<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20529
FORM 10-Q/A
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-25188
WASHINGTON MUTUAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
WASHINGTON 91-1653725
------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
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, 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 last 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the issuer's classes of common stock as
of September 30, 1997:
COMMON STOCK - 257,331,238
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated financial statements of Washington Mutual, Inc.
("Washington Mutual" or the "Company") begin on page 13.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
o The Company recorded a net loss for third quarter 1997 of $127.0
million, compared with a net loss of $26.1 million during third quarter 1996.
Fully diluted loss per share was 53 cents for third quarter 1997 compared with a
loss of 15 cents for the third quarter 1996. For the nine months ended September
30, 1997, net income was $243.9 million or $0.90 per fully diluted share
compared with $312.9 million or $1.20 per fully diluted share for the first nine
months of 1996. For the quarter ended September 30, 1997, the Company's return
on assets was negative 0.54% compared with negative 0.12% for the same period a
year earlier. For the nine months ended September 30, 1997, the Company's return
on assets was 0.36% compared with 0.48% for the same period in 1996.
The third quarter 1997 loss was the result of after-tax
transaction-related charges of $341.2 million as part of the Company's merger
with Great Western Financial Corporation ("GWFC"). Included in these charges
were $366.9 million of pretax transaction-related expenses and a pretax charge
of $100.0 million resulting from the planned securitization and subsequent
transfer to loans held for sale of $1.2 billion of higher-risk residential
mortgage loans originated by Great Western Bank, a Federal Savings Bank
("GWB"). The third quarter 1996 loss resulted from a special one-time Savings
Association Insurance Fund ("SAIF") assessment resulting in an after-tax
charge of $200.0 million.
o On July 1, 1997, GWFC merged with and into a subsidiary of the
Company, and all of the subsidiaries of GWFC, including its banking subsidiary,
GWB, and its consumer finance subsidiary, Aristar, Inc. ("Aristar"), became
subsidiaries of the Company. GWFC was a financial services company with more
than 1,150 mortgage lending, retail banking and consumer finance offices
nationwide. GWB conducted most of its retail banking business through a branch
network concentrated in California and Florida. In addition, GWB had real
estate lending operations in 27 states with business concentrated in
California, Florida, Texas and Washington. Aristar operates in 23 states
primarily in the Southeast and Southwest regions of the United States
principally under the names Blazer Financial Services and City Finance Company.
At June 30, 1997, GWFC had assets of $43.8 billion and deposits of $27.8
billion.
o On September 3, 1997, the Company and SAFECO Corporation ("SAFECO") of
Seattle, Washington announced the formation of a strategic alliance to
distribute SAFECO annuities through Washington Mutual's banking network. As part
of the alliance, SAFECO will acquire the Company's insurance subsidiary, WM Life
Insurance Co. ("WM Life"). At September 30, 1997, WM Life had assets of $1.1
billion. The Company expects the transaction to be completed during the fourth
quarter of 1997 for an estimated after-tax gain of between $12.0 million and
$15.0 million.
o On October 1, 1997, GWB was merged with and into American Savings
Bank, F.A. ("American"). Simultaneously, the name of American was changed to
Washington Mutual Bank, FA ("WMBFA").
2
<PAGE> 3
RESULTS OF OPERATIONS
NET INTEREST INCOME. The Company's net interest income increased to $655.7
million for the quarter and $1.97 billion for the nine months ended September
30, 1997 from $636.4 million and $1.93 billion for the same periods in 1996. The
increases in net interest income were primarily due to a 5% increase in average
interest-earning assets during the first nine months of 1997 compared with the
same period in 1996. Offsetting the Company's growth in average interest-earning
assets were declines in the net interest margin. The Company's net interest
margin was 2.98% for the quarter and 3.04% for the nine months ended September
30, 1997 compared with 3.09% and 3.12% for the same periods in 1996 (The net
interest margin measures the Company's annualized net interest income as a
percentage of average interest-earning assets.)
The Company's combined yield on loans and investments was 7.73% for the
quarter and 7.74% for the nine months ended September 30, 1997 compared with
7.71% and 7.77% for the same periods in 1996. Interest rates on deposits were
4.21% for the quarter ended September 30, 1997, up from 4.19% during third
quarter 1996 primarily as a result of competitive pressures in California. For
the nine months ended September 30, 1997, interest rates on deposits was 4.20%,
down from 4.24% for the same period in 1996. However, the Company's combined
cost of funds rose from the 1996 levels as a result of the Company's increased
reliance on borrowings, which typically are more expensive than deposits.
Average borrowings outstanding during the first nine months of 1997 were $31.9
billion, an increase of 21% from the same period in 1996 while average deposits
for the same period decreased 2%. In addition, the cost of borrowings increased
4 basis points during both the quarter and nine months ended September 30, 1997.
As a result, the Company's combined cost of funds was 4.88% for the quarter and
4.84% for the nine months ended September 30, 1997 compared with 4.76% and 4.77%
for the same periods in 1996. The net interest spread was 2.85% for the quarter
and 2.90% for the nine months ended September 30, 1997 compared with 2.95% and
3.00% for the same periods in 1996. (The net interest spread is the difference
between the Company's yield on assets and its cost of funds.) The net interest
rate spread decreases in an increasing interest-rate environment as increases in
COFI, to which most interest-earning assets are tied, lag behind deposit and
borrowing rate increases.
OTHER INCOME. Other income was $111.1 million for the quarter and $487.5 million
for the nine months ended September 30, 1997 compared with $152.0 million and
$447.5 million for the same periods in 1996.
Depositor fees were $92.4 million for the quarter and $267.4 million for
the nine months ended September 30, 1997, increases of 29% and 31% from the same
periods in 1996. The increases reflected expanded use of fee-based products,
implementation of a more active fee collection policy, and charges related to an
increase in retail checking accounts. The profitability of these accounts is
tempered somewhat by the amount of deposit account-related losses (included with
other expenses) incurred by the Company related to the increased number of
checking accounts. Management closely monitors the amount of such losses.
Securities and insurance commissions were $45.6 million for the quarter
and $136.6 million for the nine months ended September 30, 1997 compared with
$43.1 million and $130.4 million for the same periods a year ago. The increase
was due in part to increased sales volumes resulting from the addition of
non-proprietary annuities and mutual funds in 1996.
Loan servicing fees were $22.1 million for the quarter and $65.2 million
for the nine months ended September 30, 1997 compared with $23.3 million and
$64.1 million for the same periods in 1996. Loans serviced for others increased
to $34.0 billion at September 30, 1997 from $31.4 billion one year earlier due
to additions to the servicing portfolio throughout 1996 and the first nine
months of 1997.
Other operating income increased to $41.2 million for the quarter and
$97.5 million for the nine months ended September 30, 1997 from $22.6 million
and $62.5 million during the same periods in 1996. Included in other operating
income during the first nine months of 1997 was income generated as a result
3
<PAGE> 4
of the purchase of United Western Financial Group ("United Western") in January
1997, $6.0 million interest on a tax refund recorded during the third quarter of
1997 and several one-time adjustments, as well as an increase in general
business activity.
Gains on the sale of loans were $11.0 million for the quarter and $24.5
million for the first nine months of 1997 compared with $423,000 and $14.4
million for the same periods in 1996. During third quarter 1996, the Company
recorded a provision for loans sold with recourse of $8.7 million. The Company
sold approximately $3.3 billion of primarily fixed-rate mortgage loans during
the first nine months of 1997 compared with sales of $2.7 billion in 1996.
In September 1997, the Company recorded a $100.0 million loss related to
the planned securitization of approximately $1.2 billion of higher-risk
residential mortgage loans originated by GWB. This securitization was
completed early in the fourth quarter of 1997. See "Financial Position --
Investment Activities."
Sales of assets generated a net gain of $6.5 million during the quarter
ended September 30, 1997 compared with a net loss of $202,000 for the same
period in 1996. The net gain reported during the quarter ended September 30,
1997 included net gains on the sale of investment securities and a $1.4 million
gain on the sale of corporate property. For the nine months ended September
30,1997, the Company's net gain of $16.5 million included net gains on sales of
investment securities of $4.4 million and $8.3 million on sales of property and
equipment compared with a net loss of $3.7 million in the same period of 1996.
The 1996 loss included $6.9 million of securities transaction losses arising
from the Company's efforts to replace fixed-rate assets with adjustable-rate
assets at WMB, partially offset by a $4.1 million gain on the sale of Mutual
Travel, Inc.
Write-downs on loans underlying mortgage-backed securities with full or
limited recourse were $7.7 million and $20.2 million for the quarter and nine
months ended September 30, 1997 compared with write-downs of $8.8 million and
$23.9 million for the same periods in 1996.
OTHER EXPENSE. Other expense was $826.0 million for the quarter and $1.8 billion
for the nine months ended September 30, 1997 compared with $769.4 million and
$1.7 billion during the same periods in 1996.
Salaries and employee benefits were $204.3 million for the quarter and
$615.9 million for the nine months ended September 30, 1997 compared with $201.4
million and $622.9 million for the comparable periods in 1996. The year-to-date
decrease reflected GWB's efforts to reengineer their mortgage business and other
efficiency initiatives. The staffing level of full-time equivalent employees was
20,302 at September 30, 1997 compared with 20,564 at September 30, 1996.
Telecommunications and outsourced information services were $40.1
million for the quarter and $126.2 million for the nine months ended September
30, 1997 compared with $39.5 million and $110.0 million for the same periods in
1996. Most of the 1997 increases resulted from higher levels of customer support
services and company usage.
Regulatory assessments were $8.8 million for the quarter and $26.0
million for the nine months ended September 30, 1997, decreases of 69% from the
same periods in 1996, due to a reduction in the SAIF assessment rate.
Transaction-related expense. The Company recorded transaction-related charges of
$366.9 million during the quarter and $424.9 million for the nine months ended
September 30, 1997 as a result of the GWFC merger. The majority of the charges
were for severance and related payments, facilities and equipment impairment,
and various investment banking, legal and contract exit fees.
4
<PAGE> 5
The transaction-related charges for the nine months ended September 30,
1997 included severance and related charges of $132.9 million. As of September
30, 1997, 139 employee separations had occurred and the related severance
charge of $31.7 million had been paid. Employee separations related to the
merger are planned to be completed by the end of 1998. In addition, the Company
anticipates that additional staff reductions will result from normal attrition.
Offices used by the Company on GWB's Chatsworth campus are being
consolidated in order to make more efficient use of the building space. As a
result of this consolidation, the Company anticipates that approximately
475,000 square feet, located predominantly in five buildings, will become
available to sublet to third party tenants. Approximately 50% of the modular
furniture in the affected building space is expected not to be redeployable and
will be written off. It is expected that the space will be available for
subleasing by June 1998. In addition, the Company has identified 85 retail
branches which will be closed and will have their operations consolidated with
neighboring branches. The Company anticipates that there will be additional
closures and consolidations in 1998 and 1999. The aggregate transaction-related
charge for the consolidation of the Chatsworth campus and the announced retail
branch consolidation is $100.6 million.
In order to meet the Company's goal to consolidate its current systems
platform, certain computer hardware and software equipment has been or will be
abandoned and written off. The consolidation of equipment will allow the
Company to increase operational efficiency, improve processing capacity and
establish a common user workstation environment.
Also as part of the GWFC merger, the Company recorded $116.5 million in
tax benefits related to the exercise of options under the GWFC stock
option plan. This benefit was recorded directly as an increase to stockholders'
equity as the options were exercised. The net after-tax effect upon
stockholders' equity of all adjustments from transaction-related activity was a
reduction of $267.9 million.
The following table summarizes the GWFC transaction-related expenses at
September 30, 1997:
<TABLE>
<CAPTION>
YEAR-TO-DATE
ORIGINAL TRANSACTION-RELATED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS) ESTIMATE (1) EXPENSE/ACCRUAL 1997 ACTIVITY BALANCE
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Severance related $145,000 $132,908 $ (31,700) $101,208
Premises and equipment 106,000 155,165 - 155,165
Other 92,000 136,812 (114,434) 22,378
-----------------------------------------------------------------------------------------------------
$343,000 $424,885 $(146,134) $278,751
Market adjustment for
securitization of REMIC 100,000 100,000
Tax benefit (74,000) (140,500)
-----------------------------------------------------------------------------------------------------
Net expense 369,000 384,385
Tax benefit of GWFC
options exercise (51,000) (116,500)
-----------------------------------------------------------------------------------------------------
Equity reduction $318,000 $267,885
=====================================================================================================
</TABLE>
(1) The increase in transaction-related expenses attributed to premises and
equipment was due to the Company's decision to abandon more systems and
facilities than originally anticipated. In addition, the hostile nature of the
merger increased the Company's estimate of other expenses.
The increase in the tax benefit due to the exercise of GWFC stock
options reflected the fact that significantly more stock options were exercised
than anticipated.
Transaction-related expenses associated with the merger of Keystone
Holdings were recorded during fourth quarter 1996. The following is a
reconciliation of the activity related the Keystone Holdings merger during the
first nine months of 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS) ACCRUAL ACTIVITY BALANCE
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Severance $42,678 $(41,251) $1,427
Legal, underwriting and other 36,808 (29,226) 7,582
----------------------------------------------------------------------------------------
$79,486 $(70,477) $9,009
========================================================================================
</TABLE>
Restructure expense. In 1996, a restructure plan was implemented at GWB. The
restructuring initiatives were designed to improve GWB's competitive position,
accelerate expense reduction and enhance future revenue growth by streamlining
operations, making efficient use of premises and modernizing its systems
platform. Due to the GWFC merger, some of GWB's planned restructure activities
have been suspended. Accruals related to these activities have not been
reversed.
5
<PAGE> 6
During the nine months ended September 30, 1997, approximately 300
employee separations occurred pursuant to the GWB restructure plan. At
September 30, 1997, 597 employees are receiving, or will be eligible to
receive, $13.1 million in severance benefits.
The following is a reconciliation of the restructure activity for the
first nine months of 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1997 SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS) ACCRUAL ACCRUAL(1) ACTIVITY BALANCE
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Severance $14,260 $7,000 $ (8,186) $13,074
Premises 29,456 - (9,418) 20,038
Equipment 3,413 - (256) 3,157
--------------------------------------------------------------------------------------
$47,129 $7,000 $(17,860) $36,269
======================================================================================
</TABLE>
(1) Additional severance costs were triggered effective February 25, 1997
upon the adoption of a broad-based, change-in-control severance plan. At
March 31, 1997, the Company accrued an additional $7 million for severance
benefits expected to be paid to employees affected by the restructuring plan
and change-in-control benefits program. This increase to the fourth quarter 1996
restructuring accrual is for incremental severance charges which employees
terminated after February 24, 1997 are entitled to receive under provisions of
the change-in-control severance plan adopted on the date.
Foreclosed assets generated a net expense of $5.2 million for the
quarter and $9.7 million for the nine months ended September 30, 1997 compared
with net income of $9.0 million and net expense of $7.7 million during the same
period in 1996. Net income from foreclosed assets during third quarter 1996 was
primarily the result of gains related to the sale of a large number of
foreclosed assets at GWB.
OPERATING EFFICIENCY RATIO. The operating efficiency ratio is other expense as a
percentage of net interest income plus other income. The Company's ratio
including transaction-related expenses was 107.7% for the quarter and 73.0% for
the nine months ended September 30, 1997 compared with 97.6% and 71.8% for the
same periods in 1996. The 1996 ratios include the one-time SAIF assessment. The
operating efficiency ratios without transaction-related expenses and the SAIF
assessment were 53.0% for the quarter and 53.5% for the nine months ended
September 30, 1997 compared with 58.0% and 58.6% for the same periods in 1996.
NONBANKING SUBSIDIARY OPERATIONS. The Company's principal nonbanking subsidiary
is Aristar. The consumer finance line of business had net income of $10.0
million and $33.7 million for the quarter and nine months ended September 30,
1997, down from $12.6 million and $45.9 million during the same periods in 1996.
The current year decreases were the result of higher borrowing costs and lower
yields on consumer finance loans. In May 1996, Aristar recorded a $8.0
million insurance recovery.
FINANCIAL POSITION
ASSETS. At September 30, 1997, the Company's assets were $95.6 billion up 9%
from $87.4 billion at year-end 1996. Most of the growth was due to the record
lending activity during the first nine months of 1997.
INVESTMENT ACTIVITIES. Washington Mutual's investment portfolio at September 30,
1997 was $21.9 billion, a 6% increase from the year-end 1996 balance of $20.6
billion. The Company's mortgage-backed securities ("MBS") were $19.8 billion or
90% of the total investment portfolio at September 30, 1997.
MBS that the Company securitized from its own single-family residential
loan origination activity totaled $14.1 billion at September 30, 1997 with the
remaining $5.7 billion having been purchased in the secondary market. As part of
the securitization process, the Company has from time to time retained the
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credit risk on the loans underlying these securities. As of September 30, 1997,
the Company is subject to full or limited recourse on $14.6 billion of loans
underlying its U.S. government agency MBS portfolio. Because of the Company's
recourse obligations in regard to a portion of its MBS portfolio, Washington
Mutual has recorded an impairment of $31.5 million against its
available-for-sale and held-to-maturity MBS portfolios to cover potential losses
on the loans underlying the securities.
Held-to-maturity securities increased by $6.0 billion primarily as a
result of the transfer by GWB of $4.4 billion of MBS from the
available-for-sale portfolio. Such a transfer is allowed under Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", in the event of a major business
combination that necessitates the transfer to maintain the entity's existing
interest rate risk or credit risk position or credit risk policy.
In October 1997, the Company completed the securitization of $1.2
billion of residential mortgage loans from GWB's portfolio which the Company had
previously identified as having both high loan-to-value ratios and borrowers
with marginal credit history. These loans were transferred to a trust that
issued five classes of securities. The securities have been purchased by WMBFA
and were placed in either the Company's available-for-sale or trading portfolio,
as management deemed appropriate. The securities may subsequently be sold, from
time to time, based upon management's future judgment of market conditions and
execution capabilities. As a result, the identified loans were classified as
held for sale as of September 30, 1997 and marked to the lower of cost or market
with a charge to earnings of $100.0 million.
LOAN ORIGINATIONS. Total lending was $7.9 billion for the quarter and $21.6
billion for the nine months ending September 30, 1997, increases of 33% and 32%
compared with the same periods a year earlier. The Company's aggressive
marketing strategy together with strong regional economies in its primary
markets helped generate year-to-date increases in lending volumes in all loan
categories.
Loan originations were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- ----------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Single-family residential ("SFR") $5,854.5 $4,243.2 $15,992.3 $11,820.1
SFR custom construction 235.8 206.5 642.5 537.6
SFR builder construction 122.4 154.6 430.4 430.3
Multifamily residential 212.1 123.3 524.9 402.1
Nonresidential real estate 159.3 88.1 364.7 233.3
Consumer 591.8 461.9 1,668.2 1,268.0
Consumer finance 531.8 479.8 1,508.5 1,393.9
Commercial business 149.0 134.3 474.3 309.5
- ----------------------------------------------------------------------------------------
$7,856.7 $5,891.7 $21,605.8 $16,394.8
========================================================================================
</TABLE>
DEPOSITS. Total deposits decreased to $51.3 billion at September 30, 1997 from
$52.7 billion at December 31, 1996. Retail money market and checking accounts -
both of which have the benefit of lower interest costs than other sources of
funds - increased $1.1 billion partially offsetting a $2.6 billion decline in
retail time deposits. Contributing to the increase in retail money market and
checking accounts was the acquisition of United Western, which added $299.9
million in total deposits. Retail time deposits declined in part because the
Company chose not to aggressively price to maintain the 1996 year-end level.
While the vast majority of its deposits are retail in nature, the Company does
engage in certain wholesale activities -- primarily accepting time deposits from
political subdivisions and public agencies. The Company considers wholesale
deposits to be
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<PAGE> 8
an alternative borrowing source rather than a customer relationship and, as
such, their levels are determined by management's decisions as to the lowest
cost funding sources.
BORROWINGS. Washington Mutual's primary sources of borrowing are securities sold
under agreements to repurchase, federal funds purchased and commercial paper
issued, and advances from the Federal Home Loan Banks ("FHLB") of Seattle and
San Francisco. These three borrowing sources totaled $11.7 billion, $4.2
billion and $16.6 billion at September 30, 1997, compared with $12.0 billion,
$2.2 billion and $10.0 billion at year-end 1996, respectively. The Company also
held other borrowings totaling $3.3 billion at September 30, 1997 compared with
$3.2 billion at year-end 1996. Other borrowings primarily consisted of medium
term notes due within five years. The exact mix of borrowing sources at any
given time is dependent upon their market pricing. Specifically, due to
relative pricing advantages, the Company primarily used FHLB advances to fund
its balance sheet growth during the first nine months of 1997.
INTEREST RATE RISK MANAGEMENT. Washington Mutual engages in a comprehensive
asset and liability management program that attempts to reduce the risk of
significant decreases in net interest income caused by interest rate changes.
One of the Company's strategies to reduce the effect of future movements in
interest rates is to increase the percentage of adjustable-rate assets in its
portfolio. A conventional measure of interest rate sensitivity for thrift
institutions is the one-year gap, which is calculated by dividing the difference
between assets maturing or repricing within one year and total liabilities
maturing or repricing within one year by total assets.
The Company's assets and liabilities that mature or reprice within one
year were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) SEPTEMBER 30, 1997 DECEMBER 31, 1996
-----------------------------------------------------------------------------------
<S> <C> <C>
Interest-sensitive assets $72,111 $66,698
Derivative instruments 1,373 2,857
Interest-sensitive liabilities (66,484) (66,759)
-----------------------------------------------------------------------------------
Net liability sensitivity $7,000 $2,796
===================================================================================
One-year gap 7.32% 3.20%
</TABLE>
ASSET QUALITY
Nonperforming assets increased 3% to $832.9 million at September 30, 1997
from $805.1 million at December 31, 1996. Nonperforming assets by type
consisted of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) SEPTEMBER 30, 1997 DECEMBER 31, 1996
--------------------------------------------------------------------------------------
<S> <C> <C>
SFR $506,363 $461,730
SFR custom construction 1,051 6,724
SFR builder construction 8,928 2,511
Apartment buildings 30,295 19,659
Nonresidential real estate 10,455 14,616
Consumer 23,530 23,067
Consumer finance 47,224 45,622
Commercial business 3,295 1,068
Foreclosed assets 201,809 222,884
Other nonperforming assets - 7,232
--------------------------------------------------------------------------------------
Total nonperforming assets $832,950 $805,113
======================================================================================
Nonperforming assets as a percentage of total assets 0.87% 0.92%
</TABLE>
Contributing to the increase in nonperforming assets were increases in
SFR and apartment buildings partially offset by a 9% decrease in foreclosed
assets.
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<PAGE> 9
As required by Statement of Financial Accounting Standards No. 114, the
Company evaluates all commercial real estate, builder construction and
commercial business loans for impairment. A loan is considered impaired when it
is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Interest income is normally
recognized on an accrual basis. If the impaired loan is nonperforming, interest
income is recorded only on the receipt of cash. At September 30, 1997, loans
totaling $465.5 million were impaired compared with $498.3 million at year-end
1996.
Impaired loans consisted of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) SEPTEMBER 30,1997 DECEMBER 31, 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans included in nonperforming
assets above $ 64,048 $ 45,632
Other impaired loans 401,483 452,624
- ----------------------------------------------------------------------------------------
Total impaired loans $465,531 $498,256
========================================================================================
</TABLE>
PROVISION FOR LOAN LOSSES AND RESERVE FOR LOAN LOSSES. The provision for loan
losses for the nine months ended September 30, 1997 was $155.8 million compared
with $164.8 million for the same period in 1996. The reserve for loan losses was
$671.9 million at September 30, 1997 compared with $677.1 million at December
31, 1996. Reserves charged off, net of recoveries, totaled $152.7 million for
the first nine months of 1997 compared with $207.0 million for the same period
in 1996. At September 30, 1997, the reserve for loan losses represented 106% of
nonperforming loans compared with 116% nine months earlier.
Changes in the reserve for loan losses were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 1997 1996 1997 1996
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period $666.1 $558.5 $677.1 $598.1
Provision for loan losses 52.1 56.9 155.8 164.8
Reserves acquired through business - - 10.9 -
combinations
Transfer of reserves for write down of MBS - - (17.7) -
Transfer of reserves to contingent liability - - (1.5) -
Loans charged-off:
SFR (25.9) (38.2) (82.0) (136.9)
Commercial real estate (2.4) (5.8) (16.7) (27.9)
Consumer (3.5) (4.0) (12.7) (8.5)
Consumer finance (20.4) (18.3) (58.3) (52.8)
Commercial business (0.9) - (1.1) (0.6)
----------------------------------------------------------------------------------------
(53.1) (66.3) (170.8) (226.7)
Recoveries of loans previously charged-off:
SFR - 1.6 0.7 4.2
Commercial real estate 1.4 0.8 2.2 2.2
Consumer 1.6 0.4 3.8 0.9
Consumer finance 3.8 4.0 11.4 12.4
----------------------------------------------------------------------------------------
6.8 6.8 18.1 19.7
----------------------------------------------------------------------------------------
Balance, end of period 671.9 555.9 $671.9 $555.9
========================================================================================
Annualized ratio of net charge-offs during
the period to average loans outstanding
during the period 0.28% 0.46% 0.32% 0.51%
</TABLE>
9
<PAGE> 10
As part of the process of determining the adequacy of the reserve for
loan losses, management reviews its loan portfolio for specific weaknesses. A
portion of the reserve is then designated as either specific or allocated to
reflect the loss exposure. The September 30, 1997 analysis of commercial real
estate, builder construction and commercial loans resulted in specific and
allocated reserves totaling $99.6 million. At December 31, 1996, the Company had
specific and allocated reserves of $118.7 million. The remaining reserve of
$572.3 million at September 30, 1997 was unallocated and available for potential
losses from any of the Company's loans.
When determining the adequacy of the reserve for loan losses, management
has historically looked not only to those loans currently in its loan portfolio,
but also to any loan pool where the Company has a full or limited recourse
obligation resulting from securitization of its loans. With the Great Western
merger, the Company began recording losses on loans repurchased from MBS where
it had retained the credit risk as a writedown on the security, rather than as a
charge against the reserve for loan losses. A writedown on the MBS is included
as a component of other income. GWB had adopted this accounting policy in 1996.
Prior periods have been restated so that chargeoffs on single-family residential
loans are comparable period to period.
Also, as part of the GWFC merger, the Company has reclassified
the identified impairment on MBS where it has retained the credit risk from the
reserve for loan losses to MBS to conform the accounting policies of WMB and
American with that of GWB. An impairment of $17.7 million was recorded through a
transfer from the reserve for loan losses. The impairment was based upon an
analysis at June 30, 1997 of the loans underlying MBS where the Company remains
subject to full or limited recourse. Because this reclassification was
immaterial to the Company's statement of financial position, prior periods have
not been restated. The impairment on MBS will be evaluated periodically in
accordance with credit-risk policy. Any subsequent impairment will be recorded
as a writedown to MBS.
An analysis of the reserve for loan losses was as follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) SEPTEMBER 30, 1997 DECEMBER 31, 1996
-------------------------------------------------------------------------------------
<S> <C> <C>
Specific and allocated reserves:
Commercial real estate $ 94.3 $117.4
Builder construction 2.1 -
Commercial business 3.2 1.3
-------------------------------------------------------------------------------------
99.6 118.7
Unallocated reserves 572.3 558.4
-------------------------------------------------------------------------------------
$671.9 $677.1
=====================================================================================
Total reserve for loan losses as a percentage of:
Nonperforming assets 81% 84%
Nonperforming assets, less foreclosed assets 106 116
</TABLE>
A reserve for losses on foreclosed assets is maintained for any
subsequent decline in the value of foreclosed property. The reserve for losses
on foreclosed assets was $7.1 million at September 30, 1997, compared with $9.0
million at December 31, 1996. The level is based upon a routine review of
foreclosed assets and the strength of national and local economies.
The Company also maintains a contingent liability to cover potential
losses on loans that have been sold to third parties where the Company remains
subject to full or limited recourse. At September 30, 1997, $11.0 million was
set aside to cover losses on $2.2 billion of loans sold with full or limited
recourse.
LIQUIDITY AND CAPITAL REQUIREMENTS
LIQUIDITY. Washington Mutual monitors its ability to meet short-term cash
requirements under both normal (operating) and extreme (contingent)
circumstances using guidelines established by its Board of Directors. The
operating liquidity ratio is used to ensure that normal short-term secured
borrowing
10
<PAGE> 11
capacity is sufficient to satisfy unanticipated cash needs. The
contingent liquidity ratio measures the ability to raise cash by liquidating
assets in the event of a very adverse business environment. At September 30,
1997, the Company had substantial liquidity compared with its established
guidelines.
The Company also computes ratios promulgated by the Federal Deposit
Insurance Corporation ("FDIC") to monitor the liquidity position of WMB. The
regulatory liquidity ratio measures WMB's ability to use liquid assets to meet
unusual cash demands. The regulatory dependency ratio measures WMB's reliance
upon potentially volatile liabilities to fund long-term assets. WMB manages both
ratios to remain within the acceptable ranges and, at September 30, 1997, was
within the established FDIC guidelines.
Regulations promulgated by the Office of Thrift Supervision ("OTS")
require that the Company's federal savings bank subsidiaries maintain for each
calendar month an average daily balance of liquid assets at least equal to 5.00%
of the prior month's average daily balance of net withdrawable deposits plus
borrowings due within one year. For each month during the first nine months of
1997, the liquidity ratio for each ASB, GWB and WMBfsb was above 5.00%.
At September 30, 1997, the Company's banking subsidiaries had the
ability to borrow approximately an additional $10.2 billion from the FHLB. In
addition, to meet its immediate needs for funds as well as long-term lending
demands, Washington Mutual maintains various sources of liquid assets and
borrowing capabilities through the use of collateralized borrowings using
unpledged mortgage-backed securities and other wholesale sources. The ability of
the Company's banking subsidiaries to pay dividends to the Company is influenced
by legal, regulatory and economic restrictions.
Because the low interest rate environment of recent years and
competition from non-regulated entities (such as mutual funds) has inhibited
consumer deposits, Washington Mutual has supported its growth through business
combinations with other financial institutions and by increasing its use of
wholesale borrowings. Should the Company not be able to increase deposits either
internally or through acquisitions, its ability to grow would be dependent upon,
and to a certain extent limited by, its borrowing capacity.
As presented in the Supplemental Consolidated Statements of Cash Flows,
the sources of liquidity vary between periods. The statement of cash flows
includes operating, investing and financing categories. Cash flows from
operating activities included net income for the first nine months of 1997 of
$243.9 million, $362.6 million of noncash items and $447.3 million of other net
cash outflows from operating activities. During the nine months ended September
30, 1997, cash flows from investing activities included sales and principal
payments on securities and loans held for investment totaling $11.8 billion.
Loans originated and purchased for investment required $17.7 billion and $2.0
billion was used for the purchase of available-for-sale securities. Cash flows
from financing activities consisted of the net change in deposit accounts and
short-term borrowings, the proceeds and repayments from both securities sold
under long-term agreements to repurchase and FHLB advances, and also the
repayment of long-term debt. During the nine months ended September 30, 1997,
the above mentioned financing activities increased cash and cash equivalents by
$7.1 billion on a net basis. Cash and cash equivalents were $1.2 billion at
September 30, 1997. (See "Consolidated Statements of Cash Flows".)
11
<PAGE> 12
CAPITAL REQUIREMENTS. At September 30, 1997, WMB, ASB, GWB, and WMBfsb exceeded
all current regulatory capital requirements and were classified as well
capitalized institutions. The regulatory capital ratios of WMB, ASB, GWB, and
WMBfsb and minimum regulatory requirements to be categorized as well capitalized
were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------------------------------------WELL CAPITALIZED
WMB ASB GWB WMBfsb MINIMUM
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital ratios:
Leverage 5.69% 5.38% 5.53% 7.11% 5.00%
Tier 1 risk-based 9.96 8.91 9.40 11.44 6.00
Total risk-based 10.72 10.65 10.72 12.64 10.00
</TABLE>
In addition, federal savings associations are required by the OTS to
maintain core capital of at least 3.00% of assets and tangible capital of at
least 1.50% of assets. All of the Company's federal savings associations
satisfied this requirement at September 30, 1997.
12
<PAGE> 13
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Washington Mutual 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 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE SECURITY-HOLDERS
SPECIAL MEETING OF SHAREHOLDERS
On June 13, 1997, at a Special Meeting of Shareholders, shareholders
approved the issuance of shares of common stock pursuant to the Agreement and
Plan of Merger dated as of March 5, 1997, by and among the Company, New American
Capital, Inc. and GWFC with 103,287,775 common share votes cast for and 257,601
votes cast against the issuance with 4,452,474 abstentions.
The Special Meeting was reconvened on July 8, 1997, at which time the
Company's shareholders approved an amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of common stock from
350,000,000 to 800,000,000. Common shareholders cast 105,631,128 votes for and
1,089,785 votes against the amendment with 4,496,664 abstentions. An aggregate
of 108,289,484 common and preferred shares voted for and 1,201,917 shares voted
against the amendment with 4,615,888 abstentions.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
11.1 Statement re computation of per share earnings
27.1 Financial Data Schedule
(b) During the quarter, the Company filed the following Current Reports on
Form 8-K:
1. Items 2 and 7, dated July 15, 1997
2. Item 5, dated August 12, 1997
3. Item 5, dated September 12, 1997
4. Item 5, dated September 25, 1997
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on January 8, 1998.
Washington Mutual, Inc.
/s/ Kerry K. Killinger
-----------------------------------
Kerry K. Killinger
President and Chief Executive Officer
(Chief Executive Officer)
14
<PAGE> 15
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- ---------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income (UNAUDITED)
Loans $1,320,754 $1,160,270 $3,826,055 $3,410,593
Available-for-sale securities 230,337 323,422 773,559 1,021,659
Held-to-maturity securities 151,395 95,024 348,323 283,114
Other 26,067 20,464 66,381 58,562
- ---------------------------------------------------------------------------------------------------
Total interest income 1,728,553 1,599,180 5,014,318 4,773,928
Interest expense
Deposits 547,798 554,149 1,629,078 1,685,338
Borrowings 525,104 408,667 1,416,662 1,159,242
- ---------------------------------------------------------------------------------------------------
Total interest expense 1,072,902 962,816 3,045,740 2,844,580
- ---------------------------------------------------------------------------------------------------
Net interest income 655,651 636,364 1,968,578 1,929,348
Provision for loan losses 52,131 56,940 155,940 164,833
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 603,520 579,424 1,812,638 1,764,515
Other income
Depositor fees 92,431 71,676 267,409 203,633
Securities and insurance commissions 45,602 43,051 136,615 130,412
Loan servicing fees 22,066 23,265 65,150 64,149
Other operating income 41,240 22,564 97,513 62,543
Gain on sale of loans 11,003 423 24,502 14,403
Market adjustment for securitization of REMIC (100,000) - (100,000) -
Gain (loss) on sale of assets 6,515 (202) 16,488 (3,716)
Write-down of mortgage-backed securities (7,744) (8,766) (20,166) (23,913)
- ---------------------------------------------------------------------------------------------------
Total other income 111,113 152,011 487,511 447,511
Other expense
Salaries and employee benefits 204,328 201,352 615,891 622,902
Occupancy and equipment 80,871 78,986 239,718 238,548
Telecommunications and outsourced
information services 40,137 39,491 126,210 110,001
Regulatory assessments 8,822 28,706 26,026 85,145
Savings Association Insurance Fund special
assessment - 312,552 - 312,552
Transaction-related charges 366,860 - 424,886 1,500
Other operating expense 103,395 100,949 302,980 278,943
Amortization of goodwill and other intangible
assets 16,387 16,381 47,833 49,170
Foreclosed asset expense, net 5,166 (8,985) 9,710 7,650
- ---------------------------------------------------------------------------------------------------
Total other expense 825,966 769,432 1,793,254 1,706,411
- ---------------------------------------------------------------------------------------------------
Income before income taxes and minority (111,333) (37,997) 506,895 505,615
interest
Income taxes 15,621 (15,437) 263,017 182,209
- ---------------------------------------------------------------------------------------------------
Income before minority interest (126,954) (22,560) 243,878 323,406
Minority interest in earnings of consolidated
subsidiaries - (3,527) - (10,504)
- ---------------------------------------------------------------------------------------------------
Net income $(126,954) $(26,087) $243,878 $312,902
===================================================================================================
Net income attributable to common stock $(132,883) $(35,067) $226,091 $284,088
===================================================================================================
Net income per common share:
Primary $(0.53) $(0.15) $0.91 $1.20
Fully diluted (0.53) (0.15) 0.90 1.20
Dividends declared per common share 0.27 0.23 0.78 0.66
</TABLE>
See Notes to Consolidated Financial Statements
15
<PAGE> 16
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) SEPTEMBER 30, 1997 DECEMBER 31, 1996
- -------------------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
<S> <C> <C>
Cash $ 1,049,165 $ 1,032,379
Cash equivalents 191,389 632,976
Trading account securities - 1,647
Available-for-sale securities, amortized cost $11,112,717
and $15,913,440
Mortgage-backed securities 9,296,131 13,968,875
Other investments 1,918,120 2,126,468
Held-to-maturity securities, fair value $10,549,927 and
$4,545,125
Mortgage-backed securities 10,470,996 4,286,361
Other investments 202,807 192,695
Loans 67,080,473 61,497,847
Reserve for loan losses (671,869) (677,141)
- -------------------------------------------------------------------------------------------------
66,408,604 60,820,706
Loans held for sale 1,701,909 333,262
Investment in FHLB stock 942,413 843,002
Foreclosed assets 201,809 222,883
Premises and equipment 1,033,070 1,034,813
Intangible assets arising from acquisitions 372,520 419,500
Other assets 1,818,436 1,510,930
- -------------------------------------------------------------------------------------------------
Total assets $95,607,369 $87,426,497
=================================================================================================
LIABILITIES
Deposits $51,297,464 $52,666,914
Annuities 884,013 878,057
Federal funds purchased and commercial paper 4,247,298 2,153,506
Securities sold under agreements to repurchase 11,694,038 12,033,119
Advances from FHLBs 16,641,470 10,011,425
Trust preferred securities 800,000 100,000
Other borrowings 2,499,729 3,109,694
Other liabilities 2,206,293 1,480,694
- -------------------------------------------------------------------------------------------------
Total liabilities 90,270,305 82,433,409
STOCKHOLDERS' EQUITY
Preferred stock, no par value: 10,000,000 shares
authorized - 5,382,500 and 5,382,500 shares
issued and outstanding:
Nonconvertible liquidation preference 283,063 283,063
Common stock, no par value: 800,000,000 shares
authorized - 257,176,039 and 250,230,644 shares
issued and outstanding - -
Capital surplus - common stock 1,937,393 1,657,284
Valuation reserve for available-for-sale securities 166,263 118,625
Retained earnings 2,950,345 2,934,116
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 5,337,064 4,993,088
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $95,607,369 $87,426,497
=================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
16
<PAGE> 17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------------
PREFERRED COMMON COMMON
(IN THOUSANDS) STOCK STOCK CAPITAL
SURPLUS
- ---------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Balance at June 30, 1997 5,382 252,013 $1,717,198
Net income -- -- --
Cash dividends on common stock -- -- --
Cash dividends on preferred stock -- -- --
Common stock issued through stock
options and employee stock plans -- 5,163 167,734
Common stock issued under dividend
reinvestment plan -- -- --
Common stock acquired -- -- --
Tax benefit from nonqualified stock options -- -- 14,524
Adjustment in valuation reserve
for available-for-sale securities -- -- --
Restricted stock reclass -- -- --
Restricted stock activity, net -- -- 37,937
- ---------------------------------------------------------------------------------------------
Balance at September 30, 1997 5,382 257,176 $1,937,393
=============================================================================================
Balance at June 30, 1996 7,298 243,623 $1,525,264
Net income -- -- --
Cash dividends on common stock -- -- --
Cash dividends on preferred stock -- -- --
Common stock issued through stock
options and employee stock plans -- 272 6,156
Common stock issued under dividend
reinvestment plan -- 31 772
Common stock acquired -- -- 9
Conversion of preferred stock to common (518) 5,650 121,768
Miscellaneous stock transactions -- -- --
Adjustment in valuation reserve
for available-for-sale securities -- -- --
Amortization of restricted stock -- -- --
Common stock repurchased under
repurchase plan -- (5,850) (143,260)
- ---------------------------------------------------------------------------------------------
Balance at September 30, 1996 6,780 243,726 $1,510,709
=============================================================================================
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
CONVERTIBLE NONCONVERTIBLE VALUATION TOTAL
PREFERRED PREFERRED RETAINED RESERVE FOR STOCKHOLDERS'
(IN THOUSANDS) STOCK STOCK EARNINGS SECURITIES EQUITY
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 $-- $283,063 $3,160,400 $ 80,986 $5,241,647
Net income -- -- (126,954) -- (126,954)
Cash dividends on common stock -- -- (68,594) -- (68,594)
Cash dividends on preferred stock -- -- (5,931) -- (5,931)
Common stock issued through
stock options and employee
stock plans -- -- -- -- 167,734
Common stock issued under
dividend reinvestment plan -- -- -- -- --
Common stock acquired -- -- -- -- --
Tax benefit from nonqualified
stock options -- -- -- -- 14,524
Adjustment in valuation
reserve for available-for-
sale securities -- -- -- 85,277 85,277
Restricted stock reclass -- -- (10,829) (10,829)
Restricted stock activity, net -- -- 2,253 -- 40,190
- -------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $-- $283,063 $2,950,345 $166,263 $5,337,064
=================================================================================================
Balance at June 30, 1996 $269,025 $283,063 $3,159,207 $22,615 $5,259,174
Net income -- -- (26,087) -- (26,087)
Cash dividends on common stock -- -- (20,984) -- (20,984)
Cash dividends on preferred
stock -- -- (37,358) -- (37,358)
Common stock issued through
stock options and employee
stock plans -- -- -- -- 6,156
Common stock issued under
dividend reinvestment plan -- -- -- -- 772
Common stock acquired -- -- -- -- 9
Conversion of preferred stock
to common (129,025) -- -- -- (7,257)
Miscellaneous stock -- -- -- -- --
transactions
Adjustment in valuation
reserve for
available-for-sale -- -- -- 6,522 6,522
securities
Amortization of restricted -- -- 981 -- 981
stock
Common stock repurchased
under repurchase plan -- -- -- -- (143,260)
- -------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $140,000 $283,063 $3,075,759 $29,137 $5,038,668
=================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
18
<PAGE> 19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CONTINUED
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------------
PREFERRED COMMON COMMON
(IN THOUSANDS) STOCK STOCK CAPITAL
SURPLUS
- ---------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Balance at December 31, 1996 5,382 250,231 $1,657,284
Net income -- -- --
Cash dividends on common stock -- -- --
Cash dividends on preferred stock -- -- --
Common stock issued through stock
options and employee stock plans -- 7,852 258,838
Common stock issued under dividend
reinvestment plan -- 20 847
Common stock acquired -- (908) (32,016)
Tax benefit from nonqualified stock
options -- -- 14,524
Miscelleanous stock transactions -- -- --
Adjustment in valuation reserve
for available-for-sale securities -- -- --
Restricted stock reclass -- -- --
Restricted stock activity, net -- (19) 37,916
- ---------------------------------------------------------------------------------------------
Balance at September 30, 1997 5,382 257,176 $1,937,393
=============================================================================================
Balance at December 31, 1995 7,300 243,239 $1,517,807
Net income -- -- --
Cash dividends on common stock -- -- --
Cash dividends on preferred stock -- -- --
Common stock issued through stock
options and employee stock plans -- 814 17,754
Common stock issued under dividend
reinvestment plan -- 65 1,650
Common stock acquired -- (201) (5,220)
Conversion of preferred stock to common (520) 5,665 122,108
Miscellaneous stock transactions -- -- --
Adjustment in valuation reserve
for available-for-sale securities -- -- --
Amortization of restricted stock -- -- --
Common stock repurchased under
repurchase plan -- (5,850) (143,260)
Restricted stock activity, net -- (6) (130)
- ---------------------------------------------------------------------------------------------
Balance at September 30, 1996 6,780 243,726 $1,510,709
=============================================================================================
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
CONVERTIBLE NONCONVERTIBLE VALUATION TOTAL
PREFERRED PREFERRED RETAINED RESERVE FOR STOCKHOLDERS'
(IN THOUSANDS) STOCK STOCK EARNINGS SECURITIES EQUITY
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $-- $283,063 $2,934,116 $118,625 $4,993,088
Net income -- -- 243,878 -- 243,878
Cash dividends on common stock -- -- (201,722) -- (201,722)
Cash dividends on preferred -- -- (17,786) -- (17,786)
stock
Common stock issued through
stock options and employee
stock plans -- -- -- -- 258,838
Common stock issued under
dividend reinvestment
plan -- -- -- -- 847
Common stock acquired -- -- -- -- (32,016)
Tax benefit from nonqualified
stock options -- -- -- -- 14,524
Miscellaneous stock
transactions -- -- 108 -- 108
Adjustment in valuation
reserve for available-for-sale
securities -- -- -- 47,638 47,638
Restricted stock reclass -- -- (10,829) (10,829)
Restricted stock activity, net -- -- 2,580 -- 40,496
- -------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $-- $283,063 $2,950,345 $166,263 $5,337,064
=================================================================================================
Balance at December 31, 1995 $269,375 $283,063 $2,996,787 $297,148 $5,364,180
Net income -- -- 312,902 -- 312,902
Cash dividends on common stock -- -- (177,840) -- (177,840)
Cash dividends on preferred
stock -- -- (59,064) -- (59,064)
Common stock issued through
stock options and employee
stock plans -- -- -- -- 17,754
Common stock issued under
dividend reinvestment plan -- -- -- -- 1,650
Common stock acquired -- -- -- -- (5,220)
Conversion of preferred stock
to common (129,375) -- -- -- (7,267)
Miscellaneous stock
transactions -- -- -- -- --
Adjustment in valuation
reserve for available-
for-sale securities -- -- -- (268,011) (268,011)
Amortization of restricted
stock -- -- 2,974 -- 2,974
Common stock repurchased
under repurchase plan -- -- -- -- (143,260)
Restricted stock activity, net -- -- -- -- (130)
- -------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $140,000 $283,063 $3,075,759 $29,137 $5,038,668
=================================================================================================
</TABLE>
20
<PAGE> 21
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities (UNAUDITED)
Net income $(126,954) $(26,087) $243,878 $312,902
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 52,131 56,940 155,940 164,833
(Gain) on sale of loans (11,003) (423) (24,945) (14,403)
(Gain) loss on sale of assets (6,515) 202 (16,488) 4,378
Depreciation and amortization 47,459 44,593 133,182 140,037
FHLB stock dividend (21,582) (13,497) (46,686) (52,069)
Write-down of mortgage backed securities 7,744 8,766 20,166 23,251
Transaction Related Charges 278,751 - 278,751 -
Market adjustment for securitization of
REMIC 100,000 - 100,000 -
Decrease (increase) in trading account
securities 1,170 1,564 1,647 (1,913)
Origination of loans held for sale (1,218,625) (754,633) (3,479,940) (2,652,548)
Sale of loans held for sale 1,087,815 755,430 3,248,089 2,641,082
(Increase) decrease in other assets (28,878) 23,141 (166,196) 364,369
Increase in other liabilities (404,565) 79,458 (288,227) 319,428
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities (243,052) 175,454 159,171 1,249,347
Cash Flows From Investing Activities
Purchases of available-for-sale securities (149,547) (559,968) (2,004,161) (3,043,689)
Principal payments and maturities of 804,438 641,286 1,734,122 2,212,720
available-for-sale securities
Sales of available-for-sale securities 343,887 1,393,525 1,963,165 4,285,068
Purchases of held-to-maturities securities (7,777) (3,075,098) (27,550) (3,963,661)
Principal payments and maturities of 67,238 3,201,413 302,332 4,366,884
held-to-maturity securities
Sales of loans 9,245 32,793 26,071 61,335
Principal payments on loans 2,730,269 1,393,795 7,739,351 5,649,421
Origination and purchases of loans (6,159,715) (4,166,220) (17,689,991) (12,335,540)
REO operations, net 57,691 135,601 292,537 406,957
(Purchases) dispositions of premises and (35,278) (25,015) (83,605) (68,976)
equipment, net
- -----------------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (2,339,549) (1,027,888) (7,747,729) (2,429,481)
Cash Flows From Financing Activities
(Decrease) in deposits (470,649) 82,978 (1,369,450) (866,673)
(Decrease) increase in annuities (4,441) 2,089 5,956 12,935
Increase (decrease) in federal funds and
commercial paper purchased 805,924 666,439 2,093,792 631,636
(Decrease) in securities sold under short-term
agreements to repurchase (109,206) (1,809,912) (3,125,862) (3,033,638)
Proceeds from securities sold under long-term
agreements to repurchase 3,240,934 1,273,670 7,195,188 1,847,751
Repayment of securities sold under long-term
agreements to repurchase (3,309,573) (262,691) (4,408,407) (465,363)
Proceeds from FHLB advances 16,462,521 7,782,497 39,443,154 16,775,407
Payments on FHLB advances (14,117,520) (6,950,850) (32,813,109) (14,368,976)
Proceeds from trust preferred securities -- -- 700,000 --
(Repayments) proceeds from other borrowings (152,308) 185,984 (609,965) 292,139
Other capital transactions 211,619 (142,570) 271,968 (133,470)
Cash dividends paid (74,525) (58,342) (219,508) (236,904)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,482,776 769,292 7,163,757 454,844
- -----------------------------------------------------------------------------------------------------------
(Decrease) in cash and cash equivalents (99,825) (83,142) (424,801) (725,290)
Cash and cash equivalents at beginning of 1,340,379 1,436,102 1,665,355 2,078,250
period
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $1,240,554 $1,352,960 $1,240,554 $1,352,960
===========================================================================================================
</TABLE>=
21
<PAGE> 22
SUPPLEMENTAL DISCLOSURES RELATED TO THE
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1997 1996 1997 1996
-------------------------------------------------------------------------------------------------
(UAUDITED)
<S> <C> <C> <C> <C>
Noncash Investing Activities
Loans exchanged for mortgage-backed
securities and held for investment $14,000 $ - $2,710,300 $920,072
Securities transferred to or from
available-for-sale 4,359,814 - 4,359,814 -
Loans transferred to foreclosed assets 104,359 151,495 336,325 493,226
Loans originated to facilitate the sale of
foreclosed properties 19,645 31,140 64,862 106,754
Loans originated to refinance existing loans 458,671 865,207 1,086,881 1,455,736
Loans transferred to loans held for sale 1,236,796 - 1,236,796 -
Cash Paid During The Period For
Interest on deposits 554,876 540,552 1,623,707 1,634,603
Interest on borrowings 476,808 399,770 1,347,919 1,140,030
Income taxes 37,238 84,278 194,866 241,830
</TABLE>
See Notes to Consolidated Financial Statements
22
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING ADJUSTMENTS
The information included in the consolidated statements of financial
position as of September 30, 1997 and December 31, 1996 and the consolidated
statements of income, stockholders' equity and cash flows of Washington Mutual,
Inc. ("Washington Mutual" or the "Company") for the quarter and nine months
ended September 30, 1997 and 1996 reflect all adjustments, including only normal
recurring adjustments, which are, in the opinion of management, necessary for a
fair statement of the results for the period presented.
The merger with Great Western Financial Corporation ("GWFC") was
accounted for as a pooling-of-interests. The assets, liabilities, stockholders'
equity, and results of operations of GWFC have been recorded on the books of the
Company at their values as carried on the books of GWFC, and no goodwill was
created. Washington Mutual's financial information contained herein has been
restated as if the respective companies had been combined for all periods
presented.
2. EARNINGS PER SHARE
Primary earnings per common share have been calculated by dividing net
income, after deducting dividends on preferred stock, by the weighted average
number of shares outstanding for the period. Fully diluted earnings per common
share assume conversion of the outstanding convertible preferred stock.
Information used to calculate earnings per share was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Data Used to Compute Per Share Amounts
Net income $(126,954) $(26,087) $243,878 $312,902
Preferred stock dividends:
Noncumulative Perpetual, Series C (1,569) (1,569) (4,707) (4,707)
Noncumulative Perpetual, Series E (936) (936) (2,808) (936)
Noncumulative Convertible
Perpetual, Series D - (2,100) - (6,300)
Convertible (GWFC) - (951) - (6,599)
Nonconvertible cumulative, Series F (3,424) (3,424) (10,272) (10,272)
- -------------------------------------------------------------------------------------------
Net income available to primary
common stock $(132,883) $(35,067) $226,091 $284,088
===========================================================================================
Net income $(126,954) $(26,087) $243,878 $312,902
Preferred stock dividends:
Noncumulative Perpetual, Series C (1,569) (1,569) (4,707) (4,707)
Noncumulative Perpetual, Series E (936) (936) (2,808) (936)
Nonconvertible cumulative, Series F (3,424) (3,424) (10,272) (10,272)
- -------------------------------------------------------------------------------------------
Net income available to fully diluted
common stock $(132,883) $(32,016) $226,091 $296,987
===========================================================================================
Average common shares outstanding:
Primary 251,549,503 232,651,826 248,142,740 236,171,482
Fully diluted 252,351,852 232,651,826 250,085,026 242,055,940
</TABLE>
In February 1997, the Financial Accounting Standards Board ("FASB")
adopted Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
per Share. SFAS No. 128 specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") for entities with
3. TRUST PREFERRED STOCK
The Company is the guarantor of three separate issues of trust preferred
securities. In December 1995, Great Western Financial Trust I ("GWFT I"), a
wholly owned subsidiary of GWFC, issued $100.0 million of 8.25% Trust Originated
Preferred Securities (the "preferred securities"). In connection with GWFT I's
issuance of preferred securities, GWFC issued to GWFT I $103.1 million principal
amount of its 8.25% subordinated deferrable interest notes, due 2025 (the
"subordinated notes"). The sole assets of GWFT I are and will be the
subordinated notes. On January 27, 1997, Great Western Financial Trust II
("GWFT II"), a wholly-owned subsidiary of GWFC, issued $300.0 million of 8.206%
Trust Originated Preferred Securities (the "preferred securities II"). In
connection with FWFT II's issuance of the preferred securities II, GWFC issued
to GWFT II $309.0 million principal amount of its 8.206% subordinated deferrable
interest notes, due 2027 (the "subordinated notes II"). The sole assets of GWFT
II are and will be the subordinated notes II. On May 31, 1997, Washington Mutual
Capital I("WMC I"), a wholly-owned subsidiary of Washington Mutual, issued
$400.0 million of 8.375% Subordinated Capital Income Securities (the "capital
securities"). In connection with WMC I's issuance of the capital securities,
Washington Mutual issued to WMC I $412.0 million principal amount of its 8.375%
Junior Subordinated Debentures, due 2027(the "subordinated debentures"). The
sole assets of WMC I are and will be the subordinated debentures. GWFC's
obligations under the subordinated notes and subordinated notes II were assumed
by the Company. Washington Mutual's obligations under the subordinated notes,
subordinated notes II and subordinated debentures and related agreements, taken
together, constitute a full and unconditional guarantee by the Company of the
obligations of GWFT I under the preferred securities, of GWFT II under the
preferred securities II and of WMC I under the capital securities.
23
<PAGE> 24
publicly held common stock or potential common stock such as options, warrants,
convertible securities or contingent stock agreements if those securities trade
in a public market. This standard specifies computation and presentation
requirements for both basic EPS and, for entities with complex capital
structures, diluted EPS. SFAS No. 128 is effective for reporting periods ending
after December 15, 1997 and early adoption of the standard is not permitted. The
adoption of SFAS No. 128 will have no material impact on the Company's results
of operations on a per share basis.
4. CAPITAL STRUCTURE
In February 1997, FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure. SFAS No. 129 establishes standards for disclosing
information about an entities capital structure. Effective for periods ending
after December 31, 1997, the Company does not anticipate the adoption of SFAS
No. 129 to have a material impact on its financial position or results of
operations.
5. COMPREHENSIVE INCOME
In June 1997, FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 is effective for periods beginning after December 15, 1997 and requires
disclosure of comprehensive income and its components. Comprehensive income
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The Company does not
anticipate the adoption of SFAS No. 130 to have a material impact on its
financial position or results of operations.
6. SEGMENT DISCLOSURES
In June 1997, FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 is effective for periods
beginning after December 15, 1997 and requires disclosure of results of
operations and other key information, such as products and services, geographic
operations and major customers, by key operating segments. The Company does not
anticipate the adoption of SFAS No. 131 to have a material impact on its
financial position or results of operations.
7. SUBSEQUENT EVENTS
In October 1997, the Company completed the securitization of $1.2 billion of
residential mortgage loans from Great Western Bank's ("GWB") portfolio which the
Company had previously identified as having both high loan-to-value ratios and
borrowers with marginal credit history. These loans were transferred to a trust
that issued five classes of securities. The securities have been retained by
WMBFA and were placed in either the Company's available-for-sale or trading
portfolio, as management deemed appropriate. The securities may subsequently be
sold, from time to time, based upon management's future judgment of market
conditions and execution capabilities. As a result, the identified loans were
classified as held for sale as of September 30, 1997 and marked to the lower of
cost or market with a charge to earnings of approximately $100.0 million.
24
<PAGE> 25
WASHINGTON MUTUAL, INC.
LIST OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
- -------------------------------------------------------------------------------
<S> <C> <C>
27.1 Financial Data Schedule
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,049,166
<INT-BEARING-DEPOSITS> 191,389
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,214,251
<INVESTMENTS-CARRYING> 10,673,803
<INVESTMENTS-MARKET> 10,549,927
<LOANS> 68,782,382
<ALLOWANCE> 671,869
<TOTAL-ASSETS> 95,607,369
<DEPOSITS> 51,297,464
<SHORT-TERM> 17,215,879
<LIABILITIES-OTHER> 2,206,252
<LONG-TERM> 18,722,398
0
278,695
<COMMON> 1,937,394
<OTHER-SE> 3,121,017
<TOTAL-LIABILITIES-AND-EQUITY> 95,607,369
<INTEREST-LOAN> 1,320,754
<INTEREST-INVEST> 381,732
<INTEREST-OTHER> 26,067
<INTEREST-TOTAL> 1,728,553
<INTEREST-DEPOSIT> 547,798
<INTEREST-EXPENSE> 525,104
<INTEREST-INCOME-NET> 655,651
<LOAN-LOSSES> 52,131
<SECURITIES-GAINS> 3,600
<EXPENSE-OTHER> 825,966
<INCOME-PRETAX> (111,333)
<INCOME-PRE-EXTRAORDINARY> (126,954)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (126,954)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> (0.53)
<YIELD-ACTUAL> 2.85
<LOANS-NON> 631,141
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 515,046
<ALLOWANCE-OPEN> 666,100
<CHARGE-OFFS> 53,100
<RECOVERIES> 6,800
<ALLOWANCE-CLOSE> 671,900
<ALLOWANCE-DOMESTIC> 99,602
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 572,267
</TABLE>
