.31 billion at December 31, 1997. At the end of first quarter 1998, the
ratio of capital to total assets was 5.27% compared with 5.47% at December 31,
1997.
The regulatory capital ratios of WMBFA, WMB and WMBfsb and minimum regulatory
requirements to be categorized as well capitalized were as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------- WELL-CAPITALIZED
WMBFA WMB WMBfsb MINIMUM
---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C>
Capital ratios:
Leverage...................... 5.69% 5.92% 6.57% 5.00%
Tier 1 risk-based............. 9.86 9.99 10.46 6.00
Total risk-based.............. 11.41 10.74 11.62 10.00
</TABLE>
The Company's federal savings bank subsidiaries are also 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. WMBFA and WMBfsb each satisfied these
requirements at March 31, 1998.
The Company's securities subsidiaries are also subject to capital
requirements. At March 31, 1998, all of Washington Mutual's securities
subsidiaries were in compliance with their applicable capital requirements.
IMPACT OF RECENTLY ADOPTED ACCOUNTING STANDARDS
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, was issued in June 1996 and established,
among other things, new criteria for determining whether a transfer of financial
assets in exchange for cash or other consideration should be accounted for as a
sale or as a pledge of collateral in a secured borrowing. As issued, SFAS No.
125 was effective for all transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. In December
1996, the Financial Accounting Standards Board ("FASB") issued SFAS No. 127,
Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125.
SFAS No. 127 defers for one year the effective date of certain provisions of
SFAS No. 125. The Company has implemented SFAS No. 125, as amended by SFAS No.
127. The adoption did not have a material impact on the results of operations or
financial position of the Company.
SFAS No. 130, Reporting Comprehensive Income was issued in June 1997 and
requires businesses to disclose comprehensive income and its components in their
financial statements. This statement does not affect the results of operations
or financial position of the Company. SFAS No. 130 was adopted on January 1,
1998. See Consolidated Financial Statements - Note 2: Comprehensive Income.
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information was issued in June 1997 and redefined how operating segments are
determined. SFAS No. 131 requires disclosure of certain financial and
descriptive information about a company's operating segments. This statement was
adopted on January 1, 1998, and did not impact the results of operations or
financial position of the Company.
SFAS No. 132, Employers' Disclosure about Pensions and Other
Postretirement Benefits was issued February 1998 and standardizes the disclosure
requirements for pensions and other postretirement benefits. Disclosure
requirements for December 31, 1998 will not have a material impact on the result
of operations or the financial position of the Company.
SUBSEQUENT EVENTS
Stock Split
On April 20, 1998, the Company's Board of Directors declared a 3-for-2
common stock split in the form of a 50% stock dividend payable on June 1, 1998
to shareholders of record as of May 18, 1998.
24
<PAGE> 27
PART II
ITEM 1. LEGAL PROCEEDINGS
Washington Mutual, Inc. 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 materially
adverse effect on the Company's financial position or results of operation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
See Index of Exhibits on page 27.
(B) REPORTS ON FORM 8-K
A current report on Form 8-K dated March 17, 1998, as amended,
March 18, 1998 containing Items 2 and 7 was filed with the Securities and
Exchange Commission, and included under Item 2 a description of the merger (the
"Merger") of H.F. Ahmanson & Company with and into Washington Mutual, Inc. and a
discussion regarding forward looking statements and factors to be considered.
The report on Form 8-K, as amended, also included under item 7 the following
exhibits: (i) Press Release dated March 17, 1998 announcing the Merger, (ii)
copies of slides presented to investment analysts at a meeting on March 17,
1998, and (iii) the Agreement of Merger dated March 16, 1998 between Washington
Mutual, Inc. and H.F. Ahmanson & Company.
25
<PAGE> 28
SIGNATURES
Pursuant to the requirements 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 May 14, 1998.
WASHINGTON MUTUAL, INC.
By: /s/ FAY L. CHAPMAN
------------------------------------
Fay L. Chapman
Executive Vice President
By: /s/ RICHARD M. LEVY
------------------------------------
Richard M. Levy
Senior Vice President and Controller
(Principal Accounting Officer)
26
<PAGE> 29
WASHINGTON MUTUAL, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 Restated Articles of Incorporation of the Registrant, as amended
(the "Articles") (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,
1997, as amended on April 1, 1998). (File No. 0-25188).
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).
10.1 Agreement and Plan of Merger between Washington Mutual, Inc. and
H.F. Ahmanson & Company ("Ahmanson") dated March 16, 1998
(Incorporated by reference to the Washington Mutual, Inc. Current
Report on Form 8-K dated March 17, 1998, as amended March 18,
1998).
10.2 Stock Option Agreement between Washington Mutual, Inc. and
Ahmanson, dated March 16, 1998.
27 Financial Data Schedule.
</TABLE>
27
<PAGE> 1
EXHIBIT 10.2
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO CERTAIN PROVISIONS
CONTAINED HEREIN AND TO RESALE RESTRICTIONS UNDER THE SECURITIES
ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT, dated March 16, 1998, between H.F. Ahmanson &
Company, a Delaware corporation ("Issuer"), and Washington Mutual, Inc., a
Washington corporation ("Grantee").
W I T N E S S E T H:
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Merger of even date herewith (the "Merger Agreement"), which agreement has been
executed by the parties hereto immediately prior to this Stock Option Agreement
(this "Agreement"); and
WHEREAS, as a condition to Grantee's entering into the Merger Agreement
and in consideration therefor, Issuer has agreed to grant Grantee the Option (as
hereinafter defined);
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Merger Agreement, the
parties hereto agree as follows:
1. Grant of Option.
(a) Issuer hereby grants to Grantee an unconditional, irrevocable option
(the "Option") to purchase, subject to the terms hereof, up to an aggregate of
21,796,426 fully paid and nonassessable shares of Issuer's Common Stock, par
value $.01 per share ("Common Stock"), at a price of $79.86 per share (the
"Option Price"); provided, however, that in no event shall the number of shares
of Common Stock for which this Option is exercisable exceed 19.9% of the
Issuer's issued and outstanding shares of Common Stock without giving effect to
any shares subject to or issued pursuant to the Option. The number of shares of
Common Stock that may be received upon the exercise of the Option and the Option
Price are subject to adjustment as herein set forth.
(b) In the event that any shares of Common Stock are either (i) issued
or otherwise become outstanding after the date of this Agreement (other than
pursuant to this Agreement and other than pursuant to an event described in
Section 5 hereof) or (ii) redeemed, repurchased, retired or otherwise cease to
be outstanding after the date of this Agreement, the number of shares of Common
Stock subject to the Option shall be increased or decreased, as appropriate, so
that, after such issuance or such redemption, repurchase, retirement or other
action, such number equals 19.9% of the number of shares of Common Stock then
issued and outstanding without giving effect to any shares subject or issued
pursuant to the Option. Nothing contained in this Section 1(b) or elsewhere in
this Agreement shall be deemed to authorize Issuer or Grantee to issue, redeem,
repurchase or retire shares in breach of any provision of the Merger Agreement.
<PAGE> 2
2. Exercise of Option.
(a) The Holder (as hereinafter defined) may exercise the Option, in
whole or part, and from time to time, if both an Initial Triggering Event (as
hereinafter defined) and a Subsequent Triggering Event (as hereinafter defined)
shall have occurred prior to the occurrence of an Exercise Termination Event (as
hereinafter defined), provided that the Holder shall have sent the written
notice of such exercise (as provided in subsection (e) of this Section 2) within
ninety days following such Subsequent Triggering Event (or such longer period as
provided in Section 10), provided further, however, that if the Option cannot be
exercised on any day because of any injunction, order or similar restraint
issued by a court of competent jurisdiction, the period during which the Option
may be exercised shall be extended so that the Option shall expire no earlier
than on the tenth business day after such injunction, order or restraint shall
have been dissolved or when such injunction, order or restraint shall have
become permanent and no longer subject to appeal, as the case may be. Each of
the following shall be an "Exercise Termination Event": (i) the Effective Time
(as defined in the Merger Agreement); (ii) termination of the Merger Agreement
in accordance with the provisions thereof if such termination occurs prior to
the occurrence of an Initial Triggering Event; (iii) the passage of 18 months
after termination of the Merger Agreement if such termination follows the
occurrence of an Initial Triggering Event; or (iv) delivery of a written request
for payment of Termination Fees pursuant to Section 8.02 of the Merger Agreement
(provided that no such Exercise Termination Event shall be deemed to have
occurred unless such Termination Fees are paid in accordance with such Section
8.02). The term "Holder" shall mean the holder or holders of the Option.
Notwithstanding anything to the contrary herein, (i) the Option may not be
exercised at any time when Grantee shall be in breach of any of its
representations, warranties, covenants or agreements contained in the Merger
Agreement such that Issuer would be entitled to terminate the Merger Agreement
pursuant to Section 8.01(b) thereof and (ii) this Agreement shall automatically
terminate upon the termination of the Merger Agreement pursuant to Section
8.01(b) thereof as a result of the breach by Grantee of its representations,
warranties, covenants or agreements contained in the Merger Agreement.
(b) The term "Initial Triggering Event" shall mean any of the following
events or transactions occurring after the date hereof:
(i) Issuer or any of its Significant Subsidiaries, as defined in Rule
1-02 of Regulation S-X promulgated by the Securities and Exchange
Commission (each an "Issuer Subsidiary"), without having received
Grantee's prior written consent, shall have entered into an agreement to
engage in an Acquisition Transaction (as hereinafter defined) with any
person (the term "person" for purposes of this Agreement having the
meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and the
rules and regulations thereunder) other than Grantee or any of its
Subsidiaries (each a "Grantee Subsidiary") or the Board of Directors of
Issuer shall have recommended that the stockholders of Issuer approve or
accept any Acquisition Transaction with any person other than Grantee or
a Subsidiary of Grantee. For purposes of this Agreement, "Acquisition
Transaction" shall mean (x) a
-2-
<PAGE> 3
merger or consolidation, or any similar transaction, involving Issuer or
any Issuer Subsidiary, (y) a purchase, lease or other acquisition or
assumption of all or a substantial portion of the assets or deposits of
Issuer or any Issuer Subsidiary, or (z) a purchase or other acquisition
(including by way of merger, consolidation, share exchange or otherwise)
of securities representing 10% or more of the voting power of Issuer;
provided, however, that in no event shall any merger, consolidation,
purchase or similar transaction involving only the Issuer and one or
more of Issuer Subsidiaries or involving only two or more of Issuer
Subsidiaries, be deemed to be an Acquisition Transaction, provided that
any such transaction is not entered into in violation of the terms of
the Merger Agreement;
(ii) (A) Issuer or any Issuer Subsidiary, without having
received Grantee's prior written consent, shall have authorized,
recommended, proposed or publicly announced its intention to authorize,
recommend or propose, to engage in an Acquisition Transaction with any
person other than Grantee or a Grantee Subsidiary, or (B) the Board of
Directors of Issuer shall have failed to make its recommendation that
the stockholders of Issuer approve the transactions contemplated by the
Merger Agreement, or (C) the Board of Directors of Issuer shall have
publicly withdrawn or modified, or publicly announced its interest to
withdraw or modify, in any manner adverse to Grantee, its recommendation
that the stockholders of Issuer approve the transactions contemplated by
the Merger Agreement.
(iii) Any person, other than Grantee, any Grantee Subsidiary or
any Issuer Subsidiary acting in a fiduciary capacity in the ordinary
course of its business, shall have acquired beneficial ownership or the
right to acquire beneficial ownership of 10% or more of the outstanding
shares of Common Stock (the term "beneficial ownership" for purposes of
this Agreement having the meaning assigned thereto in Section 13(d) of
the 1934 Act, and the rules and regulations thereunder);
(iv) After any person other than Grantee or any Grantee
Subsidiary shall have made a bona fide proposal to Issuer or its
stockholders by public announcement or written communication that is or
becomes the subject of public disclosure to engage in an Acquisition
Transaction, the stockholder approval required by Section 7.01(a) of the
Merger Agreement is not obtained at the Ahmanson Meeting;
(v) After an overture is made by a third party to Issuer or its
stockholders to engage in an Acquisition Transaction (whether such
overture becomes the subject of public disclosure or not), Issuer shall
have willfully breached any covenant or obligation contained in the
Merger Agreement or willfully breached any representation or warranty
contained in the Merger Agreement and such breach (x) would entitle
Grantee to terminate the Merger Agreement and (y) shall not have been
cured prior to the Notice Date (as defined below);
(vi) Any person other than Grantee or any Grantee Subsidiary,
other than in connection with a transaction to which Grantee has given
its prior written consent,
-3-
<PAGE> 4
shall have filed an application or notice with the Office of Thrift
Supervision ("OTS"), the Federal Reserve Board, or other federal or
state bank regulatory authority, which application or notice has been
accepted for processing, for approval to engage in an Acquisition
Transaction; or
(vii) Any person other than Grantee or any Grantee Subsidiary
commences or publicly announces its intention to commence a tender offer
or exchange offer for securities representing 10% or more of the voting
power of Issuer.
(c) The term "Subsequent Triggering Event" shall mean either of the
following events or transactions occurring after the date hereof:
(i) The acquisition by any person of beneficial ownership of 25%
or more of the then outstanding shares of Common Stock; or
(ii) The occurrence of the Initial Triggering Event described in
Section 2(b)(i) hereof, except that the percentage referred to in clause
(z) thereof shall be 25%.
(d) Issuer shall notify Grantee promptly in writing of the occurrence of
any Initial Triggering Event or Subsequent Triggering Event of which it has
notice, it being understood that the giving of such notice by Issuer shall not
be a condition to the right of the Holder to exercise the Option.
(e) In the event the Holder is entitled to and wishes to exercise the
Option, it shall send to Issuer a written notice (the date of which being herein
referred to as the "Notice Date") specifying (i) the total number of shares it
will purchase pursuant to such exercise and (ii) a place and date not earlier
than three business days nor later than 60 business days from the Notice Date
for the closing of such purchase (the "Closing Date"); provided that if prior
notification to or approval of the Federal Reserve Board or the OTS or any other
regulatory or antitrust agency is required in connection with such purchase, the
Holder shall promptly file the required notice or application for approval,
shall promptly notify Issuer of such filing and shall expeditiously process the
same and the period of time that otherwise would run pursuant to this sentence
shall run instead from the date on which any required notification periods have
expired or been terminated or such approvals have been obtained and any
requisite waiting period or periods shall have passed. Any exercise of the
Option shall be deemed to occur on the Notice Date relating thereto.
(f) At the closing referred to in subsection (e) of this Section 2, the
Holder shall pay to Issuer the aggregate purchase price for the shares of Common
Stock purchased pursuant to the exercise of the Option in immediately available
funds by wire transfer to a bank account designated by Issuer, provided that
failure or refusal of Issuer to designate such a bank account shall not preclude
the Holder from exercising the Option.
(g) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (f) of this Section 2, Issuer shall
deliver to the Holder a certificate or certificates representing the number of
shares of Common Stock purchased by the
-4-
<PAGE> 5
Holder and, if the Option should be exercised in part only, a new Agreement for
an Option evidencing the rights of the Holder thereof to purchase the balance of
the shares purchasable hereunder, and the Holder shall deliver to Issuer this
Agreement and a letter agreeing that the Holder will not offer to sell or
otherwise dispose of such shares in violation of applicable law or the
provisions of this Agreement.
(h) Certificates for Common Stock delivered at a closing hereunder may
be endorsed with a restrictive legend that shall read substantially as follows:
"The transfer of the shares represented by this certificate is subject
to certain provisions of an agreement between the registered holder
hereof and H. F. Ahmanson & Company and to resale restrictions arising
under the Securities Act of 1933, as amended. A copy of such agreement
is on file at the principal office of H. F. Ahmanson & Company and will
be provided to the holder hereof without charge upon receipt by H. F.
Ahmanson & Company of a written request therefor."
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act of 1933, as amended (the "1933 Act"), in the above legend
shall be removed by delivery of substitute certificate(s) without such reference
if the Holder shall have delivered to Issuer a copy of a letter from the staff
of the Securities and Exchange Commission (the "SEC"), or an opinion of counsel,
in form and substance reasonably satisfactory to Issuer, to the effect that such
legend is not required for purposes of the 1933 Act; (ii) the reference to the
provisions of this Agreement in the above legend shall be removed by delivery of
substitute certificate(s) without such reference if the shares have been sold or
transferred in compliance with the provisions of this Agreement and under
circumstances that do not require the retention of such reference in the opinion
of counsel, in form and substance reasonably satisfactory to Issuer; and (iii)
the legend shall be removed in its entirety if the conditions in the preceding
clauses (i) and (ii) are both satisfied. In addition, such certificates shall
bear any other legend as may be required by law.
(i) Upon the giving by the Holder to Issuer of the written
notice of exercise of the Option provided for under subsection (e) of
this Section 2 and the tender of the applicable purchase price in
immediately available funds, the Holder shall be deemed to be the holder
of record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of Issuer shall then be
closed or that certificates representing such shares of Common Stock
shall not then be actually delivered to the Holder. Issuer shall pay all
expenses, and any and all United States federal, state and local taxes
and other charges that may be payable in connection with the
preparation, issue and delivery of stock certificates under this Section
2 in the name of the Holder or its assignee, transferee or designee.
3. Certain Issuer Actions. Issuer agrees: (i) that it shall at all times
maintain, free from preemptive rights, sufficient authorized but unissued or
treasury shares of Common Stock so that the Option may be exercised without
additional authorization of Common Stock after giving effect to all other
options, warrants, convertible securities and other rights to purchase
-5-
<PAGE> 6
Common Stock; (ii) that it will not, by charter amendment or through
reorganization, consolidation, merger, dissolution or sale of assets, or by any
other voluntary act, avoid or seek to avoid the observance or performance of any
of the covenants, stipulations or conditions to be observed or performed
hereunder by Issuer; (iii) promptly to take all action as may from time to time
be required (including (x) complying with all premerger notification, reporting
and waiting period requirements specified in 15 U.S.C. Section18a and
regulations promulgated thereunder and (y) in the event, under any federal or
state banking law, prior approval of or notice to the Federal Reserve Board, the
OTS or to any state regulatory authority is necessary before the Option may be
exercised, cooperating fully with the Holder in preparing such applications or
notices and providing such information to the Federal Reserve Board, the OTS or
such state regulatory authority as they may require) in order to permit the
Holder to exercise the Option and Issuer duly and effectively to issue shares of
Common Stock pursuant hereto; and (iv) promptly to take all action provided
herein to protect the rights of the Holder against dilution.
4. Exchange. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender of this Agreement at the principal office of Issuer, for other
Agreements providing for Options of different denominations entitling the holder
thereof to purchase, on the same terms and subject to the same conditions as are
set forth herein, in the aggregate the same number of shares of Common Stock
purchasable hereunder. The terms "Agreement" and "Option" as used herein include
any Stock Option Agreements and related Options for which this Agreement (and
the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver anew Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of Issuer, whether or not the
Agreement so lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
5. Adjustment of Shares. In addition to the adjustment in the number of
shares of Common Stock that are purchasable upon exercise of the Option pursuant
to Section 1 of this Agreement, the number of shares of Common Stock purchasable
upon the exercise of the Option and the Option Price shall be subject to
adjustment from time to time as provided in this Section 5. In the event of any
change in, or distributions in respect of, the Common Stock by reason of stock
dividends, split-ups, mergers, recapitalizations, combinations, subdivisions,
conversions, exchanges of shares, distributions on or in respect of the Common
Stock that would be prohibited under the terms of the Merger Agreement, or the
like, the type and number of shares of Common Stock purchasable upon exercise
hereof and the Option Price shall be appropriately adjusted in such manner as
shall fully preserve the economic benefits provided hereunder and proper
provision shall be made in any agreement governing any such transaction to
provide for such proper adjustment and the full satisfaction of the Issuer's
obligations hereunder.
6. Registration Rights. Upon the occurrence of a Subsequent Triggering
Event that occurs prior to an Exercise Termination Event, Issuer shall, at the
request of Grantee (whether on
-6-
<PAGE> 7
its own behalf or on behalf of any subsequent holder of this Option (or part
thereof) or any of the shares of Common Stock issued pursuant hereto) delivered
within six months of such Subsequent Triggering Event (or such longer period as
provided in Section 10), promptly prepare, file and keep current a shelf
registration statement under the 1933 Act covering this Option and any shares
issued and issuable pursuant to this Option and shall use its reasonable best
efforts to cause such registration statement to become effective and remain
current in order to permit the sale or other disposition of this Option and any
shares of Common Stock issued upon total or partial exercise of this Option
("Option Shares") in accordance with any plan of disposition requested by
Grantee. Issuer will use its reasonable best efforts to cause such registration
statement first to become effective and thereafter to remain effective for such
period not in excess of 180 days from the day such registration statement first
becomes effective or such shorter time as may be reasonably necessary to effect
such sales or other dispositions. Grantee shall have the right to demand two
such registrations. The foregoing notwithstanding, if, at the time of any
request by Grantee for registration of the Option or Option Shares as provided
above, Issuer is in registration with respect to an underwritten public offering
of shares of Common Stock, and if in the good faith judgment of the managing
underwriter or managing underwriters, or, if none, the sole underwriter or
underwriters, of such offering the inclusion of the Option or Option Shares
would interfere with the successful marketing of the shares of Common Stock
offered by Issuer, the number of Option Shares otherwise to be covered in the
registration statement contemplated hereby may be reduced; provided, however,
that after any such required reduction the number of Option Shares to be
included in such offering for the account of the Holder shall constitute at
least 25% of the total number of shares to be sold by the Holder and Issuer in
the aggregate; and provided further, however, that if such reduction occurs,
then Issuer shall file a registration statement for the balance as promptly as
practicable and no reduction shall thereafter occur. Each such Holder shall
provide all information reasonably requested by Issuer for inclusion in any
registration statement to be filed hereunder. If requested by any such Holder in
connection with such registration, Issuer shall become a party to any
underwriting agreement relating to the sale of such shares, but only to the
extent of obligating itself in respect of representations, warranties,
indemnities and other agreements customarily included in secondary offering
underwriting agreements for Issuer.
Upon receiving any request under this Section 6 from any Holder, Issuer
agrees to send a copy thereof to any other person known to Issuer to be entitled
to registration rights under this Section 6, in each case by promptly mailing
the same, postage prepaid, to the address of record of the persons entitled to
receive such copies. Notwithstanding anything to the contrary contained herein,
in no event shall Issuer be obligated to effect more than three registrations
pursuant to this Section 6 by reason of the fact that there shall be more than
one Grantee as a result of any assignment or division of this Agreement.
7. Repurchase Right.
(a) (i) Following the occurrence of a Repurchase Event (as defined
below), and following a request of the Holder delivered prior to an Exercise
Termination Event, Issuer (or any successor thereto) shall repurchase the Option
from the Holder at a price (the "Option Repurchase Price") equal to the amount
by which (A) the Market/Offer Price (as defined below)
-7-
<PAGE> 8
exceeds (B) the Option Price, multiplied by the number of shares for which this
Option may then be exercised; and (ii) at the request of the owner of Option
Shares from time to time (the "Owner"), delivered within 90 days of such
occurrence (or such longer period as provided in Section 10), Issuer shall
repurchase such number of the Option Shares from the Owner as the Owner shall
designate at a price (the "Option Share Repurchase Price") equal to the
Market/Offer Price multiplied by the number of Option Shares so designated.
The term "Market/Offer Price" shall mean the highest of (i) the price
per share of Common Stock at which a tender offer or exchange offer therefor has
been made, (ii) the price per share of Common Stock to be paid by any third
party pursuant to an agreement with Issuer, (iii) the highest closing price for
shares of Common Stock within the six-month period immediately preceding the
date the Holder gives notice of the required repurchase of this Option or the
Owner gives notice of the required repurchase of Option Shares, as the case
maybe, or (iv) in the event of a sale of all or a substantial portion of
Issuer's assets, the sum of the price paid in such sale for such assets and the
current market value of the remaining assets of Issuer as determined by a
nationally recognized investment banking firm selected by the Holder or the
Owner, as the case may be, and reasonably acceptable to Issuer, divided by the
number of shares of Common Stock of Issuer outstanding at the time of such sale.
In determining the Market/Offer Price, the value of consideration other than
cash shall be determined by a nationally recognized investment banking firm
selected by the Holder or Owner, as the case may be, and reasonably acceptable
to Issuer.
(b) The Holder or the Owner, as the case may be, may exercise its right
to require Issuer to repurchase the Option or any Option Shares pursuant to this
Section 7 by surrendering for such purpose to Issuer, at its principal office,
this Agreement or certificates for Option Shares, as applicable, accompanied by
a written notice or notices stating that the Holder or the Owner, as the case
maybe, elects to require Issuer to repurchase this Option and/or the Option
Shares in accordance with the provisions of this Section 7. As promptly as
practicable, and in any event within five business days after the surrender of
the Option and/or certificates representing Option Shares and the receipt of
such notice or notices relating thereto, Issuer shall deliver or cause to be
delivered to the Holder the Option Repurchase Price and/or to the Owner the
Option Share Repurchase Price therefor or the portion thereof that Issuer is not
then prohibited under applicable law and regulation from so delivering.
(c) To the extent that Issuer is prohibited under applicable law or
regulation from repurchasing the Option and/or the Option Shares in full, Issuer
shall immediately so notify the Holder and/or the Owner and thereafter deliver
or cause to be delivered, from time to time, to the Holder and/or the Owner, as
appropriate, the portion of the Option Repurchase Price and the Option Share
Repurchase Price, respectively, that it is no longer prohibited from delivering,
within five business days after the date on which Issuer is no longer so
prohibited; provided, however, that if Issuer at anytime after delivery of a
notice of repurchase pursuant to paragraph (b) of this Section 7 is prohibited
under applicable law or regulation or through commencement of regulatory
enforcement action from delivering to the Holder and/or the Owner, as
appropriate, the Option Repurchase Price and the Option Share Repurchase Price,
respectively, in full (and Issuer hereby undertakes to use its best efforts to
obtain all required regulatory and legal
-8-
<PAGE> 9
approvals and to file any required notices as promptly as practicable in order
to accomplish such repurchase), the Holder or Owner may revoke its notice of
repurchase of the Option or the Option Shares either in whole or to the extent
of the prohibition, whereupon, in the latter case, Issuer shall promptly (i)
deliver to the Holder and/or the Owner, as appropriate, that portion of the
Option Repurchase Price or the Option Share Repurchase Price that Issuer is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the
Holder, a new Agreement evidencing the right of the Holder to purchase that
number of shares of Common Stock obtained by multiplying the number of shares of
Common Stock for which the surrendered Agreement was exercisable at the time of
delivery of the notice of repurchase by a fraction, the numerator of which is
the Option Repurchase Price less the portion thereof theretofore delivered to
the Holder and the denominator of which is the Option Repurchase Price, or (B)
to the Owner, a certificate for the Option Shares it is then so prohibited from
repurchasing.
(d) For purposes of this Section 7, a Repurchase Event shall be deemed
to have occurred (i) upon the consummation of any merger, consolidation or
similar transaction involving Issuer or any purchase, lease or other acquisition
of all or a substantial portion of the assets of Issuer, other than any such
transaction which would not constitute an Acquisition Transaction pursuant to
the provisos to the final sentence of Section 2(b)(i) hereof or (ii) upon the
acquisition by any person of beneficial ownership of 50% or more of the then
outstanding shares of Common Stock, provided that no such event shall constitute
a Repurchase Event unless a Subsequent Triggering Event shall have occurred
prior to an Exercise Termination Event.
8. Substitute Option.
(a) In the event that prior to an Exercise Termination Event, Issuer
shall enter into an agreement (i) to consolidate with or merge into any person,
other than Grantee or one of its Subsidiaries, and shall not be the continuing
or surviving corporation of such consolidation or merger, (ii) to permit any
person, other than Grantee or one of its Subsidiaries, to merge into Issuer and
Issuer shall be the continuing or surviving corporation, but, in connection with
such merger, the then outstanding shares of Common Stock shall be changed into
or exchanged for stock or other securities of any other person or cash or any
other property or the then outstanding shares of Common Stock shall after such
merger represent less than 50% of the outstanding voting shares and voting share
equivalents of the merged company, or (iii) to sell or otherwise transfer all or
substantially all of its assets to any person, other than Grantee or one of its
Subsidiaries, then, and in each such case, the agreement governing such
transaction shall make proper provision so that the Option shall, upon the
consummation of any such transaction and upon the terms and conditions set forth
herein, be converted into, or exchanged for, an option (the "Substitute
Option"), at the election of the Holder, of either (x) the Acquiring Corporation
(as hereinafter defined) or (y) any person that controls the Acquiring
Corporation.
(b) The following terms have the meanings indicated:
(1) "Acquiring Corporation" shall mean (i) the continuing or surviving
corporation of a consolidation or merger with Issuer (if other than
Issuer), (ii) Issuer in a
-9-
<PAGE> 10
merger in which Issuer is the continuing or surviving person, or (iii)
the transferee of all or substantially all of Issuer's assets.
(2) "Substitute Common Stock" shall mean the common stock issued
by the issuer of the Substitute Option upon exercise of the Substitute
Option.
(3) "Assigned Value" shall mean the Market/ Offer Price, as
defined in Section 7.
(4) "Average Price" shall mean the average closing price of a
share of the Substitute Common Stock for the one year immediately
preceding the consolidation, merger or sale in question, but in no event
higher than the closing price of the shares of Substitute Common Stock
on the day preceding such consolidation, merger or sale; provided that
if Issuer is the issuer of the Substitute Option, the Average Price
shall be computed with respect to a share of common stock issued by the
person merging into Issuer or by any company which controls or is
controlled by such person, as the Holder may elect.
(c) The Substitute Option shall have the same terms as the Option,
provided, that if the terms of the Substitute Option cannot, for legal reasons,
be the same as the Option, such terms shall be as similar as possible and in no
event less advantageous to the Holder. The issuer of the Substitute Option shall
also enter into an agreement with the then Holder or Holders of the Substitute
Option in substantially the same form as this Agreement (after giving effect for
such purpose to the provisions of Section 9), which shall be applicable to the
Substitute Option.
(d) The Substitute Option shall be exercisable for such number of shares
of Substitute Common Stock as is equal to the Assigned Value multiplied by the
number of shares of Common Stock for which the Option is then exercisable,
divided by the Average Price. The exercise price of the Substitute Option per
share of Substitute Common Stock shall then be equal to the Option Price
multiplied by a fraction, the numerator of which shall be the number of shares
of Common Stock for which the Option is then exercisable and the denominator of
which shall be the number of shares of Substitute Common Stock for which the
Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs, shall the
Substitute Option be exercisable for more than 19.9% of the shares of Substitute
Common Stock outstanding prior to exercise of the Substitute Option.
In the event that the Substitute Option would be exercisable for more
than 19.9% of the shares of Substitute Common Stock outstanding prior to
exercise but for this clause (e), the issuer of the Substitute Option (the
"Substitute Option Issuer") shall make a cash payment to Holder equal to the
excess of (i) the value of the Substitute Option without giving effect to the
limitation in this clause (e) over (ii) the value of the Substitute Option after
giving effect to the limitation in this clause (e). This difference in value
shall be determined by a nationally
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<PAGE> 11
recognized investment banking firm selected by the Holder or the Owner, as the
case may be, and reasonably acceptable to the Acquiring Corporation.
(f) Issuer shall not enter into any transaction described in subsection
(a) of this Section 8 unless the Acquiring Corporation and any person that
controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder.
9. Repurchase of Substitute Option.
(a) At the request of the holder of the Substitute Option (the
"Substitute Option Holder") delivered prior to an Exercise Termination Event,
the Substitute Option Issuer shall repurchase the Substitute Option from the
Substitute Option Holder at a price (the "Substitute Option Repurchase Price")
equal to the amount by which (i) the Highest Closing Price (as hereinafter
defined) exceeds (ii) the exercise price of the Substitute Option, multiplied by
the number of shares of Substitute Common Stock for which the Substitute Option
may then be exercised, and at the request of the owner (the "Substitute Share
Owner") of shares of Substitute Common Stock (the "Substitute Shares"), the
Substitute Option Issuer shall repurchase the Substitute Shares at a price (the
"Substitute Share Repurchase Price") equal to the Highest Closing Price
multiplied by the number of Substitute Shares so designated. The term "Highest
Closing Price" shall mean the highest closing price for shares of Substitute
Common Stock within the six-month period immediately preceding the date the
Substitute Option Holder gives notice of the required repurchase of the
Substitute Option or the Substitute Share Owner gives notice of the required
repurchase of the Substitute Shares, as applicable.
(b) The Substitute Option Holder and the Substitute Share Owner, as the
case may be, may exercise its respective right to require the Substitute Option
Issuer to repurchase the Substitute Option and the Substitute Shares pursuant to
this Section 9 by surrendering for such purpose to the Substitute Option Issuer,
at its principal office, the agreement for such Substitute Option (or, in the
absence of such an agreement, a copy of this Agreement) and/or certificates for
Substitute Shares accompanied by a written notice or notices stating that the
Substitute Option Holder or the Substitute Share Owner, as the case may be,
elects to require the Substitute Option Issuer to repurchase the Substitute
Option and/or the Substitute Shares in accordance with the provisions of this
Section 9. As promptly as practicable, and in any event within five business
days after the surrender of the Substitute Option and/or certificates
representing Substitute Shares and the receipt of such notice or notices
relating thereto, the Substitute Option Issuer shall deliver or cause to be
delivered to the Substitute Option Holder the Substitute Option Repurchase Price
and/or to the Substitute Share Owner the Substitute Share Repurchase Price
therefor or, in either case, the portion thereof which the Substitute Option
Issuer is not then prohibited under applicable law and regulation from so
delivering.
(c) To the extent that the Substitute Option Issuer is prohibited under
applicable law or regulation or through commencement of regulatory enforcement
action from repurchasing the Substitute Option and/or the Substitute Shares in
part or in full, the Substitute Option Issuer following a request for repurchase
pursuant to this Section 9 shall immediately so notify the Substitute Option
Holder and/or the Substitute Share Owner and thereafter deliver or
-11-
<PAGE> 12
cause to be delivered, from time to time, to the Substitute Option Holder and/or
the Substitute Share Owner, as appropriate, the portion of the Substitute Option
Repurchase Price and Substitute Share Repurchase Price, respectively, which it
is no longer prohibited from delivering, within five business days after the
date on which the Substitute Option Issuer is no longer so prohibited; provided,
however, that if the Substitute Option Issuer is at any time after delivery of a
notice of repurchase pursuant to subsection (b) of this Section 9 prohibited
under applicable law or regulation or through commencement of regulatory
enforcement action from delivering to the Substitute Option Holder and/or the
Substitute Share Owner, as appropriate, the Substitute Option Repurchase Price
and the Substitute Share Repurchase Price, respectively, in full (and the
Substitute Option Issuer shall use its best efforts to receive all required
regulatory and legal approvals as promptly as practicable in order to accomplish
such repurchase), the Substitute Option Holder or Substitute Share Owner may
revoke its notice of repurchase of the Substitute Option or the Substitute
Shares either in whole or to the extent of the prohibition, whereupon, in the
latter case, the Substitute Option Issuer shall promptly (i) deliver to the
Substitute Option Holder or Substitute Share Owner, as appropriate, that portion
of the Substitute Option Repurchase Price or the Substitute Share Repurchase
Price that the Substitute Option Issuer is not prohibited from delivering; and
(ii) deliver, as appropriate, either (A) to the Substitute Option Holder, a new
Substitute Option evidencing the right of the Substitute Option Holder to
purchase that number of shares of the Substitute Common Stock obtained by
multiplying the number of shares of the Substitute Common Stock for which the
surrendered Substitute Option was exercisable at the time of delivery of the
notice of repurchase by a fraction, the numerator of which is the Substitute
Option Repurchase Price less the portion thereof theretofore delivered to the
Substitute Option Holder and the denominator of which is the Substitute Option
Repurchase Price, or (B) to the Substitute Share Owner, a certificate for the
Substitute Shares it is then so prohibited from repurchasing.
10. Extension of Certain Periods. The 90-day or six-month period for
exercise of certain rights under each of Sections 2, 6, 7 and 14 shall be
extended: (i) to the extent necessary to obtain all regulatory approvals for the
exercise of such rights (for so long as the Holder, Owner, Substitute Option
Holder or Substitute Share Owner, as the case may be, is using its reasonable
best efforts to obtain such regulatory approval) and for the expiration of all
statutory waiting periods; and (ii) to the extent necessary to avoid liability
under Section 16(b) of the 1934 Act by reason of such exercise.
11. Issuer Representations and Warranties. Issuer hereby represents and
warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Issuer and no other corporate proceedings on the part of
Issuer are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly and validly executed
and delivered by Issuer.
-12-
<PAGE> 13
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Common Stock equal to the maximum number of shares of Common Stock at any time
and from time to time issuable hereunder, and all such shares, upon issuance
pursuant hereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrance and security interests and not subject to any preemptive rights.
(c) Issuer has taken all action (including, if required, redeeming all
of the Rights or amending or terminating the Ahmanson Rights Agreement) so that
the entering into of this Option Agreement, the acquisition of shares of Common
Stock hereunder and the other transactions contemplated hereby do not and will
not result in the grant of any rights to any person under the Ahmanson Rights
Agreement or enable or require the Ahmanson Rights to be exercised, distributed
or triggered.
12. Grantee Representations and Warranties. Grantee hereby represents
and warrants to Issuer that:
(a) Grantee has all requisite corporate power and authority to enter
into this Agreement and, subject to any approvals or consents to herein, to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of Grantee.
This Agreement has been duly executed and delivered by Grantee.
(b) The Option is not being, and any shares of Common Stock or other
securities acquired by Grantee upon exercise of the Option will not be, acquired
with a view to the public distribution thereof and will not be transferred or
otherwise disposed of except in a transaction registered or exempt from
registration under the 1933 Act.
13. Limitation on Total Profit.
(a) Notwithstanding anything to the contrary contained herein, in no
event shall Grantee's Total Profit (as defined below in Section 13(c) hereof)
exceed $275 million.
(b) Notwithstanding anything to the contrary contained herein, the
Option may not be exercised for a number of shares as would, as of the date of
exercise, result in a Notional Total Profit (as defined below in Section 13(d)
hereof) of more than $275 million.
(c) As used herein, the term "Total Profit" shall mean the aggregate
amount (before taxes) of the following: (i) the amount received by Grantee
pursuant to Issuer's repurchase of the Option (or any portion thereof) pursuant
to Section 7 hereof, (ii) (x) the amount received by Grantee pursuant to
Issuer's repurchase of Option Shares pursuant to Section 7 hereof, less (y)
Grantee's purchase price for such Option Shares, (iii) (x) the net cash amounts
received by Grantee pursuant to the sale of Option Shares (or any other
securities into which
-13-
<PAGE> 14
such Option Shares shall be converted or exchanged) to any unaffiliated party,
less (y) Grantee's purchase price of such Option Shares, (iv) any amounts
received by Grantee on the transfer of the Option (or any portion thereof) to
any unaffiliated party, (v) any equivalent amount with respect to the Substitute
Option, including pursuant to Section 8(e); and (vi) the amount of any
Termination Fee actually received by Grantee pursuant to Section 8.02 of the
Merger Agreement. For purposes of this Section 13, references to Grantee shall
be deemed to include references to any affiliate of the Grantee.
(d) As used herein, the term "Notional Total Profit" with respect to any
number of shares as to which Grantee may propose to exercise the Option shall be
the Total Profit determined as of the date of such proposed exercise assuming
that the Option were exercised on such date for such number of shares and
assuming that such shares, together with all other Option Shares held by Grantee
and its affiliates as of such date, were sold for cash at the closing market
price for the Common Stock as of the close of business on the preceding trading
day (less customary brokerage commissions).
14. Assignment. Neither of the parties hereto may assign any of its
rights or obligations under this Agreement or the Option created hereunder to
any other person, without the express written consent of the other party, except
that in the event a Subsequent Triggering Event shall have occurred prior to an
Exercise Termination Event, Grantee, subject to the express provisions hereof,
may assign in whole or in part its rights and obligations hereunder within 90
days following such Subsequent Triggering Event (or such longer period as
provided in Section 10); provided, however, that until the date 15 days
following the date on which the Federal Reserve Board or the OTS, as applicable,
approves an application by Grantee to acquire the shares of Common Stock subject
to the Option (if such approval is required by law), Grantee may not assign its
rights under the Option except in (i) a widely dispersed public distribution,
(ii) a private placement in which no one person acquires the right to purchase
in excess of 2% of the voting shares of Issuer, (iii) an assignment to a single
person (e.g., a broker or investment banker) for the purpose of conducting a
widely dispersed public distribution on Grantee's behalf, or (iv) any other
manner approved by the Federal Reserve Board or the OTS, as applicable.
15. Filings. Each of Grantee and Issuer will use its best efforts to
make all filings with, and to obtain consents of, all third parties and
governmental authorities necessary to the consummation of the transactions
contemplated by this Agreement, including without limitation making application
to list the shares of Common Stock issuable hereunder on the New York Stock
Exchange upon official notice of issuance and applying to the Federal Reserve
Board and/or the OTS, as applicable, for approval to acquire the shares issuable
hereunder, but Grantee shall not be obligated to apply to state banking
authorities for approval to acquire the shares of Common Stock issuable
hereunder until such time, if ever, as it deems appropriate to do so.
16. Equitable Remedies. The parties hereto acknowledge that damages
would be an inadequate remedy for a breach of this Agreement by either party
hereto and that the obligations of the parties hereto shall be enforceable by
either party hereto through injunctive or other equitable relief.
-14-
<PAGE> 15
17. Validity. If any term, provision, covenant or restriction contained
in this Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that the Holder is not permitted to acquire, or Issuer is not permitted to
repurchase pursuant to Section 7, the full number of shares of Common Stock
provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or 5
hereof), it is the express intention of Issuer to allow the Holder to acquire or
to require Issuer to repurchase such lesser number of shares as maybe
permissible, without any amendment or modification hereof.
18. Notices. All notices, requests, claims, demands and other
communications hereunder shall be deemed to have been duly given when delivered
in person, by cable, telegram, telecopy or telex, or by registered or certified
mail (postage prepaid, return receipt requested) at the respective addresses of
the parties set forth in the Merger Agreement.
19. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
20. Counterparts. This Agreement may be executed in two counterparts,
each of which shall be deemed to be an original, but all of which shall
constitute one and the same agreement.
21. Expenses. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
22. Entire Agreement. Except as otherwise expressly provided herein or
in the Merger Agreement, this Agreement contains the entire agreement between
the parties with respect to the transactions contemplated hereunder and
supersedes all prior arrangements or understandings with respect thereof,
written or oral. The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and permitted assigns. Nothing in this Agreement, expressed or
implied, is intended to confer upon any party, other than the parties hereto,
and their respective successors and permitted assigns, any rights, remedies,
obligations or liabilities under or by reason of this Agreement, except as
expressly provided herein.
23. Capitalized Terms. Capitalized terms used in this Agreement and not
defined herein shall have the meanings assigned thereto in the Merger Agreement.
-15-
<PAGE> 16
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
H.F. AHMANSON & COMPANY
By:
-------------------------------------------
Name: Bruce G. Willison
Title: President and Chief
Operating Officer
WASHINGTON MUTUAL, INC.
By:
-------------------------------------------
Name: Fay L. Chapman
Title: Executive Vice President
-16-
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,037,192
<INT-BEARING-DEPOSITS> 27,015
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 130,912
<INVESTMENTS-HELD-FOR-SALE> 16,247,250
<INVESTMENTS-CARRYING> 12,492,556
<INVESTMENTS-MARKET> 12,612,245
<LOANS> 69,475,130
<ALLOWANCE> 673,172
<TOTAL-ASSETS> 103,123,908
<DEPOSITS> 51,313,052
<SHORT-TERM> 491,063
<LIABILITIES-OTHER> 3,377,418
<LONG-TERM> 28,188,411
0
49,250
<COMMON> 1,957,522
<OTHER-SE> 3,430,197
<TOTAL-LIABILITIES-AND-EQUITY> 103,123,908
<INTEREST-LOAN> 1,357,305
<INTEREST-INVEST> 440,498
<INTEREST-OTHER> 28,849
<INTEREST-TOTAL> 1,826,652
<INTEREST-DEPOSIT> 515,901
<INTEREST-EXPENSE> 1,113,779
<INTEREST-INCOME-NET> 667,530
<LOAN-LOSSES> 45,343
<SECURITIES-GAINS> 3,415
<EXPENSE-OTHER> 442,218
<INCOME-PRETAX> 419,141
<INCOME-PRE-EXTRAORDINARY> 256,471
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 256,471
<EPS-PRIMARY> 1.02<F1>
<EPS-DILUTED> 1.02
<YIELD-ACTUAL> 2.96
<LOANS-NON> 604,034
<LOANS-PAST> 0
<LOANS-TROUBLED> 138,396
<LOANS-PROBLEM> 802,631
<ALLOWANCE-OPEN> 670,494
<CHARGE-OFFS> 48,544
<RECOVERIES> 5,870
<ALLOWANCE-CLOSE> 673,172
<ALLOWANCE-DOMESTIC> 41,839
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 585,585
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
