<PAGE> 1
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UNITED STATES
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 JUNE 30, 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)
<TABLE>
<S> <C>
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)
</TABLE>
(206) 461-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER 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 July 31, 1998.
COMMON STOCK -- 387,234,619
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<PAGE> 2
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I
Item 1. Financial Statements:
Consolidated Statements of Income --
Three and six months ended June 30, 1998 and June 30,
1997...................................................... 1
Consolidated Statements of Financial Position --
June 30, 1998 and December 31, 1997....................... 2
Consolidated Statements of Stockholders' Equity --
Six months ended June 30, 1998 and June 30, 1997.......... 3
Consolidated Statements of Cash Flows --
Six months ended June 30, 1998 and June 30, 1997.......... 4
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial Position
and Results of Operations:
General..................................................... 8
Results of Operations....................................... 8
Review of Financial Position................................ 14
Asset Quality............................................... 16
Market Risk and Asset/Liability Management.................. 18
Liquidity................................................... 19
Capital Adequacy............................................ 20
Impact of Recently Issued or Adopted Accounting Standards... 21
PART II
Item 1. Legal Proceedings........................................... 22
Item 4. Submission of Matters to a Vote of Security Holders......... 22
Item 5. Other Information........................................... 22
Item 6. Exhibits and Reports on Form 8-K............................ 22
</TABLE>
i
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans......................................... $1,390,656 $1,268,733 $2,747,961 $2,505,301
Available-for-sale securities................. 247,539 271,640 453,634 543,222
Held-to-maturity securities................... 227,729 111,464 462,132 182,859
Cash equivalents and other.................... 34,813 18,512 63,662 54,383
---------- ---------- ---------- ----------
Total interest income................. 1,900,737 1,670,349 3,727,389 3,285,765
INTEREST EXPENSE
Deposits...................................... 511,882 543,792 1,027,783 1,081,280
Borrowings.................................... 662,383 473,172 1,260,261 891,558
---------- ---------- ---------- ----------
Total interest expense................ 1,174,265 1,016,964 2,288,044 1,972,838
---------- ---------- ---------- ----------
Net interest income............................. 726,472 653,385 1,439,345 1,312,927
Provision for loan losses....................... 46,405 49,999 91,748 103,809
---------- ---------- ---------- ----------
Net interest income after provision for loan
losses........................................ 680,067 603,386 1,347,597 1,209,118
OTHER INCOME
Depositor and other retail banking fees....... 105,652 92,305 197,960 174,978
Loan servicing fees........................... 18,625 19,908 33,446 43,084
Loan related income........................... 19,302 11,724 34,427 24,232
Securities fees and commissions............... 40,438 39,763 79,020 76,144
Insurance fees and commissions................ 12,003 14,315 23,852 26,914
Gain on sale of loans and leases.............. 28,007 5,415 43,451 14,210
Gain on sale of other assets.................. 13,184 2,097 16,505 9,262
Write down of loans securitized and
retained................................... (2,871) (6,172) (10,137) (12,422)
Other operating income........................ 15,477 8,792 25,122 19,996
---------- ---------- ---------- ----------
Total other income.................... 249,817 188,147 443,646 376,398
OTHER EXPENSE
Salaries and employee benefits................ 205,561 197,112 395,000 400,379
Occupancy and equipment....................... 78,917 78,263 151,213 158,847
Telecommunications and outsourced information
services................................... 52,785 42,847 101,973 86,073
Regulatory assessments........................ 8,878 8,561 18,355 17,204
Transaction-related expense................... 24,473 24,305 33,123 58,026
Amortization of intangible assets arising from
acquisitions............................... 12,327 15,683 27,028 31,446
Foreclosed asset expense...................... 2,725 902 3,601 4,544
Other operating expenses...................... 116,990 104,519 214,581 210,769
---------- ---------- ---------- ----------
Total other expense................... 502,656 472,192 944,874 967,288
---------- ---------- ---------- ----------
Income before income taxes...................... 427,228 319,341 846,369 618,228
Income taxes.................................. 162,184 123,977 320,653 238,780
Provision for payments in lieu of taxes....... 3,773 4,307 7,974 8,616
---------- ---------- ---------- ----------
NET INCOME...................................... $ 261,271 $ 191,057 $ 517,742 $ 370,832
========== ========== ========== ==========
Net income attributable to common stock......... $ 260,335 $ 185,128 $ 515,068 $ 358,974
========== ========== ========== ==========
Net income per common share:
Basic......................................... $0.69 $0.51 $1.37 $0.99
Diluted....................................... $0.69 $0.50 $1.37 $0.98
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE> 4
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash...................................................... $ 992,346 $ 1,285,222
Cash equivalents.......................................... 47,147 275,668
Investments:
Trading securities..................................... 36,024 23,364
Available-for-sale securities, amortized cost
$15,023,959 and $11,258,232:
Mortgage-backed securities ("MBS")................... 14,447,696 10,188,107
Investment securities................................ 716,153 1,185,815
Held-to-maturity securities, fair value $12,233,607 and
$12,699,653:
MBS.................................................. 12,246,295 12,659,217
Investment securities................................ 127,054 120,397
------------ -----------
Total investments................................. 27,573,222 24,176,900
Loans:
Loans held in portfolio................................ 70,035,896 67,124,935
Loans held for sale.................................... 931,448 685,716
Reserve for loan losses................................ (684,436) (670,494)
------------ -----------
Total loans....................................... 70,282,908 67,140,157
Investment in Federal Home Loan Banks ("FHLBs")........... 1,220,350 1,059,491
Foreclosed assets......................................... 180,108 205,272
Premises and equipment.................................... 1,025,847 937,198
Intangible assets arising from acquisitions............... 329,608 356,650
Mortgage servicing rights................................. 247,527 215,360
Other assets.............................................. 1,497,889 1,329,181
------------ -----------
Total assets...................................... $103,396,952 $96,981,099
============ ===========
LIABILITIES
Deposits:
Checking accounts...................................... $ 8,499,938 $ 7,914,375
Savings accounts and money market deposit accounts..... 15,325,566 14,940,045
Time deposit accounts.................................. 26,635,641 28,131,597
------------ -----------
Total deposits.................................... 50,461,145 50,986,017
Federal funds purchased and commercial paper.............. 3,705,298 2,928,282
Securities sold under agreements to repurchase ("reverse
repurchase agreements")................................ 15,100,651 12,279,040
Advances from FHLBs....................................... 23,853,137 20,301,963
Trust preferred securities................................ 800,000 800,000
Other borrowings.......................................... 2,557,297 2,689,362
Other liabilities......................................... 1,283,772 1,687,364
------------ -----------
Total liabilities................................. 97,761,300 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 -- 387,124,870 and 386,340,027 shares issued
and outstanding........................................ -- --
Capital surplus -- common stock........................... 1,966,249 1,943,294
Accumulated other comprehensive income.................... 144,171 134,610
Retained earnings......................................... 3,475,982 3,113,104
------------ -----------
Total stockholders' equity............................. 5,635,652 5,309,071
------------ -----------
Total liabilities and stockholders' equity........ $103,396,952 $96,981,099
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE> 5
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
JUNE 30, JUNE 30,
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............................................... 22,806 91,083
Common stock issued under dividend reinvestment plan...... 149 847
Common stock acquired..................................... -- (32,016)
---------- ----------
Balance, end of period.................................... 1,966,249 1,724,784
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of period.............................. 134,610 118,625
Other comprehensive income................................ 9,561 (37,639)
---------- ----------
Balance, end of period.................................... 144,171 80,986
RETAINED EARNINGS
Balance, beginning of period.............................. 3,113,104 2,926,530
Net income................................................ 517,742 370,832
Cash dividends declared on preferred stock................ (2,674) (11,858)
Cash dividends declared on common stock................... (152,190) (133,128)
Miscellaneous stock transactions.......................... -- 479
---------- ----------
Balance, end of period.................................... 3,475,982 3,152,855
---------- ----------
Total stockholders' equity........................ $5,635,652 $5,241,688
========== ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
JUNE 30, JUNE 30,
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.............................. 386,340 250,231
Common stock issued through stock options, restricted
stock grants and employee stock plans, including tax
benefits............................................... 782 2,670
Common stock issued under dividend reinvestment plan...... 3 20
Common stock acquired..................................... -- (908)
------- -------
Balance, end of period.................................... 387,125 252,013
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 6
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
JUNE 30, JUNE 30,
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 517,742 $ 370,832
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................... 91,748 103,809
(Gain) on sale of loans and leases...................... (43,451) (14,653)
(Gain) on sale of other assets.......................... (16,505) (9,262)
Depreciation and amortization........................... 85,635 85,723
Stock dividends from FHLBs.............................. (37,038) (25,104)
Write down of loans securitized and retained............ 10,137 12,422
Decrease in trading securities.......................... 97,201 477
Origination of loans held for sale...................... (6,307,615) (2,224,751)
Sales of loans held for sale............................ 6,104,976 2,123,691
(Increase) in other assets.............................. (221,985) (167,892)
(Decrease) increase in other liabilities................ (411,160) 151,921
------------ ------------
Net cash (used) provided by operating activities... (130,315) 407,213
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities................ (6,841,361) (1,854,614)
Principal payments and maturities of available-for-sale
securities.............................................. 1,819,457 929,684
Sales of available-for-sale securities.................... 1,150,512 1,619,278
Purchases of held-to-maturity securities.................. (12,036) (19,773)
Principal payments and maturities of held-to-maturity
securities.............................................. 1,049,149 235,094
Sales of loans............................................ 18,790 53,409
Origination of loans, net of principal payments........... (3,902,294) (6,557,635)
Proceeds from sale of foreclosed assets................... 165,695 234,846
Purchases of premises and equipment, net.................. (132,591) (48,327)
------------ ------------
Net cash (used) by investing activities............ (6,684,679) (5,408,038)
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) in deposits.................................... (524,872) (903,974)
Increase in annuities..................................... -- 10,397
Increase in federal funds purchased and commercial
paper................................................... 777,016 1,287,868
Increase (decrease) in short-term reverse repurchase
agreements.............................................. 2,700,534 (3,016,656)
Proceeds from long-term reverse repurchase agreements..... 1,146,205 3,954,254
Repayments on long-term reverse repurchase agreements..... (1,023,673) (1,098,834)
Proceeds from FHLBs advances.............................. 31,962,490 22,980,633
Repayments on FHLBs advances.............................. (28,411,316) (18,695,589)
Proceeds from trust preferred............................. -- 700,000
Repayments on other borrowings............................ (132,065) (457,657)
Common stock repurchased.................................. -- (32,016)
Common stock issued....................................... 22,955 92,406
Redemption of preferred stock............................. (68,813) --
Cash dividends paid....................................... (154,864) (144,983)
------------ ------------
Net cash provided by financing activities.......... 6,293,597 4,675,849
------------ ------------
(Decrease) in cash and cash equivalents................... (521,397) (324,976)
Cash and cash equivalents, beginning of period............ 1,560,890 1,665,355
------------ ------------
Cash and cash equivalents, end of period.................. $ 1,039,493 $ 1,340,379
============ ============
NONCASH INVESTING ACTIVITIES
Loans exchanged for MBS................................... $ 647,020 $ 2,696,300
Loans exchanged for trading securities.................... 107,544 --
Loans originated to facilitate the sale of foreclosed
assets.................................................. 31,469 45,217
Loans originated to refinance existing loans.............. 3,085,067 628,210
Real estate acquired through foreclosure.................. 172,000 231,966
CASH PAID DURING THE PERIOD FOR
Interest on deposits...................................... 1,019,099 1,068,831
Interest on borrowings.................................... 1,164,833 871,111
Income taxes.............................................. 456,781 157,628
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 7
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
In the opinion of management, the accompanying balance sheets and related
interim statements of income and cash flows reflect all adjustments (which
include reclassifications and normal recurring adjustments) that are necessary
for a fair presentation in conformity with generally accepted accounting
principles ("GAAP"). The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect amounts
reported in the financial statements. Changes in these estimates and assumptions
are considered reasonably possible and may have a material impact on the
financial statements. Interim results are not necessarily indicative of results
for a full year.
Certain reclassifications have been made to the 1997 financial statements
to conform to the 1998 presentation. All significant intercompany transactions
and balances have been eliminated. When Washington Mutual acquires a company
through a material pooling of interests, current and prior period financial
statements are restated to include the accounts of merged companies. Previously
reported balances of the merged companies have been reclassified to conform to
the Company's presentation and restated to give effect to the combinations.
The information included in this Form 10-Q should be read in conjunction
with Management's Discussion and Analysis and financial statements and notes
thereto included in the 1997 Washington Mutual Annual Report and Form 10-K.
NOTE 2: 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
---------------------------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1997
--------------------------------------- ---------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER 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............................ $261,271 $191,057
Less: preferred stock dividends....... (936) (5,929)
-------- --------
Income available to common
shareholders........................ 260,335 374,974,662 $0.69 185,128 363,789,497 $0.51
Diluted EPS:
Effect of dilutive securities:
Stock options....................... -- 1,612,248 -- 4,065,612
-------- ----------- -------- -----------
Income available to common
shareholders and assumed
conversions......................... $260,335 376,586,910 $0.69 $185,128 367,855,109 $0.50
======== =========== ======== ===========
</TABLE>
5
<PAGE> 8
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1997
--------------------------------------- ---------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER 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............................ $517,742 $370,832
Less: preferred stock dividends....... (2,674) (11,858)
-------- --------
Income available to common
shareholders........................ 515,068 374,776,022 $1.37 358,974 363,302,015 $0.99
Diluted EPS:
Effect of dilutive securities:
Stock options....................... -- 1,539,055 -- 4,513,669
-------- ----------- -------- -----------
Income available to common
shareholders and assumed
conversions......................... $515,068 376,315,077 $1.37 $358,974 367,815,684 $0.98
======== =========== ======== ===========
</TABLE>
NOTE 3: 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 and six months ended June 30, 1998 and 1997, the Company's
comprehensive income was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income.............................. $261,271 $191,057 $517,742 $370,832
Other comprehensive income.............. 7,043 52,125 9,561 (37,639)
-------- -------- -------- --------
Total comprehensive income.... $268,314 $243,182 $527,303 $333,193
======== ======== ======== ========
</TABLE>
NOTE 4: 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 one of the nation's ten largest banking institutions, based on total 1997
year-end assets of approximately $150 billion. Under the agreement, 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 scheduled for August 28, 1998. The Company expects to merge
Ahmanson's subsidiary, Home Savings of America, FSB, into WMBFA and to operate
the subsidiary under the Washington Mutual name.
NOTE 5: 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. All references
6
<PAGE> 9
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
in the financial statements to number of shares, per share amounts and market
prices of the Company's common stock have been restated to reflect the increased
number of common shares outstanding.
NOTE 6: IMPACT OF RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS
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. Provisions of this statement require annual
disclosure in the year of adoption and interim reporting for periods thereafter.
This statement is not expected to have a material impact on 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 annual disclosure
requirements for pensions and other postretirement benefits. This statement does
not affect the results of operations or financial position of the Company. SFAS
No. 132 was adopted as of January 1, 1998.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
was issued in June 1998 and establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Earlier application is encouraged, but it is
permitted only as of the beginning of any fiscal quarter that begins after June
1998. The impact of the adoption of the provisions of this statement on the
results of operations or the financial position of the Company has not been
determined.
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" 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 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.
RESULTS OF OPERATIONS
Overview. The Company's net income for the second quarter of 1998 was
$261.3 million compared with $191.1 million for the second quarter of 1997. The
Company's net income for the second quarter of 1998 and 1997 was reduced by
pretax charges of $24.5 million and $24.3 million for transaction-related
expenses in connection with the Great Western Merger and the proposed Ahmanson
merger. The Company's net income for the first six months of 1998 was $517.7
million compared with $370.8 million for the first six months of 1997. The
Company's net income for the first six months of 1998 and 1997 was reduced by
pretax charges of $33.1 million and $58.0 million for transaction-related
expenses in connection with the Great Western Merger and the proposed Ahmanson
merger.
Net Interest Income. Net interest income for the second quarter of 1998 was
$726.5 million, an 11% increase from $653.4 million in the second quarter of
1997. The increase was due to a 14% rise in average earning assets to $99.52
billion from $86.98 billion in the second quarter of 1997, which more than
offset the decline in the net interest spread to 2.74% in the second quarter of
1998 from 2.81% in the second quarter of 1997. The 10% increase in net interest
income in the first six months of 1998 to $1.44 billion was also due to a 14%
rise in average earning assets. The net interest spread declined to 2.75% in the
first six months of 1998 from 2.86% in the first six months of 1997. To a
certain extent, the Company's net interest spread is affected by changes in the
yield curve. During the second 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
50 basis points compared with 152 basis points for the same period a year
earlier. During the first six months of 1998, the difference between the yield
on a three-month U.S. Treasury bill and a 10-year U.S. Government note averaged
46 basis points compared with 145 basis points for the same period a year
earlier.
8
<PAGE> 11
Selected average financial balances and the net interest spread and margin
were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
------------ ----------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Selected Average Balances:
Loans............................. $ 69,926,446 $64,181,743 $ 69,076,452 $63,432,249
Investments....................... 29,590,385 22,797,092 28,224,977 22,171,487
------------ ----------- ------------ -----------
Total interest earning
assets.................. 99,516,831 86,978,835 97,301,429 85,603,736
Deposits.......................... 50,887,011 51,988,921 50,828,632 52,174,931
Borrowings........................ 45,221,930 31,730,572 42,990,338 30,300,204
------------ ----------- ------------ -----------
Total interest bearing
liabilities............. 96,108,941 83,719,493 93,818,970 82,475,135
Total assets...................... 103,034,804 90,440,848 100,969,122 88,669,939
Stockholders' equity.............. 5,518,615 5,113,595 5,434,282 5,059,955
Net Interest Spread:
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Yield on loans.................... 7.95% 7.91% 7.97% 7.91%
Yield on investments.............. 6.90 7.05 6.94 7.04
------------ ----------- ------------ -----------
Combined yield on earning
assets.................. 7.64 7.68 7.67 7.68
Cost of deposits.................. 4.03 4.20 4.08 4.18
Cost of borrowings................ 5.88 5.98 5.91 5.93
------------ ----------- ------------ -----------
Combined cost of funds.... 4.90 4.87 4.92 4.82
Net interest spread............... 2.74 2.81 2.75 2.86
Net interest margin............... 2.91 2.99 2.93 3.04
</TABLE>
The net interest spread is the difference between the Company's yield on
assets and its cost of funds. The net interest margin measures the Company's
annualized net interest income as a percentage of average interest earning
assets.
9
<PAGE> 12
Other Income. Other income was $249.8 million and $443.6 million for the
second quarter and first six months of 1998 compared with $188.1 million and
$376.4 million for the same periods in 1997.
Other income consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Depositor and other retail banking fees:
Checking and money market deposit account
("MMDA") charges........................... $ 94,116 $ 75,737 $171,772 $141,657
Automated teller machine ("ATM") transaction
fees....................................... 6,488 5,758 12,064 12,194
Other......................................... 5,048 10,810 14,124 21,127
-------- -------- -------- --------
Total depositor and other retail
banking fees........................ 105,652 92,305 197,960 174,978
Loan servicing fees............................. 18,625 19,908 33,446 43,084
Loan related income............................. 19,302 11,724 34,427 24,232
Securities fees and commissions................. 40,438 39,763 79,020 76,144
Insurance fees and commissions.................. 12,003 14,315 23,852 26,914
Gain on sale of loans and leases:
Gain on sale of mortgage loans................ 27,816 5,213 43,093 12,466
Gain on sale of student loans................. 191 206 358 1,033
(Loss) gain on sale of leases................. -- (4) -- 711
-------- -------- -------- --------
Total gain on sale of loans and
leases.............................. 28,007 5,415 43,451 14,210
Gain on sale of other assets:
Gain on sale of premises and equipment........ 410 466 316 7,306
Gain on sale of available-for-sale
securities................................. 7,702 1,631 11,117 1,864
Gain on sale of trading securities............ 2,875 -- 2,875 92
Gain on sale of other assets.................. 2,197 -- 2,197 --
-------- -------- -------- --------
Total gain on sale of other assets.... 13,184 2,097 16,505 9,262
Write down of loans securitized and retained.... (2,871) (6,172) (10,137) (12,422)
Other operating income.......................... 15,477 8,792 25,122 19,996
-------- -------- -------- --------
Total other income.................... $249,817 $188,147 $443,646 $376,398
======== ======== ======== ========
</TABLE>
Depositor and other retail banking fees of $105.7 million and $198.0
million for the second quarter and first six months of 1998 increased from $92.3
million and $175.0 million for the same periods in 1997. The increase reflected
an expanded collection of nonsufficient funds ("NSF") charges and overdraft
protection charges on checking accounts and MMDAs, increased ATM transaction
charges, and an increase in the number of checking accounts. The growth in
depositor and other retail banking fees has been offset somewhat by 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 $18.6 million declined 6% from $19.9 million in the
second quarter of 1997. Contributing to the 22% decline in loan servicing fees
from $43.1 million to $33.4 million in the first six months of 1998 was 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.
The Company had loan related income of $19.3 million and $34.4 million in
the second quarter and first six months of 1998 up from $11.7 million and $24.2
million for the same periods in 1997. Approximately one-half of the increase was
the result of loan prepayment fees resulting from greater prepayment activity
from the declining interest rate environment.
10
<PAGE> 13
The Company had a net gain on the sale of loans and leases of $28.0 million
and $43.5 million for the second quarter and first six months of 1998, compared
with $5.4 million and $14.2 million for the same periods in 1997. Due to the
increase in fixed-rate loan production resulting from the relatively low
interest rate environment, the Company sold $3.64 billion and $6.06 billion of
fixed-rate single family residential ("SFR") loans during the second quarter and
first six months of 1998.
The Company had a net gain on the sale of other assets of $13.2 million and
$16.5 million for the second quarter and first six months of 1998 compared with
$2.1 million and $9.3 million for the same periods in 1997. These increases were
due to sales and calls of mortgage-backed and investment securities as well as
an increase in the valuation of securities held for trading. The $7.3 million
gain on sale of premises and equipment for the first six months of 1997 included
a 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
$2.9 million and $10.1 million for the second quarter and first six months of
1998 down from $6.2 million and $12.4 million for the same periods in 1997. The
decrease was due to improved credit performance as well as an adjustment of $2.1
million to the contingent liability reserve.
Other Expense. Other expense totaled $502.7 million and $944.9 million for
the second quarter and first six months of 1998 compared with $472.2 million and
$967.3 million for the same periods in 1997.
Other expense consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and employee benefits.................. $205,561 $197,112 $395,000 $400,379
Occupancy and equipment:
Premises and equipment........................ 58,430 58,272 112,370 117,518
Data processing............................... 20,487 19,991 38,843 41,329
-------- -------- -------- --------
Total occupancy and equipment.............. 78,917 78,263 151,213 158,847
Telecommunications and outsourced information
services...................................... 52,785 42,847 101,973 86,073
Regulatory assessments.......................... 8,878 8,561 18,355 17,204
Transaction-related expense..................... 24,473 24,305 33,123 58,026
Amortization of intangible assets arising from
acquisitions.................................. 12,327 15,683 27,028 31,446
Foreclosed asset expense........................ 2,725 902 3,601 4,544
Other operating expense:
Advertising and promotion..................... 26,879 23,717 47,396 40,109
Postage....................................... 13,122 12,945 25,824 25,284
Operating losses and settlements.............. 12,296 9,945 23,958 23,572
Professional fees............................. 11,989 12,423 19,932 26,969
Office supplies............................... 5,761 5,236 10,686 10,350
Other......................................... 46,943 40,253 86,785 84,485
-------- -------- -------- --------
Total other operating expense.............. 116,990 104,519 214,581 210,769
-------- -------- -------- --------
Total other expense................... $502,656 $472,192 $944,874 $967,288
======== ======== ======== ========
</TABLE>
Salaries and employee benefits increased to $205.6 million for the second
quarter of 1998 from $197.1 million for the second quarter of 1997 as a result
of increased incentive compensation due to expanded loan originations. Salaries
and employee benefits decreased to $395.0 million for the first six months of
1998 from $400.4 million for the first six months of 1997. Full-time equivalent
employees ("FTEs") were 19,694 at June 30, 1998 compared with 20,099 at June 30,
1997. The decrease in FTEs was primarily due to employee
11
<PAGE> 14
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.
The Company estimated total staff reductions related to the Keystone
Transaction and the Great Western Merger (inclusive of the GWFC restructuring
plan) of approximately 2,850. The actual number of staff reductions is not
anticipated to be materially different from the original estimation of 2,850.
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 majority of the Chatsworth Campus will be
utilized by the Company.
The Company recorded transaction-related expense of $24.5 million and $33.1
million for the second quarter and first six months of 1998 compared with $24.3
million and $58.0 million for the same periods in 1997 as a result of merger
activity (see Management's Discussion and Analysis of Financial Position and
Results of Operations -- General). For the second quarter and first six months
of 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 reductions in the estimates of contract
cancellation fees, severance and savings from the consolidation of bank premises
of $5.0 million, $8.0 million and $3.3 million for the second quarter and $13.3
million, $8.0 million and $3.3 million for the first six months of 1998. The
reduction in estimates for contract cancellation fees was largely a result of
maintaining certain contracts in place for longer periods than originally
anticipated, thereby reducing the cancellation penalties. The reduction in
severance estimates is primarily the result of more employees voluntarily
terminating without severance than was originally estimated. The reduction in
the estimate of premises cost is a result of the value of excess branch
properties being higher than originally estimated due to increases in real
estate values in Southern California. For the second quarter and first six
months of 1997, the majority of transaction-related expense was for various
investment banking and legal fees.
Reconciliation of the transaction-related expense and accrual activity
during 1998 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1998 JUNE 30, 1998 JUNE 30, 1998 JUNE 30, 1998
ACCRUED ACTIVITY CHARGED ACCRUED PERIOD
BALANCE AGAINST ACCRUAL(1) BALANCE COSTS
-------------- ------------------- --------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Severance.......................... $ 71,312 $(21,166) $ 50,146 $(5,629)
Premises........................... 53,752 (6,861) 46,891 (3,250)
Legal, underwriting and other
direct transaction costs......... 471 (360) 111 3,914
Contract cancellation costs........ 23,639 (4,895) 18,744 (5,492)
Other.............................. 7,703 (965) 6,738 34,930
-------- -------- -------- -------
$156,877 $(34,247) $122,630 $24,473
======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1998 JUNE 30, 1998 JUNE 30, 1998
ACCRUED ACTIVITY CHARGED ACCRUED PERIOD
BALANCE AGAINST ACCRUAL(1) BALANCE COSTS
----------------- ------------------ --------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Severance........................... $ 93,104 $(42,958) $ 50,146 $(5,629)
Premises............................ 57,304 (10,413) 46,891 (3,250)
Legal, underwriting and other direct
transaction costs................. 742 (631) 111 3,914
Contract cancellation costs......... 33,699 (14,955) 18,744 (12,682)
Other............................... 11,243 (4,505) 6,738 50,770
-------- -------- -------- -------
$196,092 $(73,462) $122,630 $33,123
======== ======== ======== =======
</TABLE>
- ---------------
(1) Amounts included recoveries.
12
<PAGE> 15
Telecommunications and outsourced information services expense of $52.8
million and $102.0 million for the second quarter and first six months of 1998
was up from $42.8 million and $86.1 million for the same periods in 1997. This
change resulted from increased volume and usage.
Year 2000. Washington Mutual has implemented 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 the year 2000 will result
in material cost, it is expected that a substantial amount of management and
staff time will be required on the year 2000 project. Since January 1, 1998, the
Company has spent approximately $3.7 million on its year 2000 project, and it
currently expects to spend approximately $13.2 million more before it concludes
its year 2000 readiness efforts. Prior to 1998, the Company undertook strategic
business initiatives that shifted a significant portion of the cost for year
2000 readiness to third party vendors. Also, during this earlier time, the
Company spent approximately $30.3 million on technology-related initiatives.
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 the Company's systems, programs and processes. These
and other recent regulatory 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
future regulatory 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.
The Company has recently adopted business contingency plans for
applications deemed critical by the Company and is further enhancing those plans
to conform to the recently issued FFIEC guidance on business contingency
planning for year 2000 readiness. Following the proposed Ahmanson merger and
after the data processing conversions, the Company will rely on third party
vendors for significant services such as electricity, voice and data
transmission, desktop and communications management and item and loan processing
as well as on governmental third parties such as the Federal Reserve and Federal
Home Loan Bank systems. The Company has been communicating with its service
providers to understand and monitor their year 2000 readiness preparations, and
has undertaken a contingency planning process to be ready in case one of its
significant service providers fails in its own readiness efforts. No assurance
can be given, however, that the Company's third party service providers' year
2000 readiness efforts will proceed as anticipated, that the plans developed in
the Company's contingency planning process will function as anticipated, or that
the results of operations of the Company will not be adversely affected by
difficulties or delays in third parties' year 2000 readiness efforts.
Taxation. Income taxes include federal and applicable state income taxes
and payment in lieu of taxes. The provision for income taxes was $166.0 million
for the second quarter of 1998, which represented an effective tax rate of 38.8%
as compared with a 40.2% effective tax rate for the second quarter of 1997. The
provision for income taxes was $328.6 million for the first six months of 1998,
which represented an effective tax rate of 38.8% as compared with a 40.0%
effective tax rate for the first six months of 1997. The rate for 1997 was
higher than 1998 due to transaction-related expenses in 1997 which were not
deductible for tax purposes.
Consumer Finance Operations. During the three and six months ended June 30,
1998, the consumer finance line of business had net income of $13.6 million and
$26.6 million, up from $13.1 million and $24.0 million for the same periods in
1997. Contributing to the improvement in net income was an increase in
13
<PAGE> 16
interest income due to growth in the loan portfolio. The increase in the loan
loss provision reflected, in part, this growth of the loan portfolio and a
continued national trend of a high level of personal bankruptcies.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Consumer finance operations:
Net interest income............................. $67,957 $61,384 $134,864 $122,316
Provision for loan losses....................... (18,300) (15,600) (36,300) (31,000)
Other income.................................... 5,777 6,989 12,266 13,055
Other expense................................... (32,892) (31,191) (66,852) (64,764)
------- ------- -------- --------
Net income before income taxes.................. 22,542 21,582 43,978 39,607
Income taxes.................................... (8,900) (8,500) (17,400) (15,600)
------- ------- -------- --------
Net income.............................. $13,642 $13,082 $ 26,578 $ 24,007
======= ======= ======== ========
</TABLE>
REVIEW OF FINANCIAL POSITION
Assets. At June 30, 1998, the Company's assets were $103.40 billion, an
increase of 7% from $96.98 billion at December 31, 1997. The growth during the
first six months of 1998 resulted from the purchase of agency MBS in the
secondary market and the retention of adjustable-rate mortgage ("ARM") loan
originations. Growth in assets slowed, despite record loan originations during
the first six months of 1998, due to increased principal paydowns and sales of
increased fixed-rate loan production caused by lower interest rates. It is the
Company's current practice to sell the majority of its fixed-rate loan
production.
Securities. The Company's securities portfolio increased by $3.40 billion
to $27.57 billion during the first six months of 1998 due to the purchase of
agency MBS in the secondary market.
At June 30, 1998, 84% of MBS in the Company's securities portfolio were
adjustable rate. Of the securities indexed to an adjustable rate, 69% were
indexed to the Cost of Funds Index of the Eleventh District Federal Home Loan
Bank ("COFI"), 21% to U.S. Treasury indices, and 10% to LIBOR. The remaining 16%
of MBS were fixed rate.
Loans. Total loans (exclusive of the reserve for loan losses) at June 30,
1998 were $70.97 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>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loans:
Real estate loans:
SFR.................................................. $56,161,806 $53,431,451
SFR construction..................................... 925,643 877,449
Apartment buildings.................................. 4,089,165 4,187,580
Other commercial real estate......................... 2,373,862 2,425,961
----------- -----------
63,550,476 60,922,441
Manufactured housing.................................... 1,081,781 1,081,193
Second mortgage and other consumer...................... 3,095,320 2,725,144
Consumer finance........................................ 2,319,026 2,309,407
Commercial business..................................... 920,741 772,466
----------- -----------
$70,967,344 $67,810,651
=========== ===========
</TABLE>
14
<PAGE> 17
Real estate loans (exclusive of the reserve for loan losses) by product
type were as follows:
<TABLE>
<CAPTION>
JUNE 30, 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 ARMs:
COFI.......................... $30,283,843 48% $32,108,461 53%
MTA........................... 4,672,074 7 1,602,123 3
CMT........................... 3,533,828 5 3,800,156 6
Other......................... 2,977,595 5 4,553,499 7
----------- --- ----------- ---
41,467,340 65 42,064,239 69
Medium-term ARMs:
MTA........................... 5,821,061 9 2,880,587 5
CMT........................... 3,305,840 5 4,135,947 7
COFI.......................... 959,421 2 1,244,357 2
----------- --- ----------- ---
10,086,322 16 8,260,891 14
Fixed-rate mortgages............ 11,996,814 19 10,597,311 17
----------- --- ----------- ---
$63,550,476 100% $60,922,441 100%
=========== === =========== ===
Number of real estate loans..... 514,607 513,417
</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.
Loan originations were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- --------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
----------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
SFR:
Adjustable rate................... $ 4,432,043 $4,643,521 $ 7,394,151 $ 7,275,248
Fixed rate........................ 4,131,102 1,493,062 8,095,834 2,862,512
----------- ---------- ----------- -----------
8,563,145 6,136,583 15,489,985 10,137,760
SFR construction:
Custom............................ 292,694 238,371 445,414 406,713
Builder........................... 212,524 150,876 362,006 308,045
----------- ---------- ----------- -----------
505,218 389,247 807,420 714,758
Apartment buildings.................. 151,784 178,253 274,904 312,841
Other commercial real estate......... 109,471 119,073 209,018 205,474
----------- ---------- ----------- -----------
9,329,618 6,823,156 16,781,327 11,370,833
Manufactured housing................... 81,948 88,270 137,458 151,155
Second mortgage and other consumer..... 543,926 548,424 935,195 925,238
Consumer finance....................... 568,350 512,792 1,081,971 976,706
Commercial business.................... 235,441 176,806 448,371 325,210
----------- ---------- ----------- -----------
$10,759,283 $8,149,448 $19,384,322 $13,749,142
=========== ========== =========== ===========
</TABLE>
15
<PAGE> 18
SFR originations by product type were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
------------------------------- --------------------------------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
AMOUNT CATEGORY TOTAL AMOUNT CATEGORY TOTAL
---------- -------- ------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Short-term ARMs:
MTA................................. $2,028,824 90% 24% $ 2,937,157 81% 19%
COFI................................ 196,867 9 2 519,888 14 4
CMT................................. 18,292 1 * 151,843 4 1
Other............................... 14,135 * * 37,569 1 *
---------- --- --- ----------- --- ---
2,258,118 100% 26 3,646,457 100% 24
=== ===
Medium-term ARMs:
MTA................................. 2,152,136 99% 26 3,337,489 89% 21
CMT................................. 21,789 1 * 410,205 11 3
---------- --- --- ----------- --- ---
2,173,925 100% 26 3,747,694 100% 24
=== ===
Fixed-rate mortgages.................. 4,131,102 48 8,095,834 52
---------- --- ----------- ---
$8,563,145 100% $15,489,985 100%
========== === =========== ===
</TABLE>
- ---------------
* Less than one percent
The strong housing market and attractive interest rates led to record loan
production which included a significant amount of refinance activity during the
first six months of 1998. As a result of borrower preference for fixed-rate
mortgages, the fixed-rate loan production accounted for 48% of total SFR
originations in the second quarter of 1998 compared with 24% in the second
quarter of 1997, and 52% of total SFR originations during the first six months
of 1998 compared with 28% during the first six months of 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. The slight decrease in deposits from $50.99
billion to $50.46 billion 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 to 47%. 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.
The Company's borrowings primarily take the form of federal funds
purchased, commercial paper, reverse repurchase agreements and advances from the
Federal Home Loan Banks ("FHLBs") of Seattle and San Francisco. The exact mix at
any given time is dependent upon the market pricing of the individual borrowing
sources.
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.
16
<PAGE> 19
Changes in the reserve for loan losses were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period.................... $673,172 $688,016 $670,494 $677,141
Provision for loan losses....................... 46,405 49,999 91,748 103,809
Reserves added through business combinations.... -- 2,647 -- 10,908
Reserves transferred to MBS impairment.......... -- (16,505) -- (16,505)
Reserves transferred to contingent liability.... -- (2,747) -- (2,747)
Loans charged off:
SFR........................................... (9,859) (29,075) (25,064) (56,186)
SFR construction.............................. (362) -- (362) --
Commercial real estate........................ (2,632) (8,930) (6,255) (14,279)
Manufactured housing, second mortgage and
other consumer............................. (5,515) (4,606) (12,095) (9,252)
Consumer finance.............................. (21,588) (19,414) (43,693) (38,653)
Commercial business........................... (884) (181) (1,915) (306)
-------- -------- -------- --------
(40,840) (62,206) (89,384) (118,676)
Recoveries of loans previously charged off:
SFR........................................... 314 270 733 548
SFR construction.............................. -- 69 -- 69
Commercial real estate........................ 140 429 798 867
Manufactured housing, second mortgage and
other consumer............................. 524 1,726 909 2,098
Consumer finance.............................. 4,669 4,321 8,942 8,460
Commercial business........................... 52 38 196 85
-------- -------- -------- --------
5,699 6,853 11,578 12,127
-------- -------- -------- --------
Net charge offs................................. (35,141) (55,353) (77,806) (106,549)
-------- -------- -------- --------
Balance, end of period.......................... $684,436 $666,057 $684,436 $666,057
======== ======== ======== ========
</TABLE>
An analysis of the reserve for loan losses was as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Specific and allocated reserves:
Commercial real estate.................................... $ 74,511 $ 84,969
Commercial business....................................... 9,346 3,277
Builder construction...................................... 1,919 2,207
-------- --------
85,776 90,453
Unallocated reserves........................................ 598,660 580,041
-------- --------
$684,436 $670,494
======== ========
Total reserve for loan losses as a percentage of:
Annualized net charge offs................................ 440% 335%
Nonaccrual loans.......................................... 116 111
Nonperforming assets...................................... 89 83
</TABLE>
The Company considers the reserve for loan losses of $684.4 million
adequate to cover losses inherent in the loan portfolio at June 30, 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
17
<PAGE> 20
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. At June 30, 1998, the Company held in its investment portfolio
$13.71 billion of securitized loans with recourse. The related impairment
totaled $38.9 million at June 30,1998.
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
June 30, 1998, the Company had sold $1.70 billion of recourse MBS and loans sold
with recourse, and the contingent liability totaled $7.3 million, which the
Company considers adequate to cover estimated future losses.
The impairment and contingent liability are evaluated periodically and any
subsequent adjustments are recorded as a write down of loans securitized and
retained.
Nonperforming Assets. Assets considered to be nonperforming include
nonaccrual loans and securities, foreclosed assets and real estate held for
investment purposes that does 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 $768.6 million or 0.74% of total assets at June
30, 1998 compared with $806.6 million or 0.83% of total assets at December 31,
1997.
Nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans:
Real estate loans:
SFR.................................................... $477,428 $469,127
SFR construction....................................... 11,597 10,413
Apartment buildings.................................... 15,854 17,296
Other commercial real estate........................... 5,715 25,825
-------- --------
510,594 522,661
Manufactured housing...................................... 10,736 11,127
Second mortgage and other consumer........................ 14,088 14,071
Consumer finance.......................................... 51,059 50,930
Commercial business....................................... 2,039 2,585
-------- --------
588,516 601,374
Foreclosed assets........................................... 180,108 205,272
-------- --------
$768,624 $806,646
======== ========
Nonperforming assets as a percentage of total assets........ 0.74% 0.83%
</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
18
<PAGE> 21
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>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest-sensitive assets................................. $78,709,513 $74,938,422
Derivative instruments designated against assets.......... 300,000 500,000
Interest-sensitive liabilities............................ (78,429,358) (70,204,799)
Derivative instruments designated against liabilities..... 2,303,800 1,078,400
----------- -----------
Net asset sensitivity................................... $ 2,883,955 $ 6,312,023
=========== ===========
One-year gap.............................................. 2.79% 6.51%
</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.
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 June 30, 1998 the Company's MMDAs accounted for
$11.81 billion or 23% of total deposits, and time deposit accounts with
maturities less than one year totaled $23.01 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 six months 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 June 30, 1998, 84% of the
Company's total MBS portfolio and 73% 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
19
<PAGE> 22
the degree to which the Company depends on wholesale funds maturing within one
year weighted by the dependability of the source. At June 30, 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 June
30, 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
June 30, 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 the first six months of 1998 of $517.7 million, $150.5
million for noncash items and $798.5 million of other net cash flows from
operating activities. Cash flows from investing activities consisted mainly of
both proceeds from and purchases of securities, and loan principal repayments
and loan originations. For the first six months of 1998, cash flows from
investing activities included sales and principal payments on securities and
loans held for investment totaling $4.04 billion. Loans originated and purchased
for investment required $3.90 billion, and $6.85 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 six months
of 1998, the above mentioned financing activities increased cash and cash
equivalents by $6.49 billion on a net basis. Cash and cash equivalents were
$1.04 billion at June 30, 1998. See "Consolidated Financial
Statements -- Consolidated Statements of Cash Flows."
At June 30, 1998, the Company was in a position to obtain approximately
$33.76 billion in additional borrowings primarily through the use of
collateralized borrowings and deposits of public funds using unpledged MBS and
other wholesale sources.
CAPITAL ADEQUACY
The Company's capital (stockholders' equity) was $5.64 billion at June 30,
1998 and $5.31 billion at December 31, 1997. At the end of second quarter 1998,
the ratio of capital to total assets was 5.45% 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>
JUNE 30, 1998
------------------------ WELL-CAPITALIZED
WMBFA WMB WMBFSB MINIMUM
----- ----- ------ ----------------
<S> <C> <C> <C> <C>
Capital ratios:
Leverage............................... 5.87% 5.60% 6.76% 5.00%
Tier 1 risk-based...................... 10.12 10.32 11.55 6.00
Total risk-based....................... 11.55 11.03 12.81 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 June 30, 1998.
The Company's securities subsidiaries are also subject to capital
requirements. At June 30, 1998, all of Washington Mutual's securities
subsidiaries were in compliance with their applicable capital requirements.
20
<PAGE> 23
IMPACT OF RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS
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 3: 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. Provisions of this statement require annual
disclosure in the year of adoption and interim reporting for periods thereafter.
This statement is not expected to have a material impact on 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 annual disclosure
requirements for pensions and other postretirement benefits. This statement does
not affect the results of operations or financial position of the Company. SFAS
No. 132 was adopted as of January 1, 1998.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
was issued in June 1998 and establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Earlier application is encouraged, but it is
permitted only as of the beginning of any fiscal quarter that begins after June
1998. The impact of the adoption of the provisions of this statement on the
results of operations or the financial position of the Company has not been
determined.
21
<PAGE> 24
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Washington Mutual, Inc. held its annual meeting of shareholders on April
21, 1998. A brief description of each matter voted on and the results of the
shareholder voting are set forth below:
<TABLE>
<CAPTION>
VOTES VOTES ABSTENTIONS AND
FOR AGAINST NON-VOTES
---------- ---------- ---------------
<S> <C> <C> <C>
1. The election of seven directors set forth below:
Samuel B. McKinney (term ending 1999)............. 200,540,466 1,517,194
Willis B. Wood (term ending 2000)................. 200,629,239 1,428,421
John W. Ellis (term ending 2001).................. 200,552,361 1,505,299
Anne V. Farrell (term ending 2001)................ 200,623,303 1,434,357
Stephen E. Frank (term ending 2001)............... 200,624,176 1,433,484
William P. Gerberding (term ending 2001).......... 200,515,372 1,542,288
Enrique Hernandez, Jr. (term ending 2001)......... 200,612,606 1,445,054
2. Amendment and Restatement of the 1994 Stock Option
Plan.............................................. 156,959,081 44,322,462 776,118
3. Ratification of Deloitte & Touche LLP as
independent auditors.............................. 201,559,560 191,640 306,461
</TABLE>
ITEM 5. OTHER INFORMATION
A shareholder who intends to present a proposal at the Company's next
annual meeting, other than pursuant to Rule 14a-8 under the Securities Exchange
Act of 1934, must provide the Company notice of such intention by at least
February 1, 1999 or management of the Company will have discretionary voting
authority at the 1999 annual meeting with respect to such proposal without any
discussion of the matter in the Company's proxy statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See Index of Exhibits on page 24.
(b) REPORTS ON FORM 8-K
During the second quarter of 1998, WMI filed reports on Form 8-K dated June
1, 1998, June 4, 1998, as amended June 18, 1998, June 10, 1998 and June 12,
1998. The June 1 report filed, pursuant to Item 7 of the report, copies of
slides presented to investors at a conference on May 27, 1998. The June 4 report
filed, as amended June 18, 1998 pursuant to Item 7 of the report, copies of
slides presented to investors at a conference on June 3, 1998. The June 10
report disclosed, pursuant to Item 5 of the report, the WMI Board of Directors'
adoption of resolutions to effect a 3-for-2 split of WMI's common stock, no par
value per share, in the form of a stock dividend. The June 12 report filed,
pursuant to Item 7 of the report, copies of slides presented to investors at a
conference on June 9, 1998.
22
<PAGE> 25
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 August 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)
23
<PAGE> 26
WASHINGTON MUTUAL, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <S>
3.1 Restated Articles of Incorporation of the Registrant, as
amended (Incorporated by reference to the Washington Mutual,
Inc. Annual Report on Form 10-K for the year ended December
31, 1997, as amended on April 1, 1998. File No. 0-25188).
3.2 By-laws of the Registrant (Incorporated by reference to the
Washington Mutual, Inc. Annual Report on Form 10-K for the
year ended December 31, 1995. File No. 0-25188).
4.1 Rights Agreement dated October 16, 1990 (Incorporated by
reference to the Washington Mutual, Inc. Current Report on
Form 8-K dated November 29, 1994. File No. 0-25188).
4.2 Amendment No. 1 to Rights Agreement dated October 16, 1990
(Incorporated by reference to the Washington Mutual, Inc.
Current Report on Form 8-K dated November 29, 1994. File No.
0-25188).
4.3 The registrant agrees to furnish the Securities and Exchange
Commission, upon request, with copies of all instruments
defining the rights of holders of long-term debt of
registrant and its consolidated subsidiaries.
27.1 Financial Data Schedule.
27.2 Amended Financial Data Schedule for the period ended March
31, 1998.
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED STATEMENTS OF
FINANCIAL POSITION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
COMPANY'S FORM 10-Q FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998.
</LEGEND>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 992,346
<INT-BEARING-DEPOSITS> 47,147
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 36,024
<INVESTMENTS-HELD-FOR-SALE> 15,163,849
<INVESTMENTS-CARRYING> 12,373,349
<INVESTMENTS-MARKET> 12,233,607
<LOANS> 70,967,344
<ALLOWANCE> 684,436
<TOTAL-ASSETS> 103,396,952
<DEPOSITS> 50,461,145
<SHORT-TERM> 16,534,237
<LIABILITIES-OTHER> 1,283,772
<LONG-TERM> 29,482,146
0
49,250
<COMMON> 1,966,249
<OTHER-SE> 3,620,153
<TOTAL-LIABILITIES-AND-EQUITY> 103,396,952
<INTEREST-LOAN> 2,747,961
<INTEREST-INVEST> 915,766
<INTEREST-OTHER> 63,662
<INTEREST-TOTAL> 3,727,389
<INTEREST-DEPOSIT> 1,027,783
<INTEREST-EXPENSE> 2,288,044
<INTEREST-INCOME-NET> 1,347,597
<LOAN-LOSSES> 91,748
<SECURITIES-GAINS> 11,117
<EXPENSE-OTHER> 944,874
<INCOME-PRETAX> 846,369
<INCOME-PRE-EXTRAORDINARY> 517,742
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 517,742
<EPS-PRIMARY> 1.37<F1>
<EPS-DILUTED> 1.37<F1>
<YIELD-ACTUAL> 2.93
<LOANS-NON> 588,516
<LOANS-PAST> 0
<LOANS-TROUBLED> 158,837
<LOANS-PROBLEM> 588,399
<ALLOWANCE-OPEN> 670,494
<CHARGE-OFFS> 89,384
<RECOVERIES> 11,578
<ALLOWANCE-CLOSE> 684,436
<ALLOWANCE-DOMESTIC> 85,776
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 598,660
<FN>
<F1>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 WHICH WAS PAID ON JUNE 1, 1998
TO SHAREHOLDERS OF RECORD AS OF MAY 31, 1998. ALL EARNINGS PER SHARE FIGURES
PRESENTED FOR 1998 HAVE BEEN AJDUSTED FOR THIS SPLIT.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED STATEMENTS OF
FINANCIAL POSITION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
COMPANY'S FORM 10-Q FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998.
</LEGEND>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<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> 19,455,888
<LIABILITIES-OTHER> 3,377,418
<LONG-TERM> 23,540,551
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> 0.68<F1>
<EPS-DILUTED> 0.68<F1>
<YIELD-ACTUAL> 2.96
<LOANS-NON> 604,034
<LOANS-PAST> 0
<LOANS-TROUBLED> 138,396
<LOANS-PROBLEM> 591,472
<ALLOWANCE-OPEN> 670,494
<CHARGE-OFFS> 48,544
<RECOVERIES> 5,879
<ALLOWANCE-CLOSE> 673,172
<ALLOWANCE-DOMESTIC> 41,839
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 585,585
<FN>
<F1>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 WHICH WAS PAID ON JUNE 1, 1998
TO SHAREHOLDERS OF RECORD AS OF MAY 31, 1998. ALL EARNINGS PER SHARE FIGURES
PRESENTED FOR 1998 HAVE BEEN ADJUSTED FOR THIS SPLIT.
</FN>
</TABLE>
