-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OBAx6W7NgRookA253hF5xHnWp1Yiw3zErhjvr40iXKFZ867tK0gEjIqme2nPLEvo TK+PvOk/J5K6dB0K1OQkgw== 0000891020-98-001053.txt : 19980701 0000891020-98-001053.hdr.sgml : 19980701 ACCESSION NUMBER: 0000891020-98-001053 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980630 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASHINGTON MUTUAL INC CENTRAL INDEX KEY: 0000933136 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 911653725 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 033-86840 FILM NUMBER: 98658199 BUSINESS ADDRESS: STREET 1: 1201 THIRD AVENUE STREET 2: SUITE 1500 CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 2064612000 MAIL ADDRESS: STREET 1: 1201 THIRD AVE STREET 2: SUITE 1500 CITY: SEATTLE STATE: WA ZIP: 98101 10-K/A 1 AMENDMENT NO. 2 TO FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20529 FORM 10-K/A AMENDMENT NO. 2 ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED DECEMBER 31, 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 98101 SEATTLE, WASHINGTON (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 461-2000 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED ------------------- ------------------------------ Common Stock The Nasdaq Stock Market 7.60% Noncumulative Perpetual The Nasdaq Stock Market Preferred Stock, Series E
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. YES X NO __. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of January 31, 1998: COMMON STOCK -- $15,530,272,661(1) (1) Does not include any value attributable to 8,000,000 shares that are held in escrow and not traded. The number of shares outstanding of the issuer's classes of common stock as of January 31, 1998: COMMON STOCK -- 257,781,511(2) (2) Includes the 8,000,000 shares held in escrow. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement for the Annual Meeting of Shareholders to be held April 21, 1998, are incorporated by reference into Part III. ================================================================================ 2 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report................................ 64 Report of Independent Accountants........................... 65 Independent Auditors' Report................................ 66 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995.......................... 67 Consolidated Statements of Financial Position at December 31, 1997 and 1996......................................... 68 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995.................................................. 69 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.......................... 71 Notes to Consolidated Financial Statements.................. 73
63 3 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Washington Mutual, Inc.: We have audited the accompanying consolidated statements of financial position of Washington Mutual, Inc. and subsidiaries ("the Company") as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements give retroactive effect to the mergers of Washington Mutual, Inc. and Great Western Financial Corporation and Washington Mutual, Inc. and Keystone Holdings, Inc. both of which were accounted for as poolings of interests as described in Note 2 to the consolidated financial statements. We did not audit the consolidated statement of financial condition of Great Western Financial Corporation as of December 31, 1996, or the related statements of operations, changes in stockholders' equity, and cash flows for the years ended December 31, 1996 and 1995, which statements reflect total assets constituting 49% of consolidated total assets as of December 31, 1996, and total net income constituting 50% and 47% of consolidated net income for the years ended December 31, 1996 and 1995, respectively. Those statements were audited by other auditors whose report, dated, January 22, 1997 (except as to Note 28 to the consolidated financial statements, which is as of March 7, 1997) has been furnished to us, and our opinion, insofar as it relates to the amounts included for Great Western Financial Corporation for 1996 and 1995, is based solely on the report of such other auditors. We did not audit the consolidated statement of earnings, stockholder's equity, and cash flows of Keystone Holdings, Inc. and subsidiaries for the year ended December 31, 1995, which statements reflect total net income constituting 16% of consolidated net income for the year ended December 31, 1995. Those statements were audited by other auditors whose report, dated, January 26, 1996 (except as to Note 27 to the consolidated financial statements, which is as of February 8, 1996) has been furnished to us, and our opinion, insofar as it relates to the amounts included for Keystone Holdings, Inc. and subsidiaries for 1995, is based solely on the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, such consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Washington Mutual, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP February 20, 1998 Seattle, Washington 64 4 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Great Western Financial Corporation In our opinion, the accompanying consolidated statement of financial condition and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Great Western Financial Corporation and its subsidiaries ("the Company") at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the financial statements, the Company adopted accounting standards that changed its methods of accounting for mortgage servicing rights and long lived assets in 1995. /s/ Price Waterhouse LLP Los Angeles, California January 22, 1997, except as to Note 28, which is as of March 7, 1997 65 5 INDEPENDENT AUDITORS' REPORT The Board of Directors Keystone Holdings, Inc.: We have audited the consolidated statements of earnings, stockholder's equity and cash flows of Keystone Holdings, Inc. and subsidiaries for the year ended December 31, 1995, which are not presented separately herein. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Keystone Holdings, Inc. and subsidiaries for the year ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Los Angeles, California January 26, 1996, except as to Note 27 to the consolidated financial statements, which is as of February 8, 1996 66 6 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INTEREST INCOME Loans....................................................... $5,205,507 $4,621,153 $4,449,738 Available-for-sale securities............................... 1,005,991 1,310,781 694,957 Held-to-maturity securities................................. 501,834 366,592 882,654 Notes receivable............................................ -- -- 58,841 Cash equivalents and other.................................. 97,632 88,564 72,181 ---------- ---------- ---------- Total interest income..................................... 6,810,964 6,387,090 6,158,371 INTEREST EXPENSE Deposits.................................................... 2,166,104 2,240,302 2,351,903 Borrowings.................................................. 1,988,387 1,573,841 1,508,115 ---------- ---------- ---------- Total interest expense.................................... 4,154,491 3,814,143 3,860,018 ---------- ---------- ---------- Net interest income....................................... 2,656,473 2,572,947 2,298,353 Provision for loan losses................................... 207,139 392,435 251,424 ---------- ---------- ---------- Net interest income after provision for loan losses....... 2,449,334 2,180,512 2,046,929 OTHER INCOME Depositor and other retail banking fees..................... 365,883 282,468 233,879 Loan servicing fees......................................... 89,824 86,987 84,474 Securities fees and commissions............................. 132,071 131,066 135,655 Insurance fees and commissions.............................. 47,759 44,417 33,284 Other operating income...................................... 136,275 88,836 71,932 Gain (loss) on sale of loans and leases..................... (60,343) 45,708 25,933 Gain on sale of other assets................................ 39,423 17,021 19,830 Write down of loans securitized and retained................ (27,621) (38,339) (19,651) Write off of consulting fees................................ (9,871) -- -- Federal Deposit Insurance Corporation ("FDIC") assistance on covered assets............................................ -- -- 55,630 Loss on sale of covered assets.............................. -- -- (37,399) ---------- ---------- ---------- Total other income........................................ 713,400 658,164 603,567 OTHER EXPENSE Salaries and employee benefits.............................. 821,446 819,965 793,971 Occupancy and equipment..................................... 322,441 321,142 309,368 Telecommunications and outsourced information services...... 168,322 151,312 138,564 Regulatory assessments...................................... 34,873 108,271 121,274 Savings Association Insurance Fund ("SAIF") special assessment................................................ -- 312,552 -- Restructuring expense....................................... -- 68,293 -- Transaction-related expense................................. 431,125 158,121 2,000 Other operating expense..................................... 409,235 405,244 351,952 Amortization of intangible assets arising from acquisitions.............................................. 63,588 65,394 68,592 Foreclosed asset expense.................................... 10,578 18,305 17,165 ---------- ---------- ---------- Total other expense....................................... 2,261,608 2,428,599 1,802,886 ---------- ---------- ---------- Income before income taxes................................ 901,126 410,077 847,610 Income taxes................................................ 402,116 141,220 273,006 Provision for payments in lieu of taxes..................... 17,232 25,187 7,887 ---------- ---------- ---------- Income before minority interest in earnings of consolidated subsidiaries.............................................. 481,778 243,670 566,717 Minority interest in earnings of consolidated subsidiaries.............................................. -- 13,570 15,793 ---------- ---------- ---------- Net income.................................................. $ 481,778 $ 230,100 $ 550,924 ========== ========== ========== Net income attributable to common stock..................... $ 460,346 $ 191,386 $ 507,325 ========== ========== ========== Net income per common share: Basic..................................................... $1.87 $0.81 $2.19 Diluted................................................... 1.86 0.81 2.16
See Notes to Consolidated Financial Statements. 67 7 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, -------------------------- 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) ASSETS Cash........................................................ $ 1,285,222 $ 1,032,379 Cash equivalents............................................ 275,668 632,976 Trading securities.......................................... 23,364 1,647 Available-for-sale securities, amortized cost $11,258,232 and $15,913,440: Mortgage-backed securities ("MBS")........................ 10,188,107 13,968,875 Investment securities..................................... 1,185,815 2,126,468 Held-to-maturity securities, fair value $12,699,653 and $4,545,125: MBS....................................................... 12,659,217 4,286,361 Investment securities..................................... 120,397 192,695 Loans: Loans held in portfolio................................... 67,124,935 61,497,847 Loans held for sale....................................... 685,716 333,262 Reserve for loan losses................................... (670,494) (677,141) ----------- ----------- Total loans............................................. 67,140,157 61,153,968 Investment in Federal Home Loan Banks ("FHLBs")............. 1,059,491 843,002 Foreclosed assets........................................... 205,272 222,883 Premises and equipment...................................... 937,198 1,034,813 Intangible assets arising from acquisitions................. 356,650 419,500 Mortgage servicing rights................................... 215,360 185,984 Other assets................................................ 1,329,181 1,324,946 ----------- ----------- Total assets............................................ $96,981,099 $87,426,497 =========== =========== LIABILITIES Deposits: Checking accounts......................................... $ 7,914,375 $ 7,557,588 Savings accounts and money market deposit accounts ("MMDAs")............................................... 14,940,045 13,586,271 Time deposit accounts..................................... 28,131,597 31,523,055 ----------- ----------- Total deposits.......................................... 50,986,017 52,666,914 Annuities................................................... -- 878,057 Federal funds purchased and commercial paper................ 2,928,282 2,153,506 Securities sold under agreements to repurchase ("reverse repurchase agreements")................................... 12,279,040 12,033,119 Advances from FHLBs......................................... 20,301,963 10,011,425 Trust preferred securities.................................. 800,000 100,000 Other borrowings............................................ 2,689,362 3,109,694 Other liabilities........................................... 1,687,364 1,480,694 ----------- ----------- Total liabilities....................................... 91,672,028 82,433,409 Commitments and contingencies (Notes 5, 10 and 20).......... -- -- STOCKHOLDERS' EQUITY Preferred stock, no par value: 10,000,000 shares authorized -- 4,722,500 and 5,382,500 shares issued and outstanding, liquidation preference....................... 118,063 283,063 Common stock, no par value: 800,000,000 shares authorized -- 257,560,018 and 250,230,644 shares issued and outstanding........................................... -- -- Capital surplus -- common stock............................. 1,943,294 1,664,870 Valuation reserve for available-for-sale securities......... 134,610 118,625 Retained earnings........................................... 3,113,104 2,926,530 ----------- ----------- Total stockholders' equity.............................. 5,309,071 4,993,088 ----------- ----------- Total liabilities and stockholders' equity.............. $96,981,099 $87,426,497 =========== ===========
See Notes to Consolidated Financial Statements. 68 8 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) PREFERRED STOCK Balance, beginning of year............................. $ 283,063 $ 552,438 $ 554,376 Repurchase of Series C and Series E shares............. -- -- (1,938) Redemption or conversion of preferred stock............ (165,000) (269,375) -- ---------- ---------- ---------- Balance, end of year................................... 118,063 283,063 552,438 CAPITAL SURPLUS -- COMMON STOCK Balance, beginning of year............................. 1,664,870 1,521,438 1,425,671 Common stock issued through stock options, restricted stock grants and employee stock plans, including tax benefit.............................................. 309,593 46,334 25,055 Immaterial business combinations accounted for as poolings of interests................................ -- 11,844 23,562 Common stock issued under dividend reinvestment plan... 847 2,547 47,150 Conversion of preferred stock.......................... -- 268,270 -- Common stock acquired.................................. (32,016) (185,563) -- ---------- ---------- ---------- Balance, end of year................................... 1,943,294 1,664,870 1,521,438 CAPITAL SURPLUS OFFSET AGAINST NOTE RECEIVABLE Balance, beginning of year............................. -- -- (167,000) Capital surplus previously offset against note receivable........................................... -- -- 167,000 ---------- ---------- ---------- Balance, end of year................................... -- -- -- VALUATION RESERVE FOR AVAILABLE-FOR-SALE SECURITIES Balance, beginning of year............................. 118,625 297,148 (116,333) Valuation adjustments, net of related income taxes..... 15,985 (178,523) 413,481 ---------- ---------- ---------- Balance, end of year................................... 134,610 118,625 297,148 RETAINED EARNINGS Balance, beginning of year............................. 2,926,530 2,993,156 2,641,908 Net income............................................. 481,778 230,100 550,924 Cash dividends declared on preferred stock............. (21,432) (38,714) (43,599) Cash dividends declared on common stock................ (273,772) (258,012) (182,670) Immaterial business combinations accounted for as poolings of interests................................ -- -- 26,645 Repurchase of Series C and Series E shares............. -- -- (52) ---------- ---------- ---------- Balance, end of year................................... 3,113,104 2,926,530 2,993,156 ---------- ---------- ---------- Total stockholders' equity............................. $5,309,071 $4,993,088 $5,364,180 ========== ========== ==========
See Notes to Consolidated Financial Statements. 69 9 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (NUMBER OF SHARES IN THOUSANDS) PREFERRED STOCK Balance, beginning of year.................................. 5,383 7,301 7,379 Repurchase of Series C and Series E shares.................. -- -- (78) Redemption or conversion of preferred stock................. (660) (1,918) -- ------- ------- ------- Balance, end of year........................................ 4,723 5,383 7,301 ======= ======= ======= COMMON STOCK Balance, beginning of year.................................. 250,231 243,239 236,605 Common stock issued through stock options, restricted stock grants and employee stock plans, net of cancellations..... 8,217 1,628 1,150 Immaterial business combinations accounted for as poolings of interests.............................................. -- 347 3,429 Common stock issued under dividend reinvestment plan........ 20 92 2,055 Conversion of preferred stock............................... -- 11,081 -- Common stock acquired....................................... (908) (6,156) -- ------- ------- ------- Balance, end of year........................................ 257,560 250,231 243,239 ======= ======= =======
See Notes to Consolidated Financial Statements. 70 10 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income....................................... $ 481,778 $ 230,100 $ 550,924 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses................... 207,139 392,435 251,424 Loss (gain) on sale of loans and leases..... 60,343 (45,708) (25,933) (Gain) on sale of other assets.............. (39,423) (17,021) (19,830) Depreciation and amortization............... 222,317 221,679 209,936 Stock dividends from FHLBs.................. (64,086) (57,176) (39,971) Write down of loans securitized and retained.................................. 27,621 38,339 19,651 Transaction-related charges................. 196,628 145,023 -- Decrease (increase) in trading securities... 1,647 (1,409) 334 Origination of loans held for sale.......... (5,029,499) (3,171,102) (1,957,791) Sales of loans held for sale................ 4,616,468 3,622,240 2,317,031 Additions to mortgage servicing rights...... (76,352) (96,189) (69,138) Sales of mortgage servicing rights.......... -- 5,395 -- (Increase) decrease in other assets......... (486,371) 543,285 (512,624) Increase (decrease) in other liabilities.... 67,636 22,148 (177,059) ------------ ------------ ------------ Net cash provided (used) by operating activities............................. 185,846 1,832,039 (546,954) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available-for-sale securities....... (3,231,900) (4,130,281) (3,897,102) Principal payments and maturities of available-for-sale securities.................. 2,439,250 4,825,963 2,814,550 Sales of available-for-sale securities........... 2,350,541 4,540,171 2,130,340 Purchases of held-to-maturity securities......... (31,251) (3,414,473) (697,470) Principal payments and maturities of held-to-maturity securities.................... 627,163 4,019,873 1,653,413 Sales of loans................................... 41,088 1,314,090 119,194 Origination of loans, net of principal payments....................................... (12,464,718) (10,550,109) (10,003,476) Payments received on New West Federal Savings and Loan Association ("New West") Note......... -- -- 1,682,040 Proceeds from sale of foreclosed assets.......... 366,986 544,347 553,621 Purchases of premises and equipment, net......... (131,422) (113,086) (164,169) Cash acquired through acquisitions............... -- 3,506 69,358 Proceeds from sale of WM Life.................... 105,000 -- -- ------------ ------------ ------------ Net cash (used) by investing activities... (9,929,263) (2,959,999) (5,739,701)
See Notes to Consolidated Financial Statements. 71 11 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, ------------------------------------------- 1997 1996 1995 ------------ ------------ ----------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM FINANCING ACTIVITIES (Decrease) increase in deposits................... (1,680,897) (1,030,974) 1,652,935 (Decrease) increase in annuities.................. (9,538) 22,554 56,325 Increase in federal funds purchased and commercial paper........................................... 774,776 403,673 729,372 (Decrease) in short-term reverse repurchase agreements...................................... (2,634,089) (2,181,151) (1,049,527) Proceeds from long-term reverse repurchase agreements...................................... 9,800,553 4,011,148 5,347,579 Repayment of long-term reverse repurchase agreements...................................... (6,920,543) (4,649,930) (2,381,401) Proceeds from FHLBs advances...................... 51,718,045 24,676,544 5,472,178 Payments on FHLBs advances........................ (41,427,507) (20,235,938) (4,217,336) Proceeds from trust preferred..................... 700,000 -- 100,000 (Repayments of) proceeds from other borrowings.... (420,332) 229,025 90,852 Repayments to minority interest................... -- (95,372) -- Common stock repurchased.......................... (32,016) (176,732) -- Common stock issued............................... 230,704 38,944 70,215 Redemption of preferred stock..................... (165,000) Cash dividends paid............................... (295,204) (296,726) (226,269) ------------ ------------ ----------- Net cash provided by financing operations....... 9,638,952 715,065 5,644,923 ------------ ------------ ----------- (Decrease) increase in cash and cash equivalents.................................. (104,465) (412,895) 452,176 Cash and cash equivalents, beginning of year.... 1,665,355 2,078,250 1,626,074 ------------ ------------ ----------- Cash and cash equivalents, end of year.......... $ 1,560,890 $ 1,665,355 $ 2,078,250 ============ ============ =========== NONCASH INVESTING ACTIVITIES Loans exchanged for MBS........................... $ 6,408,056 $ 920,072 $ 8,585,719 Transfer to available-for-sale securities......... -- -- 10,844,168 Transfer to held-to-maturity securities........... 4,359,814 -- -- Loans transferred to foreclosed assets............ 443,412 650,079 676,001 Loans originated to facilitate the sale of foreclosed assets............................... 83,395 145,315 152,059 Loans originated to refinance existing loans...... 1,800,512 1,227,974 908,486 Loans transferred to loans held for sale.......... -- 214,991 621,267 Transaction-related write down on premises and equipment....................................... 129,151 18,388 -- CASH PAID DURING THE YEAR FOR Interest on deposits.............................. 2,177,244 2,215,708 2,340,107 Interest on borrowings............................ 2,388,780 1,549,354 1,483,695 Income taxes...................................... 226,245 269,900 159,468
See Notes to Consolidated Financial Statements. 72 12 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation On July 1, 1997, Great Western Financial Corporation ("GWFC") merged with and into a subsidiary of Washington Mutual, Inc. ("WMI" and together with its subsidiaries "Washington Mutual" or the "Company"), and all of the subsidiaries of GWFC including Great Western Bank, a Federal Savings Bank ("GWB") and Aristar, Inc. and its subsidiaries ("Aristar"), became subsidiaries of the Company (the "Great Western Merger"). The financial statements reflect the accounting for the merger as a pooling of interests and are presented as if the companies were merged as of the earliest period shown. On December 20, 1996, Keystone Holdings, Inc. ("Keystone Holdings") merged with and into Washington Mutual, and all of the subsidiaries of Keystone Holdings, including American Savings Bank, F.A. ("ASB"), became subsidiaries of the Company (the "Keystone Transaction"). The financial statements reflect the accounting for the merger as a pooling of interests and are presented as if the companies were merged as of the earliest period shown. The results of operations of Keystone Holdings have been adjusted to (i) eliminate earnings attributable to the warrant holders and (ii) reflect the preferred stock dividends to related parties as minority interest. Certain reclassifications have been made to the 1996 and 1995 financial statements to conform to the 1997 presentation. All significant intercompany transactions and balances have been eliminated. Results of operations of companies acquired and accounted for as purchases are included from the dates of acquisition. When Washington Mutual acquires a company through a material pooling of interests, current and prior-period financial statements are restated to include the accounts of merged companies. Previously reported balances of the merged companies have been reclassified to conform to the Company's presentation and restated to give effect to the combinations. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material impact on the financial statements. Lines of Business Washington Mutual provides a broad range of financial services to consumers and small to mid-sized businesses primarily throughout the western United States and Florida through its subsidiary operations. Financial services of the Company include consumer banking, mortgage lending, consumer finance, commercial banking and securities activities. Derivative Instruments The Company uses derivative instruments, such as interest rate exchange agreements and interest rate cap agreements, forward sales of financial instruments, financial futures and options to reduce its exposure to interest rate risk. Interest rate exchange agreements and interest rate cap agreements are used only if they have the effect of changing the interest rate characteristics of the assets or liabilities to which they are designated. Such effect is measured through ongoing correlation or effectiveness tests. Interest rate exchange agreements and interest rate cap agreements are designated either against the available-for-sale portfolio or against deposits and borrowings. Agreements designated against available-for-sale securities are included at fair value in the available-for-sale portfolio and any mark-to-market adjustments are reported with the change in value of the available-for-sale portfolio. Interest rate exchange agreements and 73 13 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) interest rate cap agreements designated against deposits and borrowings are reported at historical cost using settlement accounting. Under settlement accounting the interest differential paid or received on interest rate exchange agreements is recorded as an adjustment to interest income or interest expense. The purchase premium of interest rate cap agreements is capitalized and amortized and included as a component of interest income or interest expense over the original term of the interest rate cap agreement. No purchase premiums are paid at the time interest rate exchange agreements are entered into. From time to time, the Company terminates interest rate exchange agreements and interest rate cap agreements prior to maturity. Such circumstances arise if, in the judgment of management, such instruments no longer cost effectively meet policy objectives. Often such instruments are within one year of maturity. Gains and losses from terminated interest rate exchange agreements and interest rate cap agreements are recognized, consistent with the gain or loss on the asset or liability designated against the agreement. When the asset or liability is not sold or paid off, the gains or losses are deferred and amortized on a straight-line basis as additional interest income or interest expense over the original terms of the agreements or the remaining life of the designated asset or liability, whichever is less. When the asset or liability is sold or paid off, the gains or losses are recognized in the current period as an adjustment to the gain or loss recognized on the corresponding asset or liability. From time to time, the Company redesignates interest rate exchange agreements and interest rate cap agreements between available-for-sale securities and deposits and borrowings. Such redesignations are recorded at fair value at the time of transfer. The Company may also buy put or call options on mortgage instruments. The purpose and criteria for the purchase of options are to manage the interest rate risk inherent in secondary marketing activities. The cost of such options are capitalized and amortized on a straight-line basis as a reduction of other income over the original terms of the options. The fair value of options matched against closed loans are included in the lower of cost or market analysis. Changes in the fair value of options designated against the Company's loan pipeline are deferred to the extent they qualify as hedges, otherwise they are carried at fair value with the corresponding gain or loss recognized in other income. The Company may write covered call options on its available-for-sale portfolio. If the option is exercised, the option fee is an adjustment to the gain or loss on the sale of the security. If the option is not exercised, the option fee is recognized as fee income. Covered call options are carried at fair value. Additionally, to lock in prices on sales of loans originated for mortgage banking activities, the Company uses forward sales of financial instruments to lock in prices on similar types and coupons of financial instruments and thereby limit market risk until these financial instruments are sold. In the event that any of the derivative instruments fail to meet the above established criteria, they are marked to market with the corresponding gain or loss recognized in income. Trading Securities Securities classified as trading are accounted for at fair value with unrealized gains and losses included in current period earnings. Available-for-Sale Securities Securities not classified as either trading or held to maturity are considered to be available for sale. Gains and losses realized on the sale of these securities are based on the specific identification method. Unrealized gains and losses from available-for-sale securities are excluded from earnings and reported (net of tax) as a net amount in a separate component of stockholders' equity until realized. 74 14 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Held-to-Maturity Securities Investments classified as held to maturity are accounted for at amortized cost, but the Company must have both the positive intent and the ability to hold those securities to maturity. There are limited circumstances under which securities in the held-to-maturity category can be sold without jeopardizing the cost basis of accounting for the remainder of the securities in this category. Other than temporary declines in fair value are recognized as a reduction to current earnings. The Company holds a small amount of tax exempt securities, but has chosen not to report the applicable interest income and yield on a tax equivalent basis. Loans Loans held in portfolio are stated at the principal amount outstanding, net of deferred loan fees and any discounts or premiums on purchased loans. Deferred fees, discounts and premiums are amortized using the interest method over the estimated life of the loan. The Company sells most of its conforming one-to-four family residential mortgage ("SFR") fixed-rate loans in the secondary market. At the date of origination, the loans so designated and meeting secondary market guidelines are identified as loans held for sale and carried at the lower of net cost or fair value on an aggregate basis, net of their related hedge gains and losses. Management generally ceases to accrue interest income on any loan that becomes more than 90 days delinquent and reverses all interest accrued up to that time. Thereafter, interest income is accrued only if and when, in management's opinion, projected cash proceeds are deemed sufficient to repay both principal and interest. All loans for which interest is not being accrued are referred to as loans on nonaccrual status. The Company evaluates commercial real estate, commercial business and builder construction loans for impairment on an individual basis. A loan in one of the categories is considered impaired when it is (i) probable that a creditor will be unable to collect all amounts due according to the terms of the loan agreement, or (ii) a substandard loan, whether or not performing. Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, value of the underlying collateral, and current economic conditions. The valuation of impaired loans is based on (i) the present value of expected future cash flows discounted at the loan's effective interest rate, (ii) the loan's observable market price, or (iii) the fair value of the collateral if the loan is collateral dependent. The amount by which the recorded investment in the loan exceeds either the present value of expected future cash flows or the value of the impaired loan's collateral is included in the Company's allocated reserve for loan losses. Any portion of an impaired loan classified as loss under regulatory guidelines is charged off or specifically reserved. Reserve for Loan Losses The reserve for loan losses is maintained at a level sufficient to provide for estimated loan losses based on evaluating known and inherent risks in the loan portfolio. The reserve is based on management's continuing analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, loan loss experience, current and anticipated economic conditions, and detailed analysis of individual loans and credits for which full collectibility may not be assured. The detailed analysis includes techniques to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The appropriate reserve level is estimated based upon factors and trends identified by management at the time financial statements are prepared. When available information confirms that specific loans or portions thereof are uncollectible, these amounts are charged off against the reserve for loan losses. The existence of some or all of the following criteria will generally confirm that a loss has been incurred: the loan is significantly delinquent and the borrower has not evidenced the ability or intent to bring the loan current; the Company has no recourse to the borrower, or if it does, the borrower has insufficient assets to pay the debt; or the fair value of the loan 75 15 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) collateral is significantly below the current loan balance, and there is little or no near-term prospect for improvement. Commercial real estate loans are considered by the Company to have somewhat greater risk of uncollectibility than residential real estate loans due to the dependency on income production or future development of the real estate. Consumer finance loans are also reviewed on a systematic basis. In evaluating the adequacy of the reserve, consideration is given to recent loan loss experience and such other factors as, in management's judgment, deserve current recognition in estimating losses. Loans secured by collateral other than real estate are charged off based on the number of days contractually delinquent (180 days for substantially all loans). The ultimate recovery of all loans is susceptible to future market factors beyond the Company's control. These factors may result in losses or recoveries differing significantly from those provided in the financial statements. MBS Impairment and Contingent Liability for Loans Sold with Recourse Retained The Company records an impairment on loans securitized with full or limited recourse and held in its portfolio of MBS. The Company also maintains a contingent liability to cover potential losses on loans that have been sold to third parties where the Company has retained full or limited recourse. Foreclosed Assets Foreclosed assets include properties acquired through foreclosure that are transferred at the lower of cost or fair value, less estimated selling costs, which represents the new recorded basis of the property. Subsequently, properties are evaluated and any additional declines in value are provided for in a reserve for losses. The amount the Company ultimately recovers from foreclosed assets may differ substantially from the net carrying value of these assets because of future market factors beyond the Company's control or because of changes in the Company's strategy for sale or development of the property. Mortgage Servicing Rights Originated servicing rights are recorded when mortgage loans are originated and subsequently sold or securitized (and held as available-for-sale securities) with the servicing rights retained. The total cost of the mortgage loans is allocated to the servicing rights and the loans (without the servicing rights) based on their relative fair values. Purchased servicing rights represent the cost of acquiring the right to service mortgage loans. The cost relating to purchased and originated servicing is capitalized and amortized in proportion to, and over the period of, estimated future net servicing income. "Short servicing" is recorded in other liabilities in instances where the cost of servicing exceeds the servicing fees received and is amortized in proportion to, and over the period of, estimated net servicing loss. The Company assesses impairment of the capitalized servicing rights based on the fair value of those rights on a stratum-by-stratum basis with any impairment recognized through a valuation allowance for each impaired stratum. For purposes of measuring impairment, the servicing rights are stratified based on the following predominant risk characteristics of the underlying loans: fixed-rate mortgage loans by coupon rate (less than 6%, 50 basis point increments between 6% and 12% and greater than 12%); and adjustable-rate mortgage loans ("ARMs") by index, such as the 11th District Cost of Funds Index ("COFI"), Treasury, or the London Interbank Offering Rate ("LIBOR"). In order to determine the fair value of the servicing rights, the Company primarily uses a valuation model that calculates the present value of future cash flows. Assumptions used in the valuation model include market discount rates and anticipated prepayment speeds. The prepayment speeds are determined from market 76 16 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) sources for fixed-rate mortgages with similar coupons, and prepayment reports for comparable ARMs. In addition, the Company uses market comparables for estimates of the cost of servicing per loan, an inflation rate, ancillary income per loan, and default rates. Premises and Equipment Land, buildings, leasehold improvements and equipment are carried at amortized cost. Buildings and equipment are depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the shorter of their useful lives or lease terms. The Company periodically reviews premises and equipment for impairment. If identified, an impairment loss is recognized. Intangible Assets Arising from Acquisitions Because of the earnings power or other identifiable values of certain purchased companies or businesses, the Company paid amounts in excess of identifiable fair value for businesses and tangible assets acquired. Generally, such amounts are being amortized by systematic charges to income over a period no greater than the estimated remaining life of the assets acquired or not exceeding the estimated average remaining life of the existing deposit base assumed. The Company periodically reviews intangibles to assess recoverability and impairment is recognized in operations if permanent loss of value occurs. Reverse Repurchase Agreements The Company enters into agreements under which the Company sells securities subject to an obligation to repurchase the same or similar securities ("reverse repurchase agreements"). Under these arrangements, the Company transfers legal control over the assets but still retains effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, reverse repurchase agreements are accounted for as financing arrangements and not as a sale and subsequent repurchase. The obligation to repurchase the securities is reflected as a liability in the Consolidated Statements of Financial Position while the dollar amount of securities underlying the agreements remains in the respective asset accounts. Trust Assets Assets held by the Company in fiduciary or agency capacity for customers are not included in the Consolidated Statements of Financial Position as such items are not assets of the Company. Assets totaling $137.5 million and $85.8 million as of December 31, 1997 and 1996 were held by the Company in fiduciary or agency capacity. Transaction-Related Expenses The Company records transaction-related expenses in conjunction with its major business combinations. Transaction-related expenses are comprised of three major categories: employee severance costs, the write down of duplicate or excess premises and equipment, and other incremental expenses related to effecting a business combination. The Company recognizes a liability for the cost of employee termination benefits that management decides to provide involuntarily terminated employees in the period in which management approves the specific plan of termination, if all of the following conditions exist: (i) management has the appropriate level of authority to involuntarily terminate employees, (ii) management approves and commits the enterprise to the plan of termination, (iii) management establishes the benefits that current employees will receive upon termination, (iv) the benefit arrangement has been communicated to employees, (v) the communication of the benefit arrangement includes sufficient detail to enable employees to determine the type and amount of benefits they will receive if they are terminated, (vi) the plan of termination specifically identifies the number 77 17 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of employees to be terminated, their job classifications or functions, and their locations, and (vii) the period of time to complete the plan of termination indicates that significant changes to the plan of termination are not likely. Upon consummation of a business combination, the Company specifically identifies duplicate or excess facilities in the combined operations. Duplicate or excess facilities fall into two categories: facilities owned by the Company and facilities leased by the Company. Duplicate or excess facilities owned by the Company are recorded at the lower of cost or fair value. The loss estimated and recorded while these facilities remain in service does not include the portion of the cost that is properly allocable to anticipated future service of the facility. Depreciation is recorded on these facilities while they remain in service. The loss estimated and recorded on leased duplicate or excess facilities represents either costs to be incurred by the Company under contractual obligations or represents penalties that will be incurred to cancel the contractual obligations. Lease payments made on these facilities while they remain in service are included in occupancy and equipment expense and are not included in transaction-related expenses. The other incremental expenses related to effecting a business combination consist of both period costs and accrued contract exit fees for duplicate services provided. The period costs include actual fees of professional services firms (legal, underwriting, etc.) that were incurred in conjunction with the combinations, and one-time, nonrecurring incremental costs associated with combining the entities which are being expensed as incurred. The liability for contract exit fees for duplicate services provided is recognized when Company management makes the decision to terminate such contracts. Income Taxes Income taxes are accounted for using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax bases of existing assets and liabilities are expected to be reported in the Company's income tax returns. The deferred tax provision for the year is equal to the change in the deferred tax liability from the beginning to the end of the year. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The Company reports income and expenses using the accrual method of accounting and files a consolidated tax return on that basis as well. The Company's tax filings generally include all subsidiaries. Keystone Holdings filed a separate consolidated tax return for periods prior to December 20, 1996. The Keystone Holdings returns included losses of ASB's nominee, New West, incurred through October 24, 1995. Net operating losses of New West incurred prior to that date are available for carryforward by ASB and have been included in the schedule of net operating loss carryforwards presented in Note 18: Income Taxes. For periods subsequent to the Keystone Transaction, the Company's consolidated tax return includes Keystone Holdings. GWFC will file separate consolidated tax returns for periods prior to July 1, 1997. For periods subsequent to the Great Western Merger, the Company's consolidated tax return will include GWFC. Average Balances Average balances are obtained from the best available daily, weekly or monthly data, which in all cases approximate the average balances calculated on a daily basis. Adoption of Recently Issued Accounting Standards Statement of Financial Accounting Standards ("SFAS") No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in June 1996 and established, 78 18 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) among other things, new criteria for determining whether a transfer of financial assets in exchange for cash or other consideration should be accounted for as a sale or as a pledge of collateral in a secured borrowing. As issued, SFAS No. 125 was effective for all transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. In December 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125. SFAS No. 127 defers for one year the effective date of certain provisions of SFAS No. 125. The Company has and will implement SFAS No. 125, as amended by SFAS No. 127 as required. The adoption is not anticipated to have a material impact on the results of operations or financial position of the Company. 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 will not affect the results of operations or financial position of the Company. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997, and is applicable to interim periods. SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information was issued in June 1997 and redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. SFAS No. 131 is effective for the Company beginning January 1, 1998. The statement will not affect the results of operations or financial position of the Company. The Company has not yet completed its analysis of which operating segments it will report on. NOTE 2: BUSINESS COMBINATIONS/RESTRUCTURING On July 1, 1997, WMI completed its business combination with GWFC. On that date GWFC had assets of $43.77 billion, deposits of $27.79 billion and stockholders' equity of $2.69 billion. The Company issued 125,649,551 shares of common stock to complete the Great Western Merger. Results of operations of the Company and GWFC for the six months ended June 30, 1997 were as follows:
SIX MONTHS ENDED JUNE 30, 1997 -------------------------------------- WASHINGTON MUTUAL GWFC COMBINED ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Total revenue.................................. $1,850,340 $1,811,823 $3,662,163 Net income..................................... $ 232,796 $ 138,036 $ 370,832
Reconciliations of revenue and net income previously presented by the Company with the combined amounts presented in the accompanying consolidated statements of income for the years ended December 31, 1996 and 1995 were as follows.
YEAR ENDED DECEMBER 31, 1996 -------------------------------------- WASHINGTON MUTUAL GWFC COMBINED ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Total revenue.................................. $3,414,117 $3,631,137 $7,045,254 Net income..................................... $ 114,278 $ 115,822 $ 230,100
YEAR ENDED DECEMBER 31, 1995 -------------------------------------- WASHINGTON MUTUAL GWFC COMBINED ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Total revenue.................................. $3,132,675 $3,629,263 $6,761,938 Net income..................................... $ 289,902 $ 261,022 $ 550,924
79 19 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On December 20, 1996, the Company merged with Keystone Holdings. At November 30, 1996, Keystone Holdings had assets of $21.89 billion, deposits of $12.82 billion and stockholder's equity of $808.6 million. The Company issued 47,883,333 shares of common stock to complete the Keystone Transaction. During 1996, GWFC implemented a restructuring plan to improve its competitive position, accelerate expense reduction and enhance future revenue growth by streamlining operations, making efficient use of premises and modernizing its systems platform. The Company recorded $68.3 million of restructuring charges in 1996. The components of the restructuring charge were severance and related payments, and facilities and equipment impairment. At December 31, 1996, $47.1 million of these charges remained accrued. The incomplete GWFC restructuring activities have been integrated into the consolidation activities associated with the Great Western Merger and are now accounted for in connection with the transaction-related expenses discussed below. As a result of the Great Western Merger and the Keystone Transaction, the Company recorded transaction-related expenses of $431.1 million and $226.4 million (inclusive of the $68.3 million of restructuring charges discussed above) during 1997 and 1996. The majority of the charges were for severance and related payments, facilities and equipment impairment, and various investment banking, legal and contract exit fees, all of which were incremental expenses. The accrual of $196.1 million at year-end 1997 and the $126.6 million (inclusive of the $47.1 million of restructuring charges discussed above) at year-end 1996 related primarily to costs for specifically identified severance programs, the impairment of premises and equipment and the liability for contract exit fees for duplicate services. The Company expected staff reductions related to the Keystone Transaction and Great Western Merger (inclusive of the GWFC restructuring plan) of approximately 2,850. As of December 31, 1997 and 1996 approximately 1,660 and 630 employee separations had occurred under these plans. The remaining employee separations of approximately 1,190 are planned to be completed by the end of June 1998. Additional staff reductions are anticipated as a result of normal attrition. Offices used by the Company on the 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 565,000 square feet, located predominantly in six buildings, will become available to sublet to third party tenants. It is expected that the space will be available for subleasing by June 1998. In addition, the Company has identified 90 consumer financial centers which will be closed and will have their operations consolidated with neighboring financial centers by the end of the third quarter of 1998. 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 systems will allow the Company to increase operational efficiency, improve processing capacity and establish a common user workstation environment. 80 20 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reconciliations of the restructuring and transaction-related expenses and accrual activity during 1996 and 1997 were as follows:
1996 ACTIVITY DECEMBER 31, 1996 CHARGED 1996 1996 1996 TOTAL AGAINST ACCRUED PERIOD COSTS ACCRUAL EXPENSES ACCRUAL BALANCE ------------ -------- -------- ------------- ------------ (DOLLARS IN THOUSANDS) Severance..................... $ -- $ 59,714 $ 59,714 $ (2,776) $ 56,938 Premises...................... -- 29,456 29,456 -- 29,456 Equipment..................... -- 29,101 29,101 (18,388) 10,713 Legal, underwriting and other direct transaction costs.... 23,179 3,232 26,411 -- 3,232 Contract cancellation costs... -- 12,300 12,300 -- 12,300 Other......................... 55,456 13,976 69,432 -- 13,976 -------- -------- -------- -------- -------- $ 78,635 $147,779 $226,414 $(21,164) $126,615 ======== ======== ======== ======== ========
1997 ACTIVITY DECEMBER 31, 1997 CHARGED 1997 1997 1997 TOTAL AGAINST ACCRUED PERIOD COSTS ACCRUAL EXPENSES ACCRUAL BALANCE ------------ -------- -------- ------------- ------------ (DOLLARS IN THOUSANDS) Severance..................... $ 28,807 $ 94,126 $122,933 $ (57,960) $ 93,104 Premises...................... -- 97,165 97,165 (69,317) 57,304 Equipment..................... -- 49,121 49,121 (59,834) -- Legal, underwriting and other direct transaction costs.... 109,811 3,503 113,314 (5,993) 742 Contract cancellation costs... -- 33,207 33,207 (11,808) 33,699 Other......................... 8,640 6,745 15,385 (9,478) 11,243 -------- -------- -------- --------- -------- $147,258 $283,867 $431,125 $(214,390) $196,092 ======== ======== ======== ========= ========
On January 31, 1996, the Company acquired Western Bank ("Western") through a merger of Western with and into WMB. At the time of the merger, Western had 42 offices in 35 communities and was Oregon's largest community-based commercial bank. At January 31, 1996, Western had assets of $776.3 million, deposits of $696.4 million and stockholders' equity of $69.5 million. The Company issued 5,865,235 shares of common stock to complete the merger with Western. The merger was treated as a pooling of interests. The financial information presented in this document reflects the pooling of interests method of accounting for the merger of Western into the Company. Accordingly, the assets, liabilities and stockholders' equity of Western were recorded on the books of the Company at their values as reported on the books of Western immediately prior to the consummation of the merger with Western. No goodwill was created in the merger with Western. This presentation required the restatement of prior periods as if the companies had been combined for all years presented. On January 15, 1997, Washington Mutual acquired United Western Financial Group, Inc. ("United Western") of Salt Lake City, Utah and its United Savings Bank and Western Mortgage Loan Corporation subsidiaries for $79.5 million in cash. At January 15, 1997, United Western had assets of $404.1 million, deposits of $299.9 million, and stockholders' equity of $53.7 million. The acquisition of United Western was accounted for as a purchase for accounting purposes. Accordingly, on January 15, 1997, the assets, liabilities and stockholders' equity of United Western were recorded on the books of the Company at their respective fair values at the time of the consummation of the acquisition of United Western. Goodwill, the excess of the purchase price over the net fair value of the assets and liabilities, including intangible assets, was recorded at 81 21 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $4.2 million. Amortization of goodwill over a 10-year period will result in a charge to earnings of approximately $420,000 per year. NOTE 3: CASH AND CASH EQUIVALENTS Cash and cash equivalents consisted of the following:
DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- (DOLLARS IN THOUSANDS) Cash........................................................ $1,285,222 $1,032,379 Cash equivalents: Overnight investments..................................... 257,583 381,029 Commercial paper.......................................... 10,975 -- Securities purchased under agreements to resell ("repurchase agreements").............................. -- 250,000 Time deposit accounts..................................... 7,110 1,947 ---------- ---------- 275,668 632,976 ---------- ---------- $1,560,890 $1,665,355 ========== ==========
The Company enters into repurchase agreements having terms of up to 90 days; however, repurchase agreements are typically overnight investments. The Company generally takes possession of collateral supporting repurchase agreements. The repurchase agreements were collateralized by U.S. government agency securities with fair values at least 2% above the face amounts of the repurchase agreements. For the purpose of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, overnight investments, commercial paper, repurchase agreements and time deposits. These time deposit accounts are short term, with an original maturity of three months or less. Federal Reserve Board regulations require depository institutions to maintain certain minimum reserve balances. Included in cash were balances maintained at the Federal Reserve Bank of San Francisco of $102.2 million and $149.7 million at December 31, 1997 and 1996. 82 22 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4: SECURITIES The amortized cost, unrealized gains, unrealized losses, and fair values of securities (exclusive of trading securities) were as follows:
DECEMBER 31, 1997 ----------------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE YIELD(1) ----------- ---------- ---------- ----------- -------- (DOLLARS IN THOUSANDS) Available-for-sale securities Investment securities: U.S. government and agency...... $ 528,528 $ 2,211 $ (173) $ 530,566 6.67% Corporate debt.................. 456,064 2,849 (363) 458,550 6.51 Municipal(2).................... 25 1 -- 26 9.61 Equity securities: Preferred stock.............. 172,199 13,188 (75) 185,312 6.33 Other securities............. 11,331 163 (133) 11,361 6.29 ----------- -------- --------- ----------- ---- 1,168,147 18,412 (744) 1,185,815 6.55 MBS: U.S. government agency.......... 8,118,693 108,671 (5,542) 8,221,822 6.64 Private issue................... 1,970,359 13,492 (18,550) 1,965,301 7.35 ----------- -------- --------- ----------- ---- 10,089,052 122,163 (24,092) 10,187,123 6.78 Derivative instruments: Interest rate exchange agreements................... -- -- (218) (218) -- Interest rate cap agreements.... 1,033 169 -- 1,202 -- ----------- -------- --------- ----------- ---- 1,033 169 (218) 984 -- ----------- -------- --------- ----------- ---- 10,090,085 122,332 (24,310) 10,188,107 6.78 ----------- -------- --------- ----------- ---- $11,258,232 $140,744 $ (25,054) $11,373,922 6.75% =========== ======== ========= =========== ==== Held-to-maturity securities Investment securities: Corporate debt.................. $ 20,273 $ 1,152 $ (7) $ 21,418 8.21% Municipal(2).................... 100,124 5,429 -- 105,553 5.84 ----------- -------- --------- ----------- ---- 120,397 6,581 (7) 126,971 6.24 MBS: U.S. government agency.......... 12,559,634 48,337 (134,872) 12,473,099 6.38 Private issue................... 99,583 -- -- 99,583 5.90 ----------- -------- --------- ----------- ---- 12,659,217 48,337 (134,872) 12,572,682 6.38 ----------- -------- --------- ----------- ---- $12,779,614 $ 54,918 $(134,879) $12,699,653 6.38% =========== ======== ========= =========== ====
83 23 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 -------------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE YIELD(1) ----------- ---------- ---------- ----------- -------- (DOLLARS IN THOUSANDS) Available-for-sale securities: Investment securities: U.S. government and agency............. $ 878,179 $ 2,068 $ (1,904) $ 878,343 6.38% Corporate debt......................... 1,032,876 11,168 (4,796) 1,039,248 6.51 Equity securities: Preferred stock..................... 171,029 4,012 (831) 174,210 6.88 Other securities.................... 34,621 175 (129) 34,667 5.99 ----------- -------- -------- ----------- ---- 2,116,705 17,423 (7,660) 2,126,468 6.48 MBS: U.S. government agency................. 12,541,352 231,349 (53,412) 12,719,289 6.89 Private issue.......................... 1,250,738 8,372 (11,338) 1,247,772 7.38 ----------- -------- -------- ----------- ---- 13,792,090 239,721 (64,750) 13,967,061 6.93 Derivative instruments: Interest rate exchange agreements...... -- 265 (911) (646) -- Interest rate cap agreements........... 4,645 271 (2,456) 2,460 -- ----------- -------- -------- ----------- ---- 4,645 536 (3,367) 1,814 -- ----------- -------- -------- ----------- ---- 13,796,735 240,257 (68,117) 13,968,875 6.93 ----------- -------- -------- ----------- ---- $15,913,440 $257,680 $(75,777) $16,095,343 6.87% =========== ======== ======== =========== ==== Held-to-maturity securities: Investment securities: U.S. government and agency............. $ 6,629 $ 559 $ -- $ 7,188 8.25% Corporate debt......................... 77,993 5,215 (28) 83,180 8.61 Municipal(2)........................... 108,073 3,618 (238) 111,453 6.23 ----------- -------- -------- ----------- ---- 192,695 9,392 (266) 201,821 7.28 MBS: U.S. government agency................. 4,186,777 73,534 (7,781) 4,252,530 7.60 Private issue.......................... 99,584 -- (8,810) 90,774 5.55 ----------- -------- -------- ----------- ---- 4,286,361 73,534 (16,591) 4,343,304 7.56 ----------- -------- -------- ----------- ---- $ 4,479,056 $ 82,926 $(16,857) $ 4,545,125 7.55% =========== ======== ======== =========== ====
- --------------- (1) Weighted average yield at end of year. (2) The Company held a small amount of tax exempt securities, but chose not to report the applicable interest income and yield on a tax equivalent basis. 84 24 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Securities (exclusive of trading securities) by contractual maturity were as follows:
DECEMBER 31, 1997 ------------------------------------------------------------------------------------------------------ DUE AFTER ONE AFTER FIVE CARRYING WITHIN BUT WITHIN BUT WITHIN AFTER VALUE YIELD ONE YEAR YIELD FIVE YEARS YIELD 10 YEARS YIELD 10 YEARS YIELD ----------- ----- -------- ----- ---------- ----- ---------- ----- ----------- ----- (DOLLARS IN THOUSANDS) Available-for-sale securities Investment securities: U.S. government and agency................. $ 530,566 6.67% $251,924 6.06% $ 265,517 7.24% $ 8,037 6.86% $ 5,088 6.95% Corporate debt........... 458,550 6.51 139,043 6.37 229,503 6.53 51,776 6.77 38,228 6.47 Municipal................ 26 9.61 -- -- 26 9.61 -- -- -- -- Equity securities: Preferred stock.......... 185,312 6.33 -- -- -- -- -- -- 185,312 6.33 Other securities......... 11,361 6.29 3,069 5.73 2,701 5.83 2,410 7.24 3,181 6.50 MBS: U.S. government agency... 8,221,822 6.64 9,608 5.25 898,807 6.53 140,149 7.09 7,173,258 6.64 Private issue............ 1,965,301 7.35 -- -- 2,149 12.33 -- -- 1,963,152 7.35 Derivative instruments: Interest rate exchange agreements............. (218) -- (334) -- 116 -- -- -- -- -- Interest rate cap agreements............. 1,202 -- 1,202 -- -- -- -- -- -- -- ----------- ---- -------- ---- ---------- ----- -------- ---- ----------- ---- $11,373,922 6.75% $404,512 6.11% $1,398,819 6.68% $202,372 6.91% $ 9,368,219 6.79% =========== ==== ======== ==== ========== ===== ======== ==== =========== ====
Held-to-maturity securities Investment securities: Corporate debt........... $ 20,273 8.21% $ -- --% $ 100 5.50% $ -- --% $ 20,173 8.21% Municipal................ 100,124 5.84 -- -- 5,666 5.48 23,948 6.14 70,510 5.77 MBS: U.S. government agency... 12,559,634 6.38 -- -- 3,564 6.59 67,322 6.79 12,488,748 6.38 Private issue............ 99,583 5.90 -- -- -- -- -- -- 99,583 5.90 ----------- ---- -------- ---- ---------- ----- -------- ---- ----------- ---- $12,779,614 6.38% $ -- --% $ 9,330 5.90% $ 91,270 6.62% $12,679,014 6.38% =========== ==== ======== ==== ========== ===== ======== ==== =========== ====
The available-for-sale portfolio contains a small amount of private-issue securities. Private-issue securities include MBS and collateralized mortgage obligations ("CMOs") that expose the Company to certain risks that are not inherent in agency securities, primarily credit risk and liquidity risk. Because of this added risk, private-issue securities have historically paid a higher rate of interest than U.S. government agency securities, thereby enhancing the overall yield of the portfolio. Such securities do not qualify for guarantee by the U.S. government or one of its agencies because the loan size, underwriting or underlying collateral of these securities often does not meet agency standards. Consequently, there is the possibility of loss of the principal investment. For this reason, it is possible that the Company will not receive an enhanced overall yield on the portfolio and, in fact, could incur a loss. Additionally, the Company may not be able to sell such securities in certain market conditions as the number of interested buyers may be limited at that time. Furthermore, the complex structure of certain CMOs in the Company's portfolio increases the difficulty in assessing the portfolio's risk and its fair value. Examples of some of the more complex structures include certain CMOs where the Company holds subordinated tranches, certain CMOs that have been "resecuritized," and certain securities that contain a significant number of jumbo, nonconforming loans. Other than temporary declines in fair value are recognized as a reduction to current earnings. At December 31, 1997, the Company held $2.09 billion of private-issue MBS and CMOs (including the $1.22 billion Real Estate Mortgage Investment Conduit ("REMIC") created during the fourth quarter of 1997). Of the $2.09 billion, 49% were of the highest investment grade (AAA), 38% were rated investment grade (AA or A), 5% were rated lowest investment grade (BBB) and 8% were rated below investment grade (BB or below). At December 31, 1996, the Company held $1.34 billion of private-issue MBS and CMOs. Of 85 25 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) that amount, 16% were of the highest investment grade (AAA), 75% were rated investment grade (AA or A), 6% were rated lowest investment grade (BBB) and 3% were rated below investment grade (BB or below). At December 31, 1997, $15.00 billion of MBS where the Company has retained recourse against the loans collateralizing the MBS ("Recourse MBS") had an associated impairment of $35.6 million. The Company also maintains a contingent liability to cover potential losses on Recourse MBS sold to third parties and loans sold with recourse. During 1997, an additional $2.7 million was set aside to cover losses on these Recourse MBS and loans sold with recourse. At December 31, 1997 the Company had sold $2.13 billion of Recourse MBS and loans sold with recourse, and the contingent liability totaled $8.8 million, which the Company considers adequate to cover inherent losses. Proceeds from sales of securities in the available-for-sale portfolio during 1997, 1996 and 1995 were $2.35 billion, $4.54 billion and $2.13 billion. The Company realized $8.3 million in gains and $800,000 in losses on these sales during 1997. The Company realized $42.1 million in gains and $34.1 million in losses on sales during 1996. Similarly, the Company realized $31.1 million in gains and $10.0 million in losses during 1995. MBS with an amortized cost of $14.55 billion and fair value of $14.58 billion at December 31, 1997 were pledged to secure public deposits, reverse repurchase agreements, other borrowings, interest rate exchange agreements, and access to the Federal Reserve discount window. At December 31, 1997, net unrealized gains on the available-for-sale portfolio were $115.7 million and net unrealized losses on the derivative instruments designated against this portfolio were $49,000. During 1997, certain MBS were transferred from available for sale to held to maturity. The related market adjustment of $101.3 million was retained in equity and will be amortized over the life of the related securities in accordance with SFAS No. 115. The net (after tax) result was a valuation reserve of $134.6 million included as a separate component of stockholders' equity. At December 31, 1996, net unrealized gains on the available-for-sale portfolio were $184.7 million and net unrealized losses on the derivative instruments designated against this portfolio were $2.8 million, resulting in a combined net unrealized gain included as a separate component of stockholders' equity (on an after tax basis) of $118.6 million. During 1995, FASB issued a report entitled A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities, Questions and Answers that allowed companies a one-time reassessment and related reclassification from the held-to-maturity category to the available-for-sale category without adverse accounting consequences for the remainder of the portfolio. During the fourth quarter of 1995, the Company elected to take advantage of this opportunity and reclassified held-to-maturity securities with an amortized cost of $10.84 billion and unrealized gains of $225.6 million and unrealized losses of $28.2 million to the available-for-sale category. No transfers from the held-to-maturity category to the available-for-sale category were made during 1997 and 1996. 86 26 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5: LOANS Loans consisted of the following:
DECEMBER 31, -------------------------- 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) Real estate: SFR..................................................... $53,431,451 $48,689,404 SFR construction........................................ 877,449 728,121 Commercial real estate(1)............................... 6,613,541 6,488,254 ----------- ----------- 60,922,441 55,905,779 Manufactured housing...................................... 1,081,193 1,028,192 Second mortgage and other consumer........................ 2,725,144 2,371,086 Consumer finance.......................................... 2,309,407 2,185,903 Commercial business....................................... 772,466 340,149 Reserve for loan losses................................... (670,494) (677,141) ----------- ----------- $67,140,157 $61,153,968 =========== ===========
- --------------- (1) At December 31, 1997, included $65.0 million of commercial real estate construction lending. Real estate construction (including SFR construction and commercial real estate construction) and commercial business loans by maturity date were as follows:
DECEMBER 31, 1997 ---------------------------------------------------------- REAL ESTATE CONSTRUCTION COMMERCIAL BUSINESS --------------------- --------------------- ARMS FIXED RATE ARMS FIXED RATE TOTAL -------- ---------- -------- ---------- ---------- (DOLLARS IN THOUSANDS) Due within one year.................... $339,119 $ 25,382 $435,550 $ 40,517 $ 840,568 After one but within five years........ 38,584 59,527 154,298 48,038 300,447 After five years....................... 172,319 307,503 18,948 75,115 573,885 -------- -------- -------- -------- ---------- $550.022 $392,412 $608,796 $163,670 $1,714,900 ======== ======== ======== ======== ==========
Nonaccrual loans totaled $601.4 million and $575.0 million at December 31, 1997 and 1996. If interest on these loans had been recognized, such income would have been $43.6 million in 1997, $53.5 million in 1996 and $48.9 million in 1995. 87 27 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amount of impaired loans and the related allocated reserve for loan losses were as follows:
DECEMBER 31, ------------------------------------------------- 1997 1996 --------------------- ------------------------ LOAN ALLOCATED ALLOCATED AMOUNT RESERVES LOAN AMOUNT RESERVES -------- --------- ----------- --------- (DOLLARS IN THOUSANDS) Nonaccrual loans: With allocated reserves................... $ 33,980 $ 7,760 $ 19,071 $ 6,641 Without allocated reserves................ 15,481 -- 39,609 -- -------- ------- -------- ------- 49,461 7,760 58,680 6,641 Other impaired loans: With allocated reserves................... 420,662 82,693 384,272 73,168 Without allocated reserves................ 81,160 -- 177,516 -- -------- ------- -------- ------- 501,822 82,693 561,788 73,168 -------- ------- -------- ------- $551,283 $90,453 $620,468 $79,809 ======== ======= ======== =======
The average balance of impaired loans and the related interest income recognized were as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Average balance of impaired loans...................... $572,727 $607,514 $436,034 Interest income recognized............................. 38,523 34,248 28,815
Loans totaling $24.36 billion and $12.01 billion at December 31, 1997 and 1996 were pledged to secure advances from FHLBs. At December 31, 1997, the Company had $1.16 billion in fixed-rate SFR loan commitments, $1.46 billion in ARM commitments, $773.8 million in SFR construction loan commitments, $155.0 million in commercial real estate loan commitments, $518.9 million in commercial business loan commitments, and $1.60 billion in undisbursed lines of credit. Unamortized deferred loan fees were $67.7 million and $162.0 million at December 31, 1997 and 1996. The amortization of deferred loan fees included in interest income totaled $67.4 million in 1997, $63.7 million in 1996 and $83.1 million in 1995. As of December 31, 1997, the Company serviced 423 Government National Mortgage Association ("GNMA") loan pools with an outstanding security balance of $371.0 million. The Company did not issue any additional GNMA loan pools during 1997. 88 28 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6: RESERVE FOR LOAN LOSSES Changes in the reserve for loan losses were as follows:
YEAR ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 --------- --------- --------- (DOLLARS IN THOUSANDS) Balance, beginning of year......................... $ 677,141 $ 598,124 $ 683,040 Provision for loan losses.......................... 207,139 392,435 251,424 Reserves added through business combinations....... 10,908 1,077 5,372 Reserves transferred to MBS impairment............. (21,755) -- -- Reserves transferred to contingent liability....... (2,747) -- -- Loans charged off: SFR.............................................. (100,860) (232,653) (240,489) SFR construction................................. (52) (16) (125) Commercial real estate........................... (24,073) (36,354) (55,888) Manufactured housing, second mortgage and other consumer................................ (17,621) (11,127) (8,905) Commercial business.............................. (2,569) (435) (813) Consumer finance................................. (79,697) (60,520) (62,206) --------- --------- --------- (224,872) (341,105) (368,426) Recoveries of loans previously charged off: SFR.............................................. 1,353 5,693 3,891 SFR construction................................. 90 -- 47 Commercial real estate........................... 2,725 3,425 5,286 Manufactured housing, second mortgage and other consumer................................ 2,916 1,221 951 Commercial business.............................. 221 74 482 Consumer finance................................. 17,375 16,197 16,057 --------- --------- --------- 24,680 26,610 26,714 --------- --------- --------- Net charge offs.................................... (200,192) (314,495) (341,712) --------- --------- --------- Balance, end of year............................... $ 670,494 $ 677,141 $ 598,124 ========= ========= =========
In connection with the Keystone Transaction, the Company provided an additional $125.0 million in loan loss provision. This additional loan loss provision was provided principally because a number of Washington Mutual (prior to the business combination with Keystone Holdings) credit administration and asset management philosophies and procedures differed from those of ASB. The provision in 1996 also included $50.0 million attributable to a bulk sale of loans at GWB. As part of the ongoing process to determine the adequacy of the reserve for loan losses, the Company reviews the components of its loan portfolio for specific risk of principal loss. 89 29 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) An analysis of the reserve for loan losses was as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1997 1996 --------- --------- (DOLLARS IN THOUSANDS) Specific and allocated reserves: Commercial real estate............................. $ 84,969 $117,343 Commercial business................................ 3,277 1,285 Builder construction............................... 2,207 -- -------- -------- 90,453 118,628 Unallocated reserves................................. 580,041 558,513 -------- -------- $670,494 $677,141 ======== ======== Total reserve for loan losses as a percentage of: Nonaccrual loans................................... 112% 118% Nonperforming assets............................... 83 84
NOTE 7: MORTGAGE SERVICING Loans serviced consisted of the following:
DECEMBER 31, 1997 ---------------------- (DOLLARS IN THOUSANDS) Loans held in portfolio and held for sale (exclusive of loans serviced by others)............................... $ 67,351,417 Loans securitized and retained (with and without recourse)............................................... 17,007,970 Loans serviced for others................................. 29,457,988 ------------ $113,817,375 ============
Changes in the balance of mortgage servicing rights were as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Balance, beginning of year................. $185,984 $136,359 $ 96,846 Additions.................................. 76,352 96,189 69,138 Sales...................................... -- (5,395) -- Amortization of mortgage servicing rights................................... (48,027) (39,011) (28,743) Impairment adjustment...................... 1,051 (2,158) (882) -------- -------- -------- Balance, end of year....................... $215,360 $185,984 $136,359 ======== ======== ========
90 30 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Changes in the balance of short servicing were as follows:
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ------- ------- ------- (DOLLARS IN THOUSANDS) Balance, beginning of year.................... $20,714 $21,214 $25,357 Additions..................................... -- 23 2,590 Sales......................................... -- -- -- Amortization.................................. (3,858) (2,166) (6,733) Impairment adjustment......................... 1,128 1,643 -- ------- ------- ------- Balance, end of year.......................... $17,984 $20,714 $21,214 ======= ======= =======
Changes in the valuation for impairment of mortgage servicing rights were as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1997 1996 1995 ------- -------- ------- (DOLLARS IN THOUSANDS) Balance, beginning of year................... $ 3,040 $ 882 $ -- Additions.................................... 2,830 2,158 882 Recoveries................................... (3,881) -- -- ------- -------- ------- Balance, end of year......................... $ 1,989 $ 3,040 $ 882 ======= ======== =======
NOTE 8: INVESTMENT IN FHLBS The investment in the FHLBs of Seattle and San Francisco consisted of capital stock, at cost, totaling $1.06 billion at December 31, 1997 and $843.0 million at December 31, 1996. The Company earned yields of 6.66% in 1997, 6.78% in 1996 and 5.29% in 1995 from dividends on its investment in FHLBs. FHLB capital stock is pledged to secure FHLB borrowings. Earnings on FHLB capital stock will presumably continue to be restricted due to the funding requirements imposed on the FHLBs for affordable housing programs and the Resolution Funding Corporation. NOTE 9: FORECLOSED ASSETS Foreclosed assets are primarily real estate acquired through foreclosure. Real estate acquired through foreclosure is recorded at the lower of cost or fair value (less estimated selling costs) at the date of acquisition and is periodically reviewed by management to determine whether there has been deterioration or recovery in value. Foreclosed assets consisted of the following:
DECEMBER 31, ---------------------- 1997 1996 --------- --------- (DOLLARS IN THOUSANDS) Real estate acquired through foreclosure............... $202,241 $229,237 Other repossessed assets............................... 6,038 2,651 Reserve for losses..................................... (3,007) (9,005) -------- -------- $205,272 $222,883 ======== ========
91 31 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Foreclosed assets operations were as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Loss from operations....................... $(32,754) $(40,538) $(29,435) Gain on sale of foreclosed assets.......... 19,359 16,298 24,293 Provision for losses....................... 2,817 5,935 (12,023) -------- -------- -------- $(10,578) $(18,305) $(17,165) ======== ======== ========
Changes in the reserve for losses were as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 ------- -------- -------- (DOLLARS IN THOUSANDS) Balance, beginning of year.................. $ 9,005 $ 36,962 $ 50,057 Provision (recovery of reserve) for losses.................................... (2,817) (5,935) 12,023 Reserves charged off, net of recoveries..... (3,181) (22,022) (25,118) ------- -------- -------- Balance, end of year........................ $ 3,007 $ 9,005 $ 36,962 ======= ======== ========
NOTE 10: PREMISES AND EQUIPMENT Premises and equipment consisted of the following:
DECEMBER 31, ----------------------- 1997 1996 --------- ---------- (DOLLARS IN THOUSANDS) Furniture and equipment............................. $ 641,339 $ 787,763 Buildings........................................... 594,274 627,793 Leasehold improvements.............................. 204,423 217,469 Construction in progress............................ 108,338 17,203 --------- ---------- 1,548,374 1,650,228 Accumulated depreciation............................ (780,804) (785,197) Land................................................ 169,628 169,782 --------- ---------- $ 937,198 $1,034,813 ========= ==========
See "-- Note 2: Business Combinations/Restructuring." Depreciation expense for 1997, 1996 and 1995 was $115.8 million, $117.3 million and $112.6 million. The Company leases various branch offices, office facilities and equipment under capital and noncancelable operating leases which expire at various dates through 2054. Some leases contain escalation provisions for adjustments in the consumer price index and provide for renewal options for five- to 10-year periods. Rental expense, including amounts paid under month-to-month cancelable leases, amounted to $116.8 million, $102.4 million and $100.9 million in 1997, 1996 and 1995. 92 32 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum net rental commitments, including maintenance and other associated costs, for all noncancelable leases were as follows:
OPERATING LEASE CAPITAL LEASE ------------------------ ------------------------ LAND & FURNITURE & LAND & FURNITURE & BUILDINGS EQUIPMENT BUILDINGS EQUIPMENT --------- ----------- --------- ----------- (DOLLARS IN THOUSANDS) Year ending December 31, 1998................................ $ 76,968 $ 6,317 $ 7,595 $1,713 1999................................ 65,583 4,588 7,595 1,713 2000................................ 57,641 1,985 7,693 1,713 2001................................ 50,340 878 7,693 1,713 2002................................ 40,169 644 7,693 291 Thereafter.......................... 167,591 -- 70,464 -- -------- ------- -------- ------ $458,292 $14,412 $108,733 $7,143 ======== ======= ======== ======
NOTE 11: INTANGIBLE ASSETS ARISING FROM ACQUISITIONS Intangible assets arising from acquisitions consisted of the following:
DECEMBER 31, ---------------------- 1997 1996 --------- --------- (DOLLARS IN THOUSANDS) Branch acquisitions, net of amortization of $326,140 and $289,612.................................................. $249,330 $285,991 Business combinations, net of amortization of $150,950 and $125,542.................................................. 107,017 132,425 Other, net of amortization of $11,010 and $10,258........... 303 1,084 -------- -------- $356,650 $419,500 ======== ========
Intangible assets arising from acquisitions result from acquisitions accounted for as the purchase of assets and the assumption of liabilities and primarily consist of goodwill, core deposit intangibles and covenants not to compete. Intangible assets arising from acquisitions are amortized using the straight-line method over the period that is expected to be benefited, generally from three to 25 years. The average remaining amortization period at December 31, 1997 was approximately five years. 93 33 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12: DEPOSITS Deposits consisted of the following:
DECEMBER 31, -------------------------- 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) Checking accounts: Interest bearing................................... $ 4,380,133 $ 4,980,766 Noninterest bearing................................ 3,534,242 2,576,822 ----------- ----------- 7,914,375 7,557,588 Savings accounts..................................... 3,267,732 3,265,995 MMDAs................................................ 11,672,313 10,320,276 Time deposit accounts: Due within one year................................ 23,411,811 27,002,176 After one but within two years..................... 2,746,532 2,525,843 After two but within three years................... 879,090 713,005 After three but within four years.................. 546,680 631,922 After four but within five years................... 462,110 567,004 After five years................................... 85,374 83,105 ----------- ----------- 28,131,597 31,523,055 ----------- ----------- $50,986,017 $52,666,914 =========== ===========
Time deposit accounts in amounts of $100,000 or more totaled $5.74 billion and $7.08 billion at December 31, 1997 and 1996. At December 31, 1997, $1.65 billion of these deposits mature within three months, $1.34 million mature in three to six months, $1.70 billion mature in six months to one year, and $1.05 billion mature after one year. The following table shows the change in deposit balances:
DECEMBER 31, -------------------------- 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) Checking accounts: Interest bearing.......................................... $ (600,633) $ (213,902) Noninterest bearing....................................... 957,420 333,200 Savings accounts and MMDAs.................................. 1,353,774 423,493 Time deposit accounts....................................... (3,391,458) (1,573,765) ----------- ----------- $(1,680,897) $(1,030,974) =========== ===========
Financial data pertaining to the weighted average cost of deposits were as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1997 1996 1995 ---- ---- ---- Weighted average interest rate during the year.............. 4.18% 4.22% 4.40%
The weighted average interest rate is based upon stated interest rates without giving consideration to daily compounding of interest or forfeiture of interest because of premature withdrawals. Accrued but unpaid interest on deposits included in other liabilities totaled $49.8 million and $51.1 million at December 31, 1997 and 1996. 94 34 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Interest expense on deposits was as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Checking (interest bearing) accounts............... $ 58,389 $ 57,449 $ 63,958 Savings accounts and MMDAs......................... 510,001 434,691 449,813 Time deposit accounts.............................. 1,597,714 1,748,162 1,838,132 ---------- ---------- ---------- $2,166,104 $2,240,302 $2,351,903 ========== ========== ==========
NOTE 13: FEDERAL FUNDS PURCHASED AND COMMERCIAL PAPER Federal funds purchased and commercial paper consisted of the following:
DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- (DOLLARS IN THOUSANDS) Federal funds purchased..................................... $2,570,750 $1,681,000 Commercial paper............................................ 357,532 472,506 ---------- ---------- $2,928,282 $2,153,506 ========== ==========
Federal funds purchased have maturities of up to 12 months, and at December 31, 1997, the average maturity was 82 days. Aristar issues commercial paper with original maturities of less than 270 days, with an average maturity at December 31, 1997, of 61 days. Financial data pertaining to federal funds purchased and commercial paper were as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Federal funds purchased: Weighted average interest rate at end of year.... 5.92% 5.78% 5.84% Weighted average interest rate during the year... 5.64 5.40 6.05 Average balance of federal funds purchased....... $2,347,791 $1,344,706 $ 734,402 Maximum amount of federal funds purchased at any month end..................................... 3,955,600 2,242,000 998,000 Interest expense during the year................. 132,450 72,639 44,413 Commercial paper: Weighted average interest rate at end of year.... 5.99% 5.70% 5.88% Weighted average interest rate during the year... 6.06 5.40 6.27 Average balance of commercial paper.............. $ 440,057 $ 695,931 $1,164,071 Maximum amount of commercial paper issued at any month end..................................... 694,006 967,962 1,551,200 Interest expense during the year................. 26,679 37,608 73,029
95 35 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 14: REVERSE REPURCHASE AGREEMENTS The Company sold, under agreements to repurchase, specific securities of the U.S. government and its agencies and other approved investments to broker-dealers and customers. Securities underlying the agreements with broker-dealers were delivered to the dealer who arranged the transaction or were held by a safekeeping agent for the Company's account. Securities delivered to broker-dealers may be loaned out in the ordinary course of operations. Securities underlying agreements with customers were held in a segregated account by a safekeeping agent for the Company. Scheduled maturities or repricing of reverse repurchase agreements were as follows:
DECEMBER 31, -------------------------- 1997 1996 ----------- ----------- (DOLLARS IN THOUSANDS) Due within 30 days................................ $ 3,330,069 $ 5,662,338 After 30 but within 90 days....................... 1,346,043 5,455,639 After 90 but within 180 days...................... 265,000 321,987 After 180 days but within one year................ 667,197 99,067 After one year.................................... 6,670,731 494,088 ----------- ----------- $12,279,040 $12,033,119 =========== ===========
Financial data pertaining to reverse repurchase agreements were as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Weighted average interest rate at end of year....................... 5.73% 5.50% 5.85% Weighted average interest rate during the year................... 5.71 5.50 6.11 Average balance of reverse repurchase agreements............. $12,527,774 $14,360,452 $14,800,811 Maximum amount of reverse repurchase agreements............. 12,574,964 15,578,289 16,192,165 Interest expense during the year.... 715,047 790,483 904,698
NOTE 15: ADVANCES FROM FHLBS As members of the FHLBs of San Francisco and Seattle, WMBFA, WMB and WMBfsb maintain credit lines that are percentages of their total regulatory assets, subject to collateralization requirements. Advances are collateralized in the aggregate by all stock owned of the FHLBs, by deposits with the FHLBs, and by certain mortgages or deeds of trust and securities of the U.S. government and agencies thereof. The maximum amount of credit which the FHLBs will extend for purposes other than meeting withdrawals varies from time to time in accordance with their policies. The interest rates charged by the FHLBs for advances vary depending upon maturity, the cost of funds in the individual FHLB and the purpose of borrowing. 96 36 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Scheduled maturities of advances from FHLBs were as follows:
DECEMBER 31, --------------------------------------------------- 1997 1996 ------------------------ ------------------------ RANGES OF RANGES OF INTEREST INTEREST AMOUNT RATES AMOUNT RATES ----------- ---------- ----------- ---------- (DOLLARS IN THOUSANDS) Due within one year............. $10,271,528 5.50%-8.50% $ 7,388,583 4.38%-8.45% After one but within two years......................... 7,638,329 5.51 -8.53 1,698,891 5.30 -8.50 After two but within three years......................... 1,774,099 4.50 -9.34 267,889 6.17 -8.53 After three but within four years......................... 456,000 5.68 -5.79 59,397 4.98 -9.34 After four but within five years......................... 50,318 3.50 -5.73 450,000 5.40 -5.51 After five years................ 111,689 2.80 -8.65 146,665 2.80 -8.65 ----------- ----------- $20,301,963 $10,011,425 =========== ===========
Financial data pertaining to advances from FHLBs were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 ----------- ----------- ---------- (DOLLARS IN THOUSANDS) Weighted average interest rate at end of year....................................... 5.78% 5.51% 5.73% Weighted average interest rate during the year....................................... 5.75 5.56 5.73 Average balance of advances from FHLBs....... $13,621,867 $ 6,509,897 $3,668,898 Maximum amount of advances from FHLBs at any month end.................................. 20,301,963 10,011,425 5,570,819 Interest expense during the year............. 783,338 361,695 210,324
NOTE 16: TRUST PREFERRED SECURITIES 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 GWFT II's issuance of the preferred securities II, GWFC issued to GWFT II $309.3 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 $412.4 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. 97 37 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has a right to defer payment of interest on the debentures at any time or from time to time for a period not exceeding the extension period described in the table below with respect to each deferral period, provided that no extension period may extend beyond the stated maturity of the respective debentures. Distributions paid on the securities are recorded as interest expense in the consolidated statements of income. Trust preferred securities and debentures were as follows:
DECEMBER 31, 1997 -------------------------------------------------------------------------------------- AGGREGATE LIQUIDATION AGGREGATE PER AMOUNT OF LIQUIDATION AGGREGATE STATED ANNUM TRUST AMOUNT OF PRINCIPAL MATURITY INTEREST PREFERRED COMMON AMOUNT OF OF RATE OF EXTENSION NAME OF TRUST SECURITIES SECURITIES DEBENTURES DEBENTURES DEBENTURES PERIOD ------------- ----------- ----------- ---------- ---------- ---------- ------------------- (DOLLARS IN THOUSANDS) Great Western Financial Trust I.............. $100,000 $ 3,093 $103,093 2025 8.250% 20 consecutive quarters Great Western Financial Trust II............. 300,000 9,279 309,279 2027 8.206% 10 consecutive semi-annual periods Washington Mutual Capital I............ 400,000 12,371 412,371 2027 8.375% 10 consecutive semi-annual periods -------- ------- -------- ----- $800,000 $24,743 $824,743 8.296% ======== ======= ======== ===== DECEMBER 31, 1997 ------------------- REDEMPTION NAME OF TRUST OPTION ------------- ------------------- Great Western Financial Trust I.............. On or after December 31, 2000 Great Western Financial Trust II............. On or after February 1, 2007 Washington Mutual Capital I............ On or after June 1, 2007
DECEMBER 31, 1996 -------------------------------------------------------------------------------------- AGGREGATE LIQUIDATION AGGREGATE PER AMOUNT OF LIQUIDATION AGGREGATE STATED ANNUM TRUST AMOUNT OF PRINCIPAL MATURITY INTEREST PREFERRED COMMON AMOUNT OF OF RATE OF EXTENSION NAME OF TRUST SECURITIES SECURITIES DEBENTURES DEBENTURES DEBENTURES PERIOD ------------- ----------- ----------- ---------- ---------- ---------- ------------------- (DOLLARS IN THOUSANDS) Great Western Financial 20 consecutive Trust I.............. $100,000 $ 3,093 $103,093 2025 8.250% quarters DECEMBER 31, 1996 ------------------- REDEMPTION NAME OF TRUST OPTION ------------- ------------------- Great Western Financial On or after Trust I.............. December 31, 2000
98 38 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 17: OTHER BORROWINGS Other borrowings consisted of the following:
DECEMBER 31, ---------------------------------------------------------- 1997 1996 --------------------------- --------------------------- AMOUNT INTEREST RATE AMOUNT INTEREST RATE ---------- ------------- ---------- ------------- (DOLLARS IN THOUSANDS) Senior notes: Series C floating rate, due in 2000, LIBOR plus 1.375%............. $ -- --% $ 175,000 6.91% Series B 9.60%, due in 1999...... -- -- 169,000 9.60 Due in 1997...................... -- -- 352,229 7.38-9.50 Due in 1998...................... 399,903 5.75-8.63 399,728 5.75-8.60 Due in 1999...................... 199,939 6.75-7.88 199,890 6.75-7.88 Due in 2000...................... 474,037 6.13-6.38 473,706 6.12-6.38 Due in 2001...................... 349,762 6.75-7.75 349,704 6.75-7.75 Due in 2002...................... 349,068 6.30-8.60 199,410 8.60 Due in 2003...................... 149,314 6.50 -- -- Due in 2005...................... 148,182 7.25 148,007 7.25 Subordinated notes: Due in 1998...................... 99,979 8.88 99,948 8.88 Due in 1999...................... 99,788 7.50 99,659 7.50 Due in 2000...................... 63,275 10.25-10.50 63,253 10.25-10.50 Due in 2001...................... 149,764 9.88 149,708 9.88 Floating rate due in 1998, LIBOR plus 2.875%............. -- -- 10,000 8.41 Other: Notes payable, due in 1998....... 71,923 8.16 74,111 8.16 Notes payable, due in 2006....... 98,765 6.63 98,650 6.63 Other............................ 35,663 7.60-10.70 47,691 7.60-10.70 ---------- ---------- $2,689,362 $3,109,694 ========== ==========
In December 1996, the Company entered into two revolving credit facilities with The Chase Manhattan Bank ("Chase"): a $100.0 million 364-day facility and a $100.0 million four-year facility. In November 1997, these credit facilities were amended by increasing the amounts for each from $100.0 million to $200.0 million. The facilities are available for general corporate purposes, including providing capital to the Company's subsidiaries. As of December 31, 1997, there were no outstanding borrowings under these facilities. As of December 31, 1997, the Company had entered into five other credit agreements with various parties permitting aggregate borrowing up to $735.1 million. The two largest of these agreements were a $550.0 million revolving credit facility with Bank of Montreal and Chase to back Aristar's commercial paper program and a $177.1 million letter of credit with the FHLB of San Francisco to provide credit enhancement on certain of the Company's private-issue MBS. 99 39 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 18: INCOME TAXES The provision for income taxes from continuing operations consisted of the following:
YEAR ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 --------- -------- -------- (DOLLARS IN THOUSANDS) Current income tax expense................ $ 529,047 $166,713 $197,515 Deferred income tax (benefit) expense..... (126,931) (25,493) 75,491 --------- -------- -------- $ 402,116 $141,220 $273,006 ========= ======== ========
In determining taxable income for years prior to 1996, savings banks were allowed bad debt deductions based on a percentage of taxable income or on actual experience. Each year, savings banks selected whichever method resulted in the most tax savings. The Company primarily used the experience method in 1995. The Small Business Job Protection Act of 1996 (the "Job Protection Act") requires that qualified thrift institutions, such as WMB, WMBFA and WMBfsb, generally recapture, for federal income tax purposes, that portion of the balance of their tax bad debt reserves that exceeds the December 31, 1987 balance, with certain adjustments. Such recaptured amounts are to be generally taken into ordinary income ratably over a six-year period beginning in 1997. Accordingly, the Company will have to recapture approximately $151.3 million and pay approximately $4.2 million (based upon current federal income tax rates) in additional federal income taxes each year of the six-year period due to the Job Protection Act. The recapture of the post-1987 additions to tax basis bad debt reserves will not result in a charge to earnings as these amounts are included in the deferred tax liability at December 31, 1997. The Job Protection Act also repeals the reserve method of accounting for tax bad debt deductions and, thus, requires thrifts to calculate the tax bad debt deduction based on actual current loan losses. In January 1998, the Company completed a settlement with the Internal Revenue Service (the "Service") for GWFC for 1986 and 1987. The Service is currently examining GWFC for 1988 through and including 1992 and WMB for 1992 and 1993. No additional adjustments are required as of December 31, 1997, for the above examinations. 100 40 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The significant components of the Company's net deferred tax asset (liability) were as follows:
YEAR ENDED DECEMBER 31, --------------------------- 1997 1996 ---------- ----------- (DOLLARS IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards....................... $1,039,905 $ 1,269,124 Book loan loss reserves................................ 273,932 277,360 Purchase accounting adjustments........................ 14,262 20,153 Deferred losses........................................ 132,652 41,757 Other.................................................. 322,402 254,001 ---------- ----------- 1,783,153 1,862,395 Valuation allowance...................................... (966,087) (1,192,676) ---------- ----------- Deferred tax asset, net of valuation allowance........... 817,066 669,719 Deferred tax liabilities: Tax bad debt reserves.................................. 51,113 63,193 Stock dividends from FHLBs............................. 188,902 155,629 Financial leases....................................... 66,087 70,035 Deferred loan fees..................................... 245,885 229,538 Deferred gains......................................... 163,825 172,733 Purchase accounting adjustments........................ 12,757 18,098 Other.................................................. 212,966 173,820 ---------- ----------- 941,535 883,046 ---------- ----------- Net deferred tax liability............................... $ (124,469) $ (213,327) ========== ===========
The valuation allowances of $966.1 million at December 31, 1997 and $1.19 billion at December 31, 1996 included $45.8 million related to payments in lieu of taxes which are expected to arise from the realization of the net deferred tax asset. These valuation allowances represented the excess of the gross deferred tax asset over the sum of the taxes and the payments in lieu of taxes related to (i) projected future taxable income, (ii) reversing taxable temporary differences and (iii) tax planning strategies. The decrease in the valuation allowance of $226.6 million during the year ended December 31, 1997 was due primarily to adjustments for anticipated use of net operating losses and a change in state tax rates. Due to Section 382 of the Internal Revenue Code, most of the value of the net operating loss carryforward deductions of Keystone Holdings and its subsidiaries was eliminated due to the Keystone Transaction. Accordingly, the future tax savings attributable to such net operating loss carryforward deductions (other than amounts used to offset bad debt reserve deduction recapture for ASB) will be greatly reduced. In August 1996, Keystone Holdings amended prior-year federal tax returns to reduce tax bad debt deductions and to make other adjustments. As a result, the net operating loss carryforwards for federal tax purposes were reduced by approximately $756 million. In September 1996, ASB amended prior-year state tax returns to reduce tax bad debt deductions. The result was to decrease state net operating loss carryovers by approximately $545 million. The decrease in the gross deferred tax asset as a result of amendments was offset by an equal decrease in the valuation allowance for the deferred tax asset. 101 41 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Federal and state income tax net operating loss carryforwards due to expire under current law during the years indicated were as follows:
DECEMBER 31, 1997 ----------------------- FEDERAL STATE ---------- ---------- (DOLLARS IN THOUSANDS) 1999........................................................ $ -- $ 551,522 2000........................................................ 1,497 599,241 2001........................................................ 140 557,803 2002........................................................ 278 -- 2003........................................................ 1,483,640 -- 2004........................................................ 784,195 -- 2005........................................................ 700,619 -- 2007........................................................ 12,780 -- 2008........................................................ 37,460 -- ---------- ---------- $3,020,609 $1,708,566 ========== ==========
Under SFAS No. 115, where actual benefits or liabilities are expected to be realized, the net realizable tax effects of unrealized gains and losses on available-for-sale securities at December 31, 1997 and 1996 were included in the deferred tax liabilities and assets. The tax effect was recorded directly to stockholders' equity and was not included in the provision for income taxes. The change in the net deferred tax liability was as follows:
YEAR ENDED DECEMBER 31, 1997 ----------------------- (DOLLARS IN THOUSANDS) Deferred tax liability, beginning of year................... $(213,327) Tax effect of valuation adjustment on available-for-sale securities................................................ (33,155) Deferred income tax benefit................................. 126,931 Other adjustments........................................... (4,918) --------- Deferred tax liability, end of year......................... $(124,469) =========
102 42 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reconciliations between income taxes computed at statutory rates and income taxes included in the consolidated statements of income were as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Income taxes computed at statutory rates............... $318,849 $155,657 $322,412 Tax effect of: State franchise tax, net of federal tax benefit...... 38,951 (38,616) 3,899 Utilization of tax losses of New West (nominee of ASB).............................................. (21,260) (31,200) (17,482) Amortization of goodwill and other intangible assets............................................ 9,649 7,865 10,430 Dividends received deduction......................... (3,241) (2,460) (987) Tax exempt income.................................... (1,971) (2,309) (1,973) Restructuring adjustments............................ 68,276 9,321 -- Valuation allowance change from prior year........... -- 33,073 (7,114) Change in tax laws and rates......................... -- 9,397 -- Adjustment of deferred tax rate...................... -- (2,239) 422 Increase in base year reserve amount................. -- (706) (16,318) Low income housing................................... -- -- (5,065) Reversal of taxes previously provided................ -- -- (2,533) Other................................................ (7,137) 3,437 (12,685) -------- -------- -------- Income taxes included in the consolidated statements of income............ $402,116 $141,220 $273,006 ======== ======== ========
NOTE 19: PAYMENTS IN LIEU OF TAXES As a result of the Keystone Transaction, the Company and certain of its affiliates are parties to a tax related agreement (the "Assistance Agreement") with a predecessor of the FSLIC Resolution Fund ("FRF") which generally provides that 75% of most of the federal tax savings and approximately 19.5% of most of the California tax savings (as computed in accordance with the Assistance Agreement) attributable to ASB's utilization of certain tax loss carryovers of New West are to be paid by the Company for the benefit of the FRF. The Assistance Agreement sets forth certain special adjustments to federal taxable income to arrive at "FSLIC taxable income." The principal adjustments effectively permit WMBFA to recognize certain loan fees ratably over seven years adjusted for loan dispositions and treat certain of the income and expenses of New American Capital, Inc. as income and expenses of WMBFA. The provision for payments in lieu of taxes consisted of the following:
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 ------- ------- ------ (DOLLARS IN THOUSANDS) Federal.............................................. $15,948 $ 4,006 $3,450 State................................................ 1,284 21,181 4,437 ------- ------- ------ $17,232 $25,187 $7,887 ======= ======= ======
NOTE 20: CONTINGENCIES The Company has certain litigation and negotiations in progress resulting from activities arising from normal operations. In the opinion of management, none of these matters is likely to have a material adverse effect on the Company's financial position. 103 43 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As part of the administration and oversight of the Assistance Agreement and other agreements among ASB, certain of its affiliates and the FDIC, the FDIC has a variety of review and audit rights, including the right to review and audit computations of payments in lieu of taxes. ASB and certain of its affiliates have entered into settlement agreements with the FDIC for all periods through June 30, 1994, pursuant to which ASB, its affiliates and the FDIC have mutually settled and released various claims in consideration of certain nominal payments. The Office of Inspector General has completed its audit of transactions and payments under the Assistance Agreement and other agreements occurring during the period beginning July 1, 1994 and ending June 30, 1996. The Company has received no notice of any issues involving more than nominal amounts arising after June 30, 1994. As part of the Keystone Transaction, 8,000,000 shares of common stock, with an assigned value of $41.6125 per share (the "Litigation Escrow Shares"), were issued to an escrow for the benefit of the general and limited partners of Keystone Holdings and the FRF and their transferees (the "Litigation Escrow"). Shares will be released from the Litigation Escrow if and only to the extent that Washington Mutual receives net cash proceeds from certain litigation that Keystone Holdings and certain of its subsidiaries are pursuing against the United States (the "Case"), which litigation became an asset of the Company in the Keystone Transaction. Upon Washington Mutual's receipt of net cash proceeds from a judgment or settlement of the Case, if any ("Case Proceeds"), all or part of the Litigation Escrow Shares will be released, 64.9% to the general and limited partners of Keystone Holdings and 35.1% to the FRF. The number of Litigation Escrow Shares released will be equal to the Case Proceeds, reduced by certain tax and litigation-related expenses, divided by $41.6125. If not all of the Litigation Escrow Shares are distributed prior to the expiration of the Litigation Escrow, any remaining Litigation Escrow Shares will be returned to Washington Mutual for cancellation. The Litigation Escrow expires the earlier of the date that is the sixth anniversary of the Keystone Transaction or that the Litigation Escrow Shares are released. In general, the Litigation Escrow will be automatically extended to 10 years if, prior to the sixth anniversary of the Keystone Transaction, there has been any judgment or final settlement in the Case granted or entered in favor of Washington Mutual or any of its subsidiaries. The operations of the Company are significantly influenced by general economic conditions, by the related monetary and fiscal policies of the federal government, and by the regulatory policies of financial institution regulatory authorities. Deposit flows and cost of funds are influenced by interest rates on competing investments and general market rates of interest. Lending and other investment activities are affected by the demand for mortgage financing and consumer and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting the supply of housing and the availability of funds. NOTE 21: STOCKHOLDERS' EQUITY Common Stock Cash dividends paid per share were as follows(1):
YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 ----- ----- ----- Fourth quarter.............................................. $0.28 $0.24 $0.20 Third quarter............................................... 0.27 0.23 0.19 Second quarter.............................................. 0.26 0.22 0.19 First quarter............................................... 0.25 0.21 0.19
- --------------- (1) Amounts paid by acquired companies prior to their combination with the Company were not included. Prior to the business combination with Washington Mutual, acquired companies paid total common cash dividends of $68.9 million, $193.0 million and $133.6 million in 1997, 1996 and 1995. 104 44 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In addition to being influenced by legal, regulatory and economic restrictions, Washington Mutual's ability to pay dividends is also predicated on the ability of its subsidiaries to declare and pay dividends to WMI. These subsidiaries are subject to legal, regulatory and debt covenant restrictions on their ability to pay dividends. Retained earnings of the Company at December 31, 1997 included a pre-1988 thrift bad debt reserve for tax purposes of $1.22 billion for which no federal income taxes had been provided. In the future, if this thrift bad debt reserve is used for any purpose other than to absorb bad debt losses or if any of the banking subsidiaries no longer qualifies as a bank, the Company will incur a federal income tax liability, at the then prevailing corporate tax rate, to the extent of such subsidiary's pre-1988 thrift bad debt reserve. In 1990, the Company's Board of Directors adopted a shareholder rights plan and declared a dividend of one right for each outstanding share of common stock to shareholders of record on October 31, 1990. The rights have certain anti-takeover effects. They are intended to discourage coercive or unfair takeover tactics and to encourage any potential acquirer to negotiate a price fair to all shareholders. The rights may cause substantial dilution to an acquiring party that attempts to acquire the Company on terms not approved by the Board of Directors, but they will not interfere with any friendly merger or other business combination. The plan was not adopted in response to any specific effort to acquire control of the Company. See -- "Note 20: Contingencies" for discussion of the 8,000,000 shares of common stock held in escrow. Preferred Stock In 1993, the Company issued 2,000,000 shares of 7.60% Noncumulative Perpetual Preferred Stock, Series E ("Series E Preferred Stock"), at $25 per share for net proceeds of $48.2 million. The Series E Preferred Stock has a liquidation preference of $25 per share plus dividends accrued and unpaid for the then current dividend period. Dividends, if and when declared by Washington Mutual's Board of Directors, are at an annual rate of $1.90 per share. Dividends have been declared and paid in all quarters since issuance. The Company may redeem the Series E Preferred Stock on or after September 15, 1998, at the redemption price of $25 per share plus unpaid dividends, whether or not declared, for the then current dividend period up to the date fixed for redemption. The Series E Preferred Stock is senior to common stock as to dividends and liquidation, but does not confer general voting rights. In November 1995, the Company purchased and retired 30,000 shares of the Series E Preferred Stock. In 1992, the Company issued 2,800,000 shares of 9.12% Noncumulative Perpetual Preferred Stock, Series C ("Series C Preferred Stock"), at $25 per share for net proceeds of $67.4 million. The Series C Preferred Stock had a liquidation preference of $25 per share plus dividends accrued and unpaid for the then current dividend period. Dividends, if and when declared by Washington Mutual's Board of Directors, were at an annual rate of $2.28 per share. Dividends were declared and paid in all quarters since issuance. In November 1995, the Company purchased and retired 47,500 shares of the Series C Preferred Stock. The Company redeemed the Series C Preferred Stock on January 1, 1998 at the redemption price of $25 per share plus unpaid dividends, for the then current dividend period up to the date fixed for redemption. In 1992, GWFC issued 6,600,000 depository shares, each representing a one-tenth interest in a share of 8.30% Cumulative Preferred Stock ("Cumulative Preferred Stock"). The Cumulative Preferred Stock had a liquidation value of $250 per share. Each share of Cumulative Preferred Stock, $1.00 par value, was redeemable at the option of the Company on or after November 1, 1997, at $250 per share, plus accrued and unpaid dividends. Dividends were cumulative from the date of issue and were payable quarterly. Dividends were declared and paid in all quarters since issuance. On July 1, 1997, in connection with the Great Western Merger, each outstanding share of Cumulative Preferred Stock was converted into one share of Washington Mutual, Inc. 8.30% Cumulative Preferred Stock, Series F ("Series F Preferred Stock"). The terms, preferences, limitations, privileges and rights of the Series F Preferred Stock were substantially identical to 105 45 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) those of the Cumulative Preferred Stock. As in the case of the Cumulative Preferred Stock, each share of Series F Preferred Stock was represented by depository shares (the "New Washington Mutual Depository Shares"), each representing a one-tenth interest in a share of the Series F Preferred Stock. The Company redeemed the Series F Preferred Stock on November 1, 1997. Also in 1992, the Company issued 1,400,000 shares of $6.00 Noncumulative Convertible Perpetual Preferred Stock, Series D ("Series D Preferred Stock"), at $100 per share for net proceeds of $136.4 million. The Series D Preferred Stock had a liquidation preference of $100 per share plus dividends accrued and unpaid for the then current dividend period. The Series D Preferred Stock was convertible at a rate of 3.870891 shares of common stock per share of Series D Preferred Stock. Dividends were at an annual rate of $6.00 per share. Prior to December 31, 1996, substantially all of the Series D Preferred Stock was converted into shares of common stock and the Company redeemed the remaining shares. In 1991, the Company issued 2,587,500 depository shares, each representing a one-fifth interest in a share of 8.75% Cumulative Convertible Preferred Stock ("Convertible Preferred Stock"). The Convertible Preferred Stock had a liquidation value of $250 per share. The Convertible Preferred Stock was redeemable prior to May 1, 1996. Each share of Convertible Preferred Stock, $1.00 par value, was redeemable at the option of the Company, in whole or in part, at prices declining to $250 per share on or after May 1, 2001, from $260.94 per share on or after May 1, 1996, plus accrued and unpaid dividends. Each share of Convertible Preferred Stock was convertible at the option of the holder into shares of common stock of the Company at a conversion price of $20.40 per share of common stock, subject to adjustment in certain events. Dividends were cumulative from the date of issue and were payable quarterly. In September 1996, substantially all of the depository shares were converted to approximately 5,666,000 shares of common stock. In 1988, a subsidiary of Keystone Holdings issued $80.0 million of Cumulative Redeemable Preferred Stock. The Cumulative Redeemable Preferred Stock was presented as a minority interest in the Company's consolidated financial statements. The Cumulative Redeemable Preferred Stock was redeemed on December 20, 1996. NOTE 22: EARNINGS PER SHARE In February 1997, the FASB issued SFAS No. 128, Earnings per Share. This statement established standards for computing and presenting earnings per share ("EPS"). The statement simplified the standards for computing EPS and made them comparable to international EPS standards. It replaced the presentation of primary EPS with the presentation of basic 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. Diluted EPS is computed similarly to previously reported fully diluted EPS. This statement required restatement of all prior period EPS data presented. 106 46 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Information used to calculate EPS was as follows:
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1997 1996 ------------------------------------- ----------- PER INCOME SHARES SHARE INCOME (NUMERATOR) (DENOMINATOR) AMOUNTS (NUMERATOR) ----------- ------------- ------- ----------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Basic EPS: Net income...................... $481,778 $230,100 Less: preferred stock dividends..................... (21,432) (38,714) -------- -------- Income available to common shareholders.................. 460,346 246,119,646 $1.87 191,386 Diluted EPS: Effect of dilutive securities: Options....................... 925,693 Convertible preferred stock....................... Income available to common shareholders -------- ----------- -------- and assumed conversions....... $460,346 247,045,339 $1.86 $191,386 ======== =========== ======== YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 1996 1995 ----------------------- ------------------------------------- PER PER SHARES SHARE INCOME SHARES SHARE (DENOMINATOR) AMOUNTS (NUMERATOR) (DENOMINATOR) AMOUNTS ------------- ------- ----------- ------------- ------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Basic EPS: Net income...................... $550,924 Less: preferred stock dividends..................... (43,599) -------- Income available to common shareholders.................. 235,115,650 $0.81 507,325 232,104,843 $2.19 Diluted EPS: Effect of dilutive securities: Options....................... 2,567,764 1,323,521 Convertible preferred stock....................... 19,720 11,126,968 Income available to common shareholders ----------- -------- ----------- and assumed conversions....... 237,683,414 $0.81 $527,045 244,555,332 $2.16 =========== ======== ===========
Options to purchase 2,984,550 million shares of common stock at a weighted average exercise price of $62.80 per share were outstanding at December 31, 1997, but were not included in the computation of diluted EPS because the exercise price of the options was greater than the average market price of the common shares during the period. Additionally, as part of the business combination with Keystone Holdings, 8,000,000 shares of common stock, with an assigned value of $41.6125 per share, were issued to an escrow for the benefit of the general and limited partners of Keystone Holdings and the FRF and their transferees. The conditions upon which these shares are contingently issuable are not based on earnings or market price. The contingencies had not been met at December 31, 1997, and therefore the contingently issuable shares have not been included in the above computations. NOTE 23: REGULATORY CAPITAL REQUIREMENTS WMI is not subject to any regulatory capital requirements. However, each of its subsidiary depository institutions is subject to various capital requirements. WMB is subject to FDIC capital requirements while WMBFA and WMBfsb are subject to Office of Thrift Supervision ("OTS") capital requirements. The Company's also owns two small industrial banks that are subject to FDIC capital requirements. At December 31, 1997, these two institutions met all capital requirements to which they were subject and were considered well capitalized. The capital adequacy requirements are quantitative measures established by regulation that require WMBFA, WMB and WMBfsb to maintain minimum amounts and ratios of capital. The FDIC requires WMB to maintain minimum ratios of Tier 1 and total capital to risk-weighted assets as well as Tier 1 capital to average assets. The OTS requires WMBFA and WMBfsb to maintain minimum ratios of total capital to risk-weighted assets, as well as ratios of core capital and tangible capital to tangible assets. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") created a statutory framework that increased the importance of meeting applicable capital requirements. FDICIA established five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution's category depends upon where its capital levels are in relation to relevant capital measures, which include a risk-based capital measure, a leverage ratio capital measure, and certain other factors. The federal banking agencies (including the FDIC and the OTS) have adopted regulations that implement this statutory framework. Under these regulations, an institution is treated as well capitalized if its ratio of total capital to risk-weighted assets is 10.00% or more, its ratio of core capital to risk- 107 47 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) weighted assets is 6.00% or more, its ratio of core capital to adjusted total assets is 5.00% or more and it is not subject to any federal supervisory order or directive to meet a specific capital level. In order to be adequately capitalized, an institution must have a total risk-based capital ratio of not less than 8.00%, a Tier 1 risk-based capital ratio of not less than 4.00%, and a leverage ratio of not less than 4.00%. Any institution which is neither well capitalized nor adequately capitalized will be considered undercapitalized. Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized. Failure by any of the Company's depository institutions to comply with applicable capital requirements would, if unremedied, result in restrictions on its activities and lead to regulatory enforcement actions against such institution including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels. FDICIA requires the federal banking regulators to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. Additionally, FDIC or OTS approval of any regulatory application filed for their review may be dependent on compliance with capital requirements. The actual regulatory capital ratios calculated for WMBFA, WMB and WMBfsb, along with the minimum capital amounts and ratios for capital adequacy purposes and the minimum amounts required to be categorized as well capitalized under the regulatory framework for prompt corrective action were as follows:
DECEMBER 31, 1997 ------------------------------------------------------------ MINIMUM TO BE CATEGORIZED AS MINIMUM WELL CAPITALIZED FOR CAPITAL UNDER PROMPT ADEQUACY CORRECTIVE ACTION ACTUAL PURPOSES(1) PROVISIONS ------------------ ------------------ ------------------ AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ---------- ----- ---------- ----- ---------- ----- (DOLLARS IN THOUSANDS) WMBFA: Total capital to risk-weighted assets(2).......................... $4,497,262 11.11% $3,242,490 8.00% $4,050,336 10.00% Tier I capital to risk-weighted assets............................. 3,865,394 9.54 -- -- 2,434,644 6.00 Core capital to adjusted tangible assets............................. 3,865,394 5.78 2,007,736 3.00 3,346,226 5.00 Tangible capital to tangible assets... 3,865,394 5.78 1,003,868 1.50 -- -- WMB: Total capital to risk-weighted assets............................. 1,605,745 10.93 1,175,592 8.00 1,469,490 10.00 Tier I capital to risk-weighted assets............................. 1,488,610 10.13 587,796 4.00 881,694 6.00 Tier I capital to average assets...... 1,488,610 5.86 1,015,372 4.00 1,269,216 5.00 WMBfsb: Total capital to risk-weighted assets(2).......................... 77,813 11.95 52,077 8.00 65,096 10.00 Tier I capital to risk-weighted assets............................. 70,535 10.84 -- -- 39,058 6.00 Core capital to adjusted tangible assets............................. 70,535 6.66 31,789 3.00 52,982 5.00 Tangible capital to tangible assets... 70,535 6.66 15,895 1.50 -- --
108 48 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 ------------------------------------------------------------ MINIMUM TO BE CATEGORIZED AS MINIMUM WELL CAPITALIZED FOR CAPITAL UNDER PROMPT ADEQUACY CORRECTIVE ACTION ACTUAL PURPOSES(1) PROVISIONS ------------------ ------------------ ------------------ AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ---------- ----- ---------- ----- ---------- ----- (DOLLARS IN THOUSANDS) WMBFA: Total capital to risk-weighted assets(2).......................... $4,070,395 11.12% $2,929,835 8.00% $3,660,828 10.00% Tier I capital to risk-weighted assets............................. 3,464,547 9.46 -- -- 2,198,843 6.00 Core capital to adjusted tangible assets............................. 3,464,547 5.61 1,852,145 3.00 3,086,909 5.00 Tangible capital to tangible assets... 3,463,438 5.61 926,073 1.50 -- -- WMB: Total capital to risk-weighted assets............................. 1,320,577 11.09 952,810 8.00 1,191,013 10.00 Tier I capital to risk-weighted assets............................. 1,224,620 10.28 476,405 4.00 714,608 6.00 Tier I capital to average assets...... 1,224,620 5.84 843,623 4.00 1,054,529 5.00 WMBfsb: Total capital to risk-weighted assets(2).......................... 71,327 11.58 49,285 8.00 61,607 10.00 Tier I capital to risk-weighted assets............................. 64,707 10.50 -- -- 36,964 6.00 Core capital to adjusted tangible assets............................. 64,707 6.90 28,254 3.00 46,923 5.00 Tangible capital to tangible assets... 64,707 6.90 14,077 1.50 -- --
- --------------- (1) Regulatory requirements listed under this column are not the same as capital adequacy requirements under prompt corrective action provisions. (2) The OTS requires institutions to maintain Tier 1 capital of not less than one-half of total capital. Management believes, as of December 31, 1997, that WMBFA, WMB and WMBfsb individually met all capital adequacy requirements to which they were subject. Additionally, as of the most recent notifications from the FDIC (for WMB) and the OTS (for WMBFA and WMBfsb) prior to both December 31, 1997 and 1996, the FDIC and OTS individually categorized WMBFA, WMB and WMBfsb as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, a bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table above. There are no conditions or events since that notification that management believes have changed WMBFA's, WMB's and WMBfsb's category. Federal law requires that the federal banking agencies' risk-based capital guidelines take into account various factors including interest rate risk, concentration of credit risk, risks associated with nontraditional activities, and the actual performance and expected risk of loss of multi-family mortgages. In 1994, the federal banking agencies jointly revised their capital standards to specify that concentration of credit and nontraditional activities are among the factors that the agencies will consider in evaluating capital adequacy. In that year, the OTS and FDIC amended their risk-based capital standards with respect to the risk weighting of loans made to finance the purchase or construction of multi-family residences. The OTS adopted final regulations adding an interest rate risk component to the risk-based capital requirements for savings associations (such as WMBFA and WMBfsb), although implementation of the regulation has been delayed. Management believes that the effect of including such an interest rate risk component in the calculation of risk-adjusted capital will not cause WMBFA or WMBfsb to cease to be well capitalized. In June 1996, the FDIC and certain other federal banking agencies (not including the OTS) issued a joint policy statement providing guidance on prudent interest rate risk management principles. The agencies stated that they would 109 49 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) determine banks' interest rate risk on a case-by-case basis, and would not adopt a standardized measure or establish an explicit minimum capital charge for interest rate risk. NOTE 24: STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN On March 8, 1984, the Company's stockholders approved the adoption of the 1983 incentive stock option plan, providing for the award of incentive stock options or nonqualified stock options to certain officers of the Company at the discretion of the Board of Directors. On April 19, 1994, the Company's stockholders approved the adoption of the 1994 stock option plan (the "1994 Plan") in which the right to purchase common stock of the Company may be granted to officers, employees, directors, consultants and advisers of the Company. The 1994 Plan is generally similar to the 1983 plan, which terminated according to its terms in 1993. The 1994 Plan does not affect any options granted under the 1983 plan. Under the 1994 Plan, on the date of the grant, the exercise price of the option must at least equal the market value per share of the Company's common stock. The 1994 Plan provides for the granting of options for a maximum of 4,000,000 common shares. On September 16, 1997, the Company's Board of Directors approved the adoption of a broad-based stock option plan called "WAMU Shares" as part of the Company's effort to build a unified team and to appropriately compensate its employees. This plan provides for an award of nonqualified stock options to all eligible employees who were employed by the Company on September 1, 1997. Generally, full-time employees received an option to purchase 100 shares of Company common stock, while part-time employees received an option to purchase 50 shares, and employees who were designated to receive options under the 1994 Plan were excluded. All grants were made using the fair market value of the Company's common stock on September 1, 1997, and all options vest on September 1, 1999. The WAMU Shares plan provides for the granting of options for a maximum of 2,200,000 common shares. On April 26, 1988, GWFC stockholders approved the adoption of the 1988 Stock Option and Incentive Plan (the "GWFC Plan"). Options were granted at the market value of the GWFC common stock on the date of grant. The GWFC plan consisted of two separate plans: the Key Employee Program, under which options (both incentive and nonqualified), stock appreciation rights, dividend equivalents and certain other performance and incentive awards were granted to officers, key employees and certain other individuals; and the Non-employee Director Program, under which nonqualified options were granted to non-employee directors under certain circumstances. Options may be exercised either by payment of cash, or the optionee may deliver WMI common stock of an equivalent market value at the date of exercise. As of July 1, 1997, this plan was amended to eliminate further grants. Stock options under all Plans are generally exercisable on a phased-in schedule over three to five years, depending upon the date of grant, and expire five to 10 years from the grant date. At December 31, 1997, options to purchase 1,747,416 shares were fully exercisable. 110 50 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock options granted, exercised, or forfeited were as follows:
WEIGHTED AVERAGE WEIGHTED AVERAGE FAIR VALUE PER SHARE NUMBER OF EXERCISE PRICE OF OF OPTIONS AT OPTION SHARES OPTION SHARES DATE OF GRANT ------------- ----------------- -------------------- Balance, beginning of 1995............... 7,626,589 $17.65 Granted in 1995.......................... 823,012 20.01 $ 5.62 Exercised in 1995........................ (925,468) 16.58 Forfeited in 1995........................ (279,312) 20.10 ---------- ------ Balance, end of 1995..................... 7,244,821 18.01 Granted in 1996.......................... 4,406,339 31.48 9.10 Exercised in 1996........................ (1,156,121) 18.07 Forfeited in 1996........................ (195,752) 21.30 ---------- ------ Balance, end of 1996..................... 10,299,287 23.70 Granted in 1997.......................... 3,165,259 61.46 16.59 Exercised in 1997........................ (7,946,473) 23.17 Forfeited in 1997........................ (65,626) 31.72 ---------- ------ Balance, end of 1997..................... 5,452,447 $46.32 ========== ======
Financial data pertaining to outstanding stock options were as follows:
DECEMBER 31, 1997 - ----------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED AVERAGE NUMBER OF REMAINING AVERAGE NUMBER OF EXERCISE PRICE OF RANGES OF OPTION CONTRACTUAL EXERCISE PRICE EXERCISABLE EXERCISABLE EXERCISE PRICES SHARES LIFE OF OPTION SHARES OPTION SHARES OPTION SHARES - ---------------------- --------- ---------------- ---------------- ------------- ----------------- $ 7.53 through $ 8.44.............. 380,375 2.8 $ 8.09 380,375 $ 8.09 10.53 through 13.48.. 112,579 4.2 12.75 112,579 12.75 17.29 through 26.25.. 801,796 6.4 21.64 732,801 21.78 26.53 through 38.50.. 562,647 8.4 30.30 316,308 31.73 42.63 through 42.75.. 581,000 9.0 42.64 196,353 42.64 47.50 through 67.38.. 3,014,050 9.8 62.66 9,000 49.87 --------- ------ --------- ------ 5,452,447 $46.32 1,747,416 $22.51 ========= ====== ========= ======
Under the terms of the Company's employee stock purchase plan ("ESPP"), an employee can purchase WMI common stock at a 15% discount without paying brokerage fees or commissions on purchases. The Company pays for the program's administrative expenses. The plan is open to all employees who are at least 18 years old, have completed at least one year of service, and work at least 20 hours per week. Participation can be by either payroll deduction or lump sum payments with a maximum annual contribution of 10% of employees' previous year's eligible cash compensation. Under the ESPP, dividends are automatically reinvested. In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-based Compensation. The statement requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) application of its fair value recognition provisions. FAS No. 123 does not rescind or interpret the existing accounting rules for employee stock-based arrangements. Companies may continue following those rules to recognize and measure compensation as outlined in Accounting Principles Board ("APB") Opinion 25, Accounting for Stock Issued to Employees but they are now required to disclose the pro forma amounts of net income and earnings per share that would have been reported had the company elected to follow the fair value recognition provisions of SFAS No. 123. Effective January 1, 1996, the 111 51 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company adopted the disclosure requirements of SFAS No. 123, but has determined that it will continue to measure its employee stock-based compensation arrangements under the provisions of APB Opinion 25. Accordingly, no compensation cost has been recognized for its stock option plans and its ESPP. Had compensation cost for the Company's compensation plans been determined consistent with SFAS No. 123, the Company's net income available to fully diluted common stock and fully diluted earnings per share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1997 1996 1995 ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income attributable to common stock Basic: As reported............................ $460,346 $191,386 $507,325 Pro forma.............................. 429,395 186,568 506,503 Diluted: As reported............................ 460,346 191,386 515,725 Pro forma.............................. 429,395 186,568 514,903 Net income per common share Basic: As reported............................ $1.87 $0.81 $2.19 Pro forma.............................. 1.74 0.79 2.19 Diluted: As reported............................ 1.86 0.81 2.16 Pro forma.............................. 1.74 0.78 2.16
The compensation expense included in the pro forma net income attributable to diluted common stock and diluted earnings per share is not likely to be representative of the effect on reported net income for future years because options vest over several years and additional awards generally are made each year. The fair value of options granted under the Company's stock option plans is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1997, 1996 and 1995: annual dividend yield of 2.67% for 1997 and 2.50% for 1996 and 1995; expected volatility of 27.37% for 1997 and 23.99% for 1996 and 1995; risk-free interest rates of 6.01% for 1997 and 5.78% for 1996 and 1995; and expected lives of five years for 1997, 1996 and 1995. NOTE 25: EMPLOYEE BENEFITS PROGRAMS Washington Mutual maintains a noncontributory cash balance defined benefit pension plan (the "Pension Plan") for substantially all eligible employees. Benefits earned for each year of service are based primarily on the level of compensation in that year plus a stipulated rate of return on the benefit balance. It is the Company's policy to fund the Pension Plan on a current basis to the extent deductible under federal income tax regulations. ASB provided a noncontributory defined benefit pension plan (the "ASB Plan" and together with the Pension Plan, the "Pension Plans"), which was terminated effective June 30, 1995. The combined net periodic pension cost for the Pension Plans was $3.2 million, $2.1 million and $2.0 million for 1997, 1996 and 1995; the weighted average discount rate was 7.25% for 1997 and 1996 and 8.00% for 1995; the long-term rate of return on assets was 8.00% for 1997, 1996 and 1995; and the assumed rate of increase in future compensation levels was 6.00% for all years presented. The Pension Plans' assets consist primarily of listed common stocks, U.S. government obligations, asset-backed securities, corporate debt obligations, and annuity contracts. 112 52 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At the termination date of the ASB Plan, all participants' accrued benefits became fully vested. The net assets of the ASB Plan were allocated as prescribed by the Employee Retirement Income Security Act of 1974 and the Pension Benefit Guaranty Corporation and their related regulations. All participants received full benefits. The termination resulted in a settlement under SFAS No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits. ASB recognized a gain of $1.7 million as a result of the settlement. The benefit obligation was settled in 1996. WMBFA maintains a substantially similar plan from the Great Western Merger (the "Great Western Plan"). On January 1, 1997, the Great Western Plan was converted from a final average pay plan to a cash balance plan, under which participants' accounts are credited with pay-related contributions and interest. It is the Company's policy to fund the Great Western Plan on a current basis to the extent deductible under federal income tax regulations. The net periodic pension cost or benefit for the Great Western Plan was a benefit of $4.5 million for 1997, and a cost of $400,000 for 1996 and a cost of $7.6 million for 1995, the weighted average discount rate was 7.50%, 7.81%, and 8.25% for 1997, 1996 and 1995; the long-term rate of return on assets was 9.0% for all three years presented; and the assumed rate of increase in future compensation levels was 5.25% for 1997 and 1996, and 5.50% for 1995. The Great Western Plan assets consist primarily of listed common stocks, U.S. government obligations, asset-backed securities, corporate debt obligations, and annuity contracts. The Company's defined benefit plans' status and amounts recognized in the financial statements were as follows:
DECEMBER 31, ---------------------- 1997 1996 --------- --------- (DOLLARS IN THOUSANDS) Benefit obligations: Vested benefits........................................ $(244,525) $(214,687) Nonvested benefits..................................... (5,104) (12,571) --------- --------- Accumulated benefit obligation........................... (249,629) (227,258) Effect of future compensation increases.................. (4,006) (1,168) --------- --------- Projected benefit obligation............................. (253,635) (228,426) Plan assets at fair value................................ 333,000 307,168 --------- --------- Plan assets in excess of projected benefit obligation.... 79,365 78,742 Unrecognized gain due to past experience different from assumptions............................................ 7,613 2,303 Unrecognized prior service cost.......................... (34,204) (29,221) Unrecognized net asset at transition being recognized over 18.6 years........................................ (2,536) (2,918) --------- --------- Prepaid pension asset.................................... $ 50,238 $ 48,906 ========= =========
The assumptions used in determining the actuarial present value of the projected benefit obligation at December 31 were: weighted average discount rate of 7.00% for 1997 and 7.50% for 1996 and 1995; rate of increase in future compensation level was 5.25% for all years presented; and expected long-term rate of return on plan assets was 9.00% for all years presented. 113 53 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net periodic pension expense for the Company's defined benefit plans was as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Service cost -- benefits earned during the period........................................... $ 12,604 $ 12,294 $ 12,600 Interest cost on projected benefit obligations..... 16,589 16,953 18,196 Actual (gain) on plan assets....................... (31,838) (27,253) (28,534) Amortization and deferral, net..................... 1,313 517 7,348 -------- -------- -------- $ (1,332) $ 2,511 $ 9,610 ======== ======== ========
The Company sponsors unfunded defined benefit postretirement plans that make medical and life insurance coverage available to eligible employees and dependents based on age and length of service. Medical coverage options are the same as available to active employees. The cost of the plan coverage for retirees and their qualifying dependents is based upon a point system that combines age and years of service which results, generally, in lower costs to retirees in conjunction with higher accumulated points within limits. Postretirement benefits, such as retiree health benefits, are accrued during the years an employee provides services. The funded status of these benefits were as follows:
DECEMBER 31, ---------------------- 1997 1996 --------- --------- (DOLLARS IN THOUSANDS) Accumulated postretirement benefit obligation............... $(34,600) $(57,836) Unrecognized transition obligation.......................... 2,209 2,356 Unrecognized (gain)......................................... (6,249) (4,782) -------- -------- Prepaid postretirement liability............................ $(38,640) $(60,262) ======== ========
Net periodic postretirement expense was as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1997 1996 1995 ------ ------ ------ (DOLLARS IN THOUSANDS) Service cost............................................. $1,454 $2,445 $2,513 Interest cost............................................ 3,422 3,998 4,240 Amortization of transition obligation.................... 147 147 147 Curtailment (gain)....................................... (350) (580) (570) ------ ------ ------ $4,673 $6,010 $6,330 ====== ====== ======
Net periodic postretirement expense was calculated using the following assumptions: the weighted average discount rate was 7.25% for all years presented; and the medical trend rate was estimated to increase at a rate of 9.00% in 1996 and 8.00% in 1997, thereafter decreasing 1.00% per year until a stable 5.00% medical inflation rate is reached in 2000. The effect of a 1.00% increase in the trend rates is not significant. The Company, as successor to GWFC, has assumed responsibility for certain unfunded post retirement benefits, including retirement restoration plans for certain employees, a supplemental Executive Retirement Plan (the "GW SERP") for certain senior officers and a nonqualified directors' retirement plan. At December 31, 1997, the projected benefit obligation for these plans was $4.5 million. The Company has purchased cost recovery life insurance, primarily with one carrier, on the lives of the participants in the GW SERP, the directors' retirement plan and the deferred compensation plan (described below), and it is sole owner and beneficiary of said policies. The net cash surrender value of this life insurance, recorded in other 114 54 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) assets, was $187.5 million at December 31, 1997 and $180.3 million at December 31, 1996, and net premium income related to insurance purchased was $7.0 million in 1997, $8.4 million in 1996 and $6.8 million in 1995. The Company sponsors a Supplemental Executive Retirement Plan (the "ASB SERP"), under which benefits are paid to certain officers formerly of ASB using a target percentage which is based upon the number of years of service with ASB. This percentage is applied to the participant's average annual earnings for the highest three out of the final 10 years of employment. These benefits are reduced to the extent a participant receives benefits from the ASB Plan and social security benefits. WMBFA has purchased cost recovery life insurance, primarily with two carriers, on the lives of the participants of the ASB SERP and deferred compensation plan, and it is the sole owner and beneficiary of said policies. The amount of coverage is designed to provide sufficient revenues to fund said plans. The net cash surrender value of this life insurance, recorded in other assets, was $29.6 million at December 31, 1997. The Company sponsors a Supplemental Employee Retirement Plan ("WMI SERP") for the benefit of certain officers. The WMI SERP is a nonqualified, noncontributory plan designed to supplement the benefits that are accrued under the Pension Plan with respect to compensation earned above designated compensation limits. Compensation for the WMI SERP includes amounts deferred into a compensation plan sponsored by the Company. The Company also sponsors the Washington Mutual, Inc. Supplemental Executive Retirement Accumulation Plan ("WMI SERAP") for the purpose of providing supplemental retirement benefits for certain officers. The level of the benefits under the SERAP is determined by the Company. The SERAP is not funded. The Company maintains a retirement savings and investment plan for substantially all eligible employees that allows participants to make contributions by salary deduction equal to 15% or less of their salary pursuant to Section 401(k) of the Internal Revenue Code. Employees' contributions vest immediately. The Company's partial matching contributions vest over five years. The Company maintains a savings plan for substantially all eligible employees formerly of GWFC that allows participants to make contributions equal to 14% or less of their salary pursuant to Section 401(k) of the Internal Revenue Code. The Company's partial matching contributions vest over five years. The Company maintains optional deferred compensation plans for certain employees formerly employed by GWFC and ASB. Eligible employees covered defer a portion of their compensation, and the Company agrees to pay interest on the balance of funds deferred. An enhanced rate is paid on funds deferred over three years. No additional compensation may be deferred under these plans. The Company provides an optional deferred compensation plan for certain employees and directors. Eligible participants can defer a portion of their compensation, and WMI agrees to pay interest on the balance of funds deferred. The Company uses grants of restricted stock as a component of compensation to provide a long-term incentive for creation of shareholder value and to encourage the recipient to remain at Washington Mutual. In 1990, ASB implemented a Phantom Share Plan (the "PSP") for the benefit of certain of its officers. As a result of the Keystone Transaction, the benefits under the PSP were payable, and ASB incurred an expense of $12.0 million in December 1996. 115 55 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total employee benefit plan expense was as follows:
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ------- ------- ------- (DOLLARS IN THOUSANDS) Company's contributions to savings plans.............. $21,373 $21,934 $19,163 SERP expense.......................................... 6,928 6,494 5,821 Net periodic postretirement expense................... 4,673 6,010 6,330 Net periodic pension expense.......................... (1,332) 2,511 9,610 Restricted stock expense.............................. 2,831 4,736 3,958 Other................................................. 4,226 3,928 4,120 ------- ------- ------- $38,699 $45,613 $49,002 ======= ======= =======
NOTE 26: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The results of operations on a quarterly basis have been restated to give effect to the business combination with GWFC. Results of operations on a quarterly basis were as follows:
YEAR ENDED DECEMBER 31, 1997 ----------------------------------------------------------------------- FIRST QUARTER(1) SECOND QUARTER(1) ---------------------------------- ---------------------------------- WASHINGTON WASHINGTON MUTUAL GWFC RESTATED MUTUAL GWFC RESTATED ---------- -------- ---------- ---------- -------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Interest income............... $830,154 $785,262 $1,615,416 $876,165 $794,184 $1,670,349 Interest expense.............. 509,780 446,094 955,874 550,386 466,578 1,016,964 -------- -------- ---------- -------- -------- ---------- Net interest income........... 320,374 339,168 659,542 325,779 327,606 653,385 Provision for loan losses..... 13,420 40,390 53,810 13,927 36,072 49,999 Other income.................. 71,500 116,751 188,251 72,521 115,626 188,147 Other expense................. 194,270 300,826 495,096 195,944 276,248 472,192 -------- -------- ---------- -------- -------- ---------- Income before income taxes.... 184,184 114,703 298,887 188,429 130,912 319,341 Income taxes.................. 70,112 49,000 119,112 69,705 58,579 128,284 -------- -------- ---------- -------- -------- ---------- Net income.................... $114,072 $ 65,703 $ 179,775 $118,724 $ 72,333 $ 191,057 ======== ======== ========== ======== ======== ========== Net income attributable to common stock................ $111,567 $ 62,279 $ 173,846 $116,219 $ 68,909 $ 185,128 ======== ======== ========== ======== ======== ========== Net income per common share: Basic....................... $1.00 $0.72 $1.04 $0.76 Diluted..................... 0.99 0.71 1.03 0.75
116 56 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 ------------------------------- THIRD QUARTER FOURTH QUARTER WASHINGTON WASHINGTON MUTUAL MUTUAL ------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Interest income............................................. $1,728,553 $1,796,646 Interest expense............................................ 1,072,902 1,108,751 ---------- ---------- Net interest income......................................... 655,651 687,895 Provision for loan losses................................... 52,131 51,199 Other income................................................ 111,113 225,889 Other expense............................................... 825,966 468,354 ---------- ---------- Income (loss) before income taxes........................... (111,333) 394,231 Income taxes................................................ 15,621 156,331 ---------- ---------- Net income (loss)........................................... $ (126,954) $ 237,900 ========== ========== Net income (loss) attributable to common stock.............. $ (132,883) $ 234,255 ========== ========== Net income (loss) per common share: Basic..................................................... $(0.54) $0.94 Diluted................................................... (0.54) 0.94
YEAR ENDED DECEMBER 31, 1996 ----------------------------------------------------------------------- FIRST QUARTER(1) SECOND QUARTER(1) ---------------------------------- ---------------------------------- WASHINGTON WASHINGTON MUTUAL GWFC RESTATED MUTUAL GWFC RESTATED ---------- -------- ---------- ---------- -------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Interest income............... $764,622 $825,240 $1,589,862 $776,269 $808,617 $1,584,886 Interest expense.............. 477,620 472,642 950,262 476,508 454,994 931,502 -------- -------- ---------- -------- -------- ---------- Net interest income........... 287,002 352,598 639,600 299,761 353,623 653,384 Provision for loan losses..... 19,910 36,021 55,931 19,396 32,566 51,962 Other income.................. 58,594 85,792 144,386 60,893 90,221 151,114 Other expense................. 183,657 283,575 467,232 189,040 280,707 469,747 -------- -------- ---------- -------- -------- ---------- Income before income taxes and minority interest........... 142,029 118,794 260,823 152,218 130,571 282,789 Income taxes.................. 49,695 47,500 97,195 49,151 51,300 100,451 Minority interest in earnings of consolidated subsidiary.................. 3,527 -- 3,527 3,450 -- 3,450 -------- -------- ---------- -------- -------- ---------- Net income.................... $ 88,807 $ 71,294 $ 160,101 $ 99,617 $ 79,271 $ 178,888 ======== ======== ========== ======== ======== ========== Net income attributable to common stock................ $ 84,202 $ 65,040 $ 149,242 $ 95,013 $ 73,029 $ 168,042 ======== ======== ========== ======== ======== ========== Net income per common share: Basic....................... $0.75 $0.64 $0.85 $0.71 Diluted..................... 0.74 0.64 0.83 0.71
117 57 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1996 ----------------------------------------------------------------------- THIRD QUARTER(1) FOURTH QUARTER(1) ---------------------------------- ---------------------------------- WASHINGTON WASHINGTON MUTUAL GWFC RESTATED MUTUAL GWFC RESTATED ---------- -------- ---------- ---------- -------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Interest income............... $797,694 $801,486 $1,599,180 $810,651 $802,511 $1,613,162 Interest expense.............. 501,074 461,742 962,816 503,027 466,536 969,563 -------- -------- ---------- -------- -------- ---------- Net interest income........... 296,620 339,744 636,364 307,624 335,975 643,599 Provision for loan losses..... 15,269 41,671 56,940 141,702 85,900 227,602 Other income.................. 69,016 82,995 152,011 76,378 134,275 210,653 Other expense................. 320,089 449,343 769,432 343,370 378,818 722,188 -------- -------- ---------- -------- -------- ---------- Income before income taxes and minority interest........... 30,278 (68,275) (37,997) (101,070) 5,532 (95,538) Income taxes.................. 12,963 (28,400) (15,437) (16,202) 400 (15,802) Minority interest in earnings of consolidated subsidiary.................. 3,527 -- 3,527 3,066 -- 3,066 -------- -------- ---------- -------- -------- ---------- Net income (loss)............. $ 13,788 $(39,875) $ (26,087) $(87,934) $ 5,132 $ (82,802) ======== ======== ========== ======== ======== ========== Net income (loss) attributable to common stock............. $ 9,183 $(44,250) $ (35,067) $(92,539) $ 1,708 $ (90,831) ======== ======== ========== ======== ======== ========== Net income (loss) per common share: Basic....................... $0.08 $(0.15) $(0.82) $(0.38) Diluted..................... 0.08 (0.15) (0.82) (0.38)
- --------------- (1) Previously reported balances of the merged companies have been reclassified to conform to the Company's presentation and restated to give effect to the combination. NOTE 27: INTEREST RATE RISK MANAGEMENT From time to time, the following strategies may be used by the Company to reduce its exposure to interest rate risk: the origination and purchase of ARMs and the purchase of adjustable-rate MBS; the sale of fixed-rate SFR loan production or fixed-rate MBS; and the use of derivative instruments, such as interest rate exchange agreements, interest rate cap agreements, cash flow swap agreements, put options and forward sales contracts. The Company uses forward sales contracts to hedge its exposure to increasing interest rates with respect to fixed-rate loans which the Company intends to sell in the secondary market. Forward sales contracts are used to sell specific financial instruments (fixed-rate loans) at a future date for a specified price. Gains or losses are recognized at the time the contracts mature and are recorded as a component of gain on sale of loans and leases. At December 31, 1997, the Company had executed $812.1 million in forward sales contracts to hedge $930.7 million in fixed-rate SFR loan commitments which are expected to close as well as loans which have been funded but not yet sold. At December 31, 1996, the Company had executed $215.4 million in forward sales contracts. Interest rate exchange agreements, cash flow swap agreements, interest rate cap agreements, put options and forward sales contracts expose the Company to credit risk in the event of nonperformance by counterparties to such agreements. This risk consists primarily of the termination value of agreements where the Company is in a favorable position. The Company controls the credit risk associated with its various derivative agreements through counterparty credit review, counterparty exposure limits and monitoring procedures. 118 58 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's use of derivative instruments reduces the negative effect that changing interest rates may have on net interest income. The Company uses such instruments to reduce the volatility of net interest income over an interest rate cycle. The Company does not invest in leveraged derivative instruments. During 1997 and 1996, the Company did not terminate any interest rate exchange agreements, cash flow swaps or interest rate cap agreements. Scheduled maturities of interest rate exchange agreements were as follows:
DECEMBER 31, 1997 ---------------------------------------------------------------- NOTIONAL SHORT-TERM LONG-TERM CARRYING FAIR AMOUNT RECEIPT RATE(1) PAYMENT RATE VALUE VALUE ---------- --------------- ------------ -------- ------- (DOLLARS IN THOUSANDS) Designated against available-for-sale securities: Due within one year.................. $ 300,000 5.83% 6.05% $(334) $ (334) After one but within two years....... 500,000 5.88 5.97 116 116 Designated against deposits and borrowings: Due within one year.................. 506,533 5.59 6.07 -- (1,541) After one but within two years....... 277,600 5.45 7.94 -- (8,301) After two but within three years..... 259,000 6.50 5.62 -- 6,534 After three years.................... 243,800 4.90 5.49 -- (101) ---------- ----- ----- ----- ------- $2,086,933 5.71% 6.17% $(218) $(3,627) ========== ===== ===== ===== =======
DECEMBER 31, 1996 ------------------------------------------------------------------- NOTIONAL SHORT-TERM LONG-TERM CARRYING FAIR AMOUNT RECEIPT RATE(1) PAYMENT RATE VALUE VALUE ---------- --------------- ------------ -------- ---------- (DOLLARS IN THOUSANDS) Designated against available-for-sale securities: Due within one year................. $ 200,000 5.56% 6.83% $ (799) $ (799) After one but within two years...... 300,000 5.60 6.05 (112) (112) After two but within three years.... 200,000 5.87 6.09 265 265 Designated against deposits and borrowings: Due within one year................. 578,948 7.34 6.24 (498) 6,924 After one but within two years...... 506,533 5.45 6.04 52 (1,839) After two but within three years.... 282,600 5.43 7.79 -- (11,255) After three years................... 502,800 5.72 5.45 -- 18,066 ---------- ---- ---- ------- -------- $2,570,881 5.98% 6.23% $(1,092) $ 11,250 ========== ==== ==== ======= ========
119 59 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Scheduled maturities of interest rate cap agreements were as follows:
DECEMBER 31, 1997 --------------------------------------------------------- NOTIONAL STRIKE SHORT-TERM CARRYING FAIR AMOUNT RATE RECEIPT RATE(1) VALUE VALUE ---------- ------ --------------- -------- ------ (DOLLARS IN THOUSANDS) Designated against available-for-sale securities: Due within one year(2)...................... $ 650,000 6.17% 5.89% $ 1,202 $1,202 Designated against deposits and borrowings: Due within one year(3)...................... 565,500 7.89 5.82 380 (771) After one but within two years(4)........... 855,750 7.16 5.33 3,505 157 After two but within three years(5)......... 265,000 8.00 5.53 1,498 106 After three years(6)........................ 538,750 8.11 5.11 6,005 710 ---------- ---- ---- ------- ------ $2,875,000 7.34% 5.53% $12,590 $1,404 ========== ==== ==== ======= ======
- --------------- (1) The terms of each agreement had specific LIBOR or COFI reset and index requirements, which resulted in different short-term receipt rates for each agreement. The receipt rate represented the weighted average rate as of the last reset date for each agreement. (2) Included $550.0 million notional amount with a weighted average cap ceiling of 7.64% and $100.0 million notional amount with a binary (1.00%) cap. (3) Included $150.0 million notional amount with a weighted average cap floor of 5.50% and $240.0 million notional amount with a weighted average cap ceiling of 9.50%. (4) Included $839.8 million notional amount with a weighted average cap ceiling of 8.77%. (5) Included $112.0 million notional amount with a weighted average cap ceiling of 9.50%. (6) Included $459.8 million notional amount with a weighted average cap ceiling of 9.49%.
DECEMBER 31, 1996 --------------------------------------------------------- NOTIONAL STRIKE SHORT-TERM CARRYING FAIR AMOUNT RATE RECEIPT RATE(1) VALUE VALUE ---------- ------ --------------- -------- ------ (DOLLARS IN THOUSANDS) Designated against available for sale securities: Due within one year(2)..................... $ 875,000 5.85% 5.89% $ 499 $ 499 After one but within two years(3).......... 650,000 6.17 5.60 1,961 1,961 Designated against deposits and borrowings: Due within one year(4)..................... 3,001,000 6.12 5.61 707 2 After one but within two years(5).......... 565,500 7.89 5.49 1,881 798 After two but within three years(6)........ 855,750 7.17 5.16 5,814 1,396 After three years(7)....................... 832,750 8.06 5.04 9,131 1,215 ---------- ---- ---- ------- ------ $6,780,000 6.61% 5.51% $19,993 $5,871 ========== ==== ==== ======= ======
- --------------- (1) The terms of each agreement had specific LIBOR or COFI reset and index requirements, which resulted in different short-term receipt rates for each agreement. The receipt rate represented the weighted average rate as of the last reset date for each agreement. (2) Included $600.0 million notional amount with a weighted average cap ceiling of 7.75%. (3) Had a weighted average cap ceiling of 7.56%. (4) Included $45.0 million notional amount with a weighted average cap ceiling of 9.50%. (5) Included $240.0 million notional amount with a weighted average cap ceiling of 7.83% and $150.0 million notional amount with a weighted average floor of 5.50%. (6) Included $839.8 million notional amount with a weighted average cap ceiling of 8.77%. (7) Included $571.8 million notional amount with a weighted average cap ceiling of 9.49%. 120 60 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Financial data pertaining to interest rate exchange agreements were as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Weighted average net effective cost (benefit) at end of year................................................. 0.55% 0.24% (0.24)% Weighted average net effective cost (benefit) during the year............................................. 0.60 (0.26) (0.45) Monthly average notional amount of interest rate exchange agreements.................................. $2,107,184 $2,882,041 $3,049,803 Maximum notional amount of interest rate exchange agreements at any month-end.......................... 2,466,233 3,436,157 3,208,681 Net cost (benefit) included with interest expense on deposits during the year............................. 3,951 (14,471) (9,260) Net cost included with interest expense on borrowings during the year...................................... 5,975 9,951 5,889 Net cost (benefit) included with interest income on available-for-sale securities during the year........ 2,637 (2,984) (10,495)
Financial data pertaining to interest rate cap agreements were as follows:
YEAR ENDED DECEMBER 31, 1996 --------------------------------------- 1997 1996 1995 ---------- ----------- ---------- (DOLLARS IN THOUSANDS) Monthly average notional amount of interest rate cap agreements................................. $3,897,769 $10,433,750 $6,363,000 Maximum notional amount of interest rate cap agreements at any month end.................... 3,965,000 12,514,500 9,774,000 Net cost included with interest expense on deposits during the year....................... 5,773 6,206 7,875 Net cost included with interest expense on borrowings during the year..................... -- 2,162 415 Net cost (benefit) included with interest income on available-for-sale securities during the year........................................... 3,612 (4,686) (5,340)
Changes in interest rate exchange agreements and interest rate cap agreements were as follows:
YEAR ENDED DECEMBER 31, 1997 ------------------------------ INTEREST RATE INTEREST RATE EXCHANGE CAP AGREEMENTS AGREEMENTS ------------- ------------- (DOLLARS IN THOUSANDS) Notional balance, beginning of year......................... $2,570,881 $6,780,000 Additions................................................... 300,000 -- Maturities.................................................. 783,948 3,905,000 ---------- ---------- Notional balance, end of year............................... $2,086,933 $2,875,000 ========== ==========
NOTE 28: FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. 121 61 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The fair value of financial instruments were as follows:
DECEMBER 31, ----------------------------------------------------- 1997 1996 ------------------------- ------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Financial assets: Cash and cash equivalents................. $ 1,560,890 $ 1,560,890 $ 1,665,355 $ 1,665,355 Trading securities........................ 23,364 23,364 1,647 1,647 Available-for-sale securities............. 11,372,938 11,372,938 16,093,529 16,093,529 Held-to-maturity securities............... 12,779,614 12,699,653 4,479,056 4,545,125 Loans, exclusive of reserve for loan losses................................. 67,810,651 68,607,997 61,831,109 61,849,717 Investment in FHLBs....................... 1,059,491 1,059,491 843,002 843,002 Mortgage servicing rights................. 215,360 228,484 185,984 213,121 ----------- ----------- ----------- ----------- 94,822,308 95,552,817 85,099,682 85,211,496 Financial liabilities: Deposits.................................. 50,986,017 50,916,683 52,666,914 52,779,563 Annuities................................. -- -- 878,057 878,057 Federal funds purchased and commercial paper....................... 2,928,282 2,930,231 2,153,506 2,153,506 Reverse repurchase agreements............. 12,279,040 12,279,962 12,033,119 12,050,518 Advances from FHLBs....................... 20,301,963 20,325,343 10,011,425 10,028,513 Trust preferred securities................ 800,000 854,692 100,000 99,520 Other borrowings.......................... 2,689,362 2,774,939 3,109,694 3,286,356 ----------- ----------- ----------- ----------- 89,984,664 90,081,850 80,952,715 81,276,033 Derivative financial instruments(1): Interest rate exchange agreements: Designated against available-for-sale securities........................... (218) (218) (646) (646) Designated against deposits and borrowings........................... -- (3,409) (446) 11,896 Interest rate cap agreements: Designated against available-for-sale securities........................... 1,202 1,202 2,460 2,460 Designated against deposits and borrowings........................... 11,388 202 17,533 3,411 ----------- ----------- ----------- ----------- Total............................. 12,372 (2,223) 18,901 17,121 Other off-balance sheet instruments: Standby letters of credit................. -- -- -- (42) Forward sales contracts designated against loans.......................... -- (4,861) -- 83 Off-balance sheet loan commitments........ -- (781) -- 7,714 ----------- ----------- ----------- ----------- -- (5,642) -- 7,755 ----------- ----------- ----------- ----------- Net financial instruments......... $ 4,850,016 $ 5,463,102 $ 4,165,868 $ 3,960,339 =========== =========== =========== ===========
- --------------- (1) See Note 27: Interest Rate Risk Management. The following methods and assumptions were used to estimate the fair value of each class of financial instrument as of December 31, 1997 and 1996: Cash and cash equivalents -- The carrying amount represented fair value. Trading securities -- Fair values were based on quoted market prices. 122 62 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Available-for-sale securities -- Fair values were based on quoted market prices. If a quoted market price was not available, fair value was estimated using market prices for similar securities as well as internal analytics. Held-to-maturity securities -- Fair values were based on quoted market prices. If a quoted market price was not available, fair value was estimated using market prices for similar securities, as well as internal analytics. Loans -- Loans were priced using the discounted cash flow method. The discount rate used was the rate currently offered on similar products. Investment in FHLBs -- The carrying amount represented fair value. Mortgage servicing rights -- The fair value of mortgage servicing rights was estimated using projected cash flows, adjusted for the effects of anticipated prepayments, using a market discount rate. Deposits -- The fair value of checking accounts, savings accounts and MMDAs was the amount payable on demand at the reporting date. For time deposit accounts, the fair value was determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on alternate funding sources with similar maturities. Core deposit intangibles are not included. Annuities -- The carrying amount represented fair value. Federal funds purchased and commercial paper -- The value was determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings. Reverse repurchase agreements -- These were valued using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings. Advances from FHLBs -- These were valued using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings. Trust preferred securities -- Fair value was estimated using quoted market prices for similar securities. Other borrowings -- These were valued using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings. Derivative financial instruments -- The fair value for interest rate exchange agreements was determined using dealer quotations, when available, or the discounted cash flow method. The market prices for similar instruments were used to value interest rate cap agreements. Standby letters of credit -- The fair value of standby letters of credit was based on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. Forward sales contracts designated against loans -- The fair value of forward sales contracts purchased as a hedge of fixed-rate commitments and commitments to fund real estate loans was estimated using current market prices adjusted for various risk factors and market volatility. Off-balance-sheet loan commitments -- The fair value of loan commitments was estimated based on current levels of interest rates versus the committed interest rates. The balance shown represents the differential between committed value and fair value. 123 63 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 29: FINANCIAL INFORMATION -- WMI The following WMI (parent company only) financial information should be read in conjunction with the other notes to the consolidated financial statements. STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) INTEREST INCOME Loans...................................................... $ 3,832 $ -- $ -- Available-for-sale securities.............................. 1,769 6,777 8,033 Cash equivalents........................................... 1,448 5,378 471 -------- -------- -------- Total interest income.................................... 7,049 12,155 8,504 INTEREST EXPENSE Borrowings................................................. 34,839 14,396 9,072 -------- -------- -------- Total interest expense................................... 34,839 14,396 9,072 -------- -------- -------- Net interest expense.................................. (27,790) (2,241) (568) OTHER INCOME Other operating income..................................... 353 122 8 Gain (loss) on sale of other assets........................ 20,845 -- (171) -------- -------- -------- Total other income....................................... 21,198 122 (163) OTHER EXPENSE Salaries and employee benefits............................. 6,907 3,561 2,716 Occupancy and equipment.................................... -- 11 1 Other operating expense.................................... 5,629 18,013 3,289 Transaction-related expense................................ 32,308 -- -- Amortization of goodwill................................... 731 629 -- -------- -------- -------- Total other expense...................................... 45,575 22,214 6,006 -------- -------- -------- Loss before income taxes and equity in net earnings of subsidiaries........................................ (52,167) (24,333) (6,737) Income tax benefit......................................... (21,523) (8,105) (865) Equity in net earnings of subsidiaries..................... 512,422 246,328 556,796 -------- -------- -------- Net income................................................. $481,778 $230,100 $550,924 ======== ======== ========
124 64 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS Cash and cash equivalents................................... $ 330,764 $ 109,356 Available-for-sale securities............................... 1,000 82,033 Loans....................................................... 11,555 92,083 Investment in subsidiaries.................................. 5,496,975 4,925,262 Other assets................................................ 114,442 12,917 ---------- ---------- Total assets.............................................. $5,954,736 $5,221,651 ========== ========== LIABILITIES Reverse repurchase agreements............................... $ -- $ 68,326 Other borrowings............................................ 562,298 148,007 Other liabilities........................................... 83,367 12,230 ---------- ---------- Total liabilities......................................... 645,665 228,563 STOCKHOLDERS' EQUITY Preferred stock, no par value: 10,000,000 shares authorized -- 4,722,500 and 5,382,500 shares issued and outstanding, liquidation preference....................... 118,063 283,063 Common stock, no par value: 800,000,000 shares authorized -- 257,560,018 and 250,230,644 shares issued and outstanding........................................... -- -- Capital surplus -- common stock............................. 1,943,294 1,664,870 Valuation reserve for available-for-sale securities......... -- 1,156 Valuation reserve for available-for-sale securities -- subsidiaries 134,610 117,469 Retained earnings........................................... 3,113,104 2,926,530 ---------- ---------- Total stockholders' equity................................ 5,309,071 4,993,088 ---------- ---------- Total liabilities and stockholders' equity................ $5,954,736 $5,221,651 ========== ==========
125 65 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 --------- --------- --------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $ 481,778 $ 230,100 $ 550,924 Adjustments to reconcile net income to net cash (used) provided by operating activities: (Gain) on sale of assets............................... (20,845) -- -- Decrease (increase) in interest receivable............. 326 (69) 80 Increase in interest payable........................... 2,624 530 3,167 Decrease in income taxes payable....................... (88,809) (8,105) (865) Equity in undistributed earnings of subsidiaries....... (512,422) (246,328) (556,796) Decrease (increase) in other assets.................... 6,047 (16,619) 9,910 Increase in other liabilities.......................... 60,483 14,867 720 --------- --------- --------- Net cash (used) provided by operating activities (70,818) (25,624) 7,140 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available-for-sale securities............. (1,000) -- -- Sales of available-for-sale securities................. 75,866 -- -- Principal payments of available-for-sale securities.... 4,191 16,118 12,594 Sale of subsidiary..................................... 102,775 -- -- Origination of loans, net of principal payments........ 80,528 55,784 (147,867) Investment in subsidiary............................... (554,412) (170,000) -- Dividends received from subsidiaries................... 476,525 280,026 136,521 --------- --------- --------- Net cash provided by investing activities............ 184,473 181,928 1,248 CASH FLOWS FROM FINANCING ACTIVITIES Decrease in reverse repurchase agreements.............. (68,326) (14,155) (1,848) Proceeds from other borrowings......................... 414,291 -- 147,845 Issuance of common stock through stock options and employee stock plans................................. 146,266 20,604 8,379 Repurchase of preferred stock.......................... (165,000) -- (1,990) Conversion of preferred stock to common stock.......... -- (107) -- Cash dividends paid.................................... (219,478) (143,386) (76,581) --------- --------- --------- Net cash provided (used) by financing activities 107,753 (137,044) 75,805 --------- --------- --------- Increase in cash and cash equivalents.................. 221,408 19,260 84,193 Cash and cash equivalents, beginning of year........... 109,356 90,096 5,903 --------- --------- --------- Cash and cash equivalents, end of year................. $ 330,764 $ 109,356 $ 90,096 ========= ========= =========
126 66 SIGNATURES Pursuant to the requirement of the Securities and Exchange Act of 1934, the registrant has duly caused this Amendment No. 2 to be signed on its behalf by the undersigned, thereunto duly authorized on June 25, 1998. WASHINGTON MUTUAL, INC By: /s/ Fay L. Chapman ----------------------- Fay L. Chapman Executive Vice President 67 WASHINGTON MUTUAL, INC. INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION ----------- ----------- 23 Consent of Deloitte & Touche LLP 23.1 Consent of KPMG Peat Marwick LLP 23.2 Consent of Price Waterhouse LLP
EX-23 2 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT - -------------------------------------------------------------------------------- We consent to the incorporation by reference in Registration Statement No. 33-93850 of Washington Mutual, Inc. on Form S-3; Post-Effective Amendment No. 1 on Form S-8 to Form S-4 (No. 333-23221) of Washington Mutual, Inc.; Registration Statement No. 33-86840 of Washington Mutual, Inc. on Form S-8; and Registration Statement No. 333-37685 of Washington Mutual, Inc. on Form S-3 of our report dated February 20, 1998, appearing in the Annual Report on Form 10-K of Washington Mutual, Inc. for the year ended December 31, 1997. /s/ Deloitte & Touche LLP Seattle, Washington March 18, 1998 EX-23.1 3 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Washington Mutual, Inc., as successor to Keystone Holdings, Inc.: We consent to incorporation by reference in Registration Statement No. 33-93850 of Washington Mutual, Inc. on Form S-3, Post-Effective Amendment No. 1 on Form S-8 to Form S-4 (No. 333-23221) of Washington Mutual, Inc., Registration Statement No. 33-86840 of Washington Mutual, Inc. on Form S-8, and Registration Statement No. 333-37685 of Washington Mutual, Inc. on Form S-3 of our report dated January 26, 1996, except as to Note 27 to the consolidated financial statements, which is as of February 8, 1996, relating to the consolidated statements of earnings, stockholder's equity, and cash flows for the year ended December 31, 1995, which report appears in the December 31, 1997, annual report on Form 10-K of Washington Mutual, Inc. /s/ KPMG Peat Marwick LLP Los Angeles, California March 18, 1998 EX-23.2 4 CONSENT OF PRICE WATERHOUSE LLP 1 Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registrations Statements on Form S-3 (Nos. 33-93850 and 333-37685), on Post-Effective Amendment No. 1 on Form S-8 to Form S-4 (No. 333-23221) and on Form S-8 (No. 33-86840) of Washington Mutual, Inc. of our report dated January 22, 1997, except as to Note 28, which is as of March 7, 1997, relating to the consolidated financial statements of Great Western Financial Corporation, which appears on page 62 of this Form 10-K. /s/ Price Waterhouse LLP Los Angeles, California March 18, 1998 -----END PRIVACY-ENHANCED MESSAGE-----