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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20529
FORM 10-K
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(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, 1998
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO :
COMMISSION FILE NUMBER 1-14667
WASHINGTON MUTUAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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Common Stock New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 voting stock held by nonaffiliates of the
registrant as of February 26, 1999:
COMMON STOCK -- $22,717,380,720(1)
(1) Does not include any value attributable to 12,000,000 shares that are held
in escrow and not traded.
The number of shares outstanding of the issuer's classes of common stock as
of February 26, 1999:
COMMON STOCK -- 593,989,545(2)
(2) Includes the 12,000,000 shares held in escrow.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held April 20, 1999 are incorporated by reference into Part
III.
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WASHINGTON MUTUAL, INC.
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I...................................................... 1
ITEM 1. BUSINESS.......................................... 1
Overview............................................... 1
Corporate Developments................................. 2
Integration of Operations.............................. 3
Risk Factors........................................... 4
Mortgage Banking....................................... 7
Consumer Banking....................................... 8
Commercial Banking..................................... 9
Financial Services..................................... 10
Consumer Finance....................................... 10
Treasury Activities.................................... 11
Asset Quality.......................................... 13
Employees.............................................. 13
Business Combinations.................................. 14
Taxation............................................... 14
Environmental Regulation............................... 15
Regulation and Supervision............................. 16
Competitive Environment................................ 24
Principal Officers..................................... 25
ITEM 2. PROPERTIES........................................ 26
ITEM 3. LEGAL PROCEEDINGS................................. 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................ 27
PART II..................................................... 27
ITEM 5. MARKET FOR WASHINGTON MUTUAL'S COMMON STOCK AND
RELATED SECURITY HOLDER
MATTERS................................................ 27
ITEM 6. SELECTED FINANCIAL DATA........................... 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 31
General................................................ 31
Results Of Operations.................................. 31
Quarterly Results Of Operations........................ 40
Review Of Financial Condition.......................... 42
Provision and Reserve for Loan Losses.................. 46
Asset and Liability Management Strategy................ 52
Liquidity.............................................. 53
Capital Adequacy....................................... 54
Year 2000 Project...................................... 54
Accounting Developments Not Yet Adopted................ 56
Tax Contingency........................................ 56
Goodwill Litigation.................................... 57
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................ 59
Management of Interest Rate Risk and Derivative
Activities............................................ 62
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....... 63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................... 63
PART III.................................................... 64
PART IV..................................................... 64
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.................................... 64
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PART I
ITEM 1. BUSINESS
OVERVIEW
With a history dating back to 1889, Washington Mutual, Inc. is a financial
services company committed to serving consumers and small to mid-sized
businesses. At December 31, 1998, we had deposits of $85.49 billion and
stockholders' equity of $9.34 billion. Based on our consolidated assets of
$165.49 billion at December 31, 1998, we were the largest savings institution
and the eighth largest banking company in the United States.
We operate principally in California, Washington, Oregon, Florida, Texas
and Utah, and have operations in 31 other states and the District of Columbia.
Through our subsidiaries, we engage in the following business activities:
- Mortgage Banking
- Consumer Banking
- Commercial Banking
- Financial Services
- Consumer Finance
Our principal business offices are located at 1201 Third Avenue, Seattle,
Washington 98101. When we refer to "we" or "Washington Mutual" or the "Company"
in this Form 10-K, we mean Washington Mutual, Inc., as well as its consolidated
subsidiaries. When we refer to WMI, we mean Washington Mutual, Inc. exclusively.
Mortgage Banking
We conduct mortgage banking through our banking subsidiaries, Washington
Mutual Bank, FA ("WMBFA"), Washington Mutual Bank ("WMB"), and Washington Mutual
Bank fsb ("WMBfsb"). The principal activities conducted by our mortgage banking
operations are the origination of single-family residential mortgages and
residential construction loans and the associated loan servicing activities. For
the year ended December 31, 1998, this group originated $43.62 billion of SFR
loans (including residential construction), making us the nation's fourth
largest single-family residential mortgage originator. At December 31, 1998, we
had a servicing portfolio of $154.24 billion of single-family residential
mortgage loans and residential construction loans. When we refer to
"single-family residential mortgage" loans or "SFR" loans in this Form 10-K, we
mean first lien mortgage loans on owner-occupied one-to-four-family residences.
Consumer Banking
The consumer banking business includes the sale of all consumer deposit
products, including checking accounts, and the associated servicing activities
as well as the origination of consumer loans through our consumer financial
centers. These consumer loan products include second equity mortgage loans and
lines of credit, manufactured housing loans, automobile, boat and recreational
vehicle loans and education loans. We conduct consumer banking in eight states
through 1,173 financial centers. The consumer banking group also has
approximately 1,200 employees in its telephone banking centers. At December 31,
1998, we had $85.49 billion in deposits and a consumer loan portfolio of $5.48
billion.
Commercial Banking
This business line is comprised of our commercial real estate group and
Western Bank, a separately named division of Washington Mutual Bank. This
business segment offers commercial business loans and commercial real estate
loans, comprised of multi-family residential loans and loans for nonresidential
real estate. The Western Bank division operates primarily in Washington and
Oregon and commenced operations
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in California as of the beginning of 1999 under the name WM Business Bank. The
commercial banking group provides personalized commercial banking services to
small to mid-sized businesses and makes available multi-family shelter-based
lending, commercial construction financing and other commercial real estate
loans. For the year ended December 31, 1998, Western Bank had average commercial
business loans outstanding of $1.49 billion compared with $1.14 billion for
1997. We also had $18.13 billion of commercial real estate loans in our
portfolio.
Financial Services
The financial services business consists of WM Financial Services, Inc., a
licensed broker-dealer; WM Advisors, Inc., the investment adviser to the WM
Group of Funds; WM Funds Distributor, Inc., the distributor of the WM Group of
Funds; and Washington Mutual Insurance Services, Inc. Through our broker-
dealer, WM Financial Services, we offer a wide range of investment products to
our customers, including mutual funds, variable and fixed annuities and general
securities.
The WM Group of Funds is a proprietary mutual fund complex formed through
the consolidation of the Composite Funds and the Sierra Trust Funds. At December
31, 1998, the WM Group of Funds consisted of 18 mutual funds, 18 variable
annuities and five managed asset funds. At that date, it had 215,052 accounts
and $4.93 billion in assets under management. As part of the acquisition of H.
F. Ahmanson & Company ("Ahmanson") in 1998, we acquired Griffin Financial
Investment Advisers, which is the investment adviser to The Griffin Funds, a
mutual fund family with $1.09 billion in assets under management at December 31,
1998. The Griffin Investment Advisers merged into WM Advisors and The Griffin
Funds merged into the WM Group of Funds in 1999.
Washington Mutual Insurance Services, Inc. supports the mortgage lending
process by offering customers property and casualty insurance products. The
group also offers insurance products to existing mortgage and deposit customers,
which includes mortgage life and accidental death and dismemberment, property
and casualty, and life insurance.
Consumer Finance
We conduct our consumer finance business through Aristar, Inc. and its
subsidiaries ("Aristar"). Through those companies, we make direct consumer
installment loans and purchase retail installment contracts from local retail
establishments through a network of over 500 branch offices located in 24
states, primarily in the southeastern United States. Aristar also accepts
deposits in Colorado and Utah through its industrial bank subsidiary. Aristar
generally conducts its business under the names Blazer Financial, City Finance
and First Community Industrial Bank. At December 31, 1998, Aristar had assets of
$2.77 billion and deposits of $187.5 million.
CORPORATE DEVELOPMENTS
Acquisitions
The Keystone Transaction. In December 1996, Keystone Holdings, Inc.
("Keystone Holdings") merged into WMI. As a result of the merger and related
transactions, all of Keystone Holdings subsidiaries, including American Savings
Bank, F.A. ("ASB"), became our subsidiaries.
The Great Western Merger. In July 1997, Great Western Financial Corporation
("Great Western") merged into New American Capital, Inc., our wholly-owned
subsidiary. As a result, all of the subsidiaries of Great Western, including
Great Western Bank, a Federal Savings Bank ("GWB"), and Aristar, became our
subsidiaries. In October 1997, Great Western Bank merged into American Savings
Bank, which changed its name to Washington Mutual Bank, FA.
The Ahmanson Merger. On October 1, 1998, Ahmanson merged into WMI. As a
result, Home Savings of America, FSB ("Home Savings") became our subsidiary. On
October 3, 1998, Home Savings merged into WMBFA. Prior to our merger with
Ahmanson, Ahmanson had acquired Coast Savings Financial, Inc. ("Coast"). We
anticipate that the complete integration of Home Savings into WMBFA's systems
will occur
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in mid-1999. For purposes of segment reporting under the newly effective
accounting standard, SFAS 131, Ahmanson is being treated as a separate segment
for the time periods discussed. See "Notes to Consolidated Financial
Statements -- Note 2: Business Combinations/Restructuring and Note 27: Lines of
Business."
Other Significant Actions
On April 20, 1998, our Board of Directors declared a 3-for-2 common stock
split in the form of a 50% stock dividend payable on June 1, 1998 to
shareholders of record as of May 18, 1998.
On May 22, 1998, we announced a new ten-year community reinvestment
commitment to the communities in which we do business. The new $120 billion
pledge targets loans and other financial support to traditionally underserved
communities. The pledge will take effect beginning in 1999 and replaces earlier
pledges made both by us and by the companies we acquired.
On August 28, 1998, our shareholders approved an amendment to our Restated
Articles of Incorporation to increase the number of authorized shares of common
stock from 800 million shares to 1.60 billion shares.
On January 1, 1998, we redeemed our Series C Preferred Stock at $25.00 per
share, plus unpaid dividends up to the redemption date.
On September 16, 1998, we redeemed our Series E Preferred Stock at $25.00
per share, plus unpaid dividends up to the redemption date.
On December 9, 1998, our common stock began trading on the New York Stock
Exchange under the trading symbol "WM." As a result, our common stock no longer
trades on The Nasdaq Stock Market.
INTEGRATION OF OPERATIONS
This section contains forward-looking statements that we have based on our
best judgments and currently available information. These forward-looking
statements are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond our
control. In addition, these forward-looking statements are subject to
assumptions with respect to future business strategies and decisions that are
subject to change. Accordingly, we cannot assure you that we will achieve the
cost savings that we describe in the amounts or within the time periods
currently estimated. See "Risk Factors" beginning on page 4 for a discussion of
factors that may cause these forward-looking statements to differ from actual
results.
Operations
The integration of Great Western and its subsidiaries into our operations
is complete. We consolidated the administration of Great Western's payroll,
employee benefit plans, incentive compensation systems, and accounts payable
effective January 1, 1998. In the first and second quarters of 1998, we
consolidated 86 consumer financial centers of ASB and GWB. During the second
quarter of 1998, we converted 4.7 million deposit accounts representing $24.0
billion in deposits, and 1.5 million transaction card accounts at nearly 370
Great Western locations in Florida and northern and southern California. In
addition, we consolidated the approximately 650,000 mortgage and consumer loans
that made up the Great Western and ASB loan portfolios. By the end of third
quarter 1998, we had made all staff reductions related to the Great Western
Merger.
The decision in March 1998 to pursue the merger with Ahmanson caused
management to revise its plan for the integration of Great Western facilities,
staffing levels and the geographic location of corporate support functions.
These changes affected both the cost savings that were expected to be realized
from the Great Western Merger and the amount of transaction-related expenses for
the Great Western Merger. In addition, certain of these charges were factored
into the transaction-related expenses for the Ahmanson Merger.
We have identified 162 consumer financial centers in California to be
consolidated into neighboring offices as a result of the Ahmanson Merger. We
have scheduled the consolidations for mid-1999 to coincide with the projected
conversion of Home Savings branches in California to Washington Mutual systems
and
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signage. Conversion of Home Savings branches in Texas occurred in February 1999.
The conversion of all Ahmanson systems is expected to be completed in the third
quarter of 1999. Upon completion of all systems conversions, it is anticipated
that the Company will no longer operate from Ahmanson's Irwindale campus.
Cost Savings
Before the Great Western Merger, we projected annual pretax cost savings of
$340 million as part of the benefit of the merger. We originally anticipated
approximately $208 million in savings for 1998, with the full savings of $340
million being realized in 1999. Actual cost savings related to financial center
consolidations and improved productivity of the mortgage banking operations were
$243 million in 1998. These savings were significantly offset by an increase in
volume-related expenses of $194 million and investments in de novo financial
centers, upgraded information systems and other infrastructure related costs of
$57 million. We expect to achieve the full projected consolidation and
productivity savings of $340 million in 1999. However, expected increases in
volume-related expenses resulting from increases in internal growth and market
expansion, along with other increases in infrastructure-related expenses, could
reduce the amount of actual cost savings that we realize in 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Other Expense."
Before the Ahmanson Merger, we projected annual pretax savings of operating
costs of $199 million in 1999 and $330 million in 2000 and each year thereafter
as part of the benefits of that merger. We expect to achieve cost savings of
$199 million in 1999. We also expect volume-related expenses to increase from
internal growth and market expansion.
RISK FACTORS
COST SAVINGS MAY NOT BE
REALIZED We cannot assure you that we will achieve the
cost savings we anticipate through the
consolidation of administrative functions or
consumer financial centers, nor can we assure
you that any cost savings will occur in the
anticipated time periods. In addition, when
consumer financial centers are closed or
consolidated, financial institutions often lose
customers and deposits as a result. To the
extent that we lose customers or deposits
significantly in excess of the amount we
anticipated, our operations could be materially
adversely affected, particularly in the short
term. The forward-looking statements assume,
based on our historical experience following
acquisitions, that our customer base will
remain substantially intact during the period
presented in the forward-looking statements. To
the extent that the change in ownership of GWB
and Home Savings, the consolidation of branches
of WMBFA, or other factors result in a
significant temporary or long-term loss of
customers, actual results of our operations may
vary materially from the forward-looking
information presented.
CONSUMER BANKING
EXPANSION RISKS Our business plan includes increased fee income
from our consumer banking operations. The
sources of these fee increases include revised
policies for checking account services in new
consumer financial centers in California and
Texas in accordance with our programs,
implementation of our checking programs
throughout the WMBFA system, introduction of a
debit card to former Home Savings customers,
improved revenues in financial services
subsidiaries, and the introduction of consumer
loan products in consumer financial centers. We
have relatively limited experience with these
business initiatives in California, Florida and
Texas, where we expect the greatest expansion
of our consumer banking activities to occur.
Accordingly, we cannot assure you that
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our emphasis on consumer banking activities
will be successful in the California, Florida
or Texas markets or that we will achieve the
increase in fee income anticipated by our
business plan.
CONCENTRATION OF
OPERATIONS IN CALIFORNIA At December 31, 1998, 60% of our loan portfolio
and 73% of our deposits were concentrated in
California. As a result, our financial
condition and results of operations will be
particularly subject to the conditions in the
single-family and multi-family residential
markets in California. If economic conditions
generally, or in California in particular,
worsen or if the market for residential real
estate declines, we may suffer decreased net
income or losses associated with higher default
rates and decreased collateral values on our
existing portfolio. We might also not be able
to originate the volume or type of loans or
achieve the level of deposits that we currently
anticipate. The forward-looking statements
regarding our results of operations assume that
the California economy and real estate market
will remain healthy. A worsening of current
economic conditions or a significant decline in
real estate values in California could cause
actual results to vary materially from the
forward-looking statements.
INTEREST RATE RISK We realize our income principally from the
differential between the interest earned on
loans and investments and the interest paid on
deposits and borrowings. The difference between
the repricing characteristics of
interest-earning assets and interest-bearing
liabilities affects net interest spreads.
Market interest rates have an impact on the
volume and rates on loans, investments,
deposits and borrowings. Significant
fluctuations in interest rates and spreads may
adversely affect net income. At the end of
1997, long-term interest rates declined
dramatically and the yield curve (the
difference between short-term and long-term
interest rates) became much flatter. This
interest rate environment continues. In this
type of interest rate environment, our
customers tend to prefer fixed-rate loans to
adjustable-rate mortgages ("ARMs") and thus
during 1998, originations of fixed-rate loans
were substantially higher than in previous
years. Lower long-term interest rates resulted
in refinancing activity in 1998 that was higher
than historical averages. As a result, our
ability to grow our asset size by retaining
ARMs in our portfolio has been and could
continue to be adversely affected. See
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations -- Asset and Liability Management
Strategy."
COMPETITION We face significant competition both in
attracting and retaining deposits and in making
loans in all of our markets. Our most direct
competition for deposits has historically come
from other savings institutions, credit unions
and commercial banks doing business in our
primary market areas of California, Washington,
Oregon, Florida, Texas and Utah. As with all
banking organizations, we have also experienced
competition from nonbanking sources, including
mutual funds and securities brokerage
companies. Our most direct competition for
loans comes from other savings institutions,
national mortgage companies, insurance
companies, commercial banks and
government-sponsored enterprises ("GSEs")
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such as the Fannie Mae and Freddie Mac.
Competition from such sources could increase in
the future and could adversely affect our
ability to achieve our financial goals. In
addition, competitive factors such as the lower
cost structure of less regulated originators
and the influence of the GSEs in establishing
rates heavily influence our lending activities.
READINESS FOR THE YEAR 2000 We are taking what we believe to be the
appropriate steps to avoid customer disruption
from the "Year 2000 Problem." The Year 2000
Problem could cause our information systems and
facilities, and those of our vendors, to
malfunction or fail in 1999 and 2000. Any
disruption could cause numerous problems for
us, such as diminished service levels, some
customer inconvenience and additional costs,
which we cannot estimate now. Our failure to
make our systems, or the failure of our vendors
to make their systems Year 2000 ready could
result in our inability to process our daily
business for some period of time or in other
significant business interruptions.
During 1998, we incurred expenses of $11.8
million to complete the inventory and
assessment and the renovation phases of our
"Year 2000 Project" to become Year 2000 ready.
We have finished the testing of internal
systems, the failure of which would have a
major impact on customers. Work on the final
phases involving validation, due diligence on
third-party services, testing of interactions
between our most critical internal systems,
testing of interactions with service providers
and vendors and development of contingency
plans is proceeding. We expect to incur
additional expenses of approximately $15.6
million in 1999.
We have adopted business contingency plans for
our most critical information systems and
facilities. If we are required to implement
these contingency plans, we believe that we
will minimize the effect on customers that
would occur in a temporary disruption in
services. If a prolonged disruption or failure
occurs, our contingency plans may not operate
as anticipated and our results of operations
may be adversely affected.
Despite our efforts, there is always the
possibility that we may not identify and
correct a Year 2000 Problem in our information
systems and facilities and those of our
suppliers before they occur or that our
contingency plans may not be adequate. Our
efforts to identify and address these problems,
and the expenses or liabilities we may incur to
fix them, could materially and adversely affect
our financial condition and results of
operations. In addition, federal regulators may
issue new regulations that require us to
perform additional work. If issued, new
regulations could increase the cost or delay
completion of our Year 2000 Project.
Although we are reviewing the Year 2000
compliance efforts of our vendors, we cannot be
sure that their efforts will be sufficient to
avoid a Year 2000 Problem.
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MORTGAGE BANKING
General
Our mortgage banking activities are carried out by our banking
subsidiaries, WMBFA, WMB and WMBfsb. Each of our banking subsidiaries has broad
lending powers, but statutory restrictions limit total investment in different
types of loans. All of our residential mortgage lending is subject to
nondiscriminatory underwriting standards. All loans are subject to underwriting
review and approval by various levels of our personnel, depending on the size
and characteristics of the loan.
We require title insurance on all first liens on real property securing
loans. We also require our borrowers to maintain property and casualty insurance
in an amount at least equal to the total of our loan amount plus all prior liens
on the property or the replacement cost of the property, whichever is less.
Federal guidelines require depository institutions to adopt written
policies that establish appropriate limits and standards for real estate loans
consistent with regulatory guidelines. According to these guidelines:
- we should not originate any commercial, multi-family or nonowner-occupied
SFR loan (including builder construction loans) with an initial
loan-to-value ratio in excess of 85%;
- we should not originate any owner-occupied SFR loan with a loan-to-value
ratio of 90% or above at origination, unless such loan is protected by
appropriate credit enhancement in the form of either mortgage insurance
or readily marketable collateral; and
- in appropriate circumstances, we may originate mortgage loans with
loan-to-value ratios exceeding these specified levels, if (i) the
aggregate amount of all loans in excess of these limits does not exceed a
specified level of our total capital and (ii) such loans are identified
in our records and reported at least quarterly to our Board of Directors.
At December 31, 1998, 6% of our SFR loan portfolio had loan-to-value ratios of
90% or above at origination and were without mortgage insurance.
SFR Lending
In 1998, we were the leading originator of SFR loans in Washington and
Oregon and the second leading originator in California. We make available to
borrowers a full range of SFR loans, including FHA-insured and VA-guaranteed
loans, conventional fixed-rate loans with a variety of maturities and
amortization schedules, and ARMs. ARMs are advantageous to us because
adjustable-rate loans better match the interest rate characteristics of our
liability base. In recent years, and particularly in the California market, we
have emphasized the origination of ARMs. As a result of the interest rate
environment that began in 1997 and is continuing, however, our customers have
preferred fixed-rate loans and accordingly, 56% of our SFR loan originations in
1998 were fixed rate.
The primary ARM products that we currently offer are indexed to the
12-month average of annual yields on actively traded United States Treasury
securities adjusted to a constant maturity of one year ("MTA"). Under our
current ARM programs, the borrower may choose among loans that have the initial
interest rate fixed for one, three or five years before the adjustments begin.
With some products, the borrower may elect, between the sixth and the 60th
months, to convert to a fixed-rate loan payable over the remainder of the
original term. There is no conversion fee, and the fixed interest rate is
indexed to the then current required net yield for loans sold to Fannie Mae.
There are a variety of payment options, some of which permit negative
amortization.
We originate loans through our consumer financial centers in Washington,
Oregon, Utah, Idaho and Montana and through home loan centers and mortgage
brokers in 29 states and the District of Columbia. In 1998, we originated loans
for the first time through our consumer financial centers in California and
Florida. Nearly half of our loans were originated through mortgage brokers. To
monitor credit quality, we conduct extensive due diligence and review the
stability and credit experience of each broker prior to accepting any
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loan packages. We subject loan production from the wholesale channel to the same
underwriting standards as loan production from our internal channels.
We originate loans that meet GSE standards for sale in the secondary market
("conforming loans") as well as loans that meet our underwriting standards but
not the secondary market standards of the GSEs ("nonconforming loans").
Nonconforming loans constituted approximately half of 1998's total SFR
originations. These loans may be nonconforming because:
- they exceed the maximum amount allowed by the secondary market ("jumbo
loans");
- the loan documentation lacks some information relating to the borrower's
credit or employment history but not the value of the collateral; or
- the borrower's credit history fails to meet secondary market standards.
All nonconforming loans are fully supported by appraisals and title insurance.
In addition, the permitted loan-to-value ratios are generally lower for
nonconforming loans than for conforming loans, and they decrease as the amount
of the loan increases.
SFR Construction Loans
We finance two different categories of SFR construction loans. We make
custom construction loans to the intended occupant of a house to finance the
house's construction. We typically combine construction phase financing with
permanent financing of the completed home. We make builder construction loans to
borrowers that are in the business of building homes for resale. We make builder
construction loans on a house-by-house basis or, in certain circumstances,
through a collateralized, limited line of credit. Builder construction loans
involve somewhat more risk and different underwriting considerations than custom
construction loans.
Before we make an SFR construction loan, the borrower must obtain the
approval of various levels of our personnel, depending on the size and
characteristics of the loan. The approval requirements for SFR construction
loans are more stringent for properties other than single-family detached houses
than for single-family detached houses.
SFR construction loans are an integral part of our overall lending program.
Builder construction loans are of short duration, generally 12 to 18 months and
are generally priced at a higher rate than permanent residential loans. Custom
construction loans may also be of short duration, generally 9 to 12 months, or
may be 15 to 30 years if combined with permanent financing.
At December 31, 1998, 51% of our SFR construction portfolio was custom
construction loans and 49% was builder construction loans. Originations of SFR
construction loans for 1998 totaled $1.75 billion, an increase of 21% from $1.45
billion in 1997. We made substantially all of our 1998 SFR construction loan
originations in Washington, Oregon, Utah, Idaho and California.
CONSUMER BANKING
Through our banking subsidiaries, we offer consumer loan programs in
California, Washington, Oregon, Utah, Idaho, Montana, Florida and Texas. These
consumer loan programs include:
- manufactured housing loans;
- second mortgage loans for purposes unrelated to the property securing the
loan and for a variety of purposes related to the property, including its
renovation or remodeling;
- purchase money loans for automobiles, pleasure boats and recreational
vehicles;
- student loans;
- loans secured by deposit accounts;
- secured and unsecured loans made under our line of credit programs; and
- small business lines of credit of $100,000 or less.
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In addition to being an important part of our orientation toward consumer
financial services, consumer loans provide greater net interest income due to
their generally higher yields. The size of our consumer loan portfolio has grown
in recent years as we have begun to introduce these products into WMBFA's
service area.
Consumer loans generally are secured loans. Our decision to make a consumer
loan is based on an evaluation of the collateral and the borrower's
creditworthiness, including such factors as income, other indebtedness and
credit history. Lines of credit are subject to our periodic review. If a
borrower's financial circumstances change, then we may revise or cancel the
borrower's line of credit as we deem appropriate. Consumer lending may involve
special risks, including decreases in the value of collateral and transaction
costs associated with realization on the collateral.
Our consumer banking operations also offer various consumer deposit
products, including money market deposit accounts ("MMDAs") and checking
accounts as well as the more traditional savings accounts and time deposit
accounts. MMDAs generally require higher minimum balances and offer higher
yields than savings accounts. We offer interest-bearing and noninterest-bearing
checking accounts. We assess monthly service charges on interest-bearing
checking accounts, unless the depositor maintains a minimum balance. We assess
no monthly fees on the vast majority of our noninterest-bearing checking
accounts.
At December 31, 1998, we had $85.49 billion in deposits as follows:
TYPE OF DEPOSIT AMOUNT
--------------- --------------
Time deposit accounts....................................... $43.74 billion
MMDAs and savings accounts.................................. 28.29 billion
Checking accounts........................................... 13.46 billion
Since 1995, we have been actively promoting a checking account product
called "Free Checking" which we introduced into our California and Florida
operations during 1997. This account has helped to reduce our overall cost of
funds by increasing the percentage of deposits that are noninterest bearing. We
expect to continue actively promoting our "Free Checking" account throughout our
markets. We also actively have promoted MMDAs because they have the advantage of
being variable-rate liabilities and are generally lower costing than time
deposits.
COMMERCIAL BANKING
We offer a full range of commercial banking products and services,
primarily through the Western Bank division of WMB. Our commercial business
loans are mainly loans to individuals and to small to mid-sized businesses. Some
of these loans are unsecured. A variety of business and personal assets secure
the others. In 1998, we originated $1.01 billion of commercial business loans.
Our commercial business loan portfolio totaled $1.13 billion at December 31,
1998.
In addition, we provide loans to commercial real estate owners and
developers. Commercial real estate lending generally entails greater risks than
residential mortgage lending, although less risk than commercial business
lending. Commercial real estate loans typically involve large loan balances
concentrated with single borrowers or groups of related borrowers. In addition,
the payment experience on loans secured by income-producing properties usually
depends on the successful operation of the real estate project that secures the
loan and thus may be subject, to a greater extent, to adverse conditions in the
real estate market or in the economy, particularly the interest rate
environment. Commercial real estate values tend to be cyclical and, while
commercial real estate values trended upward in many areas of the country in
1998, we carefully monitor the commercial real estate environment to determine
the level of our activity in this area.
In all commercial real estate lending, we consider the location,
marketability and overall attractiveness of the project. Our current
underwriting guidelines for commercial real estate loans require us to perform
an economic analysis of each property with regard to the annual revenue and
expenses, debt service coverage and fair value to determine the maximum loan
amount. Before we make a commercial real estate loan, the borrower must obtain
the approval of various levels of our personnel, depending on the size and
characteristics of the loan.
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Historically, we focused our commercial real estate lending on small to
mid-sized apartment lending (loans of $2.5 million or less). Beginning in 1996,
we broadened our lending scope by increasing our nonresidential real estate
lending at a faster pace than our apartment lending. This change in emphasis
reflected, in part, the development of our commercial banking operations which
we began in 1995. Home Savings, however, had restricted its commercial real
estate lending to apartments since 1990. The acquisition of Home Savings has
substantially changed the makeup of our commercial real estate loan portfolio.
At December 31, 1998, our commercial real estate portfolio contained $14.55
billion in apartment loans and $3.58 billion in nonresidential commercial real
estate loans.
FINANCIAL SERVICES
Our financial services business consists of WM Financial Services, Inc., a
licensed broker-dealer; WM Advisors, Inc., the investment adviser to WM Group of
Funds; WM Funds Distributor, Inc., the distributor of the WM Group of Funds; and
Washington Mutual Insurance Services, Inc. Through our broker-dealer, WM
Financial Services, we offer a wide range of investment products to our
customers, including mutual funds, variable and fixed annuities and general
securities. At December 31, 1998, we operated in seven states and had 319
financial consultants and 559 licensed personal financial representatives. On
January 1, 1999, the broker-dealer formerly owned by Ahmanson, Griffin Financial
Services, merged into WM Financial Services, so that our broker-dealer now
operates in one additional state, has 159 additional financial consultants and
has 55 additional personal financial representatives.
Our WM Group of Funds is a proprietary mutual fund complex formed through
the consolidation of our Composite Funds and Great Western's Sierra Trust Funds.
At December 31, 1998, the WM Group of Funds consisted of 18 mutual funds, 18
variable annuities and five managed asset funds, and had 215,052 accounts and
$4.93 billion in assets under management. We distribute these mutual funds,
non-proprietary mutual funds and variable annuities to our customers through the
WM Financial Services network located in the branches of our subsidiary banks
and to non-customers through a network of unaffiliated broker-dealers.
Ahmanson's mutual fund group, The Griffin Funds, merged with the WM Group of
Funds during March of 1999. At December 31, 1998, The Griffin Funds had $1.09
billion in assets.
Washington Mutual Insurance Services supports the mortgage lending process
by offering property and casualty insurance products. The group also offers
mortgage life and accidental death and dismemberment, property and casualty, and
life insurance products to existing mortgage and deposit customers.
CONSUMER FINANCE
Aristar makes direct consumer installment loans, including real estate
secured loans, and purchases retail installment contracts from local retail
establishments. Aristar also issues a credit card to facilitate revolving credit
transactions. These consumer credit transactions are primarily for personal,
family or household purposes. Installment loans typically have original terms
ranging from 12 to 360 months. In 1998, originations had an average original
term of 63 months. In the year ended December 31, 1998, 72% of the originations
of all installment loans were unsecured or secured by luxury goods, automobiles
or other personal property. The remaining 28% were secured by real estate. We
generally acquire retail installment contracts without recourse to the
originating merchant. These contracts are typically written with original terms
of three to 60 months and for 1998 had an average original term of 27 months.
The loans made by Aristar have a higher yield than the SFR loans and
consumer loans made by our banking subsidiaries, because these loans tend to
have higher risk. Many of Aristar's borrowers would not qualify for a loan from
our banking subsidiaries due to high debt-to-income ratios. In addition, Aristar
makes home equity loans primarily where the proceeds are used for purposes
unrelated to the property securing the loan, and thus bears more risk relating
to declining collateral values.
Aristar currently operates in 24 states, primarily in the southeastern
United States. In 1998, Aristar significantly increased its lending volume in
Texas as a result of changes in state law, which permitted non-purchase money
home equity lending in Texas beginning January 1, 1998. For the first time in
Texas, lenders may make home equity loans for purposes unrelated to the
property.
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TREASURY ACTIVITIES
Our treasury department has three primary responsibilities:
- interest rate risk management;
- acquisition of funds; and
- investment of excess funds.
It manages these responsibilities primarily through the purchase and sale of
mortgage-backed securities and whole loans in the secondary market and through
its borrowing practices.
Investing Activities
One way in which we manage our interest rate risk is by purchasing and
selling mortgage-backed securities in the secondary market. Mortgage-backed
securities ("MBS") are pools of loans that are transferred to a single purpose
trust or other special purpose entity created for the securitization.
Certificates issued by the trust or other special purpose entity represent
undivided ownership interests in those loans transferred to the trust or other
special purpose entity. Securitization of our loans provides us with increased
liquidity both because MBS are more readily marketable than the underlying loans
and because MBS can be used more readily as collateral for borrowing. During
1998, we also purchased a substantial amount of MBS and whole loans in the
secondary market in order to increase our asset base.
Prior to 1998, the primary ARM product originated by our operations in
California was indexed to the Cost of Funds Index of the Eleventh District
Federal Home Loan Bank (San Francisco) ("COFI"). At December 31, 1998,
approximately 49% of our real estate loan portfolio and 58% of our MBS were
indexed to COFI. The MBS we purchased in 1998 were both fixed rate and
adjustable rate tied to indices other than COFI. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Asset and
Liability Management Strategy."
We generally securitize a substantial portion of our fixed-rate SFR loan
production in order to sell the MBS in the secondary market. When we securitize
and sell these fixed-rate loans without recourse, as we generally do, they
become obligations of the applicable GSE. Generally, we retain the right to
service these loans for a fee fixed by the GSE.
Beginning in 1995, we securitized loans with Fannie Mae and Freddie Mac
under programs in which they have recourse against us as the originator of the
loans ("Recourse MBS"). These securitizations primarily involve ARMs. They
generally are less costly and sometimes require less documentation than
securitizations without recourse. We generally can sell these Recourse MBS in
the secondary market or use them to collateralize borrowings and to meet
regulatory liquidity requirements. We have retained the majority of Recourse MBS
in our portfolio. The remainder were sold to third parties. We establish a
recourse liability to cover the estimated loss on these obligations.
We also purchase private issue MBS, collateralized mortgage obligations
("CMOs"), and loan pools in the secondary market. The yield on these assets
generally exceeds the yield on agency MBS because they expose us to certain
risks that are not inherent in agency MBS, such as credit risk and liquidity
risk. Neither the U.S. government nor any of its agencies guarantees these
assets, because the loan size, underwriting or underlying collateral often does
not meet set industry standards. Consequently, the potential for loss of the
principal investment is higher than for agency MBS. Furthermore, the complex
structure of certain CMOs in our 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 we hold subordinated tranches, certain
CMOs that have been resecuritized and certain securities that contain a
significant number of loans with principal balances in amounts larger than can
be sold as agency MBS.
Beginning in 1999, we began to acquire sub-prime single-family mortgage
loans in order to increase the yield in our loan portfolio. Loans are classified
as sub-prime because the borrowers have had past credit problems or have high
debt-to-income ratios. These borrowers would typically not qualify for
conforming
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loans. We anticipate that we will purchase increased amounts of sub-prime loans
in 1999. While we screen the portfolios of sub-prime loans we purchase for
unacceptable credit risk, these loans by their nature bear more credit risk than
is found in conforming loans that we originate or in agency MBS and,
accordingly, we expect that loan charge offs on these portfolios will be higher
than on our other portfolios.
We have instituted a policy of performing credit reviews on each individual
security or loan pool prior to purchase. Such a review includes consideration of
the collateral characteristics, borrower payment histories and information
concerning loan delinquencies and losses of the underlying collateral. After a
security is purchased, similar information is monitored on a periodic basis.
Furthermore, we have established internal guidelines limiting the geographic
concentration of the underlying collateral.
Under federal and state law, our banking subsidiaries must maintain a
minimum amount of assets that qualify as liquid for regulatory purposes. WMBFA
and WMBfsb have authority to make investments specified by the Home Owners' Loan
Act ("HOLA") and applicable regulations, including the purchase of governmental
obligations, investment grade commercial paper, and investment grade corporate
debt securities. Under Washington state law, WMB has authority, subject to a
numerical limit, to make any investment deemed prudent by its board of
directors, and may invest in commercial paper, corporate bonds, mutual fund
shares, debt and equity securities issued by creditworthy entities and interests
in real estate located inside or outside of Washington State. The Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), however,
prohibits a state bank (such as WMB) from making or retaining equity investments
that are not permissible for a national bank, subject to certain exceptions.
Despite these broad investment powers, at December 31, 1998, MBS accounted for
$46.42 billion or 99% of our total investment portfolio. At December 31, 1998,
75% of MBS were agency MBS. The remainder, $11.73 billion, were private issue
MBS and CMOs. See "Notes to Consolidated Financial Statements -- Note 4:
Securities."
Borrowing Activities
Because deposits have generally declined in recent years, we increasingly
have relied on wholesale borrowings to fund our asset growth. Borrowings include
securities sold under agreements to repurchase ("reverse repurchase
agreements"), the purchase of federal funds, the issuance of mortgage-backed
bonds or notes, capital notes and other types of debt securities, the issuance
of commercial paper, and funds obtained as advances from the Federal Home Loan
Bank ("FHLB") of Seattle, the FHLB of San Francisco and the FHLB of Topeka. We
also have access to the Federal Reserve Bank's discount window. Under Washington
state law, WMB may borrow up to 30% of its total assets, but reverse repurchase
agreements are not deemed borrowings under such law, and the 30% does not apply
to borrowings from federal, state or municipal governments, agencies or
instrumentalities, including the FHLBs.
We actively engage in reverse repurchase agreements with authorized
broker-dealers and major customers, selling U.S. government and corporate debt
securities and MBS under agreements to repurchase them or similar securities at
a future date. At December 31, 1998, we had $17.52 billion of such borrowings.
WMB and WMBfsb are members of the FHLB of Seattle and WMBFA is a member of
the FHLB of San Francisco. As members, each company maintains a credit line that
is a percentage of its total regulatory assets, subject to collateralization
requirements. At year-end 1998, WMBFA, WMB and WMBfsb had credit lines ranging
from 40% to 50% of total assets. At December 31, 1998, advances under these
credit lines totaled $39.75 billion and were secured by mortgage loans, MBS and
U.S. government and agency securities.
A member of an FHLB is generally required to purchase stock of the FHLB in
an amount equal to at least 5% of the aggregate outstanding advances made by the
FHLB to the member. At December 31, 1998, we held stock in FHLBs with an
aggregate value of $2.03 billion.
We offer wholesale deposits, primarily time deposit accounts, to political
subdivisions and public agencies. Generally, these deposits must be
collateralized. We consider wholesale deposits to be a borrowing source rather
than a customer relationship.
In addition to the borrowings discussed above, at December 31, 1998, we
were in a position to borrow an additional $33.66 billion, primarily through the
use of collateralized borrowings using unpledged mortgage-
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backed securities and other wholesale borrowing sources. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity."
ASSET QUALITY
We maintain an allowance to absorb credit losses inherent in the loan
portfolio. The allowance is based on an ongoing, quarterly assessment of the
probable estimated losses inherent in the loan portfolio, and to a lesser
extent, unused commitments to provide financing. This quarterly analysis
provides a mechanism for ensuring that estimated losses reasonably approximate
actual observed losses, as any differences between estimated and actual losses
will be immediately addressed in the assessment and resulting loan loss
provision.
In analyzing our existing loan portfolios, we apply specific monitoring
policies and procedures which vary according to the relative risk profile and
other characteristics of the loans within the various portfolios. Our SFR,
consumer loans, consumer finance loans and commercial real estate loans under $1
million are relatively homogeneous, and no single loan is individually
significant in terms of its size or potential risk of loss. Therefore, we review
these portfolios by analyzing their performance as a pool of loans and no
reserves are allocated to any specific loan. Our determination of the level of
the reserve and, correspondingly, the provision for loan losses for these
homogenous loan pools rests upon various judgments and assumptions used to
determine the risk characteristics of the portfolio. These judgments are
supported by analyses that fall into three general categories: (i) current and
anticipated economic conditions; (ii) a predictive analysis of the outcome of
the current portfolio (a migration analysis); and (iii) our prior loan loss
experience. These systematic analyses provide a self-correcting mechanism to
reduce differences between estimated and actual observed losses in the
portfolios.
In contrast, our monitoring process for the commercial real estate over $1
million, commercial business and builder construction loan portfolios includes a
periodic review of individual loans. Loans that are performing but have shown
some signs of weakness are evaluated under more stringent reporting and
oversight. We review these loans to assess the ability of the borrowing entity
to continue to service all of its interest and principal obligations and, as a
result, may adjust the risk grade accordingly. In the event that we believe that
full collection of principal and interest is not reasonably assured, the loan
will be appropriately downgraded and, if warranted, placed on nonaccrual status.
In that event, an allocated reserve will be established for it, even though the
loan may be current as to principal and interest payments.
We have a Credit Policy Committee ("CPC") that provides reports to the
Board of Directors and continuously reviews loan quality. We also have internal
staff regularly review the classification of commercial business loans and
commercial real estate loans over $1 million and report such classification to
the CPC. Such reviews also assist management in establishing the level of the
reserve. We are also examined by our primary regulators. These examinations
generally occur annually and target various of our activities, including
specific segments of the loan portfolio.
EMPLOYEES
Our number of full-time equivalent employees decreased from 27,661 at
December 31, 1997 to 27,330 at December 31, 1998. We believe that we have been
successful in attracting quality employees and that our employee relations are
good.
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BUSINESS COMBINATIONS
Most of our growth since 1988 has occurred as a result of banking business
combinations. The following table summarizes our business combinations since
April 1988:
NUMBER OF
ACQUISITION NAME DATE ACQUIRED LOANS DEPOSITS ASSETS LOCATIONS
---------------- ------------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
Columbia Federal Savings Bank and
Shoreline Savings Bank.............. April 29, 1988 $ 551.0 $ 555.0 $ 752.6 26
Old Stone Bank(1)..................... June 1, 1990 229.5 292.6 294.0 7
Frontier Federal Savings
Association(2)...................... June 30, 1990 -- 95.6 -- 6
Williamsburg Federal Savings
Bank(2)............................. Sept. 14, 1990 -- 4.3 -- 3
Vancouver Federal Savings Bank........ July 31, 1991 200.1 253.4 260.7 7
CrossLand Savings, FSB(2)............. Nov. 8, 1991 -- 185.4 -- 15
Sound Savings and Loan Association.... Jan. 1, 1992 16.8 20.5 23.51 1
World Savings and Loan
Association(2)...................... March 6, 1992 -- 37.8 -- 2
Great Northwest Bank.................. April 1, 1992 603.2 586.4 710.4 17
Pioneer Savings Bank.................. March 1, 1993 624.5 659.5 926.5 17
Pacific First Bank, A Federal Savings
Bank................................ April 9, 1993 3,770.7 3,831.7 5,861.3 129
Far West Federal Savings Bank(2)...... April 15, 1994 -- 42.2 -- 3
Summit Savings Bank................... Nov. 14, 1994 127.5 169.3 188.1 4
Olympus Bank, a Federal Savings
Bank................................ April 28, 1995 237.8 278.6 391.4 11
Enterprise Bank....................... Aug. 31, 1995 92.8 138.5 153.8 1
Western Bank.......................... Jan. 31, 1996 500.8 696.4 776.3 42
Utah Federal Savings Bank............. Nov. 30, 1996 88.9 106.7 122.1 5
American Savings Bank, F.A............ Dec. 20, 1996 14,562.9 12,815.4 21,893.5 224
United Western Financial Group........ Jan. 15, 1997 272.7 299.9 404.1 16
Great Western Financial Corporation... July 1, 1997 32,448.3 27,785.1 43,769.8 1,138
H.F. Ahmanson & Company(3)............ Oct. 1, 1998 33,939.1 33,974.6 50,354.7 436
Industrial Bank....................... Dec. 31, 1998 11.1 26.1 27.2 1
- ---------------
(1) This was an acquisition of selected assets and liabilities.
(2) The acquisition was of branches and deposits only. The only assets acquired
were branch facilities or loans collateralized by acquired savings deposits.
(3) Includes loans, deposits and assets acquired by Ahmanson from Coast.
See "Notes to Consolidated Financial Statements -- Note 2: Business
Combinations/Restructuring" for a discussion of accounting treatment for certain
of the acquisitions.
TAXATION
General
For federal income tax purposes, we report our income and expenses using
the accrual method of tax accounting and use the calendar year as our tax year.
Except for the interest expense rules pertaining to certain tax-exempt income
applicable to banks and the bad debt reserve deduction repealed in 1996, we are
subject to federal income tax, under existing provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), in generally the same manner as other
corporations.
Tax Bad Debt Reserve Recapture
The Small Business Job Protection Act of 1996 (the "Job Protection Act")
requires that qualified thrift institutions, such as WMBFA, WMB 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 generally are to be taken into
ordinary income ratably over a six-year
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period beginning in 1997. The amount we would have to pay (based upon current
federal income tax rates) in federal income taxes each year of the six-year
period due to the Job Protection Act is not material.
The Job Protection Act also repeals the reserve method of accounting for
tax bad debt deductions. Thus, it requires thrifts to calculate the tax bad debt
deduction based on actual current loan losses.
State Income Taxation
The states of California, Oregon, Florida, Utah, Idaho and Montana, as well
as many other states in which we do business, have corporate income taxes, which
are imposed on companies doing business in those states. Our operations in
California, Oregon and Florida result in substantial corporate income tax
expense in those states. As our operations in the remaining states increase,
these state corporate income taxes will have an increasing effect on our results
of operations or financial condition.
The state of Washington does not currently have a corporate income tax.
Washington imposes on businesses a business and occupation tax based on a
percentage of gross receipts. Currently, the tax does not apply to interest
received on loans secured by first mortgages or deeds of trust on residential
properties. However, it is possible that legislation will be introduced that
would repeal or limit this exemption.
Assistance Agreement
As a result of the Keystone Transaction and related transactions in 1996,
WMI and certain of its affiliates are parties to an agreement (the "Assistance
Agreement") with a predecessor of the Federal Savings & Loan Insurance
Corporation ("FSLIC") Resolution Fund (the "FRF"). The Assistance Agreement
provides, in part, for the payment to the FRF over time of 75% of most of the
federal tax savings and 19.5% of most of the California tax savings (in each
case computed in accordance with specific provisions contained in the Assistance
Agreement) attributable to the utilization of certain tax loss carryforwards of
New West Federal Savings and Loan Association ("New West"). The provision for
such payments is reflected in the financial statements as a part of the line
item -- income taxes. See "Notes to Consolidated Financial Statements -- Note
17: Income Taxes."
ENVIRONMENTAL REGULATION
Our business and properties are subject to federal and state laws and
regulations governing environmental matters, including the regulation of
hazardous substances and wastes. For example, under the federal Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and similar
state laws, owners and operators of contaminated properties may be liable for
the costs of cleaning up hazardous substances without regard to whether such
persons actually caused the contamination. Such laws may affect us both as an
owner of properties used in or held for our business, and as a secured lender of
property that is found to contain hazardous substances or wastes.
Although CERCLA and similar state laws generally exempt holders of security
interests, the exemption may not be available if a secured party engages in the
management of its borrower or the collateral property in a manner deemed beyond
the protection of the secured party's interest. Recent federal and state
legislation, as well as guidance issued by the United States Environmental
Protection Agency and a number of court decisions, have provided assurance to
lenders regarding the activities they may undertake and remain within CERCLA's
secured party exemption. However, these assurances are not absolute and
generally will not protect a lender or fiduciary that participates or otherwise
involves itself in the management of its borrower, particularly in foreclosure
proceedings. As a result, CERCLA and similar state statutes may influence our
decision whether to foreclose on property that is found to be contaminated. Our
general policy is to obtain an environmental assessment prior to foreclosure on
commercial property. The existence of hazardous substances or wastes on such
property may cause us to elect not to foreclose on the property, thereby
limiting, and in some instances precluding, us from realizing on such loans.
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REGULATION AND SUPERVISION
References in this section to applicable statutes and regulations are brief
and incomplete summaries only. You should consult the statutes and regulations
for a full understanding of the details of their operation.
General
As a savings and loan holding company, WMI is subject to regulation by the
Office of Thrift Supervision ("OTS"). WMBFA and WMBfsb are federal savings
associations and are subject to extensive regulation and examination by the OTS,
which is their primary federal regulator. Their deposit accounts are insured
through the Savings Association Insurance Fund (the "SAIF") and, to a lesser
extent, the Bank Insurance Fund (the "BIF") by the FDIC, which also has some
authority to regulate WMBFA and WMBfsb. WMB is subject to regulation and
supervision by the Director of Financial Institutions of the State of Washington
("State Director"). The FDIC insures the deposit accounts of WMB through both
the BIF and SAIF. The FDIC examines and regulates WMB and other state-chartered
banks that are not members of the Federal Reserve System ("FDIC-regulated
banks"). Federal and state laws and regulations govern, among other things,
investment powers, deposit activities, borrowings, maintenance of guaranty funds
and retained earnings.
PRIMARY
FEDERAL STATE INSURANCE
ENTITY CHARTER REGULATOR REGULATOR FUND(S)
- ------ --------- --------- ----------------- --------------
WMI................................... State (WA) OTS n.a. n.a.
WMBFA................................. Federal OTS None SAIF, BIF
WMB................................... State (WA) FDIC WA State Director BIF, SAIF
WMBfsb................................ Federal OTS None SAIF
We also own a small industrial bank, First Community Industrial Bank
("FCIB"), in Denver, Colorado. FCIB is a state-chartered institution that is
regulated by Colorado state authorities in addition to the FDIC. State law
specifies the investments that this institution may make and the activities in
which it may engage.
State and federal laws govern our consumer finance subsidiaries. Federal
laws relate primarily to fair credit practice matters. State laws establish
applicable licensing requirements, provide for periodic examinations and
establish maximum finance charges on credit extensions.
Holding Company Regulation
WMI is a multiple savings and loan holding company, as defined by federal
law, because it owns three savings associations: WMB, WMBFA and WMBfsb. WMB is a
state-chartered savings bank that has elected to be treated as a savings
association for purposes of the federal savings and loan holding company law.
WMI is treated as a unitary savings and loan holding company, because WMBFA and
WMBfsb are deemed to have been acquired in supervisory transactions. Therefore,
certain restrictions under federal law on the activities and investments of
multiple savings and loan holding companies do not apply to WMI. These
restrictions will apply to WMI if WMB, WMBFA or WMBfsb fails to be a qualified
thrift lender ("QTL"). By this we mean generally that:
- at least 65% of a specified asset base must consist of: loans to small
businesses, including credit card loans; education loans; or certain
assets related to domestic residential real estate, including residential
mortgage loans and mortgage securities; or
- at least 60% of total assets must consist of cash, government or agency
debt or equity securities, fixed assets, or loans secured by: deposits;
real property used for residential, educational, church, welfare or
health purposes; or real property in certain urban renewal areas.
Each of WMB, WMBFA and WMBfsb is currently in compliance with QTL standards.
Failure to remain a QTL would restrict the ability of WMBFA, WMBfsb or WMB to
obtain advances from the FHLB. Failure to remain a QTL also would restrict the
ability of WMBFA or WMBfsb to branch and pay dividends. The OTS
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has recently proposed a regulation that could affect WMI's treatment as a
unitary savings and loan holding company. See "-- Recent and Proposed Federal
Legislation and Regulation."
Acquisitions by Savings and Loan Holding Companies. Neither WMI nor any
other person may acquire control of a savings institution or a savings and loan
holding company without the prior approval of the OTS, or, if the acquirer is an
individual, the OTS' lack of disapproval. In either case, the public must have
an opportunity to comment on the proposed acquisition, and the OTS must complete
an application review. Without prior approval from the OTS, WMI may not acquire
more than 5% of the voting stock of any savings institution that is not one of
its subsidiaries.
Annual Reporting; Examinations. Under HOLA and OTS regulations WMI, as a
savings and loan holding company, must file periodic reports with the OTS. In
addition, WMI must comply with OTS recordkeeping requirements.
WMI is subject to holding company examination by the OTS. The OTS may take
enforcement action if the activities of a savings and loan holding company
constitute a serious risk to the financial safety, soundness or stability of a
subsidiary savings association.
Commonly Controlled Depository Institutions; Affiliate Transactions.
Depository institutions are "commonly controlled" if they are controlled by the
same holding company or if one depository institution controls another
depository institution. WMI controls WMB, WMBFA, WMBfsb and FCIB. The FDIC has
authority to require FDIC-insured banks and savings associations to reimburse
the FDIC for losses it incurs in connection either with the default of a
"commonly controlled" depository institution or with the FDIC's provision of
assistance to such an institution.
WMB, WMBFA and WMBfsb, as holding company subsidiaries that are depository
institutions, are subject to both qualitative and quantitative limitations on
the transactions they conduct with WMI and its other subsidiaries.
Capital Adequacy. WMI is not subject to any regulatory capital
requirements, but each of its subsidiary depository institutions is subject to
various capital requirements. See "-- Capital Requirements."
Subsidiary Savings Institution Regulation. As federally-chartered savings
associations, WMBFA and WMBfsb are subject to regulation and supervision by the
OTS. As a state-chartered savings bank, WMB is subject to regulation and
supervision by the State Director and the FDIC.
State Regulation and Supervision. State statutes empower savings banks in
Washington, such as WMB, to conduct, subject to various conditions and
limitations, business activities that include the following:
- accept deposits and pay interest on them;
- make loans on or invest in residential and other real estate;
- make consumer loans;
- make commercial loans;
- invest in corporate obligations, government debt securities, and other
securities; and
- offer various trust and banking services to their customers.
Under state law, savings banks in Washington also generally have all of the
powers that federal mutual savings banks have under federal laws and
regulations.
Restrictions on Subsidiary Savings Institution Dividends. WMI's principal
sources of funds are cash dividends paid to it by its banking and other
subsidiaries, investment income and borrowings. Federal and state law limits the
ability of a depository institution, such as WMB, WMBFA or WMBfsb, to pay
dividends or make other capital distributions.
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Washington state law prohibits WMB from declaring or paying a dividend
greater than its retained earnings if doing so would cause its net worth to be
reduced below (i) the amount required for the protection of preconversion
depositors or (ii) the net worth requirements, if any, imposed by the State
Director.
OTS regulations limit the ability of savings associations such as WMBFA and
WMBfsb to pay dividends and make other capital distributions. The regulations
currently establish a three-tiered system of regulation, with the greatest
flexibility afforded to institutions that meet or exceed the capital
requirements.
A savings association that has capital immediately prior to, and on a pro
forma basis after giving effect to, a proposed capital distribution that is at
least equal to its capital requirements is considered a "Tier 1 association." At
December 31, 1998, WMBFA and WMBfsb were Tier 1 associations. Unless the OTS has
notified a Tier 1 association that it requires more than normal supervision, the
association may make capital distributions during a calendar year up to the
greater of:
- 100% of its net income to date during the calendar year plus the amount
that would reduce the association's "surplus capital ratio" (the
institution's excess capital over its capital requirement) to one-half of
its surplus capital ratio at the beginning of the calendar year, or
- 75% of the association's net income over the most recent four-quarter
period.
The association must give 30 days' prior notice to the OTS, but OTS approval is
not required. In addition, a Tier 1 association may make capital distributions
in excess of the foregoing limits if the OTS does not object within a 30-day
period following notice by the association.
The OTS has amended its capital distribution regulation effective April 1,
1999. Associations (such as WMBFA and WMBfsb) that are subsidiaries of a savings
and loan holding company must file a notice with the OTS at least 30 days before
the proposed declaration of a dividend or approval of the proposed capital
distribution by its Board of Directors. In addition, the savings institution now
must obtain prior approval from the OTS if it fails to meet certain regulatory
conditions or if, after giving effect to the proposed distribution, the
institution's capital distributions in a calendar year would exceed its
year-to-date net income plus retained net income for the preceding two years or
the association would not be at least adequately capitalized.
FDIC Insurance
The FDIC insures the deposits of each of our banking subsidiaries to the
applicable maximum in each institution. The FDIC administers two separate
deposit insurance funds, the BIF and the SAIF. The BIF is a deposit insurance
fund for commercial banks and some state-chartered savings banks. The SAIF is a
deposit insurance fund for most savings associations. WMB and FCIB are members
of the BIF, but a portion of WMB's deposits is insured through the SAIF. WMBFA
and WMBfsb are members of the SAIF, but a portion of WMBFA's deposits is insured
through the BIF. WMB and WMBFA are subject to payment of annual assessments
ratably to both funds.
The FDIC has established a risk-based system for setting deposit insurance
assessments. Under the risk-based assessment system, an institution's insurance
assessments vary according to the level of capital the institution holds and the
degree to which it is the subject of supervisory concern. In addition,
regardless of the potential risk to the insurance fund, federal law requires the
FDIC to establish assessment rates that will maintain each insurance fund's
ratio of reserves to insured deposits at $1.25 per $100. Both funds currently
meet this reserve ratio. During 1998, the assessment rate for both SAIF and BIF
deposits ranged from 0% to 0.27% of covered deposits. WMB, WMBFA and FCIB
qualify for the lowest rate on their BIF deposits, and WMB, WMBFA and WMBfsb
qualify for the lowest rate on their SAIF deposits. Accordingly, none of these
institutions paid any deposit insurance assessments in 1998.
In addition to deposit insurance assessments, the FDIC is authorized to
collect assessments against insured deposits to be paid to the Finance
Corporation ("FICO") to service FICO debt incurred in the 1980s. The FICO
assessment rate is adjusted quarterly. The current FICO assessment rate for
BIF-insured deposits is 1.22 cents per $100 of deposits per year and 6.10 cents
per $100 of deposits per year for SAIF-insured deposits.
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Capital Requirements
Each of our subsidiary depository institutions is subject to various
capital requirements. WMB and FCIB are each subject to FDIC capital
requirements, while WMBFA and WMBfsb are subject to OTS capital requirements.
WMB and FCIB. FDIC regulations recognize two types or tiers of capital:
core ("Tier 1") capital and supplementary ("Tier 2") capital. Tier 1 capital
generally includes common stockholders' equity and noncumulative perpetual
preferred stock less most intangible assets. Tier 2 capital, which is limited to
100% of Tier 1 capital, includes such items as qualifying general loan loss
reserves, cumulative perpetual preferred stock, mandatory convertible debt, term
subordinated debt and limited life preferred stock; however, the amount of term
subordinated debt and intermediate term preferred stock (original maturity of at
least five years but less than 20 years) that may be included in Tier 2 capital
is limited to 50% of Tier 1 capital.
The FDIC uses a combination of risk-based guidelines and leverage ratios to
evaluate capital adequacy. Under the risk-based capital guidelines, different
categories of assets are assigned different risk weights, based generally on the
perceived credit risk of the asset. For example, U.S. Treasury bills and GNMA
securities are placed in the 0% risk category, Fannie Mae and Freddie Mac
securities are placed in the 20% risk category, loans secured by SFR properties
and certain private issue MBS are generally placed in the 50% risk category, and
commercial real estate and consumer loans are generally placed in the 100% risk
category. These risk weights are multiplied by corresponding asset balances to
determine a risk-weighted asset base. Certain off-balance sheet items are added
to the risk-weighted asset base by converting them to a balance sheet equivalent
and assigning them the appropriate risk weight in one of four categories.
Under FDIC guidelines, the ratio of total capital (Tier 1 capital plus Tier
2 capital) to risk-weighted assets must be at least 8.00%, and the ratio of Tier
I capital to risk-weighted assets must be at least 4.00%.
In addition to the risk-based capital guidelines, the FDIC uses a leverage
ratio to evaluate a bank's capital adequacy. Most banks are required to maintain
a minimum leverage ratio of Tier 1 capital to average assets of at least 4.00%
to 5.00%. The FDIC retains the right to require a particular institution to
maintain a higher capital level based on the institution's particular risk
profile.
The FDIC may consider other factors that may affect a bank's financial
condition. These factors may include interest rate risk exposure, liquidity,
funding and market risks, the quality and level of earnings, concentration of
credit risk, risks arising from nontraditional activities, loan and investment
quality, the effectiveness of loan and investment policies, and management's
ability to monitor and control financial operating risks.
The following table sets forth the current regulatory requirement for
capital ratios for FDIC-regulated banks as compared with our capital ratios at
December 31, 1998:
TIER 1 CAPITAL TO TOTAL CAPITAL TO
TIER 1 CAPITAL TO RISK-WEIGHTED RISK-WEIGHTED
AVERAGE ASSETS ASSETS ASSETS
----------------- ----------------- ----------------
Regulatory minimum................... 4.00% - 5.00% 4.00% 8.00%
WMB's actual......................... 5.90 10.59 11.47
FCIB actual.......................... 20.02 24.01 25.27
WMBFA and WMBfsb. The OTS requires savings associations, such as WMBFA and
WMBfsb, to meet each of three separate capital adequacy standards:
- a core capital leverage requirement;
- a tangible capital requirement; and
- a risk-based capital requirement.
For a limited time, core capital may include certain amounts of qualifying
supervisory goodwill.
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OTS regulations incorporate a risk-based capital requirement that is
designed to be no less stringent than the capital standard applicable to
national banks. It is modeled in many respects on, but not identical to, the
risk-based capital requirements adopted by the FDIC. Associations whose exposure
to interest rate risk is deemed to be above normal will be required to deduct a
portion of such exposure in calculating their risk-based capital. The OTS may
establish, on a case-by-case basis, individual minimum capital requirements for
a savings association that vary from the requirements that otherwise would apply
under the OTS capital regulations. The OTS has not established such individual
minimum capital requirements for WMBFA or WMBfsb.
The following table sets forth the current regulatory requirement for
capital ratios for savings associations as compared with our capital ratios at
December 31, 1998:
CORE RISK- TOTAL RISK-
CORE TANGIBLE BASED BASED
CAPITAL CAPITAL CAPITAL CAPITAL
RATIO RATIO RATIO RATIO
------- -------- ---------- -----------
Regulatory minimum......................... 3.00%(1) 1.50% 4.00% 8.00%
WMBFA's actual............................. 5.76 5.76 10.22 12.11
WMBfsb's actual............................ 7.37 7.37 12.09 13.35
- ---------------
(1) Most savings associations are required to maintain a minimum leverage ratio
of at least 4.00% - 5.00%.
FDICIA Requirements and Prompt Corrective Action
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-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 that is neither well capitalized nor
adequately capitalized will be considered undercapitalized.
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 the 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
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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 evaluate the 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.
FDIC and OTS Regulation and Examination
The FDIC has adopted regulations to protect the deposit insurance funds and
depositors, including regulations governing the deposit insurance of various
forms of accounts. The FDIC also has adopted numerous regulations to protect the
safety and soundness of FDIC-regulated banks. These regulations cover a wide
range of subjects including financial reporting, change in bank control,
affiliations with securities firms and capital requirements. In certain
instances, these regulations restrict the exercise of powers granted by state
law.
An FDIC regulation and a joint FDIC/OTS policy statement place a number of
restrictions on the activities of WMB's and WMBFA's securities affiliates and on
such affiliates' transactions with WMB, WMBFA and WMBfsb. These restrictions
include requirements that such affiliates follow practices and procedures to
distinguish them from WMB, WMBFA and WMBfsb and that such affiliates give
customers notice from time to time of their separate corporate status and of the
distinction between insured deposits and uninsured nondeposit products.
FDICIA also prohibited banks, such as WMB, and their subsidiaries from
exercising certain powers that were granted by state law to make investments or
carry on activities as principal (i.e., for their own account) unless either (i)
national banks have power under federal law to make such investments or carry on
such activities, or (ii) the bank and such investments or activities meet
certain requirements established by FDICIA and the FDIC.
FDICIA imposed new supervisory standards requiring annual examinations,
independent audits, uniform accounting and management standards, and prompt
corrective action for problem institutions. As a result of FDICIA, depository
institutions and their affiliates are subject to federal standards governing
asset growth, interest rate exposure, executive compensation, and many other
areas of depository institution operations. FDICIA contains numerous other
provisions, including reporting requirements and revised regulatory standards
for, among other things, real estate lending.
The FDIC may sanction any FDIC-regulated bank that does not operate in
accordance with FDIC regulations, policies and directives. Proceedings may be
instituted against any FDIC-regulated bank, or any institution-affiliated party,
such as a trustee, director, officer, employee, agent, or controlling person of
the bank, who engages in unsafe and unsound practices, including violations of
applicable laws and regulations. The FDIC may revalue assets of an institution,
based upon appraisals, and may require the establishment of specific reserves in
amounts equal to the difference between such revaluation and the book value of
the assets. The State Director has similar authority under Washington state law,
and the OTS has similar authority under HOLA. The FDIC has additional authority
to terminate insurance of accounts, after notice and hearing, upon a finding
that the insured institution is or has engaged in any unsafe or unsound practice
that has not been corrected, is operating in an unsafe or unsound condition, or
has violated any applicable law, regulation, rule, or order of or condition
imposed by the FDIC.
Federal savings associations, such as WMBFA and WMBfsb, are subject to
regulatory oversight and examination by the OTS and the FDIC. HOLA and OTS
regulations delineate such associations' investment and lending powers. Federal
savings associations generally may not invest in noninvestment grade debt
securities, nor may they generally make equity investments, other than
investments in service corporations.
Federal law and regulations require that WMBFA and WMBfsb maintain liquid
assets in excess of a specified limit. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity."
Federal regulation of depository institutions is intended for the
protection of depositors (and the BIF and the SAIF), and not for the protection
of stockholders or other creditors. In addition, a provision in the
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Omnibus Budget Reconciliation Act of 1993 (the "Budget Act") requires that in
any liquidation or other resolution of any FDIC-insured depository institution,
claims for administrative expenses of the receiver and for deposits in U.S.
branches (including claims of the FDIC as subrogee of the insured institution)
shall have priority over the claims of general unsecured creditors.
Federal Reserve Regulation
Under Federal Reserve Board regulations, WMB, WMBFA, WMBfsb and FCIB are
each required to maintain reserves against their transaction accounts (primarily
interest-bearing and noninterest-bearing checking accounts). Because reserves
must generally be maintained in cash or in noninterest-bearing accounts, the
effect of the reserve requirements is to increase an institution's cost of
funds. These regulations generally require that WMB, WMBFA, WMBfsb and FCIB each
maintain reserves against net transaction accounts in the amount of 3% on
amounts of $41.6 million or less, plus 10% on amounts in excess of $41.6
million. Institutions may designate and exempt $4.9 million of certain
reservable liabilities from these reserve requirements. These amounts and
percentages are subject to adjustment by the Federal Reserve Board. Savings
banks and savings associations, like other depository institutions maintaining
reservable accounts, may borrow from the Federal Reserve Bank discount window,
but the Federal Reserve Board's regulations require the institution to exhaust
other reasonable alternative sources before borrowing from the Federal Reserve
Bank.
Numerous other regulations promulgated by the Federal Reserve Board affect
the business operations of our banking subsidiaries. These include regulations
relating to equal credit opportunity, electronic fund transfers, collection of
checks, truth in lending, truth in savings and availability of funds.
Community Reinvestment Act
The Community Reinvestment Act ("CRA") requires financial institutions
regulated by the federal financial supervisory agencies to ascertain and help
meet the credit needs of their delineated communities, including low- to
moderate-income neighborhoods within those communities, while maintaining safe
and sound banking practices. The regulatory agency assigns one of four possible
ratings to an institution's CRA performance and is required to make public an
institution's rating and written evaluation. The four possible ratings of
meeting community credit needs are outstanding, satisfactory, needs to improve,
and substantial noncompliance.
Under regulations that apply to all CRA performance evaluations after July
1, 1997, many factors play a role in assessing a financial institution's CRA
performance. The institution's regulator must consider its financial capacity
and size, legal impediments, local economic conditions and demographics,
including the competitive environment in which it operates. The evaluation does
not rely on absolute standards, and the institutions are not required to perform
specific activities or to provide specific amounts or types of credit.
Under the regulations applicable before July 1, 1997, WMBFA and WMBfsb each
received an "outstanding" CRA rating from the OTS, and WMB and FCIB received an
"outstanding" CRA rating from the FDIC. These ratings reflect our commitment to
meeting the credit needs of the communities we serve. Although subsequent CRA
examinations have occurred, we have not yet received the final results. We
maintain a CRA statement for public viewing, as well as an annual CRA highlights
document. These documents describe our credit programs and services, community
outreach activities, public comments and other efforts to meet community credit
needs.
In May 1998, we announced a ten-year, $120 billion community reinvestment
commitment to the communities in which we do business. This commitment replaces
prior commitments made by us and the companies we have acquired.
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The $120 billion commitment targets single-family lending, small business
and consumer lending, multi-family lending and community investment at the
following levels:
- Single-family lending -- $81.6 billion in affordable housing loans to
minority racial and ethnic borrowers, borrowers in low- to moderate-
income census tracts and borrowers earning less than 80% of median
income. Of this amount, $30 billion will target low- to moderate-income
borrowers.
- Small business and consumer lending -- $25 billion in loans to small
businesses and consumers with low to moderate incomes, including consumer
loans and lines of credit to borrowers with low to moderate incomes and
in low- to moderate-income census tracts and to small businesses with an
emphasis on loans and lines of credit of $50,000 or less and on loans to
people of color, women and disabled persons.
- Multi-family lending -- $12.1 billion for apartment and manufactured home
park developments in low- to moderate-income census tracts or serving
families earning less than 80% of median income.
- Community investment -- $1.3 billion in investments and loans to
community development and low-income housing initiatives, tax-exempt
housing revenue bonds, minority financial institutions and community
banks and financial institutions targeting minority racial and ethnic
communities or other community needs.
As part of this commitment, we expect to continue our long-standing target
of returning 2% of our pretax earnings in contributions to the communities we
serve, with an emphasis on underserved areas. We will target 3% of our after-tax
earnings, plus an additional 10% of any net recovery from the resolution of
Ahmanson's goodwill litigation against the U.S. government, if that total
exceeds 2% of pretax earnings. These contributions are made through grants,
sponsorships, loans at below-market rates, in-kind donations, volunteer time and
other financial support.
Recent and Proposed Federal Legislation and Regulation
Effective June 1, 1997, federal legislation repealed certain restrictions
on the establishment of interstate branches by national banks and
state-chartered banks. In addition, bank holding companies are now generally
permitted to buy banks in any state. WMBFA and WMBfsb already had authority to
establish interstate branches under existing federal law and regulations, so
management expects that such legislation will primarily benefit our competitors.
In February 1999, the OTS proposed a regulation which could affect WMI's
ability to engage in certain nonbanking activities. If a savings and loan
holding company ("SLHC") owns more than one savings association, it is a
multiple SLHC. HOLA generally restricts multiple SLHCs and their non-association
subsidiaries to traditional savings association activities and services and to
activities permitted bank holding companies. These restrictions do not apply to
a multiple SLHC if all, or all but one, of its subsidiary savings associations
were acquired in transactions involving a sale or transfer from an ailing or
failing institution ("supervisory acquisition"). Such a multiple SLHC is
sometimes referred to as an "exempt" multiple SLHC. The OTS proposal states
that, under certain circumstances, an exempt multiple SLHC could lose its exempt
status if it or one of its subsidiary associations is involved in a merger.
WMI has had the status of an exempt multiple SLHC because two of its three
subsidiary associations -- WMBFA and WMBfsb -- were acquired in supervisory
acquisitions. However, both WMBFA and WMBfsb, as well as WMI, have been involved
in subsequent merger transactions. Accordingly, it is possible that, if the
proposed regulation were adopted, the OTS could assert that WMI is not an exempt
multiple SLHC. If that were to occur, WMI would have to merge its subsidiary
associations or discontinue activities not permitted to multiple SLHCs.
Various legislative proposals relating to financial services companies have
been or are expected to be introduced in the current session of Congress. These
include proposals to restrict affiliations between banks and nonbanking
corporations including life insurance companies, and to require federal savings
institutions,
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such as WMBFA and WMBfsb, to convert to commercial banks. The outcome of these
legislative proposals cannot be forecast reliably.
Regulation of Nonbanking Affiliates
As a broker-dealer registered with the Securities and Exchange Commission
("SEC") and a member of the National Association of Securities Dealers, Inc.
("NASD"), WM Financial Services is subject to various regulations and
restrictions imposed by those entities, as well as by various state authorities.
As a registered investment advisor, WM Advisors is subject to various federal
and state securities regulations and restrictions.
The NASD has adopted and forwarded to the SEC for approval rules concerning
NASD member operations conducted in branches of depository institutions.
Although many of the NASD's proposed requirements are substantially similar to
the joint FDIC/OTS policy statement governing the activities of our securities
affiliates, the NASD proposal, if approved by the SEC, could impose additional
restrictions on these affiliates.
COMPETITIVE ENVIRONMENT
We face significant competition in attracting and retaining deposits and
making loans in all of our market areas. Our most direct competition for
deposits has historically come from savings institutions, credit unions and
commercial banks doing business in our primary market areas of California,
Washington, Oregon, Florida, Texas and Utah. As with all banking organizations,
however, we have also experienced competition from nonbanking sources, including
mutual funds, corporate and governmental debt securities and other investment
alternatives. Our most direct competition for loans comes from other savings
institutions, national mortgage companies, insurance companies, commercial banks
and GSEs. Our competitors' activities may make it difficult for us to achieve
our financial goals. In addition to the normal competitive factors described
above, our management at the holding company level has limited operating
experience in California, Florida and Texas.
Although consolidation has decreased the number of institutions competing
in our markets, both savings associations and commercial banks have reemphasized
their focus on the consumer, making competition for retail deposits and loans
extremely fierce. While the increased competitive pressures make the banking
environment more difficult, we remain a strong market force. For 1998, our
originations of SFR loans ranked first in both Washington and Oregon, and second
in California.
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PRINCIPAL OFFICERS
The following table sets forth certain information regarding the principal
officers of Washington Mutual:
EMPLOYEE OF
PRINCIPAL OFFICERS AGE CAPACITY IN WHICH SERVED COMPANY SINCE
- ------------------ --- ------------------------ -------------
Kerry K. Killinger.................. 49 Chairman of the Board of Directors, 1983
President and Chief Executive
Officer
Fay L. Chapman...................... 52 Executive Vice President and General 1997
Counsel
Craig S. Davis...................... 47 Executive Vice President 1996
Steven P. Freimuth.................. 42 Executive Vice President 1988
William A. Longbrake................ 55 Executive Vice President and Chief 1996
Financial Officer
Deanna W. Oppenheimer............... 40 Executive Vice President 1985
Craig E. Tall....................... 53 Executive Vice President 1985
S. Liane Wilson..................... 56 Executive Vice President 1985
Richard M. Levy..................... 40 Senior Vice President and Controller 1998
Norman H. Swick..................... 49 Senior Vice President and Chief Risk 1980
Officer
Douglas G. Wisdorf.................. 44 Senior Vice President and Deputy 1976
Chief
Financial Officer
Mr. Killinger has been Chairman, President and Chief Executive Officer of
WMI since its organization as a holding company in 1994. He has been Chairman of
the Board of Directors of WMB since 1991 and Chief Executive Officer since 1990.
Mr. Killinger became an Executive Vice President of WMB in 1983, a Senior
Executive Vice President of WMB in 1986 and the President and a director of WMB
in 1988.
Ms. Chapman became an Executive Vice President and General Counsel and
member of the Executive Committee of WMI in September 1997. Prior to that, Ms.
Chapman had been a partner with Foster Pepper & Shefelman PLLC, a Seattle,
Washington law firm, since 1979.
Mr. Davis became an Executive Vice President and member of the Executive
Committee in January 1997, following our merger with Keystone Holdings. In his
capacity as Executive Vice President, Mr. Davis is responsible for SFR lending
and financial services. He was Director of Mortgage Origination of American
Savings Bank from 1993 through 1996 and served as President of ASB Financial
Services, Inc. from 1989 to 1993.
Mr. Freimuth became an Executive Vice President and member of the Executive
Committee in 1997. In this capacity, he is responsible for corporate lending
administration and human resources. He joined WMB as a Vice President in 1988
and became a Senior Vice President in 1991.
Mr. Longbrake rejoined WMI in October 1996 as Executive Vice President and
Chief Financial Officer and a member of the Executive Committee. In his capacity
as Executive Vice President, Mr. Longbrake is responsible for corporate finance.
From March of 1995 through September of 1996, he served as Deputy to the
Chairman for Finance and Chief Financial Officer of the FDIC. Mr. Longbrake was
Senior Executive Vice President and Chief Financial Officer of WMI from its
organization through February 1995. He was Chief Financial Officer of WMB from
1988 to 1995 and a member of our Executive Committee from its formation in 1990
until 1995 and again since 1996.
Ms. Oppenheimer has been an Executive Vice President of WMI since its
organization. She has been an Executive Vice President of WMB since 1993 and a
member of the Executive Committee since its formation in 1990. In this capacity,
Ms. Oppenheimer is responsible for corporate marketing and consumer bank
distribution. She has been an officer of WMB since 1985. She became an Assistant
Vice President of WMB in 1986, a Vice President in 1987 and a Senior Vice
President in 1989.
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Mr. Tall has been an Executive Vice President of WMI since its
organization. He had been an Executive Vice President of WMB since 1987 and a
member of the Executive Committee since its formation in 1990. In his capacity
as Executive Vice President, Mr. Tall is responsible for corporate development,
corporate properties, commercial banking and consumer finance.
Ms. Wilson has been an Executive Vice President of WMI since its
organization. She has been an Executive Vice President of WMB since 1988 and a
member the Executive Committee since its formation in 1990. In her capacity as
Executive Vice President, Ms. Wilson is responsible for corporate operations.
Mr. Levy has been a Senior Vice President and Controller of WMI since
February 1998. In this capacity, he is Washington Mutual's principal accounting
officer. Prior to joining the Company, Mr. Levy was Executive Vice President and
Chief Financial Officer of Community Trust Bancorp from 1995 to 1997. Prior to
that, he was the Controller of Bank of America Texas, N.A.
Mr. Swick has been a Senior Vice President of WMI since its organization.
He became Chief Risk Officer in 1998 and prior to that time was the Company's
General Auditor. He has been an officer of WMB since 1980. Mr. Swick became a
Vice President in 1984 and Senior Vice President in 1988. In this capacity, he
monitors our internal controls and credit risk.
Mr. Wisdorf has been Deputy Chief Financial Officer since 1996 and Senior
Vice President of WMI since its organization. Mr. Wisdorf was Controller of WMI
from 1994 to February 1998. He became Vice President and Controller of WMB in
1986 and has been an officer since 1978.
ITEM 2. PROPERTIES
As of December 31, 1998, the Company's banking subsidiaries conducted
business from 1,173 consumer financial centers, 55 Western Bank financial
centers, 16 business banking centers and 273 home loan centers and wholesale
loan centers in 37 states and the District of Columbia. Consumer finance
operations were conducted in over 500 locations in 24 states.
Washington Mutual's administrative offices are located at 1201 Third
Avenue, Seattle, Washington, 98101 where, as of December 31, 1998, the Company
leased approximately 236,000 square feet pursuant to a lease agreement that
starts to terminate in 2007. The Company also leases approximately 158,000
square feet of space in Seattle in the Second and Seneca Building pursuant to a
lease agreement that starts to terminate in 2001; approximately 75,000 square
feet in the adjoining building pursuant to a lease agreement that starts to
terminate in 2006; approximately 100,000 square feet in Seattle in the First
Interstate Building at 999 Third Avenue pursuant to a lease agreement that
starts to terminate in 1999; approximately 76,000 square feet in Seattle in the
1111 Third Avenue Building pursuant to a lease agreement that starts to
terminate in 2004; approximately 59,000 square feet in the Rainer Tower Building
at 1301 Fifth Avenue pursuant to a lease agreement that starts to terminate in
2003; and approximately 110,000 square feet in Bothell, Washington pursuant to a
lease agreement that terminates in 2009. The Company has multiple options to
renew leases at all locations.
WMBFA administrative and subsidiary operations are conducted from owned
office space totaling 280,000 square feet in Irvine, California; 237,000 square
feet in Stockton, California; and 305,000 square feet in Chatsworth, California;
and 87,000 square feet in Baldwin Park, California. WMBFA administrative and
subsidiary operations are also conducted from leased office space totaling
approximately 11,000 square feet in Los Angeles pursuant to a lease agreement
that terminates in 2002; approximately 722,000 square feet in Chatsworth
pursuant to a lease agreement that starts to terminate in 2005; 691,000 square
feet in Irwindale pursuant to a lease agreement that terminates in 2010; 465,000
square feet in the City of Industry, California pursuant to a lease agreement
that terminates in 2005 and 82,000 square feet in St. Louis, Missouri pursuant
to a lease agreement that terminates in 2007.
Offices used by the Company on the Irwindale-Baldwin Park, City of Industry
and St. Louis campuses (the "Home Savings Campuses") are being closed in order
to consolidate operations there with similar operations on other administrative
campuses, which will make more efficient use of building space. As a result of
this consolidation, the Company anticipates that the approximately 1,325,000
square feet located on the
26
29
Home Savings Campuses will become available to sublet to third party tenants
beginning in mid-1999. In addition, the Company has identified 162 consumer
financial centers that will be closed and will have their operations
consolidated with neighboring financial centers by mid-1999.
WMBFA also owned a vacant administrative facility totaling approximately
385,000 square feet located in Canoga Park, California that housed the Coast
operations and administration prior to its acquisition by Home Savings in 1998.
This facility was sold in February 1999.
Aristar administrative operations are conducted from owned office space
totaling 71,000 square feet in Tampa, Florida.
See "Notes to Consolidated Financial Statements -- Note 10: Premises and
Equipment."
ITEM 3. LEGAL PROCEEDINGS
Washington Mutual has certain litigation and negotiations in progress
resulting from activities arising from normal operations. In the opinion of
management, none of these matters is likely to have a materially adverse effect
on the Company's results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of
1998.
PART II
ITEM 5. MARKET FOR WASHINGTON MUTUAL'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
COMMON STOCK
Washington Mutual's common stock trades on The New York Stock Exchange
under the symbol WM. Prior to December 9, 1998, the Company's common stock
traded on The Nasdaq Stock Market under the symbol WAMU. As of February 26,
1999, there were 593,989,545 shares issued and outstanding held by 40,181
shareholders of record. The closing price of the Company's common stock on March
9, 1999 was $42.44 per share.
The high and low common stock prices by quarter were as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997
---------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
Fourth quarter.......................... $41.25 $28.50 $48.25 $40.20
Third quarter........................... 46.06 31.13 46.83 39.25
Second quarter.......................... 50.92 40.94 41.80 30.25
First quarter........................... 49.95 36.75 39.25 28.50
The cash dividends declared by quarter were as follows:
YEAR ENDED
DECEMBER 31,
----------------
1998 1997
------ ------
Fourth quarter............................................. $0.220 $0.187
Third quarter.............................................. 0.207 0.180
Second quarter............................................. 0.200 0.173
First quarter.............................................. 0.193 0.167
These dividends have not been restated to reflect pooling combinations.
27
30
PREFERRED STOCK
At December 31, 1998, the Company had no preferred stock outstanding.
PAYMENT OF DIVIDENDS AND POLICY
Payment of future dividends is subject to declaration by Washington
Mutual's Board of Directors. Factors considered in determining the size of
dividends are the amount and stability of profits, adequacy of capitalization,
and expected asset and deposit growth of its subsidiaries. The dividend policy
of Washington Mutual is also dependent on the ability of WMB, WMBFA and WMBfsb
to pay dividends to their respective parent company, which is influenced by
legal, regulatory and economic restrictions. See "Business -- Regulation and
Supervision -- Restrictions on Subsidiary Savings Institution Dividends."
Retained earnings of the Company at December 31, 1998 included a pre-1988
thrift bad debt reserve for tax purposes of $2.01 billion for which no federal
income taxes have been provided. In the future, if the thrift bad debt reserve
is used for any purpose other than to absorb bad debt losses, or if any of the
thrift subsidiaries no longer qualifies as either a bank or a qualified thrift
lender, 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. As a result, the Company's ability to pay dividends in
excess of current earnings may be limited.
28
31
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data for
Washington Mutual and is derived from and should be read in conjunction with the
Consolidated Financial Statements of Washington Mutual and the Notes thereto,
which are included in this Annual Report on Form 10-K. The Ahmanson Merger in
1998, the Great Western Merger in 1997 and the Keystone Transaction in 1996 were
accounted for as poolings of interests. The assets, liabilities, stockholders'
equity, and results of operations of the pooled companies have been included in
the Company's financial statements on a consolidated basis at their book values
for all periods, and no goodwill was created. Washington Mutual's financial
information contained herein has been restated as if the respective companies
had been combined for all periods presented unless otherwise noted. Prior to the
Ahmanson Merger, Ahmanson acquired Coast Savings Financial, Inc. in a
transaction accounted for by the purchase method. As a result, Coast's financial
information has been included only from the date of its acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General." As such, the information presented herein is not
comparable with that reflected in the Company's Annual Report on Form 10-K/A for
the year ended December 31, 1997.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA
Interest income..................... $11,221,468 $10,202,531 $9,892,290 $9,860,408 $8,020,040
Interest expense.................... 6,929,743 6,287,038 6,027,177 6,306,724 4,416,088
----------- ----------- ---------- ---------- ----------
Net interest income................. 4,291,725 3,915,493 3,865,113 3,553,684 3,603,952
Provision for loan losses........... 161,968 246,642 498,568 344,624 490,449
Other income........................ 1,524,148 996,162 833,696 1,253,463 930,170
Other expense....................... 3,284,448 3,126,744 3,609,606 2,790,267 2,863,146
----------- ----------- ---------- ---------- ----------
Income before income taxes,
cumulative effect of accounting
changes, and minority interest.... 2,369,457 1,538,269 590,635 1,672,256 1,180,527
Income taxes........................ 882,525 653,151 201,707 654,593 437,668
Cumulative effect of change in tax
accounting method................. -- -- -- (234,742) --
Minority interest in earnings of
consolidated subsidiaries......... -- -- 13,570 15,793 13,992
----------- ----------- ---------- ---------- ----------
Net income.......................... $ 1,486,932 $ 885,118 $ 375,358 $ 767,128 $ 728,867
=========== =========== ========== ========== ==========
Net income attributable to common
stock............................. $ 1,470,990 $ 830,087 $ 291,723 $ 673,099 $ 634,838
=========== =========== ========== ========== ==========
Net income per common share:
Basic............................. $2.61 $1.56 $0.55 $1.23 $1.19
Diluted........................... 2.56 1.52 0.54 1.21 1.17
Average diluted common shares used
to calculate earnings per share... 578,562,305 556,759,023 539,058,104 585,045,390 574,540,459
Cash dividends paid per common
share:
Pre-business combinations(1)...... $0.82 $0.71 $0.60 $0.51 $0.47
Post-business combinations(2)..... 0.73 0.66 0.65 0.51 0.52
Common stock dividend payout
ratio(2).......................... 29.32% 40.61% 94.12% 37.26% 40.24%
Return on average assets............ 0.96 0.63 0.28 0.56 0.58
Return on average stockholders'
equity............................ 16.62 11.73 4.70 10.02 10.00
Return on average common
stockholders' equity.............. 16.67 11.95 3.95 10.14 10.12
29
32
DECEMBER 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET DATA
Assets...................... $165,493,281 $143,522,398 $137,328,541 $137,142,972 $133,426,346
Available-for-sale
securities................ 32,917,053 19,817,226 25,431,464 31,181,617 10,255,552
Held-to-maturity
securities................ 14,129,482 17,207,854 9,605,367 10,967,204 21,505,700
Loans....................... 108,370,906 97,624,348 92,943,126 85,335,568 89,852,632
Deposits.................... 85,492,141 83,429,433 87,509,358 88,019,469 92,758,147
Borrowings.................. 65,200,489 49,976,377 40,014,735 38,261,697 31,053,312
Stockholders' equity........ 9,344,400 7,601,085 7,426,137 8,421,102 7,303,223
Ratio of stockholders'
equity to total assets.... 5.65% 5.30% 5.41% 6.14% 5.47%
Diluted book value per
common share.............. $16.07(3) $13.23(3)(4) $12.52(3)(4) $13.31(4) $11.37(4)
Number of diluted common
shares outstanding at end
of period................. 581,408,525(3) 550,689,721(3)(4) 554,811,012(3)(4) 583,622,187(4) 584,757,465(4)
- ---------------
(1) Amounts paid by acquired companies prior to their combination with the
Company were not included.
(2) Based on dividends paid and earnings of the Company after restatement of
financial statements for significant transactions accounted for as poolings
of interests.
(3) 12,000,000 shares of common stock issued to an escrow for the benefit of the
general and limited partners of Keystone Holdings and the FRF and their
transferees were not included.
(4) Net of outstanding treasury shares and including potential conversion of
outstanding convertible preferred stock.
30
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto presented elsewhere in
this report.
GENERAL
Washington Mutual is a financial services company committed to serving
consumers and small to mid-sized businesses. The Company's banking subsidiaries
accept deposits from the general public, make residential loans, consumer loans,
limited types of commercial real estate loans (primarily loans secured by
multi-family properties), and engage in certain commercial banking activities.
The Company's consumer finance operations provide direct installment loans and
related credit insurance services and purchase retail installment contracts.
Washington Mutual also markets annuities and other insurance products, offers
full service securities brokerage, and acts as the investment advisor to and the
distributor of mutual funds.
During the past three years, the transactions described below transformed
the Company from a regional financial services company whose activities were
concentrated in Washington, Oregon and Utah to a company with operations in 37
states and the District of Columbia, including California, Florida and Texas. At
December 31, 1998, the Company was the largest savings institution and the
eighth largest banking company in the United States.
The Keystone Transaction. On December 20, 1996, Keystone Holdings merged
with and into WMI, and all of the subsidiaries of Keystone Holdings, including
ASB, became subsidiaries of WMI.
The Great Western Merger. On July 1, 1997, Great Western merged with and
into New American Capital, Inc. ("NACI"), a wholly-owned subsidiary of WMI, and
all of the subsidiaries of Great Western, including GWB and Aristar, became
subsidiaries of NACI. On October 1, 1997, GWB was merged with and into ASB;
simultaneously, the name of ASB was changed to Washington Mutual Bank, FA. Great
Western was a diversified financial services company with more than 1,000
mortgage lending, retail banking and consumer finance offices nationwide.
The Ahmanson Merger. On October 1, 1998, Ahmanson merged with and into WMI.
On October 3, 1998, Ahmanson's banking subsidiary, Home Savings, was merged with
and into WMBFA. Ahmanson conducted the majority of its business in California,
with operations in eight other states.
The Coast Acquisition. On February 13, 1998, Ahmanson acquired Coast in a
transaction accounted for as a purchase (the "Coast Acquisition"). Under this
method of accounting, periods prior to the acquisition were not restated, the
assets and liabilities of Coast were adjusted to their estimated fair values and
any excess of the purchase price over the fair value of the assets acquired, net
of the fair value of the liabilities assumed, was recognized as goodwill. At the
date of the Coast Acquisition, Coast had total assets of $8.90 billion and
deposits of $6.40 billion. The value of Ahmanson common stock issued to effect
the transaction was $925.1 million as of the purchase date. Ahmanson recorded
$516.5 million in goodwill and core deposit intangibles.
The Keystone Transaction, the Great Western Merger, the Ahmanson Merger and
the Coast Acquisition are collectively referred to herein as the "Transactions."
RESULTS OF OPERATIONS
Overview
Washington Mutual's net income for 1998 was $1.49 billion compared with
$885.1 million in 1997 and $375.4 million in 1996. Net income during 1998 was
reduced by charges associated with the Ahmanson Merger and the Great Western
Merger totaling $508.3 million for transaction-related expenses, but was
enhanced by income of $289.0 million from the sale of certain retail branches in
Florida. Net income during 1997 was reduced by charges associated primarily with
the Great Western Merger totaling $431.1 million for transaction-related
expenses and $100.0 million for the write down of one tranche of a security
created with loans acquired from GWB. Net income during 1996 was reduced by
charges of $556.4 million for the special
31
34
SAIF assessment, $158.1 million for transaction-related expenses in the Keystone
Transaction, $68.3 million for restructuring expense at Great Western prior to
the Great Western Merger, a $125.0 million loan loss provision for loans
acquired from Keystone Holdings, and a $50.0 million loan loss provision for the
bulk sale by GWB of nonperforming loans prior to the Great Western Merger.
Diluted earnings per share were $2.56 in 1998, $1.52 in 1997 and $0.54 in 1996.
The various transaction-related expenses, the special SAIF assessment and the
addition to the loan loss reserve and loan write downs discussed above
negatively affected the various financial ratios that are commonly used to
assess the performance of financial institutions. Due to the effect of
adjustments related to the merger activity in the past three years, the Company
does not believe that the 1998, 1997 and 1996 ratios are indicative of the
Company's overall performance in those years, nor does the Company believe they
are indicative of the Company's performance in 1999 and subsequent years.
Net Interest Income
Net interest income for 1998 of $4.29 billion increased from $3.92 billion
in 1997 and $3.87 billion in 1996. The net interest margin for 1998 was 2.88%
compared with 2.91% in 1997 and 2.96% in 1996.
The 1998 increase in net interest income was due to an 11% rise in average
interest-earning assets to $149.08 billion in 1998 compared with $134.44 billion
in 1997. The net interest spread, however, declined slightly to 2.70% in 1998
from 2.74% in 1997. The 1997 increase in net interest income was due to a 3%
rise in average interest-earning assets from $130.71 billion in 1996. The net
interest spread declined to 2.74% in 1997 from 2.78% in 1996. To a certain
extent, the Company's net interest spread is affected by changes in the yield
curve. During 1998, the difference between the yields on a three-month U.S.
Treasury bill and a ten-year U.S. government note averaged 37 basis points
compared with 116 basis points a year earlier, and 128 basis points in 1996.
This substantial flattening in the slope of the yield curve began in late 1997
and continued throughout 1998.
Approximately 80% of the Company's interest-sensitive assets have
adjustable rates that change with movements in short- to mid-term market
interest rates as do the majority of the liabilities contributing to the
Company's cost of funds. Market interest rates generally declined during 1996
and then remained low within a narrow range during 1997 and 1998, which was
reflected in the relative stability of the Company's yields, rates and net
interest spread during the same period.
32
35
Average statements of financial condition, together with the total dollar
amounts of interest income and expense and the weighted average interest rates
were as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1998 1997
--------------------------------- ---------------------------------
INTEREST INTEREST
AVERAGE INCOME OR AVERAGE INCOME OR
BALANCE(1) RATE EXPENSE BALANCE(1) RATE EXPENSE
------------ ---- ----------- ------------ ---- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash equivalents, securities and
FHLB stock..................... $ 43,484,260 7.02% $ 3,054,699 $ 37,545,693 7.14% $ 2,681,771
Loans(2)......................... 105,595,302 7.73 8,166,769 96,892,957 7.76 7,520,760
------------ ----------- ------------ -----------
Total interest-earning
assets................... 149,079,562 7.53 11,221,468 134,438,650 7.59 10,202,531
Other assets..................... 6,041,833 5,000,374
------------ ------------
Total assets............... $155,121,395 $139,439,024
============ ============
LIABILITIES
Deposits:
Checking accounts............ $ 12,165,263 0.61 74,643 $ 10,698,514 0.75 80,014
Savings accounts and MMDAs... 25,924,391 3.65 946,975 22,570,995 3.35 755,198
Time deposit accounts........ 48,340,728 5.31 2,566,397 52,065,270 5.40 2,810,330
------------ ----------- ------------ -----------
Total deposits............. 86,430,382 4.15 3,588,015 85,334,779 4.27 3,645,542
Borrowings:
Reverse repurchase
agreements................... 16,875,176 5.67 957,514 14,792,062 5.69 841,114
Advances from FHLBs............ 30,109,943 5.65 1,701,312 17,643,892 5.76 1,016,925
Federal funds purchased and
commercial paper............. 4,121,666 5.61 231,085 3,335,437 5.71 190,373
Other.......................... 6,046,087 7.47 451,817 8,655,345 6.85 593,084
------------ ----------- ------------ -----------
Total borrowings........... 57,152,872 5.85 3,341,728 44,426,736 5.95 2,641,496
------------ ----------- ------------ -----------
Total interest-bearing
liabilities.............. 143,583,254 4.83 6,929,743 129,761,515 4.85 6,287,038
----------- -----------
Other liabilities................ 2,590,912 2,134,298
------------ ------------
Total liabilities.............. 146,174,166 131,895,813
STOCKHOLDERS' EQUITY............. 8,947,229 7,543,211
------------ ------------
Total liabilities and
stockholders' equity........... $155,121,395 $139,439,024
============ ============
Net interest spread and
net interest income............ 2.70 $ 4,291,725 2.74 $ 3,915,493
=========== ===========
Net interest margin.............. 2.88 2.91
YEAR ENDED DECEMBER 31,
--------------------------------
1996
--------------------------------
INTEREST
AVERAGE INCOME OR
BALANCE(1) RATE EXPENSE
------------ ---- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash equivalents, securities and
FHLB stock..................... $ 41,537,767 7.16% $2,974,351
Loans(2)......................... 89,173,080 7.76 6,917,939
------------ ----------
Total interest-earning
assets................... 130,710,847 7.57 9,892,290
Other assets..................... 5,624,498
------------
Total assets............... $136,335,345
============
LIABILITIES
Deposits:
Checking accounts............ $ 9,512,343 0.83 78,898
Savings accounts and MMDAs... 21,482,940 3.16 679,006
Time deposit accounts........ 56,191,952 5.35 3,006,271
------------ ----------
Total deposits............. 87,187,235 4.32 3,764,175
Borrowings:
Reverse repurchase
agreements................... 16,596,812 5.51 914,992
Advances from FHLBs............ 10,801,707 5.63 608,503
Federal funds purchased and
commercial paper............. 2,092,617 5.40 113,086
Other.......................... 9,077,753 6.90 626,421
------------ ----------
Total borrowings........... 38,568,889 5.87 2,263,002
------------ ----------
Total interest-bearing
liabilities.............. 125,756,124 4.79 6,027,177
----------
Other liabilities................ 2,589,325
------------
Total liabilities.............. 128,345,449
STOCKHOLDERS' EQUITY............. 7,989,896
------------
Total liabilities and
stockholders' equity........... $136,335,345
============
Net interest spread and
net interest income............ 2.78 $3,865,113
==========
Net interest margin.............. 2.96
- ---------------
(1) Average balances were obtained from the best available daily, weekly or
monthly data, which management believes approximated the average balances
calculated on a daily basis.
(2) Nonaccrual loans were included in their respective loan categories.
Amortized net deferred loan fees were included in the interest income
calculations. The amortization of net deferred loan fees was $6.6 million in
1998, $51.3 million in 1997 and $72.0 million in 1996.
33
36
The dollar amounts of interest income and interest expense fluctuate
depending upon changes in interest rates and upon changes in amounts (volume) of
the Company's interest-earning assets and interest-bearing liabilities. Changes
attributable to (i) changes in volume (changes in average outstanding balances
multiplied by the prior period's rate), (ii) changes in rate (changes in average
interest rate multiplied by the prior period's volume), and (iii) changes in
rate/volume (changes in rate times the change in volume that were allocated
proportionately to the changes in volume and the changes in rate) were as
follows:
1998 VS. 1997 1997 VS. 1996
---------------------------------- ---------------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO DUE TO
--------------------- TOTAL --------------------- TOTAL
VOLUME(1) RATE CHANGE VOLUME(1) RATE CHANGE
---------- -------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
INTEREST INCOME
Cash equivalents, securities
and FHLB stock............. $ 416,360 $(43,432) $ 372,928 $(285,160) $ (7,420) $(292,580)
Loans(2)..................... 672,941 (26,932) 646,009 599,209 3,612 602,821
---------- -------- ---------- --------- --------- ---------
Total interest
income............. 1,089,301 (70,364) 1,018,937 314,049 (3,808) 310,241
INTEREST EXPENSE
Deposits:
Checking accounts.......... 17,325 (22,696) (5,371) 5,271 (4,155) 1,116
Savings accounts and
MMDAs................... 118,565 73,212 191,777 35,324 40,868 76,192
Time deposits.............. (198,353) (45,580) (243,933) (223,018) 27,077 (195,941)
---------- -------- ---------- --------- --------- ---------
Total deposit
expense............ (62,463) 4,936 (57,527) (182,423) 63,790 (118,633)
Borrowings:
Reverse repurchase
agreements.............. 118,194 (1,794) 116,400 (103,892) 30,014 (73,878)
Advances from FHLBs........ 703,969 (19,582) 684,387 394,043 14,379 408,422
Federal funds purchased and
commercial paper........ 44,016 (3,304) 40,712 70,609 6,678 77,287
Other...................... (178,730) 37,463 (141,267) (28,881) (4,456) (33,337)
---------- -------- ---------- --------- --------- ---------
Total borrowing
expense............ 687,449 12,783 700,232 331,879 46,615 378,494
---------- -------- ---------- --------- --------- ---------
Total interest
expense............ 624,986 17,719 642,705 149,456 110,405 259,861
---------- -------- ---------- --------- --------- ---------
Net interest income.......... $ 464,315 $(88,083) $ 376,232 $ 164,593 $(114,213) $ 50,380
========== ======== ========== ========= ========= =========
- ---------------
(1) Average balances were obtained from the best available daily, weekly or
monthly data, which management believes approximated the average balances
calculated on a daily basis.
(2) Nonaccrual loans were included in the average loan amounts outstanding.
Amortized net deferred loan fees were included in the interest income
calculations. The amortization of net deferred loan fees was $6.6 million in
1998, $51.3 million in 1997 and $72.0 million in 1996.
Provision for Loan Losses
The provision for loan losses during 1998 was $162.0 million compared with
$246.6 million in 1997 and $498.6 million in 1996, reflecting a continued
declining trend in nonperforming assets, nonaccrual loans and charge offs. In
addition, in 1996, the provision reflected an additional charge of $125.0
million related to the Keystone Transaction and a bulk sale of $50.0 million of
nonperforming loans by GWB prior to the Great Western Merger. The provisions in
both 1998 and 1997 were lower than the levels of charge offs, reflecting
improved credit quality in the loan portfolio caused primarily by the general
improvement in the California economy.
34
37
Other Income
Other income consisted of the following:
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
---------- -------- ---------
(DOLLARS IN THOUSANDS)
Depositor and other retail banking fees:
Checking account and MMDA charges.............. $ 493,549 $388,832 $ 279,014
ATM transaction fees........................... 34,939 30,755 26,449
Other.......................................... 39,888 59,113 53,426
---------- -------- ---------
Total depositor and other retail banking
fees...................................... 568,376 478,700 358,889
Loan servicing income............................ 117,356 141,278 143,835
Loan related income.............................. 111,155 89,758 78,479
Securities fees and commissions.................. 192,126 186,079 176,434
Insurance fees and commissions................... 59,202 58,327 54,749
Mortgage banking income (loss)................... 133,084 (44,368) 49,174
Gain on sale of retail deposit branch systems.... 289,040 57,566 6,861
Gain on sale of other assets..................... 26,966 41,179 43,521
Provision for recourse liability................. (52,871) (76,636) (113,686)
Other operating income........................... 79,714 64,279 35,440
---------- -------- ---------
Total other income.......................... $1,524,148 $996,162 $ 833,696
========== ======== =========
Depositor and other retail banking fees of $568.4 million in 1998 increased
from $478.7 million in 1997 and $358.9 million in 1996. The increases reflected
the collection of overdraft protection, nonsufficient funds ("NSF") and other
fees on a greatly increased number of checking accounts and MMDAs. The number of
checking accounts increased during 1998 by nearly 550,000 or 16% to
approximately 3,899,000.
The growth in depositor and other retail banking fees has been offset
somewhat by an increase in the amount of deposit account-related losses
(included in other operating expense) incurred by the Company resulting from the
increased number of checking accounts. For 1998 (excluding Ahmanson), depositor
fees averaged $149.18 per checking account compared with losses of $25.46 per
checking account.
Loan servicing income totaled $117.4 million in 1998, compared with $141.3
million in 1997 and $143.8 million in 1996. The 17% decline in 1998 reflected an
increase in the amortization of mortgage servicing rights from $64.2 million in
1997 to $89.3 million in 1998 related to the higher rate of prepayments in the
portfolio of loans serviced.
Loan related income consists of late charges, prepayment fees, reconveyance
fees and miscellaneous income. The increases in loan related income were
primarily the result of growth in the loan portfolio and the Coast Acquisition.
During 1998, the Company had net mortgage banking income of $133.1 million,
compared with a net loss of $44.4 million in 1997 and net income of $49.2
million in 1996. Included in the net loss in 1997 was a $100.0 million write
down of one tranche of a security created from loans acquired from GWB. This
tranche was held in the trading portfolio. Excluding this transaction, the
Company would have had net mortgage banking income of $55.6 million in 1997. The
Company sold SFR loans of $18.11 billion in 1998 and $7.41 billion in 1997,
primarily from its fixed-rate loan production. During 1996, GWB sold a
substantial portion of its student loan portfolio for $356.6 million, realizing
a gain of $22.5 million. Most of the remaining gains recognized during 1996 were
the result of selling $6.20 billion of fixed-rate loans.
Ahmanson had a consistent strategy to engage in retail branch purchases and
sales to consolidate its presence in key geographic locations. Pretax gain on
sale of retail deposit branch systems was $289.0 million in 1998, up from $57.6
million in 1997 and $6.9 million in 1996. In 1998, Ahmanson sold deposits of
$3.24 billion and the remainder of its branch premises in Florida. In 1997,
Ahmanson sold deposits of $251.4 million and
35
38
branch premises in Arizona for a pretax gain of $16.0 million, and deposits of
$916.3 million and certain branch premises in Florida for a pretax gain of $41.6
million. In 1996, Ahmanson sold deposits of $197.4 million and certain branch
premises in Texas for a pretax gain of $6.9 million.
Net gain on the sale of other assets was $27.0 million during 1998,
compared with $41.2 million during 1997 and $43.5 million during 1996. On
December 31, 1997, the Company recorded a $20.8 million gain on the sale of its
insurance subsidiary, WM Life Insurance Company, to SAFECO Life Insurance
Company.
Charge offs on loans securitized with recourse are reported in the line
item -- provision for recourse liability -- as a charge to earnings in other
income. The provision for recourse liability was $52.9 million for 1998,
compared with $76.6 million in 1997 and $113.7 million in 1996. The provision
for recourse liability is established through the same guidelines used to
determine the provision for loan losses.
Other operating income totaled $79.7 million in 1998, compared with $64.3
million in 1997 and $35.4 million in 1996. Other operating income includes
nonrecurring income as well as various types of miscellaneous income that tend
to grow with the size of the Company.
Other Expense
Other expense consisted of the following:
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Salaries and employee benefits................. $1,190,679 $1,168,604 $1,175,107
Occupancy and equipment:
Premises and equipment....................... 389,434 393,559 409,544
Data processing.............................. 108,692 106,560 103,156
---------- ---------- ----------
Total occupancy and equipment............. 498,126 500,119 512,700
Telecommunications and outsourced
information services......................... 255,644 213,372 178,454
Regulatory assessments......................... 63,204 59,887 168,912
SAIF special assessment........................ -- -- 556,414
Transaction-related expense.................... 508,286 431,125 226,414
Amortization of intangible assets.............. 104,252 89,351 84,236
Foreclosed asset expense....................... 23,445 80,704 124,185
Other operating expense:
Advertising and promotion.................... 114,247 108,485 88,052
Operating losses and settlements............. 94,885 62,745 68,070
Postage...................................... 76,457 71,391 54,203
Professional fees............................ 60,587 75,333 77,899
Office supplies.............................. 42,053 35,741 46,879
Travel and training.......................... 44,995 37,377 36,200
Proprietary mutual fund expense.............. 30,421 38,163 24,855
Other........................................ 177,167 154,347 187,026
---------- ---------- ----------
Total other operating expense............. 640,812 583,582 583,184
---------- ---------- ----------
Total other expense....................... $3,284,448 $3,126,744 $3,609,606
========== ========== ==========
Salaries and employee benefits totaled $1.19 billion during 1998, compared
with $1.17 billion during 1997 and $1.18 billion during 1996. Full-time
equivalent employees were 27,330 at December 31, 1998, compared with 27,661 at
year-end 1997 and 28,077 at year-end 1996. During 1998, staff reductions in
connection with the Great Western and Ahmanson Mergers and sales of branches
were offset by increased staff levels resulting from the Coast Acquisition and
required to support the Company's increased loan production.
36
39
Expense for telecommunications and outsourced information services was
$255.6 million in 1998, compared with $213.4 million in 1997 and $178.5 million
in 1996. In general, the year-to-year increases reflected growth in deposit
accounts and loan originations, higher levels of customer support services
during account conversions and increased use of outsourced data processing
services.
Regulatory assessments were $63.2 million in 1998 and $59.9 million in
1997, down from $168.9 million in 1996, reflecting a reduction in the assessment
rate paid on the Company's deposits as a result of the recapitalization of the
SAIF. During 1996, Washington Mutual was subject to a special assessment on SAIF
deposits held by its banking subsidiaries which resulted in a charge of $556.4
million.
Amortization of intangible assets increased to $104.3 million in 1998, from
$89.4 million in 1997 and $84.2 million in 1996. The 17% increase in 1998 was
due to the Coast Acquisition in February 1998 under the purchase accounting
method, which created intangible assets of $516.5 million.
Foreclosed asset expense declined to $23.4 million in 1998, from $80.7
million in 1997 and $124.2 million in 1996. The decrease in foreclosed asset
expense from 1997 to 1998 reflected the elimination of outsourcing activities, a
decrease in the number of foreclosed assets, increased gain on sales of
properties and a net loss on foreclosed asset sales in 1997.
Other operating expense increased to $640.8 million in 1998, from $583.6
million in 1997 and $583.2 million in 1996. Contributing to the rise in
advertising costs in 1998 and 1997 were marketing campaigns designed to
introduce the Company's products to the California market. Operating losses and
settlements increased in 1998 primarily due to an increase in deposit
account-related losses resulting from the growth in the number of checking
accounts. Postage costs increased due to the system conversions related to the
Transactions which required several special customer notifications as well as
increased mailings related to various marketing campaigns. Other operating
expense in 1998 included $30.0 million of expense for the donation of land for
open space to support further development of property owned by Ahmanson as a
real estate investment. It also included $28.5 million in write downs on other
Ahmanson real estate investment properties.
As a result of the Transactions, the Company recorded transaction-related
expenses of $508.3 million, $431.1 million and $226.4 million during 1998, 1997
and 1996. The majority of the expenses were for severance and related payments,
facilities and equipment impairment, and various investment banking, legal and
contract exit fees. The accruals of $262.0 million at year-end 1998, $196.1
million at year-end 1997 and $126.6 million at year-end 1996 related primarily
to expenses 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 the Great Western Merger of approximately 2,850 and an additional 3,400
staff reductions related to the Ahmanson Merger. As of December 31, 1998, all
staff reductions related to the Keystone Transaction and the Great Western
Merger were completed and approximately 800 employee separations had occurred as
a result of the Ahmanson Merger. The remaining employee separations are planned
to be completed by the end of September 1999.
During 1998, these transaction-related expenses were partially offset by
reductions in the estimates of contract cancellation fees of $13.6 million,
severance of $8.7 million and other accruals of $3.6 million, and from gains on
the disposition of surplus real estate of $12.8 million. The reduction in
estimates for contract cancellation fees was largely a result of maintaining
certain contracts in place for longer periods than originally anticipated,
thereby reducing the cancellation penalties. The reduction in severance
estimates was primarily the result of more employees voluntarily terminating
without severance than was originally estimated. The gains from the disposition
of surplus real estate were a result of the value of excess branch properties
being higher than originally estimated due to increases in real estate values in
southern California.
Offices used by the Company on the Irwindale campus are expected to be
closed by the end of the third quarter of 1999. The office space at the
Irwindale campus is expected to become available over time to sublet to third
party tenants beginning in July 1999. During 1998, the Company consolidated
consumer financial centers with neighboring financial centers in conjunction
with the Great Western Merger. The Company has also identified 162 branch
consolidations in California that will result from the Ahmanson Merger. The
37
40
consolidations are scheduled for mid-1999 and will coincide with the conversion
of the Home Savings branches in California to Washington Mutual's systems and
signage. The carrying amount of assets held for disposal at December 31, 1998
was $80.2 million.
In order to meet the Company's goal to consolidate its current systems
platform, certain computer hardware and software equipment has been or will be
abandoned and written off. The consolidation of systems will allow the Company
to increase operational efficiency, improve processing capacity and establish a
common user workstation environment.
Reconciliations of the transaction-related expenses and accrual activity
were as follows:
1996
AMOUNTS DECEMBER 31,
1996 1996 CHARGED 1996
PERIOD 1996 TOTAL AGAINST ACCRUED
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
AMOUNTS DECEMBER 31,
1997 1997 CHARGED 1997
PERIOD 1997 TOTAL AGAINST ACCRUED
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
======== ======== ======== ========= ========
1998
AMOUNTS DECEMBER 31,
1998 1998 CHARGED 1998
PERIOD 1998 TOTAL AGAINST ACCRUED
COSTS ACCRUAL EXPENSES ACCRUAL BALANCE
-------- -------- -------- --------- ------------
(DOLLARS IN THOUSANDS)
Severance.............................. $ -- $186,845 $186,845 $(193,935) $ 86,014
Premises............................... 5,905 117,341 123,246 (15,713) 158,932
Equipment.............................. 71,721 -- 71,721 -- --
Legal, underwriting and other
direct transaction costs............. 47,548 -- 47,548 (742) --
Contract cancellation costs............ 2,071 563 2,634 (18,584) 15,678
Other.................................. 78,778 (2,486) 76,292 (7,351) 1,406
-------- -------- -------- --------- --------
$206,023 $302,263 $508,286 $(236,325) $262,030
======== ======== ======== ========= ========
Taxation. Income taxes include federal and applicable state income taxes
and payments in lieu of taxes. The provision for income taxes was $882.5 million
for 1998, which represented an effective tax rate of
38
41
37.25%. The provision was lower due to a one-time favorable adjustment in the
Company's deferred tax assets attributable to the Keystone Transaction,
partially offset by nondeductible transaction-related expenses associated with
the Ahmanson Merger.
The provision for income taxes of $653.2 million for 1997 represented an
effective tax rate of 42.46%, due in part to the nondeductibility of certain
transaction-related expenses at Washington Mutual, Ahmanson and Great Western,
and a settlement with the Internal Revenue Service (the "Service") for 1986 and
1987 for Great Western.
The provision for income taxes of $201.7 million in 1996 represented an
effective tax rate of 34.15%. The primary reason for the lower effective tax
rate in 1996 as compared with 1997 and 1998 was the realization of deductions
for state tax purposes relating to basis differences of certain subsidiary
corporations.
Keystone Holdings commenced operations in December 1988 as an indirect
holding company for ASB. ASB was formed to effect the December 1988 acquisition
(the "1988 Acquisition") of certain assets and liabilities of the failed savings
and loan association subsidiary (the "Failed Association") of Financial
Corporation of America. The 1988 Acquisition had a "good bank/bad bank"
structure, with ASB, the "good bank," acquiring substantially all of the Failed
Association's performing loans and fixed assets and assuming substantially all
of its deposit liabilities. New West Federal Savings and Loan Association ("New
West"), the "bad bank," was formed to acquire the Failed Association's other
assets (including nonperforming loans) and liabilities with a view toward their
liquidation. New West was transferred to the FDIC as manager of the FRF, prior
to the Keystone Transaction.
In connection with the 1988 Acquisition, the Service entered into a closing
agreement (the "Closing Agreement") with respect to the federal income tax
consequences of the 1988 Acquisition and certain aspects of the taxation of
Keystone Holdings and certain of its affiliates. The Closing Agreement contains
provisions that were intended to ensure that losses generated by New West would
be available to offset income of ASB for federal income tax purposes. In
connection with the 1988 Acquisition, Keystone Holdings and certain of its
affiliates entered into a number of continuing agreements with the predecessor
to the FRF. These agreements were designed, in part, to provide that over time
75% of most of the federal income tax savings and 19.5% of most of the
California tax savings (in each case computed in accordance with specific
provisions contained in the Assistance Agreement) attributable to the
utilization of certain tax loss carryforwards of New West are paid ultimately to
the FRF. The provision for such payments is reported in the line item -- income
taxes.
See "Notes to Consolidated Financial Statements -- Note 17: Income Taxes."
39
42
QUARTERLY RESULTS OF OPERATIONS
The results of operations on a quarterly basis have been restated to give
effect to the business combination with Ahmanson. Results of operations on a
quarterly basis were as follows:
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------------------
FIRST QUARTER(1) SECOND QUARTER(1)
------------------------------------ ------------------------------------
WASHINGTON WASHINGTON
MUTUAL AHMANSON RESTATED MUTUAL AHMANSON RESTATED
---------- -------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income.............. $1,826,652 $900,584 $2,727,236 $1,900,737 $941,846 $2,842,583
Interest expense............. 1,113,779 553,155 1,666,934 1,174,265 578,621 1,752,886
---------- -------- ---------- ---------- -------- ----------
Net interest income.......... 712,873 347,429 1,060,302 726,472 363,225 1,089,697
Provision for loan losses.... 45,343 4,632 49,975 46,405 (2,011) 44,394
Other income................. 193,829 70,533 264,362 249,817 79,586 329,403
Other expense................ 442,218 232,527 674,745 502,656 225,092 727,748
---------- -------- ---------- ---------- -------- ----------
Income before income taxes... 419,141 180,803 599,944 427,228 219,730 646,958
Income taxes................. 162,670 66,500 229,170 165,957 82,400 248,357
---------- -------- ---------- ---------- -------- ----------
Net income................... $ 256,471 $114,303 $ 370,774 $ 261,271 $137,330 $ 398,601
========== ======== ========== ========== ======== ==========
Net income attributable to
common stock............... $ 254,733 $107,317 $ 362,050 $ 260,335 $133,426 $ 393,761
========== ======== ========== ========== ======== ==========
Net income per common share:
Basic...................... $0.68 $0.63 $0.66 $0.69 $0.72 $0.70
Diluted.................... 0.68 0.58 0.64 0.69 0.66 0.68
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------
THIRD QUARTER(1) FOURTH
------------------------------------ QUARTER
WASHINGTON WASHINGTON
MUTUAL AHMANSON RESTATED MUTUAL
---------- -------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income...................................... $1,911,827 $902,451 $2,814,278 $2,837,371
Interest expense..................................... 1,195,686 555,223 1,750,909 1,759,014
---------- -------- ---------- ----------
Net interest income.................................. 716,141 347,228 1,063,369 1,078,357
Provision for loan losses............................ 35,250 (874) 34,376 33,223
Other income......................................... 246,686 362,380 609,066 321,317
Other expense........................................ 489,382 238,709 728,091 1,153,864
---------- -------- ---------- ----------
Income before income taxes........................... 438,195 471,773 909,968 212,587
Income taxes......................................... 163,898 185,600 349,498 55,500
---------- -------- ---------- ----------
Net income........................................... $ 274,297 $286,173 $ 560,470 $ 157,087
========== ======== ========== ==========
Net income attributable to common stock.............. $ 273,028 $285,064 $ 558,092 $ 157,087
========== ======== ========== ==========
Net income per common share:
Basic.............................................. $0.73 $1.45 $0.98 $0.27
Diluted............................................ 0.73 1.38 0.96 0.27
40
43
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------
FIRST QUARTER(1) SECOND QUARTER(1)
------------------------------------ ------------------------------------
WASHINGTON WASHINGTON
MUTUAL AHMANSON RESTATED MUTUAL AHMANSON RESTATED
---------- -------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income............. $1,615,416 $858,834 $2,474,250 $1,670,349 $848,532 $2,518,881
Interest expense........... . 955,874 535,751 1,491,625 1,016,964 534,118 1,551,082
---------- -------- ---------- ---------- -------- ----------
Net interest income......... 659,542 323,083 982,625 653,385 314,414 967,799
Provision for loan losses... 53,810 15,977 69,787 49,999 10,462 60,461
Other income................ 188,251 76,423 264,674 188,147 99,494 287,641
Other expense............... 495,096 218,394 713,490 472,192 233,882 706,074
---------- -------- ---------- ---------- -------- ----------
Income before income
taxes..................... 298,887 165,135 464,022 319,341 169,564 488,905
Income taxes................ 119,112 62,042 181,154 128,284 64,350 192,634
---------- -------- ---------- ---------- -------- ----------
Net income.................. $ 179,775 $103,093 $ 282,868 $ 191,057 $105,214 $ 296,271
========== ======== ========== ========== ======== ==========
Net income attributable to
common stock.............. $ 173,846 $94,685 $ 268,531 $ 185,128 $96,807 $ 281,935
========== ======== ========== ========== ======== ==========
Net income per common share:
Basic..................... $0.48 $0.56 $0.50 $0.51 $0.60 $0.54
Diluted................... 0.47 0.52 0.49 0.50 0.55 0.52
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------
THIRD QUARTER(1) FOURTH QUARTER(1)
------------------------------------ ------------------------------------
WASHINGTON WASHINGTON
MUTUAL AHMANSON RESTATED MUTUAL AHMANSON RESTATED
---------- -------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income............. $1,728,553 $844,346 $2,572,899 $1,796,646 $839,855 $2,636,501
Interest expense............ 1,072,902 534,042 1,606,944 1,108,751 528,636 1,637,387
---------- -------- ---------- ---------- -------- ----------
Net interest income......... 655,651 310,304 965,955 687,895 311,219 999,114
Provision for loan losses... 52,131 8,833 60,964 51,199 4,231 55,430
Other income................ 111,113 52,312 163,425 225,889 54,533 280,422
Other expense............... 825,966 205,333 1,031,299 468,354 207,527 675,881
---------- -------- ---------- ---------- -------- ----------
Income (loss) before income
taxes..................... (111,333) 148,450 37,117 394,231 153,994 548,225
Income taxes................ 15,621 52,911 68,532 156,331 54,500 210,831
---------- -------- ---------- ---------- -------- ----------
Net income (loss)........... $ (126,954) $95,539 $ (31,415) $ 237,900 $99,494 $ 337,394
========== ======== ========== ========== ======== ==========
Net income (loss)
attributable to common
stock..................... $ (132,882) $87,132 $ (45,750) $ 234,254 $91,117 $ 325,371
========== ======== ========== ========== ======== ==========
Net income (loss) per common
share:
Basic..................... $(0.36) $0.54 $(0.09) $0.63 $0.58 $0.61
Diluted................... (0.36) 0.54 (0.09) 0.62 0.53 0.59
- ---------------
(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.
Net interest income increased in the fourth quarter of 1998 compared with
the third quarter of 1998 and the fourth quarter of 1997 primarily due to an
increase in interest-earning assets, partially offset by decreases in the net
interest spread to 2.66% for the fourth quarter of 1998 from 2.69% in the third
quarter of 1998 and 2.77% in the fourth quarter of 1997. Provision for loan
losses decreased throughout the quarterly periods reflecting the declining trend
in nonperforming assets and improvement in the California economy. Other income
included a gain on sale of retail deposit branch systems of $289.0 million in
the third quarter of 1998, $41.6 million in the second quarter of 1997 and $16.0
million in the first quarter of 1997. Other expense included transaction-related
expenses of $431.5 million in the fourth quarter of 1998 for the Ahmanson Merger
and $366.9 million in the third quarter of 1997 related to the Great Western
Merger. Income taxes in the fourth quarter of 1998 reflected an unusually low
tax rate resulting from a one-time favorable adjustment in the Company's
deferred tax assets attributable to the Keystone Transaction, partially offset
by nondeductible transaction-related expenses associated with the Ahmanson
Merger.
41
44
REVIEW OF FINANCIAL CONDITION
Assets. At December 31, 1998, the Company's assets were $165.49 billion, an
increase of $21.97 billion or 15% from $143.52 billion at December 31, 1997. The
increase was primarily the result of the Coast Acquisition and the purchase of
MBS and whole loans in the secondary market. The Company purchased $19.77
billion of MBS and $2.98 billion of loans during 1998. The Company has
historically increased asset size by emphasizing the origination of ARMs and
retaining these loans in its portfolio. During 1998, however, fixed-rate
originations accounted for 56% of total SFR originations, and, in keeping with
the Company's policy, most of the conforming loans were sold. In addition, due
to lower mortgage rates throughout 1998, prepayments were higher than historical
averages. Accordingly, the Company used the purchases of MBS and whole loans to
increase its asset base.
Interest-Earning Assets. The Company's interest-earning assets consisted of
the following:
DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Cash equivalents......................... $ 61,520 $ 830,978 $ 1,385,258
Securities:
Trading securities..................... 39,068 23,364 1,647
Available-for-sale securities:
MBS................................. 32,399,591 18,624,163 23,295,837
Investment securities............... 517,462 1,193,063 2,135,627
Held-to-maturity securities:
MBS................................. 13,992,235 17,085,036 9,410,234
Investment securities............... 137,247 122,818 195,133
------------ ------------ ------------
47,085,603 37,048,444 35,038,478
Loans:
Loans held in portfolio................ 107,612,197 97,530,826 92,610,380
Loans held for sale.................... 1,826,549 1,141,367 1,399,022
Reserve for loan losses................ (1,067,840) (1,047,845) (1,066,276)
------------ ------------ ------------
108,370,906 97,624,348 92,943,126
Investment in FHLBs...................... 2,030,027 1,471,469 1,263,980
------------ ------------ ------------
$157,548,056 $136,975,239 $130,630,842
============ ============ ============
Securities. The Company's trading, available-for-sale and held-to-maturity
securities consisted of the following (at carrying value):
DECEMBER 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Agency MBS................................ $34,696,584 $29,199,263 $26,206,243
Private issue MBS......................... 11,727,454 6,532,316 6,498,014
U.S. government and agency debt........... 71,227 532,991 887,407
Corporate debt............................ 300,504 478,823 1,118,894
Municipal securities...................... 112,189 100,150 108,073
Equity securities......................... 180,457 203,917 218,033
----------- ----------- -----------
47,088,415 37,047,460 35,036,664
Derivative instruments.................... (2,812) 984 1,814
----------- ----------- -----------
$47,085,603 $37,048,444 $35,038,478
=========== =========== ===========
The Company's securities portfolio increased by $10.04 billion at December
31, 1998, compared with the prior year. The increase was due primarily to the
purchase of agency and investment grade private issue MBS in the secondary
market and $2.15 billion of MBS from the Coast Acquisition.
42
45
Securities classified as available for sale increased by $13.10 billion in
1998 while securities classified as held to maturity decreased by $3.08 billion.
The increase in the available-for-sale category was primarily due to the
purchase of agency and investment grade private issue MBS in the secondary
market. The decline in the held-to-maturity category was due to paydowns on
existing securities. This decline was offset, in part, through the
securitization of $647.0 million of loans, which were classified as held to
maturity during 1998.
Trading securities increased by $15.7 million due to initial investment in
a Company-sponsored mutual fund and to unrealized gains on a REMIC created
during 1997. The REMIC is made up of five tranches. The fifth tranche was
classified as trading because this was a securitization of loans which
management intended to sell when, in its judgment, the credit and interest rate
factors affecting the value of this security create an appropriate economic
return. The remaining four tranches were classified as available for sale, as
management intended to hold these securities in a manner consistent with other
internal securitizations.
At December 31, 1998, the Company held $11.73 billion of private issue MBS
and CMOs (including the REMIC). Of this total, 93% were rated the highest
investment grade (AAA), nearly 7% were rated investment grade (AA through BBB)
and less than 1% were rated below investment grade.
At December 31, 1998, 71% of MBS were adjustable rate. Of the 71% indexed
to an adjustable rate, 83% were indexed to COFI, 11% to U.S. Treasury indexes,
and 6% to LIBOR. The remaining 29% of MBS were fixed rate.
Loans. Total loans (exclusive of the reserve for loan losses) at December
31, 1998 were $109.44 billion, up 11% from $98.67 billion at December 31, 1997.
The increase in loan balances was primarily the result of the Coast Acquisition,
originations of new loans and the purchase of loans.
Loans (exclusive of the reserve for loan losses) consisted of the
following:
DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
SFR...................... $ 81,101,706 $72,160,696 $69,101,085 $62,589,169 $68,794,672
SFR construction......... 1,020,082 877,449 728,121 629,280 559,365
Manufactured housing,
second mortgage and
other consumer........ 5,478,350 4,913,383 4,215,835 3,495,162 3,019,249
Commercial business...... 1,129,329 838,436 394,630 179,568 257,048
Commercial real estate... 18,134,881 17,572,822 17,383,828 17,285,377 16,306,740
Consumer finance......... 2,574,398 2,309,407 2,185,903 2,136,022 1,998,830
------------ ----------- ----------- ----------- -----------
$109,438,746 $98,672,193 $94,009,402 $86,314,578 $90,935,904
============ =========== =========== =========== ===========
Loans as a percentage of
total loans (exclusive of
the reserve for loan
losses):
SFR...................... 74% 73% 74% 73% 76%
SFR construction......... 1 1 1 1 1
Manufactured housing,
second mortgage and
other consumer........ 5 5 4 4 3
Commercial business...... 1 1 * * *
Commercial real estate... 17 18 19 20 18
Consumer finance......... 2 2 2 2 2
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
- ---------------
* Less than 1%.
43
46
Real estate loans by product type were as follows:
DECEMBER 31,
-----------------------------------------------------------
1998 1997
---------------------------- ---------------------------
PERCENT OF PERCENT OF
TOTAL REAL TOTAL REAL
AMOUNT ESTATE LOANS AMOUNT ESTATE LOANS
------------ ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
Short-term ARMs:
COFI................................. $ 47,874,289 48% $56,026,224 62%
MTA.................................. 11,740,550 12 3,901,583 4
CMT.................................. 2,767,058 3 3,800,156 4
Other................................ 14,066,225 14 6,329,096 7
------------ --- ----------- ---
76,448,122 77 70,057,059 77
Medium-term ARMs:
MTA.................................. 7,529,655 7 3,400 *
CMT.................................. 1,880,419 2 4,629,480 5
COFI................................. 739,252 1 1,244,357 2
Other................................ 2,303,039 2 2,877,187 3
------------ --- ----------- ---
12,452,365 12 8,754,424 10
Fixed-rate mortgages................... 11,356,182 11 11,799,484 13
------------ --- ----------- ---
$100,256,669 100% $90,610,967 100%
============ === =========== ===
Number of real estate loans............ 691,354 680,236
- ---------------
* Less than 1%.
Short-term ARMs reprice within a year. Medium-term ARMs have an initial
fixed rate for more than one year and then convert to short-term ARMs.
Loan originations were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
SFR:
Adjustable rate................................... $18,342,900 $16,871,431 $13,403,642
Fixed rate........................................ 23,526,800 8,892,275 6,683,930
----------- ----------- -----------
41,869,700 25,763,706 20,087,572
SFR construction:
Custom............................................ 1,017,194 883,211 779,698
Builder........................................... 731,103 565,305 513,972
Manufactured housing................................ 280,981 324,583 334,721
Second mortgage and other consumer.................. 2,815,305 2,671,239 1,652,086
Commercial business................................. 1,011,502 759,546 424,991
Apartment buildings................................. 2,014,770 1,857,874 1,706,628
Other commercial real estate........................ 471,682 494,965 295,377
Consumer finance.................................... 2,477,338 2,179,136 1,995,696
----------- ----------- -----------
$52,689,575 $35,499,565 $27,790,741
=========== =========== ===========
44
47
SFR originations by product type were as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
PERCENT OF PERCENT PERCENT OF PERCENT
AMOUNT CATEGORY OF TOTAL AMOUNT CATEGORY OF TOTAL
----------- ---------- -------- ----------- ---------- --------
(DOLLARS IN THOUSANDS)
Short-term ARMs:
MTA............................. $ 7,809,546 87% 19% $ 2,421,450 20% 10%
COFI............................ 852,217 9 2 6,971,444 58 27
CMT............................. 174,457 2 1 1,362,150 11 5
Other........................... 143,001 2 * 1,334,625 11 5
----------- --- --- ----------- --- ---
8,979,221 100% 22 12,089,669 100% 47
=== ===
Medium-term ARMs:
MTA............................. 8,637,294 92% 21 -- --% --
CMT............................. 543,983 6 1 3,906,419 82 15
COFI............................ -- -- -- 21,238 * *
Other........................... 182,402 2 * 854,105 18 3
----------- --- --- ----------- --- ---
9,363,679 100% 22 4,781,762 100% 18
=== ===
Fixed-rate mortgages.............. 23,526,800 56 8,892,275 35
----------- --- ----------- ---
$41,869,700 100% $25,763,706 100%
=========== === =========== ===
SFR refinances to total SFR
originations.................... 65% 45%
- ---------------
* Less than 1%.
Liabilities
The Company uses customer deposits and wholesale borrowings to fund its
operations. Due to increased market competition for customer deposits, the
Company has increasingly relied on wholesale borrowings to fund its asset
growth.
Deposits. Total deposits of $85.49 billion at December 31, 1998 increased
$2.06 billion or 2% from year-end 1997.
Deposits consisted of the following:
DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Checking accounts:
Interest bearing.......................... $ 6,686,682 $ 6,535,662 $ 7,266,721
Noninterest bearing....................... 6,774,049 4,650,292 3,562,416
----------- ----------- -----------
13,460,731 11,185,954 10,829,137
Savings accounts............................ 7,794,622 4,917,964 4,919,839
MMDAs....................................... 20,491,246 18,010,852 16,648,511
Time deposit accounts....................... 43,745,542 49,314,663 55,111,871
----------- ----------- -----------
$85,492,141 $83,429,433 $87,509,358
=========== =========== ===========
The increase in deposits during 1998 was primarily due to the Coast
Acquisition in the first quarter of 1998 with $6.40 billion of deposits,
partially offset by the sale of 27 branches in Florida in the third quarter of
1998 with $3.24 billion of deposits. Excluding these transactions, deposits
decreased $1.10 billion. This decrease in deposits was the result of lower time
deposits, which reflected the competitive environment of banking institutions
and the wide array of investment opportunities available to consumers, as well
as the
45
48
Company's decision to reduce the amount of time deposits. Savings accounts,
MMDAs and checking accounts have increased in amount and as a percentage of
total deposits to 49% at year-end 1998 compared with 41% at year-end 1997 and
37% at year-end 1996. These latter three products have the benefit of lower
interest costs compared with time deposit accounts. Even though savings
accounts, MMDAs and checking accounts are liquid, they are considered by the
Company to be the core relationship with its customers. In the aggregate, the
Company views these core accounts to be a stable source of long-term funding.
While the vast majority of its deposits are retail in nature, the Company
does engage in certain wholesale activities -- primarily accepting time deposits
from political subdivisions and public agencies. The Company considers wholesale
deposits to be an alternative borrowing source rather than a customer
relationship, and as such, their levels are determined by management's decisions
as to the most economic funding sources.
Borrowings. Washington Mutual's borrowings primarily take the form of
reverse repurchase agreements and advances from the FHLBs of Seattle and San
Francisco. The exact mix at any given time is dependent upon the market pricing
of the individual borrowing sources.
Borrowings consisted of the following:
DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Federal funds purchased and commercial
paper..................................... $ 2,482,830 $ 3,732,282 $ 2,353,506
Reverse repurchase agreements............... 17,519,538 13,954,040 13,853,119
Advances from FHLBs......................... 39,748,613 25,114,776 14,452,797
Other borrowings............................ 5,449,508 7,175,279 9,355,313(1)
----------- ----------- -----------
$65,200,489 $49,976,377 $40,014,735
=========== =========== ===========
- ---------------
(1) Includes annuities issued by WM Life. WM Life was sold by the Company at the
end of 1997.
The Company's wholesale borrowing portfolio increased by $15.22 billion at
December 31, 1998, compared with the prior year. The increase was due to the
Company's use of wholesale borrowings as an alternative to retail deposits as a
funding source for asset growth. Due to relative pricing advantages, the Company
primarily used advances from FHLBs and reverse repurchase agreements as the
primary funding vehicles.
WMBFA is a member of the FHLB of San Francisco, and as a regular part of
its business obtains advances from this FHLB. WMB and WMBfsb are members of the
FHLB of Seattle, and as a regular part of their businesses obtain advances from
this FHLB. An institution is required to own stock in the FHLB of which it is a
member.
Each institution obtaining FHLB advances is required to enter into a
written agreement with the lending FHLB under which the borrowing institution is
primarily and unconditionally obligated to repay such advances and all other
amounts owing to the lending FHLB. All advances must be fully secured by
eligible collateral. Eligible collateral includes whole first mortgage loans on
improved residential real estate, mortgage-backed and other securities issued or
guaranteed by the United States or any of its agencies, certain privately issued
MBS and other real estate-related collateral acceptable to the lending FHLB.
FHLBs offer advances with maturities of up to ten years, and an FHLB is
permitted to offer advances with longer maturities if such advances are
consistent with the safe and sound operation of that FHLB. Each FHLB prices its
advances to members by taking into account various factors, including the
marginal cost to the FHLB of raising matching maturity funds in the market and
the administrative and operating costs associated with making such advances to
its members.
PROVISION AND RESERVE FOR LOAN LOSSES
The Company analyzes several important elements in determining the level of
the provision for loan losses in any given year, such as current and anticipated
economic conditions, nonperforming asset trends,
46
49
historical loan loss experience, and plans for problem loan administration and
resolution. These elements are also captured in a migration analysis performed
on the loan portfolio on a quarterly basis and used in determining the loan loss
provision. During 1997 and continuing in 1998, the results of the migration
analysis and the elements analyzed indicated continued improvement in loss
experience.
Economically, California continued to improve significantly, resulting in a
dramatic turnaround in the housing market. The median price for California homes
had declined steadily from a high of $211,000 in 1991 to a low point of $168,000
in February 1997. By December 1998, the median price of homes had increased to
$198,000, up $30,000 or 18% from the low point in 1997. The result has been a
decline in residential loan charge offs and a slowing in foreclosure activity
toward the end of 1997. Residential loan charge offs, net of recoveries, for
1998 totaled $46.8 million, which was less than net charge offs of $119.6
million in 1997 and $270.5 million in 1996.
Nonaccrual loans and nonperforming assets also continued to show improving
trends. Although average loans continued to increase, nonaccrual loans decreased
from $1.17 billion in 1996 to $1.03 billion in 1997 to $938.0 million in 1998.
Total nonperforming assets decreased from $1.65 billion in 1996 to $1.37 billion
in 1997 to $1.21 billion in 1998, and nonperforming assets as a percentage of
total assets decreased from 1.20% in 1996 to 0.96% in 1997 to 0.73% in 1998.
Actual loss experience, as measured by net charge offs, decreased as well. Net
charge offs decreased from $427.1 million in 1996 to $251.5 million in 1997 to
$175.5 million in 1998, despite an increase in average loans. As a result of
these continuing improvements in loss experience, the provision for loan losses
was less than net charge offs during 1997 and 1998. Net charge offs exceeded the
provision by $4.8 million in 1997 and by $13.6 million in 1998.
The 1996 additional reserve for loan losses recorded at the date of the
merger with Keystone Holdings was provided principally because a number of
Washington Mutual's credit administration and asset management philosophies and
procedures differed from those of ASB. Those differences consisted principally
of the following: (i) Washington Mutual was more proactive in dealing with
emerging credit problems and tended to prefer foreclosure actions to induce
borrowers to correct defaults, whereas ASB was not as proactive and tended to
prefer workouts in lieu of a more aggressive foreclosure stance; and (ii) ASB
considered the risk characteristics of its portfolio of loans secured by
apartment buildings of less than $1 million to be similar to its SFR portfolio;
Washington Mutual, on the other hand, considered the risk characteristics of
that portfolio to be more closely aligned with its commercial real estate loan
portfolio, which tended to have a higher incidence of loan losses than the SFR
portfolio. WMBFA's asset management practices, administration, philosophies and
procedures are now the same as those of WMB and WMBfsb. The addition to the
reserve for loan losses was to a lesser degree provided because Washington
Mutual believed that, while there had been an increase in the value of
residential real estate in certain California markets, a decline in collateral
values for some portions of the California real estate market occurred in 1996.
Management of the Company reviewed ASB's large performing and nonperforming
loans on an individual loan basis, reviewed its other loan portfolios in the
aggregate, and implemented appropriate strategies for such credits. As a result,
Washington Mutual allocated approximately 43% of the additional $125.0 million
provision to loans in the commercial real estate loan portfolio. The remainder
was attributed to ASB's various residential loan portfolios, for which specific
or allocated reserves were not recorded.
At December 31, 1998, the Company had specific or allocated reserves
totaling $143.7 million, compared with $128.3 million at December 31, 1997 and
$175.3 million at December 31, 1996. Of the amount added to allocated reserves
during 1996, $53.8 million was attributable to the Company's review of ASB's
commercial real estate loan portfolio as discussed above. During 1997 and 1998,
the economy in California improved significantly and boosted the value of real
estate across the state. This increase in real estate values resulted in a
reduction in allocated reserves for commercial real estate loans during 1997.
The California economic growth and the recovery of commercial real estate
markets nationwide also resulted in significant improvement in the quality of
the apartment building and commercial real estate portfolio. At the end of 1996,
management was particularly concerned about potential losses in this portfolio
and had increased allocated reserves to it. Beginning in 1997 and continuing
through 1998, the apartment building and commercial real estate portfolios have
improved steadily reflecting the growth in jobs and
47
50
population. Average occupancy levels and rental rates have increased as has the
average sales price per square foot. The result has been a reduction in the
level of nonaccrual loans in these portfolios and reduced allocated reserves
during 1997 and a small increase in 1998. Commercial real estate loan charge
offs, net of recoveries, for 1998 totaled $17.7 million, which was less than net
charge offs of $46.6 million in 1997 and $101.5 million in 1996.
Unallocated reserves are established for loss exposure that is not yet
specifically identified but exists in the remainder of the loan portfolio. In
determining the adequacy of unallocated reserves, management utilizes migration
analysis and considers changes in the size and composition of the loan
portfolio, historical loan loss experience, current and anticipated economic
conditions, and the Company's credit administration and asset management
philosophies and procedures.
Changes in the reserve for loan losses were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Balance, beginning of year..................... $1,047,845 $1,066,276 $ 979,010 $1,083,272 $1,186,117
Provision for loan losses...................... 161,968 246,642 498,568 344,624 490,449
Reserves added through business combinations... 107,968 10,908 15,787 5,372 921
Reserves transferred to recourse liability..... (74,409) (24,502) -- -- --
Loans charged off:
SFR.......................................... (65,260) (141,488) (297,468) (299,492) (363,475)
SFR construction............................. (870) (52) (16) (125) (190)
Manufactured housing, second mortgage and
other consumer............................. (33,795) (23,068) (11,525) (8,905) (14,306)
Commercial business.......................... (5,280) (3,028) (504) (813) (2,065)
Commercial real estate....................... (31,370) (57,873) (115,215) (132,158) (224,685)
Consumer finance............................. (90,123) (79,697) (60,520) (62,206) (54,041)
---------- ---------- ---------- ---------- ----------
(226,698) (305,206) (485,248) (503,699) (658,762)
Recoveries of loans previously charged off:
SFR.......................................... 18,459 21,880 26,967 17,424 18,576
SFR construction............................. -- 90 -- 47 --
Manufactured housing, second mortgage and
other consumer............................. 1,888 2,916 1,221 951 1,861
Commercial business.......................... 882 221 74 482 443
Commercial real estate....................... 13,630 11,245 13,700 14,480 28,099
Consumer finance............................. 16,307 17,375 16,197 16,057 15,568
---------- ---------- ---------- ---------- ----------
51,166 53,727 58,159 49,441 64,547
---------- ---------- ---------- ---------- ----------
Net charge offs.............................. (175,532) (251,479) (427,089) (454,258) (594,215)
---------- ---------- ---------- ---------- ----------
Balance, end of year........................... $1,067,840 $1,047,845 $1,066,276 $ 979,010 $1,083,272
========== ========== ========== ========== ==========
Net charge offs as a percentage of average
loans........................................ 0.17% 0.26% 0.48% 0.51% 0.67%
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51
An analysis of the reserve for loan losses was as follows:
DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Specific and allocated reserves:
Commercial real estate........................ $ 133,167 $ 122,838 $ 174,012 $124,921 $ 120,538
Commercial business........................... 9,690 3,277 1,285 -- --
Builder construction.......................... 852 2,207 -- 158 1,327
---------- ---------- ---------- -------- ----------
143,709 128,322 175,297 125,079 121,865
Unallocated reserves............................ 924,131 919,523 890,979 853,931 961,407
---------- ---------- ---------- -------- ----------
$1,067,840 $1,047,845 $1,066,276 $979,010 $1,083,272
========== ========== ========== ======== ==========
Total reserve for loan losses as a
percentage of:
Nonaccrual loans.............................. 114% 101% 91% 69% 71%
Nonperforming assets.......................... 88 76 65 50 54
The Company considers the reserve for loan losses of $1.07 billion adequate
to cover losses inherent in the loan portfolio at December 31, 1998. Although
the reserve as a percentage of nonaccrual loans and nonperforming assets was
higher at year-end 1998 than at year-end 1997, the reserve as a percentage of
total loans was 0.98% at year-end 1998 compared with 1.06% at year-end 1997 and
1.13% at year-end 1996. The amount of nonperforming loans, nonaccrual loans and
charge offs were each lower in 1998 than in 1997 despite a $10.75 billion
increase in the size of the loan portfolio. In establishing the overall reserve
level, management also took into account its uncertainty with the ultimate
credit performance of loan portfolios recently acquired through the Coast
Acquisition and the Ahmanson Merger. No assurance can be given that the Company
will not, in any particular period, sustain loan losses that are sizable in
relation to the amount reserved, or that subsequent evaluation of the loan
portfolio, in light of the factors then prevailing, including economic
conditions and the Company's ongoing examination process and that of its
regulators, will not require significant increases in the reserve for loan
losses.
The Company follows the practice of securitizing certain loans and
retaining them in its investment portfolio. The Company's intent is to hold the
majority of these securities to maturity. By remaining liable for potential
losses on the loans underlying these securities, the Company believes it
ultimately maintains higher yields. Because these loans are similar in all
respects to the loans in its loan portfolio, the Company estimates its recourse
obligation on these securities in a manner similar to the method it uses for the
reserve for losses on its loan portfolio.
The liability for this recourse is included in other liabilities. Certain
of the companies that have merged with Washington Mutual recorded the provision
or liability differently. These differences were eliminated and the treatment of
the liabilities conformed when the mergers were completed.
The Company has previously sold certain securities with recourse. The
recourse obligation on these securities is also accounted for in a manner
similar to the liability for recourse on securities the Company has originated
and retained.
At December 31, 1998 and 1997, the Company had $18.62 billion and $15.00
billion of loans securitized and retained with recourse, and $5.83 billion and
$5.90 billion of loans sold with recourse. At December 31, 1998 and 1997, the
liability for this recourse was $144.3 million and $80.2 million.
The economic and credit conditions affecting these liabilities and
provisions are similar to those affecting the Company's single-family loan
portfolio.
Nonperforming Assets
Assets considered to be nonperforming include nonaccrual loans and
foreclosed assets. When loans securitized or sold on a recourse basis are
nonperforming, they are repurchased by the Company and included in nonaccrual
loans. Management's classification of a loan as nonaccrual does not necessarily
indicate that the
49
52
principal of the loan is uncollectible in whole or in part. Loans are generally
placed on nonaccrual status when they are four payments or more past due. See
"Notes to Consolidated Financial Statements -- Note 1: Summary of Significant
Accounting Policies."
Nonperforming assets were $1.21 billion or 0.73% of total assets at
December 31, 1998, compared with $1.37 billion or 0.96% of total assets at
December 31, 1997. During 1996, the Company sold $292.4 million of nonperforming
SFR loans and real estate. The loans and properties were primarily associated
with originations that occurred between 1989 and 1992. Primarily as a result of
the improving economy in California, bulk sales of SFR loans and foreclosed
properties were discontinued in mid-1997 and Washington Mutual began using
retail sales channels to dispose of foreclosed SFR assets.
Nonperforming assets consisted of the following:
DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Nonaccrual loans:
SFR.......................................... $ 752,261 $ 845,548 $ 998,973 $1,220,435 $1,230,944
SFR construction............................. 9,188 10,413 9,235 9,550 4,640
Manufactured housing......................... 14,669 11,127 8,721 1,923 1,643
Second mortgage and other consumer........... 24,284 17,679 15,756 9,266 8,077
Commercial business.......................... 7,416 2,652 1,267 824 1,018
Apartment buildings.......................... 43,653 37,927 64,631 117,666 180,800
Other commercial real estate................. 33,077 57,996 29,453 38,693 77,911
Consumer finance............................. 53,412 50,930 45,622 25,772 21,277
---------- ---------- ---------- ---------- ----------
937,960 1,034,272 1,173,658 1,424,129 1,526,310
Foreclosed assets.............................. 274,767 340,582 470,460 512,271 475,340
Other nonperforming assets..................... -- -- 7,232 4,564 4,980
---------- ---------- ---------- ---------- ----------
$1,212,727 $1,374,854 $1,651,350 $1,940,964 $2,006,630
========== ========== ========== ========== ==========
Nonperforming assets as a percentage of total
assets....................................... 0.73% 0.96% 1.20% 1.42% 1.50%
Loans (exclusive of the reserve for loan losses) and nonaccrual loans by
geographic concentration at December 31, 1998 were as follows:
CONNECTICUT
WASHINGTON MASSACHUSETTS
CALIFORNIA OREGON NEW YORK
------------------------ ------------------------ -----------------------
PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL
----------- ---------- ----------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
SFR................................ $47,297,034 $506,359 $13,285,136 $53,201 $4,088,206 $49,387
SFR construction................... 91,102 2,378 796,275 4,876 -- --
Manufactured housing............... 10,099 43 836,511 10,621 67 --
Second mortgage and other
consumer......................... 2,068,914 10,861 1,794,078 10,145 8,423 93
Commercial business................ 201,032 1,299 695,312 5,468 -- --
Apartment buildings................ 13,300,994 42,368 788,105 215 69,112 --
Other commercial real estate....... 2,104,122 22,988 1,026,581 6,613 45,010 1,244
Consumer finance................... 154,146 2,505 21,489 179 -- --
----------- -------- ----------- ------- ---------- -------
$65,227,443 $588,801 $19,243,487 $91,318 $4,210,818 $50,724
=========== ======== =========== ======= ========== =======
Loans and nonaccrual loans as a
percentage of total loans and
total nonaccrual loans........... 60% 63% 18% 10% 4% 5%
50
53
FLORIDA ILLINOIS TEXAS
----------------------- ----------------------- -----------------------
PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
SFR.................................. $3,355,014 $41,593 $2,205,716 $22,888 $1,547,502 $13,649
SFR construction..................... 312 -- -- -- 980 --
Manufactured housing................. 42 -- 44 -- 325 --
Second mortgage and other consumer... 131,415 850 7,405 32 12,453 44
Commercial business.................. 50,606 376 -- -- 25 --
Apartment buildings.................. 46,243 376 54,600 -- 49,493 693
Other commercial real estate......... 26,282 34 7,201 -- 32,037 --
Consumer finance..................... 107,753 4,638 11,650 432 352,187 4,884
---------- ------- ---------- ------- ---------- -------
$3,717,667 $47,867 $2,286,616 $23,352 $1,995,002 $19,270
========== ======= ========== ======= ========== =======
Loans and nonaccrual loans as a
percentage of total loans and total
nonaccrual loans................... 3% 5% 2% 3% 2% 2%
UTAH OTHER(1) TOTAL
----------------------- ------------------------ -------------------------
PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL
---------- ---------- ----------- ---------- ------------ ----------
(DOLLARS IN THOUSANDS)
SFR............................... $ 824,913 $6,335 $ 8,498,185 $ 58,849 $ 81,101,706 $752,261
SFR construction.................. 78,602 1,049 52,811 885 1,020,082 9,188
Manufactured housing.............. 102,591 1,592 138,474 2,413 1,088,153 14,669
Second mortgage and other
consumer........................ 79,344 684 288,165 1,575 4,390,197 24,284
Commercial business............... 19,643 -- 162,711 273 1,129,329 7,416
Apartment buildings............... 60,982 -- 189,162 1 14,558,691 43,653
Other commercial real estate...... 79,709 -- 255,248 2,198 3,576,190 33,077
Consumer finance.................. 70,130 237 1,857,043 40,537 2,574,398 53,412
---------- ------ ----------- -------- ------------ --------
$1,315,914 $9,897 $11,441,799 $106,731 $109,438,746 $937,960
========== ====== =========== ======== ============ ========
Loans and nonaccrual loans as a
percentage of total loans and
total nonaccrual loans.......... 1% 1% 10% 11% 100% 100%
- ---------------
(1) No one state represented more than 1% of the totals.
At December 31, 1998, nonaccrual loans in California accounted for 63% of
total nonaccrual loans, down from 66% in 1997. Due to the concentration of the
Company's loans in California, the California real estate market requires
continual review. In general, real estate values have improved during 1998.
However, there may be regional differences in economic performance within
California and among property types which are attributable to differing recovery
rates for the wide range of economic activities within California.
Impaired Loans
Commercial real estate over $1 million, commercial business and builder
construction loans are individually evaluated for impairment. A loan in one of
these categories is considered impaired when it is (i) probable that a creditor
will be unable to collect all amounts due according to the contractual terms of
the loan agreement, or (ii) a substandard loan, whether or not performing.
Factors involved in determining impairment include, but are not limited to, the
financial condition of the borrower, the value of the underlying collateral, and
current economic conditions.
At December 31, 1998, loans totaling $719.2 million were impaired, of which
$558.6 million had allocated reserves of $143.7 million. Of the $719.2 million
of impaired loans, $46.6 million were on nonaccrual status.
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54
The amount of impaired loans and the related allocated reserve for loan
losses were as follows:
DECEMBER 31,
-------------------------------------------------
1998 1997
----------------------- -----------------------
ALLOCATED ALLOCATED
LOAN AMOUNT RESERVES LOAN AMOUNT RESERVES
----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Nonaccrual loans:
With allocated reserves......................... $ 30,251 $ 11,187 $ 44,660 $ 10,902
Without allocated reserves...................... 16,378 -- 29,386 --
-------- -------- -------- --------
46,629 11,187 74,046 10,902
Other impaired loans:
With allocated reserves......................... 528,379 132,522 740,394 117,420
Without allocated reserves...................... 144,210 -- 170,607 --
-------- -------- -------- --------
672,589 132,522 911,001 117,420
-------- -------- -------- --------
$719,218 $143,709 $985,047 $128,322
======== ======== ======== ========
ASSET AND LIABILITY MANAGEMENT STRATEGY
The long-run profitability of the Company depends not only on the success
of the services it offers to its customers and the credit quality of its loans
and securities, but also the extent to which its earnings are not negatively
affected by changes in interest rates. The Company engages in a comprehensive
asset and liability management program that attempts to reduce the risk of
significant decreases in net interest income caused by interest rate changes
without unduly penalizing current earnings. As part of this strategy, the
Company actively manages the amounts and maturities of its assets and
liabilities.
An inherent characteristic of the Company's deposit structure is customers'
preference for liquidity. This is apparent from the fact that at December 31,
1998, the Company's MMDAs accounted for $20.49 billion or 24% of total deposits,
and time deposit accounts with maturities less than one year totaled $39.49
billion or 46% of total deposits. As a result, another key component of this
program is the origination and retention of short-term and adjustable-rate
assets whose repricing characteristics more closely match the repricing
characteristics of the Company's liabilities. At December 31, 1998,
approximately 80% of the Company's total SFR loan and MBS portfolio had
adjustable rates.
During periods of moderate to high market interest rates, originations of
ARMs have been well received by customers. When interest rates are relatively
low, however, unless long-term rates remain appreciably higher than short-term
rates, borrowers show a preference for fixed-rate loans. During 1998, market
interest rates were low and the difference between the yields on a three-month
U.S. Treasury bill and a ten-year U.S. government note averaged only 37 basis
points. The effect of this interest rate environment in 1998 was that 56% of the
Company's SFR loan originations were fixed rate while 44% were ARMs. Because it
is the Company's practice to sell conforming fixed-rate loans, lower levels of
ARM originations can have an adverse effect on the Company's asset size,
especially when combined with relatively high levels of prepayments, such as
those experienced in 1998.
In order to maintain the balance between interest-sensitive liabilities and
interest-sensitive assets, the Company continued to sell fixed-rate conforming
loans and, at the same time, bought, in the secondary market, adjustable-rate
MBS, pools of adjustable-rate loans and shorter duration tranches of CMOs, and
has committed to further such purchases in 1999. See "Business -- Treasury
Activities -- Investing Activities."
A conventional measure of interest rate sensitivity for savings
institutions is the one-year gap, which is calculated by dividing the difference
between assets maturing or repricing within one year and total liabilities
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maturing or repricing within one year by total assets. The Company's assets and
liabilities that mature or reprice within one year were as follows:
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
(DOLLARS IN THOUSANDS)
Interest-sensitive assets............................... $ 123,238,925 $ 116,042,201
Derivative instruments designated against assets........ -- 479,393
Interest-sensitive liabilities.......................... (120,695,638) (109,615,688)
Derivative instruments designated against liabilities... 2,252,800 1,078,400
------------- -------------
Net asset sensitivity................................... $ 4,796,087 $ 7,984,306
============= =============
One-year gap............................................ 2.90% 5.56%
While the one-year gap helps provide some information about a financial
institution's interest sensitivity, it does not predict the trend of future
earnings. This is due, in part, to the lag risk, described below in "Item
7A -- Quantitative and Qualitative Disclosures About Market Risk." For this
reason, Washington Mutual uses financial modeling to forecast earnings under
different interest rate projections. Although this modeling is very helpful in
managing interest rate risk, it does require significant assumptions about loan
prepayment rates, loan origination volumes and liability funding sources that
may prove to be inaccurate. The Company monitors its interest rate sensitivity
and attempts to reduce the risk of a significant decrease in net interest income
caused by a change in interest rates.
In addition to originating and holding in portfolio adjustable-rate and
short-term loans in order to better control the interest sensitivity of its
assets, the Company also attempts to manage its liability durations by utilizing
a variety of borrowing types and sources. In addition, it utilizes derivative
instruments to adjust the interest-sensitivity characteristics of certain of its
borrowings and deposits to better match those of the assets which the
liabilities fund.
LIQUIDITY
Liquidity management focuses on the need to meet both short-term funding
requirements and long-term growth objectives. The long-term growth objectives of
the Company are to attract and retain stable consumer deposit relationships and
to maintain stable sources of wholesale funds. Because the low interest rate
environment of recent years has inhibited growth of consumer deposits,
Washington Mutual has supported its growth through business combinations with
other financial institutions and by increasing its use of wholesale borrowings.
Should the Company not be able to increase deposits either internally or through
acquisitions, its ability to grow would be dependent upon, and to a certain
extent limited by, its borrowing capacity.
Washington Mutual monitors its ability to meet short-term cash requirements
using guidelines established by its Board of Directors. These guidelines ensure
that short-term secured borrowing capacity is sufficient to satisfy
unanticipated cash needs.
Regulations promulgated by the OTS require that the Company's federal
savings banks maintain for each calendar month an average daily balance of
liquid assets at least equal to 4.00% of the prior month's average daily balance
of net withdrawable deposits plus borrowings due within one year. At December
31, 1998, both of the Company's federal savings banks had liquidity ratios in
excess of 4.00%.
As presented in the Consolidated Statements of Cash Flows, the sources of
liquidity vary between years. The statement of cash flows includes operating,
investing and financing categories. Cash flows from operating activities
included net income for 1998 of $1.49 billion, $482.4 million for noncash items
and $4.95 billion of other net cash inflows from operating activities. Cash
flows from investing activities consisted mainly of both proceeds from and
purchases of securities, and loan principal repayments and loan originations. In
1998, cash flows from investing activities included sales, maturities and
principal payments on securities totaling $12.60 billion. Loans originated and
purchased for investment were in excess of repayments by $10.75 billion, and
$17.73 billion was used for the purchase of securities. Cash flows from
financing activities consisted of the net change in the Company's deposit
accounts and short-term borrowings, the proceeds and repayments from
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both long-term reverse purchase agreements and FHLB advances, and the issuance
of long-term debt. In 1998, the above mentioned financing activities increased
cash and cash equivalents by $9.04 billion on a net basis. Cash and cash
equivalents were $2.76 billion at December 31, 1998. See "Consolidated Financial
Statements -- Consolidated Statements of Cash Flows."
At December 31, 1998, the Company was in a position to obtain $33.66
billion in additional borrowings primarily through the use of collateralized
borrowings and deposits of public funds using unpledged MBS and other wholesale
borrowing sources.
As of December 31, 1998, the Company had two revolving credit facilities
with The Chase Manhattan Bank ("Chase") permitting borrowings in the aggregate
of up to $400.0 million. The facilities are available for general corporate
purposes, including providing capital to the Company's subsidiaries. There were
no outstanding borrowings under these facilities at year-end 1998.
CAPITAL ADEQUACY
The Company's capital (stockholders' equity) was $9.34 billion at December
31, 1998, compared with $7.60 billion at year-end 1997. At the end of 1998, the
ratio of capital to total assets was 5.65% compared with 5.30% a year earlier.
The regulatory capital ratios of WMBFA, WMB and WMBfsb and the minimum
regulatory requirements to be categorized as well capitalized were as follows:
DECEMBER 31, 1998
------------------------ WELL-CAPITALIZED
WMBFA WMB WMBFSB MINIMUM
----- ----- ------ ----------------
Leverage................................. 5.76% 5.90% 7.37% 5.00%
Tier 1 risk-based........................ 10.22 10.59 12.09 6.00
Total risk-based......................... 12.11 11.47 13.35 10.00
In addition, Aristar's industrial bank, FCIB, met all FDIC requirements to
be categorized as well capitalized at December 31, 1998.
The Company's federal savings bank subsidiaries are also required by OTS
regulations to maintain core capital of at least 3.00% of assets and tangible
capital of at least 1.50% of assets. WMBFA and WMBfsb both satisfied these
requirements at December 31, 1998.
The Company's broker-dealer subsidiary is also subject to capital
requirements. At December 31, 1998, it was in compliance with its applicable
capital requirements.
YEAR 2000 PROJECT
This section contains forward-looking statements that have been prepared on
the basis of management's best judgments and currently available information and
constitutes a Year 2000 Readiness Disclosure within the meaning of the Year 2000
Readiness Disclosure Act of 1998. These forward-looking statements are
inherently subject to significant business, third-party and regulatory
uncertainties and contingencies, many of which are beyond the Company's control.
In addition, these forward-looking statements are based on current assessments
and remediation plans, which are based on certain representations of third-party
service providers and are subject to change. Accordingly, there can be no
assurance that the Company's results of operations will not be adversely
affected by difficulties or delays in the Company's or in third parties' Year
2000 readiness efforts. See "Risks" below for a discussion of factors that may
cause such forward-looking statements to differ from actual results.
The Company has implemented a company-wide program to renovate, test and
document the readiness ("Year 2000 readiness") of its electronic systems,
programs and processes ("Computer Systems") and facilities to properly recognize
dates to and through the year 2000 (the "Year 2000 Project"). While the Company
is in various stages of modification and testing of individual Year 2000 Project
components, the Year 2000 Project is proceeding generally on schedule.
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The Company has assigned its Executive Vice President of Operations to
oversee the Year 2000 Project, has set up a Year 2000 Project Office, and has
charged a senior management team representing all of its significant operational
areas to act as a Steering Committee. The Company has dedicated a substantial
amount of management and staff time to the Year 2000 Project. In addition, it
has engaged IBM to provide supplemental technical and management resources to
assess and test the Year 2000 readiness of its Computer Systems, Deloitte
Consulting Group LLC to assist in documenting certain aspects of the Year 2000
Project, and CB Richard Ellis to provide technical and management resources in
executing the Year 2000 Project with respect to facilities. Monthly progress
reports are made to the Board of Directors, and the Board's Audit Committee
reviews Year 2000 Project progress on a quarterly basis.
The Project
The Company has divided its Year 2000 Project into the following general
phases, consistent with guidance issued by the Federal Financial Institutions
Examinations Council (the "FFIEC"): (i) inventory and assessment; (ii)
renovation, which includes repair or replacement; (iii) validation, which
includes testing of Computer Systems and their connections with other computer
systems; (iv) due diligence on third-party service providers; and (v)
development of contingency plans. The Year 2000 Project is divided into four
categories: mainframe systems, non-mainframe systems, third-party service
providers, and facilities.
The inventory and assessment phase is substantially complete, and each
component that has been identified has been assigned a priority rating
corresponding to its significance. The rating has allowed the Company to direct
its attention to those Computer Systems, third-party service providers, and
facilities that it deems more critical to its ongoing business and the
maintenance of good customer relationships.
The Company has also substantially completed the process of repairing or
replacing and testing the components of its Computer Systems and facilities it
deems most critical and is in the process of testing these Computer Systems in
an integrated environment. It has also adopted business contingency plans for
the Computer Systems and facilities that it has determined to be most critical.
These plans conform to guidance from the FFIEC on business contingency planning
for Year 2000 readiness. Contingency plans include, among other actions, manual
workarounds and identification of resource requirements and alternative
solutions for resuming critical business processes in the event of a year
2000-related failure.
The Company continues to assess the readiness of its third-party service
providers, though it is currently unable to predict their final readiness. Prior
to 1998, the Company undertook strategic business initiatives that shifted a
significant portion of the cost for Year 2000 readiness to third-party service
providers. Following the merger with Ahmanson and after the data processing
conversions associated with that merger, the Company will rely on third-party
service providers for significant business processes such as item processing,
loan servicing, and desktop and communications management. It has been
communicating with its third-party service providers to assess and monitor their
Year 2000 readiness. The Company expects that its due diligence on third-party
service providers for its most critical business processes, including the
testing of connections with these service providers, where possible, will be
substantially complete by March 31, 1999, although the monitoring of these
service providers will continue after that date. The Company has established
contingency plans for the service providers it deems most critical and will
continue monitoring to determine whether to implement specific contingency
plans.
The Company has completed its planning to test the connections between its
Computer Systems and third-party computer systems that it deems most critical.
It expects to be substantially complete with this phase of testing by June 30,
1999.
On October 1, 1998, WMI acquired Ahmanson and began to manage its Year 2000
planning process. As of December 31, 1998, Ahmanson's planning process was
consolidated into the Company's Year 2000 Project, because all of Ahmanson's
critical computer systems will be converted to the Company's systems as a part
of the integration process.
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The Company continues to assess its risk from other environmental factors
over which it has little control, such as electrical power supply, and voice and
data transmission. Because of the nature of the factors, however, the Company is
not actively engaged in any repair, replacement or testing efforts for these
services.
Costs
While the Company does not believe that the process of making its Computer
Systems Year 2000 ready will result in material cost, it is expected that a
substantial amount of management and staff time will be required on the Year
2000 Project. The Company spent approximately $11.8 million during 1998 on its
Year 2000 Project, and it currently expects to spend approximately $15.6 million
more before it concludes its Year 2000 readiness efforts. In 1996 and 1997, the
Company spent approximately $30.3 million on technology-related initiatives,
which had the effect of reducing its current cost of Year 2000 readiness.
Risks
Based on its current assessments and remediation plans, which are based in
part on certain representations of third-party service providers, the Company
does not expect that it will experience a significant disruption of its
operations as a result of the change to the new millennium. Although the Company
has no reason to conclude that a failure will occur, the most reasonably likely
worst-case Year 2000 scenario would entail a disruption or failure of its power
supply or voice and data transmission suppliers, a Computer System, a
third-party service provider, or a facility. If such a failure were to occur,
the Company would implement its contingency plan. While it is impossible to
quantify the impact of such a scenario, the most reasonably likely worst-case
scenario would entail a diminishment of service levels, some customer
inconvenience, and additional costs from the contingency plan implementation,
which are not currently estimable. While the Company has contingency plans to
address a temporary disruption in these services, there can be no assurance that
any disruption or failure will be only temporary, that the contingency plans
will function as anticipated, or that the Company's results of operations will
not be adversely affected in the event of a prolonged disruption or failure.
There can be no assurance that the FFIEC or other federal regulators will
not issue new regulatory requirements that require additional work by the
Company and, if issued, that new regulatory requirements will not increase the
cost or delay the completion of the Year 2000 Project.
ACCOUNTING DEVELOPMENTS NOT YET ADOPTED
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
was issued in June 1998 and establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company will implement this
statement on January 1, 2000. The impact of the adoption of the provisions of
this statement on the results of operations or financial condition of the
Company has not yet been determined.
SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise,
was issued in October 1998. Prior to issuance of SFAS No. 134, when a mortgage
banking company securitized mortgage loans held for sale but did not sell the
security in the secondary market, the security was classified as trading. SFAS
No. 134 requires that the security be classified as either trading, available
for sale or held to maturity according to the Company's intent unless the
Company has already committed to sell the security before or during the
securitization process. The Company implemented this statement on January 1,
1999. The statement is effective for all fiscal years beginning after December
15, 1998. This statement is not expected to have a material impact on the
results of operations or financial condition of the Company.
TAX CONTINGENCY
The Company's Consolidated Financial Statements do not contain any benefit
related to the Company's determination that it is entitled to a deduction for
the amount of its tax bases in certain state branching rights when it sold its
deposit taking businesses in those states, thereby abandoning such branching
rights. The
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Company's position is that the tax bases result from the tax treatment of
property received as assistance from the FSLIC in conjunction with
FSLIC-assisted transactions. From 1981 through 1985, the Company acquired thrift
institutions in six states through FSLIC-assisted transactions. The Company's
position is that assistance received from the FSLIC included out-of-state
branching rights valued at approximately $740.0 million. As of December 31,
1998, the Company had sold its deposit taking businesses and abandoned such
branching rights in five states, the first of which was Missouri in 1993. The
potential tax benefit related to these abandonments as of December 31, 1998,
could approach $238.0 million.
The Internal Revenue Service (the "Service") is in the process of
completing its examination of the Company's federal income tax returns for the
years 1990 through 1993. The return for 1993 included the Company's proposed
adjustment related to the abandonment of its Missouri branching rights. The
Services' National Office has notified the Company that the Service is
tentatively issuing an adverse ruling. The Company believes that its position
with respect to the tax treatment of these rights is the correct interpretation.
However, the Company acknowledges that no judicial or administrative authority
has ever directly addressed its position and it is therefore impossible to
predict the outcome if the Service contests the Company's position and the
Company is required to litigate the issue. Because of these uncertainties, the
Company cannot presently determine if any of the above described tax benefits
will ever be realized and therefore, in accordance with generally accepted
accounting principles, the Company does not believe it is appropriate at this
time to reflect these tax benefits in its financial statements.
GOODWILL LITIGATION
On August 9, 1989, the Financial Institutions Reform, Recovery and
Enforcement Act ("FIRREA") was enacted. Among other things, FIRREA raised the
minimum capital requirements for savings institutions and required a phase-out
of the amount of supervisory goodwill which could be included in satisfying
certain regulatory capital requirements. The exclusion of supervisory goodwill
from regulatory capital led many savings institutions to either replace the lost
capital by issuing new qualifying debt or equity securities or to reduce assets.
Home Savings
On August 31, 1989, Home Savings had loss of supervisory goodwill totaling
$572.0 million resulting from its acquisitions of 18 savings institutions in
Florida, Missouri, Texas, Illinois, New York and Ohio. In September 1992, Home
Savings filed a lawsuit against the U.S. government for unspecified damages
involving supervisory goodwill related to its acquisitions of troubled savings
institutions from 1981 through 1988.
In March 1998, the U.S. government conceded that Home Savings had contracts
with the U.S. government and that the U.S. government took actions that were
inconsistent with those contracts. These contracts relate to Home Savings'
purchase of troubled savings institutions in Florida, Missouri, Texas and
Illinois and the purchase of Century Federal Savings of New York, with
associated unamortized supervisory goodwill of $374.8 million as of August 31,
1989. The U.S. government denied both the existence of additional contracts and
any action inconsistent with a contract in connection with Home Savings'
purchase of savings institutions in Ohio and The Bowery Savings Bank of New
York, with associated unamortized supervisory goodwill of $197.2 million as of
August 31, 1989.
The U.S. government's response represents a concession of liability and is
not a concession that Home Savings was damaged by the U.S. government's breach
of contract. In addition, there has been no determination as to the amount of
damages that Home Savings may have sustained as a result of the breach of
contract. WMBFA (as successor to Home Savings) is continuing to pursue its case
with respect to these supervisory goodwill claims.
American Savings Bank
In December 1992, ASB, Keystone Holdings and certain related parties
brought a lawsuit against the United States, alleging, among other things, that
in connection with the acquisition of ASB they entered into a contract with
agencies of the United States and that the U.S. government breached that
contract. As a result
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of the Keystone Transaction, Washington Mutual succeeded to all of the rights of
ASB, Keystone Holdings and such related parties in such litigation and will
receive any recovery from the litigation. ASB is now WMBFA.
In connection with the Keystone Transaction, WMI delivered a specified
number of shares of its common stock into an escrow. There are currently
12,000,000 shares in the escrow (the "Escrow Shares"). Upon Washington Mutual's
receipt of net cash proceeds from a judgment in or settlement of the litigation,
all or part of the Escrow Shares will be released, 64.9% to investors in
Keystone Holdings or their assigns, and 35.1% to the FRF or its assigns. The
number of Escrow Shares to be released will be equal to the case proceeds,
reduced by certain tax and litigation-related costs and expenses, divided by
$27.7417. The escrow will expire on December 20, 2002, subject to extensions in
certain circumstances. If not all Escrow Shares are released prior to such
expiration, any remaining Escrow Shares will be returned to the Company for
cancellation.
The allegations made in the ASB case are similar to those asserted in other
cases where the United States Supreme Court affirmed decisions holding the U.S.
government liable for breach of contract. However, no record has been
established in those other cases which would indicate what, if any, damages
Washington Mutual is entitled to receive in this case. Accordingly, the ultimate
outcome of the ASB case is uncertain, and there can be no assurance that
Washington Mutual will benefit financially from it. Generally, Washington Mutual
is expected to receive financial benefit only if the case proceeds, after
reduction for certain tax and litigation-related costs and expenses, exceed
$332.9 million.
Coast
Prior to the Coast Acquisition, Coast had a similar lawsuit against the
U.S. government. In the Coast Acquisition, Ahmanson did not acquire control of,
or a significant interest in, the lawsuit. Generally, securities representing
interests in the lawsuit were issued to Coast shareholders. These securities,
called contingent payment rights certificates, are currently traded on The
Nasdaq Stock Market under the symbol CCPRZ. The Company, as successor to
Ahmanson, owns a small number of these securities.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The tables below represent in tabular form contractual balances of the
Company's financial instruments at their expected maturity dates as well as the
fair value of those financial instruments at December 31, 1998 and 1997. The
expected maturity categories take into consideration historical prepayment
speeds as well as actual amortization of principal and do not take into
consideration reinvestment of cash. Principal prepayments are the amounts of
principal reduction over and above normal amortization. The Company has used
prepayment assumptions that are materially higher than normal for this analysis
because of the current yield curve environment. The weighted average interest
rates for the various assets and liabilities presented are actual as of December
31, 1998 and 1997. The principal/notional amounts and fair values presented in
the following tables do not include the reserve for loan losses or recourse
liability. See "Notes to Consolidated Financial Statements -- Note 25: Fair
Value of Financial Instruments."
PRINCIPAL/NOTIONAL AMOUNT MATURING IN:
---------------------------------------------------------------------------------
1999 2000 2001 2002 2003 THEREAFTER
------------ ----------- ----------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
Interest-sensitive assets:
Adjustable-rate loans............... $ 18,946,400 $13,441,638 $ 9,331,318 $ 6,242,742 $5,101,195 $34,573,485
Average interest rate............. 8.31% 7.26% 7.05% 7.02% 7.53% 6.99%
Fixed-rate loans.................... 6,443,986 4,137,050 2,795,276 1,806,494 1,246,206 5,372,956
Average interest rate............. 10.44 9.96 9.20 8.11 7.89 6.96
Adjustable-rate securities.......... 8,256,430 5,540,521 3,916,817 2,809,154 2,103,242 11,615,935
Average interest rate............. 6.92 6.60 6.37 6.30 6.27 6.02
Fixed-rate securities............... 1,901,411 2,090,336 2,071,365 1,525,697 1,106,481 6,198,796
Average interest rate............. 6.56 6.56 6.59 6.58 6.57 6.46
Cash and cash equivalents........... 2,277,305 -- -- -- -- 479,669
Average interest rate............. 0.13 -- -- -- -- --
------------ ----------- ----------- ----------- ---------- -----------
$ 37,825,532 $25,209,545 $18,114,776 $12,384,087 $9,557,124 $58,240,841
============ =========== =========== =========== ========== ===========
7.79% 7.50% 7.18% 6.96% 7.19% 6.68%
==== ==== ==== ==== ==== ====
Derivatives matched against assets:
Pay fixed swaps..................... $ 500,000 $ -- $ -- $ -- $ -- $ --
Average pay rate.................. 5.96% --% --% --% --% --%
Average receive rate.............. 5.45 -- -- -- -- --
------------ ----------- ----------- ----------- ---------- -----------
$ 500,000 $ -- $ -- $ -- $ -- $ --
============ =========== =========== =========== ========== ===========
Interest-sensitive liabilities:
Noninterest-bearing checking
accounts.......................... $ 2,685,324 $ 738,432 $ 700,268 $ 675,462 $ 659,338 $ 1,315,225
Interest-bearing checking accounts,
savings accounts and MMDA......... 20,540,329 7,084,752 1,499,149 1,469,948 1,453,358 2,925,014
Average interest rate........... 3.55% 3.70% 1.93% 1.90% 1.89% 1.90%
Time deposit accounts............... 39,291,090 2,687,188 884,513 571,502 221,004 90,245
Average interest rate........... 5.09 5.40 5.58 5.97 5.47 6.84
Short-term and adjustable-rate
borrowings........................ 35,160,914 12,750,354 4,370,292 51,439 11,488 294,602
Average interest rate........... 5.71 4.45 5.04 5.01 5.04 5.13
Fixed-rate borrowings............... 6,581,341 2,589,750 912,056 744,411 232,934 1,500,909
Average interest rate........... 5.70 5.94 7.17 7.76 7.97 8.09
------------ ----------- ----------- ----------- ---------- -----------
$104,258,998 $25,850,476 $ 8,366,278 $ 3,512,762 $2,578,122 $ 6,125,995
============ =========== =========== =========== ========== ===========
4.90% 4.36% 4.35% 3.48% 2.28% 3.24%
==== ==== ==== ==== ==== ====
Derivatives matched against deposits:
Pay fixed swaps..................... $ 121,600 $ 159,000 $ 234,600 $ -- $ 9,200 $ --
Average pay rate.................. 5.34% 5.55% 5.48% --% 5.58% --%
Average receive rate.............. 4.76 4.76 4.76 -- 4.76 --
Interest rate caps.................. 855,750 265,000 154,000 80,000 113,500 191,250
Average strike rate............... 7.16 8.00 7.60 8.63 8.41 8.14
Average index rate................ 4.99 5.26 5.05 4.76 4.92 4.76
------------ ----------- ----------- ----------- ---------- -----------
$ 977,350 $ 424,000 $ 388,600 $ 80,000 $ 122,700 $ 191,250
============ =========== =========== =========== ========== ===========
Derivatives matched against
borrowings:
Pay floating swaps.................. $ -- $ 100,000 $ -- $ -- $ -- $ --
Average pay rate.................. --% 5.36% --% --% --% --%
Average receive rate.............. -- 9.03 -- -- -- --
Pay fixed rate swaps................ 656,000 1,950,000 -- -- -- --
Average pay rate.................. 6.76 5.71 -- -- -- --
Average receive rate.............. 5.35 5.30 -- -- -- --
Interest rate caps.................. 150,000 1,875,000 -- -- -- --
Average strike rate............... 5.90 5.72 -- -- -- --
Average index rate................ 5.28 5.31 -- -- -- --
------------ ----------- ----------- ----------- ---------- -----------
$ 806,000 $ 3,925,000 $ -- $ -- $ -- $ --
============ =========== =========== =========== ========== ===========
FAIR VALUE
DECEMBER, 31,
TOTAL 1998
------------ -------------
(DOLLARS IN THOUSANDS)
Interest-sensitive assets:
Adjustable-rate loans............... $ 87,636,778 $ 87,940,256
Average interest rate............. 7.36%
Fixed-rate loans.................... 21,801,968 21,936,376
Average interest rate............. 9.00
Adjustable-rate securities.......... 34,242,099 34,187,443
Average interest rate............. 6.41
Fixed-rate securities............... 14,894,086 14,914,137
Average interest rate............. 6.53
Cash and cash equivalents........... 2,756,974 2,756,974
Average interest rate............. 0.11
------------ ------------
$161,331,905 $161,735,186
============ ============
7.18%
====
Derivatives matched against assets:
Pay fixed swaps..................... $ 500,000 $ (2,812)
Average pay rate.................. 5.96%
Average receive rate.............. 5.45
------------ ------------
$ 500,000 $ (2,812)
============ ============
Interest-sensitive liabilities:
Noninterest-bearing checking
accounts.......................... $ 6,774,049 $ 6,774,049
Interest-bearing checking accounts,
savings accounts and MMDA......... 34,972,550 34,972,550
Average interest rate........... 3.23%
Time deposit accounts............... 43,745,542 43,815,219
Average interest rate........... 5.14
Short-term and adjustable-rate
borrowings........................ 52,639,089 52,694,708
Average interest rate........... 5.34
Fixed-rate borrowings............... 12,561,401 12,781,420
Average interest rate........... 6.30
------------ ------------
$150,692,631 $151,037,946
============ ============
4.63%
====
Derivatives matched against deposits:
Pay fixed swaps..................... $ 524,400 $ (10,535)
Average pay rate.................. 5.47%
Average receive rate.............. 4.76 544
Interest rate caps.................. 1,659,500
Average strike rate............... 7.61
Average index rate................ 4.99
------------ ------------
$ 2,183,900 $ (9,991)
============ ============
Derivatives matched against
borrowings:
Pay floating swaps.................. $ 100,000 $ 5,704
Average pay rate.................. 5.36%
Average receive rate.............. 9.03
Pay fixed rate swaps................ 2,606,000 (23,537)
Average pay rate.................. 5.98
Average receive rate.............. 5.31
Interest rate caps.................. 2,025,000 (5,696)
Average strike rate............... 5.73
Average index rate................ 5.31
------------ ------------
$ 4,731,000 $ (23,529)
============ ============
59
62
PRINCIPAL/NOTIONAL AMOUNT MATURING IN:
---------------------------------------------------------------------------------
1998 1999 2000 2001 2002 THEREAFTER
------------ ----------- ----------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
Interest-sensitive assets:
Adjustable-rate loans............... $ 15,091,456 $12,560,516 $ 9,890,178 $ 7,668,067 $5,999,687 $30,479,858
Average interest rate............. 7.05% 7.62% 7.66% 7.64% 7.65% 7.57%
Fixed-rate loans.................... 4,266,137 2,635,247 1,889,038 1,414,399 1,090,340 5,687,270
Average interest rate............. 11.99 10.53 9.52 8.77 9.36 7.65
Adjustable-rate securities.......... 5,660,143 4,066,442 3,844,700 2,866,805 2,367,402 15,954,844
Average interest rate............. 7.05 7.02 7.12 7.04 7.01 6.81
Fixed-rate securities............... 700,860 590,455 201,138 230,272 245,252 1,797,621
Average interest rate............. 6.93 6.81 7.00 7.20 6.93 6.53
Cash and cash equivalents........... 2,719,997 -- -- -- -- --
Average interest rate............. 3.35 -- -- -- -- --
------------ ----------- ----------- ----------- ---------- -----------
$ 28,438,593 $19,852,660 $15,825,054 $12,179,543 $9,702,681 $53,919,593
============ =========== =========== =========== ========== ===========
7.44% 7.86% 7.74% 7.62% 7.67% 7.32%
==== ==== ==== ==== ==== ====
Derivatives matched against assets:
Pay fixed swaps..................... $ 439,859 $ 500,000 $ -- $ -- $ -- $ --
Average pay rate.................. 5.90% 5.97% --% --% --% --%
Average receive rate.............. 5.64 5.88 -- -- -- --
Interest rate caps.................. 650,000 -- -- -- -- --
Average strike rate............... 6.17 -- -- -- -- --
Average index rate................ 5.89 -- -- -- -- --
------------ ----------- ----------- ----------- ---------- -----------
$ 1,089,859 $ 500,000 $ -- $ -- $ -- $ --
============ =========== =========== =========== ========== ===========
Interest-sensitive liabilities:
Noninterest-bearing checking
accounts.......................... $ 1,930,134 $ 482,533 $ 482,533 $ 482,533 $ 482,533 $ 965,067
Interest-bearing checking accounts,
savings accounts and MMDAs........ 16,618,090 6,663,896 1,260,560 1,180,904 1,128,194 2,437,793
Average interest rate............. 3.37% 3.50% 1.56% 1.55% 1.54% 1.56%
Time deposits....................... 42,244,836 4,583,332 1,224,074 668,163 502,604 91,654
Average interest rate............. 5.37 5.54 5.97 5.68 5.80 6.85
Short-term and adjustable-rate
borrowings........................ 11,704,568 10,673,549 4,949,504 468,900 50,000 550,905
Average interest rate............. 5.98 5.80 5.80 5.83 5.81 5.84
Fixed-rate borrowings............... 13,134,121 3,546,410 1,821,029 749,663 708,638 1,619,090
Average interest rate............. 5.88 6.24 6.49 7.24 6.91 7.87
------------ ----------- ----------- ----------- ---------- -----------
$ 85,631,749 $25,949,720 $ 9,737,700 $ 3,550,163 $2,871,969 $ 5,664,509
============ =========== =========== =========== ========== ===========
5.02% 5.11% 5.12% 3.88% 3.43% 3.60%
==== ==== ==== ==== ==== ====
Derivatives matched against
liabilities:
Pay fixed swaps..................... $ 506,533 $ 277,600 $ 159,000 $ 234,600 $ -- $ 9,200
Average pay rate.................. 6.07% 7.94% 5.55% 5.48% --% 5.58%
Average receive rate.............. 5.59 5.45 4.90 4.90 -- 4.90
Pay variable swaps.................. -- -- 100,000 -- -- --
Average pay rate.................. -- -- 5.70 -- -- --
Average receive rate.............. -- -- 9.03 -- -- --
Interest rate caps.................. 565,500 855,750 265,000 154,000 80,000 304,750
Average strike rate............... 7.89 7.17 8.00 7.60 8.63 8.24
Average index rate................ 5.82 5.32 5.53 5.32 4.96 5.03
------------ ----------- ----------- ----------- ---------- -----------
$ 1,072,033 $ 1,133,350 $ 524,000 $ 388,600 $ 80,000 $ 313,950
============ =========== =========== =========== ========== ===========
FAIR VALUE
DECEMBER, 31,
TOTAL 1997
------------ -------------
(DOLLARS IN THOUSANDS)
Interest-sensitive assets:
Adjustable-rate loans............... $ 81,689,762 $ 82,329,649
Average interest rate............. 7.50%
Fixed-rate loans.................... 16,982,431 17,538,820
Average interest rate............. 9.60
Adjustable-rate securities.......... 34,760,336 34,557,020
Average interest rate............. 6.94
Fixed-rate securities............... 3,765,598 3,853,799
Average interest rate............. 6.74
Cash and cash equivalents........... 2,719,997 2,719,997
Average interest rate............. --
------------ ------------
$139,918,124 $140,999,285
============ ============
7.45%
====
Derivatives matched against assets:
Pay fixed swaps..................... $ 939,859 $ (449)
Average pay rate.................. 5.94%
Average receive rate.............. 5.77
Interest rate caps.................. 650,000 1,202
Average strike rate............... 6.17
Average index rate................ 5.89
------------ ------------
$ 1,589,859 $ 753
============ ============
Interest-sensitive liabilities:
Noninterest-bearing checking
accounts.......................... $ 4,825,333 $ 4,825,333
Interest-bearing checking accounts,
savings accounts and MMDAs........ 29,289,437 29,289,437
Average interest rate............. 3.02%
Time deposits....................... 49,314,663 49,278,189
Average interest rate............. 5.41
Short-term and adjustable-rate
borrowings........................ 28,397,426 28,459,187
Average interest rate............. 5.87
Fixed-rate borrowings............... 21,578,951 21,852,769
Average interest rate............. 6.22
------------ ------------
$133,405,810 $133,704,915
============ ============
4.92%
====
Derivatives matched against
liabilities:
Pay fixed swaps..................... $ 1,186,933 $ 9,958
Average pay rate.................. 6.32%
Average receive rate.............. 5.32
Pay variable swaps.................. 100,000 (6,549)
Average pay rate.................. --
Average receive rate.............. --
Interest rate caps.................. 2,225,000 (202)
Average strike rate............... 7.68
Average index rate................ 5.42
------------ ------------
$ 3,511,933 $ 3,207
============ ============
The differences in the maturities of assets between December 31, 1997 and
December 31, 1998 related primarily to the $21.4 billion increase in
interest-sensitive assets due to purchases of MBS and loan pools in the
secondary market and to a change in assumptions with regard to prepayment speed.
Due to increased levels of refinancing during 1998, the Company assumed higher
estimated prepayment speeds in 1998 than in 1997.
The differences in maturities of liabilities were the result of two
factors. Due to the Company's emphasis on checking accounts and MMDAs, 1998 had
a higher percentage of transaction accounts compared with time deposits than in
1997. In addition, the Company substantially increased its wholesale fundings in
1998. These borrowings were shorter in duration and thus caused an increase in
maturities under one year.
60
63
The Company is subject to various types of interest rate risk. Management
characterizes these types as repricing risk, lag risk, basis risk, and cap risk.
Repricing risk
Currently, repricing risk is the Company's primary interest rate risk. It
is caused by the mismatch in the maturities or repricing periods between
interest-earning assets and interest-bearing liabilities. In particular, in a
low interest rate environment with a flat yield curve, customers' preference for
fixed-rate loans may result in the prepayment and refinancing of existing loans,
fixed-rate and ARMs, to lower, fixed-rate mortgage loans. This preference, when
combined with its policy of selling most of its fixed-rate loan production, may
make it more difficult for the Company to increase or even maintain the size of
its loan and MBS portfolio during these periods. In addition, premiums related
to loans and MBS on the Company's Consolidated Statement of Financial Condition,
as well as the servicing rights attributed to loans serviced for others, must be
written off at the time of repayment, and can have an adverse impact on
earnings.
Lag risk
In times of rising interest rates, the Company is negatively affected by an
inherent timing difference between the repricing of its adjustable-rate assets
and its liabilities. The effect of this timing difference, or "lag," will be
favorable during a period of declining interest rates. Although the effect of
this lag generally balances out over the life of a given loan, it can produce
short-term volatility in the Company's net interest income during periods of
interest rate movement. One example of this is the delay in the repricing of
COFI-based assets, commonly referred to as "COFI lag." This lag results from the
two-month delay in reported COFI because of the time required to gather the data
needed to compute the index. The COFI used to reprice ARMs and adjustable-rate
MBS actually reflects the cost of funds for a two-month prior period. As a
result, COFI loans reprice more slowly than the Company's liabilities.
Basis risk
The repricing of the Company's assets and liabilities is also at risk from
interest rate movements because generally its assets and liabilities are tied to
different indices which may react differently to changes in interest rates.
Loans tied to the COFI index create a form of basis risk for the Company because
the cost of the portion of the Company's liabilities that are borrowings rather
than deposits is higher than the general cost of funds for most of the other
savings institutions whose costs are a component of COFI. To reduce basis risk,
during 1997, the Company introduced the MTA loan. This loan has all the same
borrower advantages as the COFI product, such as a 7.5% annual payment cap and
four payment options. However, the MTA loan is indexed to the 12-month moving
average of the one-year U.S. Treasury bill, which more closely reflects the
Company's borrowing costs. During 1998, $16.45 billion or 90% of all SFR ARM
originations were MTA loans. Management hopes to reduce potential net interest
income volatility caused by COFI basis risk by increasing its production of MTA
and other non-COFI adjustable-rate products and short-term fixed-rate products,
such as consumer loans.
Borrowings are generally more rate sensitive than deposits and reprice more
quickly as market interest rates (such as treasury rates) change. To the extent
that loan indexes move at a different rate or in a different direction from the
Company's cost of funds, the general cost of funds basis risk may be realized.
Cap risk
The lifetime interest rate caps, which the Company offers to its ARM
borrowers, introduce another element of interest rate risk to the Company. In
periods of high interest rates, it is possible for market interest rates to
exceed the lifetime interest rate caps of existing ARM loans.
61
64
Loan indexes
As discussed previously, the majority of the Company's loans and MBS have
adjustable rates that are tied to a market index. The Company's cost of funds
compared to various indexes was as follows:
WASHINGTON MUTUAL'S COST OF FUNDS
WASHINGTON LESS THAN (GREATER THAN)
MUTUAL'S ----------------------------------
FOR THE QUARTER ENDED COST OF FUNDS COFI CMT MTA LAMA COFI CMT MTA LAMA
- --------------------- ------------- ---- ---- ---- ---- ------ ------ ----- -----
December 31, 1998................... 4.75% 4.66% 4.52% 5.25% 5.55% (0.09)% (0.23)% 0.50% 0.80%
September 30, 1998.................. 4.84 4.88 4.71 5.32 5.70 0.04 (0.13) 0.48 0.86
June 30, 1998....................... 4.84 4.88 5.41 5.44 5.72 0.04 0.57 0.60 0.88
March 31, 1998...................... 4.89 4.92 5.39 5.55 5.72 0.03 0.50 0.66 0.83
MANAGEMENT OF INTEREST RATE RISK AND DERIVATIVE ACTIVITIES
To further manage interest rate risk, the Company uses derivative
instruments, such as interest rate exchange agreements and interest rate cap
agreements, to mitigate interest rate risk. At December 31, 1998, the Company
had entered into interest rate exchange agreements and interest rate cap
agreements with notional values of $7.41 billion. Derivative instruments, if not
used appropriately, can subject a company to unintended financial exposure.
These instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the Statement of Financial Condition. The contract
or notional amount of these instruments reflects the extent of involvement the
Company has in particular classes of financial instruments.
Management, in conjunction with the Company's Board of Directors, has
established strict policies and guidelines for the use of derivative
instruments. Moreover, Washington Mutual has used these instruments for many
years to mitigate interest rate risk. These instruments are not intended to be
used as techniques to generate earnings by speculating on the movements of
interest rates, nor does the Company act as a dealer of these instruments. See
"Notes to Consolidated Financial Statements -- Note 24: Interest Rate Risk
Management."
The Company's current strategy is to use derivative instruments to hedge
interest rate risk associated with deposits and borrowings. For example, the
Company has entered into interest rate cap agreements to provide an additional
layer of interest rate protection should interest rates on deposits and
borrowings rise. Through the use of these agreements, management attempts to
offset increases in interest expense related to these deposits and borrowings
and effectively lengthen the repricing period. Thus, the Company has a degree of
interest rate protection when interest rates increase because the interest rate
cap agreements provide a mechanism for repricing the deposits and borrowings
generally on pace with current market rates. In a similar way, interest rate
exchange agreements are utilized to provide protection in an increasing rate
environment, and also result in sensitivity in a downward market. There can be
no assurance that interest rate exchange agreements and interest rate cap
agreements will provide the Company with protection in all scenarios or to the
full extent of the Company's exposure.
The effect that interest rate exchange agreements and interest rate cap
agreements would have had on the repricing period of deposits and borrowings in
an increasing interest rate environment (up 200 basis points) for the period the
derivatives were outstanding was as follows:
DECEMBER 31, 1998
-----------------------------------------------------------------------
AFTER THREE
MONTHS AFTER ONE BUT
DUE WITHIN BUT WITHIN WITHIN AFTER TWO
THREE MONTHS ONE YEAR TWO YEARS YEARS TOTAL
------------ ----------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
Amount of deposits and
borrowings................... $75,630,778 $45,064,860 $13,785,606 $16,211,387 $150,692,631
Effect of derivative
instruments.................. (6,914,900) 1,783,350 4,349,000 782,550 --
----------- ----------- ----------- ----------- ------------
Amount of deposits and
borrowings after effect of
derivative instruments....... $68,715,878 $46,848,210 $18,134,606 $16,993,937 $150,692,631
=========== =========== =========== =========== ============
62
65
The effect that interest rate exchange agreements and interest rate cap
agreements would have had on the repricing period of deposits and borrowings in
a decreasing interest rate environment (down 200 basis points) for the period
the derivatives were outstanding was as follows:
DECEMBER 31, 1998
----------------------------------------------------------------------
AFTER THREE
DUE WITHIN MONTHS BUT AFTER ONE BUT
THREE WITHIN WITHIN TWO AFTER TWO
MONTHS ONE YEAR YEARS YEARS TOTAL
----------- ----------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
Amount of deposits and
borrowings................... $75,630,778 $45,064,860 $13,785,606 $16,211,387 $150,692,631
Effect of derivative
instruments.................. (5,255,400) 927,600 4,084,000 243,800 --
----------- ----------- ----------- ----------- ------------
Amount of deposits and
borrowings after effect of
derivative instruments....... $70,375,378 $45,992,460 $17,869,606 $16,455,187 $150,692,631
=========== =========== =========== =========== ============
The Company also hedges the risks associated with the mortgage pipeline.
The mortgage pipeline consists of fixed-rate SFR loans, which will be sold in
the secondary market. The risk associated with the mortgage pipeline is that
interest rates will rise between the time the customer locks in the interest
rate on the loan and the time the loan is sold. This period is usually 30 to 60
days. To hedge this risk, the Company executes forward sales agreements. A
forward sales agreement protects the Company in a rising interest rate
environment since the sales price and delivery date have already been
established. A forward sales agreement, however, is different than an option
contract in that the Company is obligated to deliver the loan to the third party
on the agreed upon future date. As a result, if the loans do not fund, the
Company may not have the necessary assets to meet its commitment. Therefore, the
Company would be required to purchase other assets, at current market prices, to
satisfy the forward sales contract. To mitigate this risk, the Company uses
fallout factors, which represent the percentage of loans which are not expected
to close, when calculating the amount of forward sales agreements to execute.
The Company has previously executed derivative instruments to reduce the
risk of the available-for-sale portfolio. Because the available-for-sale
portfolio is required to be carried at fair value, its carrying value fluctuates
with changes in market factors, primarily interest rates. This portfolio is
substantially composed of MBS, of which the vast majority have adjustable rates
and the remainder have fixed rates. In an attempt to modify the interest flows
on these securities, as well as protect against market value changes, certain
interest rate exchange agreements have been designated to the available-for-sale
portfolio. The effect of such agreements in a rising interest rate environment
is to shorten the effective repricing period of the underlying assets. At
December 31, 1998, the effect of the Company's exchange agreements in an
increasing or decreasing interest rate environment (up or down 200 basis points)
would be to shorten the repricing period of $500.0 million of MBS from in excess
of two years to three months.
Counterparty risk
The Company's borrowing activities (including reverse repurchase
agreements) and derivative instruments generally involve an exchange of
obligations with another financial institution, referred to in such transactions
as a counterparty. If a counterparty were to default, the Company could be
exposed to a financial loss. A loss would result to the extent that the value of
the collateral or funds held by the counterparty exceeded the value of the
collateral or funds held by the Company. In order to minimize the risk, all
counterparties are evaluated for financial strength on at least an annual basis.
Exposure limits are then established for each counterparty. The Company's
primary focus is to deal with well-established reputable and financially strong
firms. The majority of the counterparties are U.S.-based companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For financial statements, see Index to Consolidated Financial Statements on
page 66.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
63
66
PART III
Part III is incorporated by reference from the Company's definitive proxy
statement issued in conjunction with the Company's Annual Meeting of
Shareholders to be held April 20, 1999. Certain information regarding the
principal officers of Washington Mutual is set forth in "Business -- Principal
Officers."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
See Index to Consolidated Financial Statements on page 66.
(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because they are not
applicable or not required, or because the required information is included in
the Consolidated Financial Statements or the Notes thereto.
(b) REPORTS ON FORM 8-K:
Washington Mutual filed the following reports on Form 8-K during the fourth
quarter of 1998:
1. Report filed October 15, 1998. Items included: Item 2. Acquisition
or Disposition of Assets, and Item 7. Financial Statements and Exhibits.
The report included the financial statements of H. F. Ahmanson & Company
for the years ended December 31, 1997, 1996 and 1995. The report also
included pro forma financial information for Washington Mutual, Inc. for
the years ended December 31, 1997, 1996 and 1995 as though the acquisition
of H. F. Ahmanson & Company had taken place on January 1, 1995.
2. Report filed November 17, 1998. Items included: Item 5. Other
Events.
3. Amended report filed November 30, 1998. Items included: Item 7.
Financial Statements and Exhibits. The report included the unaudited
financial statements of H. F. Ahmanson & Company for the nine months ended
September 30, 1998 and 1997, and pro forma financial statements for
Washington Mutual, Inc. for the nine months ended September 30, 1998 and
1997.
4. Report filed December 22, 1998. Items included: Item 7. Financial
Statement and Exhibits. Additional exhibits relating to employee benefit
plans were included.
(c) EXHIBITS:
See Index of Exhibits on page 134.
64
67
SIGNATURES
Pursuant to the requirements of the Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on March 10, 1999.
WASHINGTON MUTUAL, INC.
/s/ KERRY K. KILLINGER
--------------------------------------
Kerry K. Killinger
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on February 16, 1999.
/s/ KERRY K. KILLINGER /s/ WILLIAM A. LONGBRAKE
- ----------------------------------------------------- -----------------------------------------------------
Kerry K. Killinger William A. Longbrake
Chairman, President and Chief Executive Officer; Executive Vice President and Chief Financial Officer
Director (Principal Executive Officer) (Principal Financial Officer)
/s/ RICHARD M. LEVY
-----------------------------------------------------
Richard M. Levy
Senior Vice President and Controller (Principal
Accounting Officer)
/s/ DOUGLAS P. BEIGHLE /s/ PHILIP D. MATTHEWS
- ----------------------------------------------------- -----------------------------------------------------
Douglas P. Beighle Philip D. Matthews
Director Director
/s/ DAVID BONDERMAN /s/ DR. SAMUEL B. MCKINNEY
- ----------------------------------------------------- -----------------------------------------------------
David Bonderman Dr. Samuel B. McKinney
Director Director
/s/ J. TAYLOR CRANDALL /s/ MICHAEL K. MURPHY
- ----------------------------------------------------- -----------------------------------------------------
J. Taylor Crandall Michael K. Murphy
Director Director
/s/ ROGER H. EIGSTI /s/ WILLIAM G. REED, JR.
- ----------------------------------------------------- -----------------------------------------------------
Roger H. Eigsti William G. Reed, Jr.
Director Director
/s/ JOHN W. ELLIS /s/ ELIZABETH A. SANDERS
- ----------------------------------------------------- -----------------------------------------------------
John W. Ellis Elizabeth A. Sanders
Director Director
/s/ ANNE V. FARRELL /s/ WILLIAM D. SCHULTE
- ----------------------------------------------------- -----------------------------------------------------
Anne V. Farrell William D. Schulte
Director Director
/s/ STEPHEN E. FRANK /s/ JAMES H. STEVER
- ----------------------------------------------------- -----------------------------------------------------
Stephen E. Frank James H. Stever
Director Director
/s/ WILLIAM P. GERBERDING /s/ WILLIS B. WOOD, JR.
- ----------------------------------------------------- -----------------------------------------------------
William P. Gerberding Willis B. Wood
Director Director
/s/ ENRIQUE HERNANDEZ, JR.
- -----------------------------------------------------
Enrique Hernandez, Jr.
Director
65
68
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ 67
Independent Auditors' Report................................ 68
Report of Independent Accountants........................... 69
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996.......................... 70
Consolidated Statements of Comprehensive Income for the
years ended December 31, 1998, 1997 and 1996.............. 71
Consolidated Statements of Financial Condition at December
31, 1998 and 1997......................................... 72
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997
and 1996.................................................. 73
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... 74
Notes to Consolidated Financial Statements.................. 76
66
69
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Washington Mutual, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Washington Mutual, Inc. and subsidiaries (the "Company") as of
December 31, 1998 and 1997, and the related consolidated statements of income,
comprehensive income, stockholders' equity, and cash flows for each of the years
then ended. 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 merger on October 1, 1998,
of Washington Mutual, Inc. and subsidiaries and H. F. Ahmanson & Company and
subsidiaries, and the merger, on July 1, 1997, of Washington Mutual, Inc. and
subsidiaries and Great Western Financial Corporation and subsidiaries, 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 H. F. Ahmanson & Company and subsidiaries as of
December 31, 1997, or the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended, which statements
reflect total assets constituting 32% of consolidated total assets as of
December 31, 1997, and total net income constituting 46% of consolidated net
income for the year then ended. Those statements were audited by other auditors
whose report, dated January 15, 1998 (except as to Note 2 of Notes to
Consolidated Financial Statements, which is as of February 13, 1998 and Note 19
of Notes to Consolidated Financial Statements, which is as of March 16, 1998)
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for H. F. Ahmanson & Company and subsidiaries for 1997, 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 of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
such consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial condition of Washington Mutual,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years then ended, in conformity
with generally accepted accounting principles.
We previously audited and reported on the consolidated statements of
income, stockholders' equity and cash flows of Washington Mutual, Inc. and
subsidiaries for the year ended December 31, 1996, prior to their restatement
for the 1998 and 1997 poolings of interests. The net income of Washington
Mutual, Inc. and subsidiaries constituted $114.3 million of restated net income
of $375.4 million for the year ended December 31, 1996. Separate financial
statements of the other companies included in the 1996 restated consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
were audited and reported on separately by other auditors. We also audited the
combination of the accompanying consolidated statements of income, comprehensive
income, stockholders' equity and cash flows for the year ended December 31,
1996, after restatement for the 1998 and 1997 poolings of interests; in our
opinion, such consolidated statements have been properly combined on the basis
described in Note 2 to the consolidated financial statements.
/s/ Deloitte & Touche LLP
February 26, 1999
Seattle, Washington
67
70
INDEPENDENT AUDITORS' REPORT
The Board of Directors
H. F. Ahmanson & Company:
We have audited the consolidated statement of financial condition of H. F.
Ahmanson & Company and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the two-year period ended December 31, 1997, 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of H. F.
Ahmanson & Company and subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Los Angeles, California
January 15, 1998, except as to
Note 2 of Notes to Consolidated
Financial Statements, which is as of
February 13, 1998 and Note 19 of
Notes to Consolidated Financial
Statements, which is as of
March 16, 1998
68
71
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders
Great Western Financial Corporation
In our opinion, the accompanying consolidated statements of operations, of
changes in stockholders' equity and of cash flows present fairly, in all
material respects the results of operations and cash flows of Great Western
Financial Corporation and its subsidiaries ("the Company") for the year 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 audit 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 audit provides a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
January 22, 1997, except as to Note 28,
which is as of March 7, 1997
69
72
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
----------- ----------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
INTEREST INCOME
Loans....................................................... $ 8,166,769 $ 7,520,760 $6,917,939
Available-for-sale securities............................... 1,707,874 1,674,375 2,072,250
Held-to-maturity securities................................. 1,175,334 791,242 765,983
Other interest income....................................... 171,491 216,154 136,118
----------- ----------- ----------
Total interest income..................................... 11,221,468 10,202,531 9,892,290
INTEREST EXPENSE
Deposits.................................................... 3,588,015 3,645,542 3,764,175
Borrowings.................................................. 3,341,728 2,641,496 2,263,002
----------- ----------- ----------
Total interest expense.................................... 6,929,743 6,287,038 6,027,177
----------- ----------- ----------
Net interest income....................................... 4,291,725 3,915,493 3,865,113
Provision for loan losses................................... 161,968 246,642 498,568
----------- ----------- ----------
Net interest income after provision for loan losses....... 4,129,757 3,668,851 3,366,545
OTHER INCOME
Depositor and other retail banking fees..................... 568,376 478,700 358,889
Loan servicing income....................................... 117,356 141,278 143,835
Loan related income......................................... 111,155 89,758 78,479
Securities fees and commissions............................. 192,126 186,079 176,434
Insurance fees and commissions.............................. 59,202 58,327 54,749
Mortgage banking income (loss).............................. 133,084 (44,368) 49,174
Gain on sale of retail deposit branch systems............... 289,040 57,566 6,861
Gain on sale of other assets................................ 26,966 41,179 43,521
Provision for recourse liability............................ (52,871) (76,636) (113,686)
Other operating income...................................... 79,714 64,279 35,440
----------- ----------- ----------
Total other income........................................ 1,524,148 996,162 833,696
OTHER EXPENSE
Salaries and employee benefits.............................. 1,190,679 1,168,604 1,175,107
Occupancy and equipment..................................... 498,126 500,119 512,700
Telecommunications and outsourced information services...... 255,644 213,372 178,454
Regulatory assessments...................................... 63,204 59,887 168,912
Savings Association Insurance Fund ("SAIF") special
assessment................................................ -- -- 556,414
Transaction-related expense................................. 508,286 431,125 226,414
Amortization of intangible assets........................... 104,252 89,351 84,236
Foreclosed asset expense.................................... 23,445 80,704 124,185
Other operating expense..................................... 640,812 583,582 583,184
----------- ----------- ----------
Total other expense....................................... 3,284,448 3,126,744 3,609,606
----------- ----------- ----------
Income before income taxes and minority interest in
earnings of consolidated subsidiaries................... 2,369,457 1,538,269 590,635
Income taxes................................................ 882,525 653,151 201,707
----------- ----------- ----------
Income before minority interest in earnings of consolidated
subsidiaries.............................................. 1,486,932 885,118 388,928
Minority interest in earnings of consolidated
subsidiaries.............................................. -- -- 13,570
----------- ----------- ----------
Net income.................................................. $ 1,486,932 $ 885,118 $ 375,358
=========== =========== ==========
Net income attributable to common stock..................... $ 1,470,990 $ 830,087 $ 291,723
=========== =========== ==========
Net income per common share:
Basic..................................................... $2.61 $1.56 $0.55
Diluted................................................... 2.56 1.52 0.54
See Notes to Consolidated Financial Statements.
70
73
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
---------- -------- ---------
(DOLLARS IN THOUSANDS)
Net income.................................................. $1,486,932 $885,118 $ 375,358
Other comprehensive income, net of income taxes:
Gross unrealized gain (loss) on securities:
Unrealized holding gain (loss) during the period, net of
deferred income tax (benefit) of $31,818, $15,622 and
$(180,123)............................................ 52,866 24,310 (267,678)
Less: adjustment for gains included in net income, net
of income tax of $6,700, $2,894 and $3,254............ (11,407) (4,532) (5,059)
Less: amortization of market adjustment for
mortgage-backed securities ("MBS") transferred from
available for sale to held to maturity, net of
deferred income tax of $10,255, $1,267 and none....... (16,151) (1,982) --
---------- -------- ---------
25,308 17,796 (272,737)
Minimum pension liability adjustment...................... (13,324) -- --
---------- -------- ---------
Other comprehensive income (loss)........................... 11,984 17,796 (272,737)
---------- -------- ---------
Comprehensive income........................................ $1,498,916 $902,914 $ 102,621
========== ======== =========
See Notes to Consolidated Financial Statements.
71
74
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash........................................................ $ 2,695,454 $ 1,889,019
Cash equivalents............................................ 61,520 830,978
Trading securities.......................................... 39,068 23,364
Available-for-sale securities, amortized cost of $32,861,818
and $19,824,231:
MBS....................................................... 32,399,591 18,624,163
Investment securities..................................... 517,462 1,193,063
Held-to-maturity securities, fair value of $14,112,620 and
$17,099,744:
MBS....................................................... 13,992,235 17,085,036
Investment securities..................................... 137,247 122,818
Loans:
Loans held in portfolio................................... 107,612,197 97,530,826
Loans held for sale....................................... 1,826,549 1,141,367
Reserve for loan losses................................... (1,067,840) (1,047,845)
------------ ------------
Total loans............................................. 108,370,906 97,624,348
Investment in Federal Home Loan Banks ("FHLBs")............. 2,030,027 1,471,469
Foreclosed assets........................................... 274,767 340,582
Premises and equipment...................................... 1,421,162 1,301,824
Intangible assets........................................... 1,009,666 636,946
Mortgage servicing rights................................... 461,295 311,480
Other assets................................................ 2,082,881 2,067,308
------------ ------------
Total assets............................................ $165,493,281 $143,522,398
============ ============
LIABILITIES
Deposits:
Checking accounts......................................... $ 13,460,731 $ 11,185,954
Savings accounts and money market deposit accounts
("MMDAs")............................................... 28,285,868 22,928,816
Time deposit accounts..................................... 43,745,542 49,314,663
------------ ------------
Total deposits.......................................... 85,492,141 83,429,433
Federal funds purchased and commercial paper................ 2,482,830 3,732,282
Securities sold under agreements to repurchase ("reverse
repurchase agreements")................................... 17,519,538 13,954,040
Advances from FHLBs......................................... 39,748,613 25,114,776
Other borrowings............................................ 5,449,508 7,175,279
Other liabilities........................................... 5,456,251 2,515,503
------------ ------------
Total liabilities....................................... 156,148,881 135,921,313
STOCKHOLDERS' EQUITY
Preferred stock:
Nonconvertible............................................ -- 313,063
Convertible............................................... -- 284,199
Common stock, no par value: 1,600,000,000 shares authorized,
593,408,525 and 589,789,725 shares issued................. -- --
Capital surplus -- common stock............................. 2,994,653 2,629,377
Accumulated other comprehensive income:
Valuation reserve for available-for-sale securities....... 87,605 62,297
Minimum pension liability adjustment...................... (13,324) --
Retained earnings........................................... 6,275,466 5,244,509
Common stock in treasury at cost, none and 46,947,916
shares.................................................... -- (932,360)
------------ ------------
Total stockholders' equity.............................. 9,344,400 7,601,085
------------ ------------
Total liabilities and stockholders' equity.............. $165,493,281 $143,522,398
============ ============
See Notes to Consolidated Financial Statements.
72
75
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CAPITAL ACCUMULATED COMMON
SURPLUS- OTHER STOCK
PREFERRED COMMON COMPREHENSIVE RETAINED IN
TOTAL STOCK STOCK INCOME EARNINGS TREASURY
---------- ---------- ---------- ------------- ---------- ---------
(DOLLARS IN THOUSANDS)
Balance, December 31, 1995........... $8,421,102 $1,209,938 $2,125,647 $ 317,238 $4,836,860 $ (68,581)
Net income........................... 375,358 -- -- -- 375,358 --
Cash dividends declared on preferred
stock.............................. (85,035) -- -- -- (85,035) --
Cash dividends declared on common
stock.............................. (353,286) -- -- -- (353,286) --
Repurchase of common stock, net...... (567,496) -- (185,563) -- -- (381,933)
Redemption or conversion of preferred
stock.............................. (176,105) (444,375) 268,270 -- -- --
Common stock issued through employee
stock plans, including tax
benefit............................ 69,945 -- 70,353 -- -- (408)
Common stock issued under dividend
reinvestment plan.................. 2,547 -- 2,547 -- -- --
Other comprehensive income, net of
related income taxes............... (272,737) -- -- (272,737) -- --
Immaterial business combinations
accounted for as poolings of
interests.......................... 11,844 -- 11,844 -- -- --
---------- ---------- ---------- --------- ---------- ---------
Balance, December 31, 1996........... 7,426,137 765,563 2,293,098 44,501 4,773,897 (450,922)
Net income........................... 885,118 -- -- -- 885,118 --
Cash dividends declared on preferred
stock.............................. (55,018) -- -- -- (55,018) --
Cash dividends declared on common
stock.............................. (359,488) -- -- -- (359,488) --
Repurchase of common stock, net...... (502,953) -- (21,574) -- -- (481,379)
Redemption or conversion of preferred
stock.............................. (165,000) (168,301) 3,300 -- -- 1
Common stock issued through employee
stock plans, including tax
benefit............................ 353,646 -- 353,706 -- -- (60)
Common stock issued under dividend
reinvestment plan.................. 847 -- 847 -- -- --
Other comprehensive income, net of
related income taxes............... 17,796 -- -- 17,796 -- --
---------- ---------- ---------- --------- ---------- ---------
Balance, December 31, 1997........... 7,601,085 597,262 2,629,377 62,297 5,244,509 (932,360)
Net income........................... 1,486,932 -- -- -- 1,486,932 --
Cash dividends declared on preferred
stock.............................. (19,974) -- -- -- (19,974) --
Cash dividends declared on common
stock.............................. (436,001) -- -- -- (436,001) --
Repurchase of common stock, net...... (24,082) -- -- -- -- (24,082)
Redemption or conversion of preferred
stock.............................. (313,063) (597,262) (112,085) -- -- 396,284
Common stock issued to acquire Coast
Savings Financial, Inc.
("Coast").......................... 925,143 -- 373,078 -- -- 552,065
Common stock issued through employee
stock plans, including tax
benefit............................ 112,044 -- 114,847 -- -- (2,803)
Common stock issued under dividend
reinvestment plan.................. 332 -- 332 -- -- --
Treasury shares retired.............. -- -- (10,896) -- -- 10,896
Other comprehensive income, net of
related income taxes............... 11,984 -- -- 11,984 -- --
---------- ---------- ---------- --------- ---------- ---------
Balance, December 31, 1998........... $9,344,400 $ -- $2,994,653 $ 74,281 $6,275,466 $ --
========== ========== ========== ========= ========== =========
See Notes to Consolidated Financial Statements.
73
76
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................... $ 1,486,932 $ 885,118 $ 375,358
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses................... 161,968 246,642 498,568
Mortgage banking (income) loss.............. (133,084) 44,368 (49,174)
(Gain) on sale of other assets.............. (26,966) (41,179) (43,521)
Provision for recourse liability............ 52,871 76,636 113,686
Depreciation and amortization............... 313,499 308,078 319,384
Stock dividends from FHLBs.................. (111,925) (89,174) (82,352)
Transaction-related expense................. 65,938 219,742 145,023
Decrease (increase) in trading securities... 96,637 1,647 (1,409)
Origination of loans held for sale.......... (13,501,513) (6,324,786) (4,053,362)
Sales of loans held for sale................ 18,238,151 7,538,968 6,325,307
Decrease (increase) in other assets......... 163,731 (394,929) 620,627
Increase (decrease) in other liabilities.... 108,778 (81,259) (288,074)
------------ ------------ ------------
Net cash provided by operating
activities............................. 6,915,017 2,389,872 3,880,061
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities....... (17,372,010) (3,243,633) (4,153,887)
Purchases of held-to-maturity securities......... (17,033) (31,251) (3,414,473)
Sales of available-for-sale securities........... 2,158,037 2,362,772 4,755,628
Maturities of available-for-sale securities...... 420,345 253,352 --
Maturities of held-to-maturity securities........ 7,118 20,763 --
Principal payments on securities................. 10,009,719 4,294,364 10,297,506
Purchases of FHLB stock.......................... (343,501) (187,407) (30,335)
Redemption of FHLB stock......................... -- 69,092 90,136
Purchases of loans............................... (3,065,042) (88,216) (1,759,499)
Sales of loans................................... 49,137 41,088 1,314,090
Origination of loans, net of principal
payments....................................... (7,736,440) (12,968,472) (11,751,453)
Proceeds from sales of foreclosed assets......... 608,562 784,668 986,386
Cash from Coast Acquisition...................... 399,590 -- --
Purchases of premises and equipment, net......... (320,175) (130,189) (191,903)
Goodwill from First Interstate Bank branch
acquisition.................................... -- -- (185,021)
Cash proceeds from sale of WMLife................ -- 105,000 --
------------ ------------ ------------
Net cash used by investing activities,
carried forward........................ (15,201,693) (8,718,069) (4,042,825)
See Notes to Consolidated Financial Statements.
74
77
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Net cash used by investing activities,
brought forward........................... (15,201,693) (8,718,069) (4,042,825)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in deposits............................. (1,102,464) (2,912,233) (2,201,953)
Proceeds from deposits purchased................. -- -- 1,888,849
Deposits sold.................................... (3,235,644) (1,167,693) (197,007)
(Decrease) increase in federal funds purchased
and commercial paper........................... (1,249,452) 774,776 403,673
Increase (decrease) in short-term reverse
repurchase agreements.......................... 3,584,929 (2,779,089) (3,880,462)
Proceeds from long-term reverse repurchase
agreements..................................... 1,146,205 9,800,553 4,011,148
Repayments of long-term reverse repurchase
agreements..................................... (1,582,489) (6,920,543) (4,649,930)
Proceeds from FHLBs advances..................... 67,188,545 58,265,565 26,878,526
Repayments of FHLBs advances..................... (53,882,390) (47,603,586) (22,346,709)
Proceeds from other borrowings................... 236,776 2,850,963 3,158,755
Repayments of other borrowings................... (2,067,805) (3,546,336) (1,904,115)
Cash dividends paid on preferred and common
stock.......................................... (455,975) (414,506) (438,321)
Redemption of preferred stock.................... (313,063) (165,000) (175,000)
Repurchase of common stock, net.................. (24,082) (502,953) (567,496)
Other capital transactions....................... 80,562 259,061 66,615
------------ ------------ ------------
Net cash provided by financing activities... 8,323,653 5,938,979 46,573
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents............................... 36,977 (389,218) (116,191)
Cash and cash equivalents, beginning of
year...................................... 2,719,997 3,109,215 3,225,406
------------ ------------ ------------
Cash and cash equivalents, end of year...... $ 2,756,974 $ 2,719,997 $ 3,109,215
============ ============ ============
NONCASH INVESTING ACTIVITIES
Loans exchanged for MBS.......................... $ 647,020 $ 6,408,056 $ 1,125,161
Loans exchanged for trading securities........... 107,544 -- --
Transfer to held-to-maturity securities.......... -- 4,359,814 1,258,728
Real estate acquired through foreclosure......... 511,763 738,440 1,103,360
Loans originated to facilitate the sale of
foreclosed assets.............................. 55,161 123,762 231,709
Loans held for sale originated to refinance
existing
loans.......................................... 5,288,736 969,192 813,728
Loans held in portfolio originated to refinance
existing loans................................. 2,556,023 1,249,087 1,071,484
Loans transferred to loans held for sale......... -- -- 214,991
Trade date purchases not yet settled............. 2,609,937 77,684 --
Reserves transferred to recourse liability....... 74,409 24,502 --
Transaction-related write down on premises and
equipment...................................... 76,486 129,151 18,388
CASH PAID DURING THE YEAR FOR
Interest on deposits............................. 3,609,804 3,655,105 3,740,872
Interest on borrowings........................... 3,194,464 3,069,683 2,321,426
Income taxes..................................... 814,337 494,062 343,143
See Notes to Consolidated Financial Statements.
75
78
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Washington Mutual, Inc. ("WMI" and together with its subsidiaries,
"Washington Mutual" or the "Company") is a financial services company committed
to serving consumers and small to mid-sized businesses. Through its
subsidiaries, Washington Mutual engages in the following lines of business:
mortgage banking, consumer banking, commercial banking, financial services and
consumer finance. The Company's principal banking subsidiaries are Washington
Mutual Bank, FA ("WMBFA"), Washington Mutual Bank ("WMB") and Washington Mutual
Bank fsb ("WMBfsb"). The banking subsidiaries accept deposits from the general
public, make residential loans, consumer loans, and limited types of commercial
real estate loans (primarily loans secured by multi-family properties), and
engage in certain commercial banking activities. The Company provides consumer
installment loans and purchases retail installment contracts through its
consumer finance subsidiary, Aristar, Inc. and its subsidiaries ("Aristar").
Washington Mutual markets annuities and other insurance products, offers
full-service securities brokerage, and acts as the investment advisor to and the
distributor of mutual funds. Certain reclassifications have been made to the
1997 and 1996 financial statements to conform to the 1998 presentation. All
significant intercompany transactions and balances have been eliminated.
All information, including that of prior periods, has been restated to
reflect the Company's 3-for-2 stock split in June 1998.
On October 1, 1998, H.F. Ahmanson & Company ("Ahmanson") merged with and
into WMI and all of the subsidiaries of Ahmanson, including Home Savings of
America, FSB ("Home Savings"), became subsidiaries of the Company (the "Ahmanson
Merger").
On July 1, 1997, Great Western Financial Corporation ("Great Western")
merged with and into a subsidiary of WMI and all of the subsidiaries of Great
Western, including Great Western Bank, a Federal Savings Bank ("GWB") and
Aristar, became subsidiaries of the Company (the "Great Western Merger").
On December 20, 1996, Keystone Holdings, Inc. ("Keystone Holdings") merged
with and into WMI, and all of the subsidiaries of Keystone Holdings, including
American Savings Bank, F.A. ("ASB"), became subsidiaries of the Company (the
"Keystone Transaction").
The Ahmanson Merger, the Great Western Merger and the Keystone Transaction
were all accounted for as poolings of interests. 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.
As a result, the accompanying financial statements and notes thereto are
presented as if the companies were merged as of the beginning of the earliest
period shown. 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.
On February 13, 1998, Ahmanson acquired Coast Savings Financial, Inc.
("Coast"), which was accounted for as a purchase (the "Coast Acquisition").
Under this method of accounting, the assets and liabilities of Coast were
adjusted to their estimated fair values and any excess of the purchase price
over the fair value of the assets acquired, net of the fair value of the
liabilities assumed, was recognized as goodwill. The resulting goodwill and core
deposit intangibles are being amortized over 25 years and ten years,
respectively. The operating activities of Coast have been included in the
Company's results of operations from the date of acquisition.
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
76
79
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statements. Changes in these estimates and assumptions are considered reasonably
possible and may have a material impact on the financial statements.
Derivative Instruments
The Company uses derivative instruments, such as interest rate exchange
agreements, interest rate cap agreements, and forward sales contracts of
financial instruments 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 against interest-earning assets, deposits and borrowings. Agreements
designated against available-for-sale securities are included at fair value in
the available-for-sale portfolio and any mark-to-market adjustments are reported
with the change in value of the available-for-sale portfolio. Interest rate
exchange agreements and interest rate cap agreements designated against cash
equivalents, loans, deposits and borrowings are reported at historical cost.
Under settlement accounting, the interest differential paid or received on
interest rate exchange agreements and interest rate cap 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 of
entering into interest rate exchange agreements.
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 associated with the agreement. When the asset or liability is not sold
or paid off, the gains or losses are deferred and amortized 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.
From time to time, the Company redesignates interest rate exchange
agreements and interest rate cap agreements between earning assets and deposits
and borrowings. Such redesignations are recorded at fair value at the time of
transfer.
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 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 mortgage banking income.
The Company may write covered call options on its available-for-sale
portfolio. If the option is exercised, the option fee is recorded as 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.
Trading Securities
Securities classified as trading are accounted for at fair value with
changes in 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
77
80
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
gains and losses from available-for-sale securities are excluded from earnings
and reported (net of tax) in accumulated other comprehensive income until
realized.
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. Other than temporary declines in fair value are
recognized as a reduction to current earnings.
Loans
Loans held in portfolio are stated at the principal amount outstanding, net
of deferred loan costs or fees and any discounts or premiums on purchased loans.
Deferred costs or fees, discounts and premiums are amortized using the interest
method over the estimated life of the loan. The Company sells most of its
conforming fixed-rate single-family residential mortgage ("SFR") loans in the
secondary market. SFR loans are defined as first lien mortgages on
owner-occupied one-to-four family residences. At the date of origination, the
loans so designated 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
forward sales hedge gains and losses.
Management generally ceases to accrue interest income on any loan that
becomes four payments 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 loans over $1 million,
commercial business loans and builder construction loans for impairment on an
individual basis. A loan in one of these categories is considered impaired when
it is (i) probable that the Company will be unable to collect all amounts due
according to the terms of the loan agreement, or (ii) designated a substandard
loan, whether or not performing. Factors involved in determining impairment
include, but are not limited to: the financial condition of the borrower, the
value of the underlying collateral, and current economic conditions. 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 and trends 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, predictive
analytical tools (migration analyses), 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.
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
78
81
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 reviewed on a collective 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 Consolidated Financial
Statements.
Recourse Liability
The Company records a recourse liability to cover potential losses on loans
securitized and retained in its MBS portfolio. The recourse liability is also
intended to cover potential losses on loans and MBS sold to third parties for
which a recourse liability exists. On a quarterly basis, a review is performed
to determine the adequacy of the recourse liability. Because the portfolio of
loans and securities for which a recourse obligation exists is similar to the
Company's SFR loan portfolio, the review for adequacy of the recourse liability
is substantially similar to the review of the adequacy of the reserve for SFR
loan losses. Adjustments to the recourse liability are recorded in the provision
for recourse liability. In 1998, in connection with the Ahmanson Merger, an
additional amount was transferred from the reserve for loan losses to the
recourse liability to conform with Washington Mutual's policy.
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 or through a direct charge off to the property. 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
Servicing rights are created when mortgage loans are originated and the
loans are 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
79
82
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 FHLB 11th
District Cost of Funds Index ("COFI"), U.S. 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 expected
future cash flows. Assumptions used in the valuation model include market
discount rates and anticipated prepayment speeds. The prepayment speeds are
determined from market sources for fixed-rate mortgages with similar coupons and
prepayment reports for comparable ARMs. In addition, the Company uses market
comparables for estimates of the cost of servicing per loan, inflation rates,
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 buildings and improvements for impairment. Impairment
exists when the estimated undiscounted cash flows for the property is less than
its carrying value. If identified, an impairment loss is recognized through a
charge to earnings based on the fair value of the property.
Intangible Assets
Because of the potential earning power or other identifiable values of
certain purchased companies or businesses, the Company paid amounts in excess of
identifiable fair value for assets acquired. Such amounts are being amortized by
systematic charges to earnings over the estimated remaining life of the assets
acquired. The Company periodically reviews intangibles to assess recoverability
and impairment is recognized through a charge to earnings if permanent loss of
value occurs.
Real Estate Held for Investment
Real estate held for investment ("REI") consists of properties which the
Company intends to develop and sell. The periods of development and eventual
sale of these properties may extend over several years and are dependent upon
economic and other conditions. Costs to acquire and develop the properties,
including a financing cost, are capitalized as incurred during construction. REI
is also reviewed for impairment and impairment losses, if any, are recognized
through a charge to earnings. At December 31, 1998 and 1997, the Company had
total REI of $222.4 million and $211.1 million, which was included in other
assets.
Company-Owned Life Insurance
The Company purchased life insurance policies as a funding source for
certain employees' and directors' benefit plans and is the sole owner and
beneficiary of these company-owned life insurance policies. Premiums paid, net
of changes in the estimated cash surrender value of the related policies, are
included in salaries and employee benefits.
Trust Assets
Assets held by the Company in a fiduciary or agency capacity for customers
are not included in the Consolidated Statements of Financial Condition as such
items are not assets of the Company. Assets totaling $176.5 million and $137.5
million as of December 31, 1998 and 1997 were held by the Company in a fiduciary
or agency capacity.
80
83
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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 of securities. The obligation to repurchase the securities
is reflected as a liability in the Consolidated Statements of Financial
Condition while the dollar amount of securities underlying the agreements
remains in the respective asset accounts.
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 expenses related to effecting a
business combination.
A liability for the cost of employee termination benefits that management
intends to provide to involuntarily terminated employees is recognized 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 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. Fair value of
duplicate or excess facilities is estimated based on the present value of the
expected future cash flows using a discount rate commensurate with the risks
involved. 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.
Other 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,
investment banking, etc.) that were incurred in conjunction with the
combinations, and one-time, nonrecurring costs associated with combining the
entities which are being expensed as incurred. The liability for contract exit
fees for duplicate services is recognized when management makes the decision to
terminate such contracts.
81
84
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
comprehensive 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 of the change.
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, Great Western and Ahmanson filed separate consolidated
tax returns prior to the mergers with the Company. For periods subsequent to the
mergers with Washington Mutual, the Company's consolidated tax return included
the merged companies.
Year 2000 Project
The Company expenses all costs related to making its information systems
and facilities ready for the Year 2000 date change.
Average Balances
Average balances are obtained from the best available daily, weekly or
monthly data, which management believes approximate the average balances
calculated on a daily basis.
Recently Issued Accounting Standards Adopted in These Financial Statements
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, 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, which deferred the adoption date
of certain collateral recognition provisions of SFAS No. 125 until January 1,
1998. The Company adopted the relevant provisions of SFAS No. 125 effective
January 1, 1997, and the deferred provisions effective January 1, 1998. There
was no material impact on the Company's results of operations or financial
condition due to the adoption of these statements.
SFAS No. 130, Reporting Comprehensive Income, was issued in June 1997 and
requires businesses to disclose comprehensive income and its components in their
financial statements. This statement does not affect the results of operations
or financial condition of the Company. The Company adopted SFAS No. 130 on
January 1, 1998.
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. This statement does not affect
the results of operations or financial condition of the Company. SFAS No. 131
was adopted by the Company on January 1, 1998.
SFAS No. 132, Employers' Disclosure about Pensions and Other Postretirement
Benefits, was issued in February 1998 and standardizes the annual disclosure
requirements for pensions and other postretirement
82
85
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
benefits. This statement does not affect the results of operations or financial
condition of the Company. SFAS No. 132 was adopted by the Company on January 1,
1998.
Recently Issued Accounting Standards Not Yet Adopted
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
was issued in June 1998 and establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company will implement this
statement on January 1, 2000. The impact of the adoption of the provisions of
this statement on the results of operations or financial condition of the
Company has not yet been determined.
SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise,
was issued in October 1998. Prior to issuance of SFAS No. 134, when a mortgage
banking company securitized mortgage loans held for sale but did not sell the
security in the secondary market, the security was classified as trading. SFAS
No. 134 requires that the security be classified either trading, available for
sale or held to maturity according to the Company's intent, unless the Company
has already committed to sell the security before or during the securitization
process. The statement is effective for all fiscal years beginning after
December 15, 1998. This statement is not expected to have a material impact on
the results of operations or financial condition of the Company.
NOTE 2: BUSINESS COMBINATIONS/RESTRUCTURING
On October 1, 1998, Washington Mutual completed its merger with Ahmanson.
On that date, Ahmanson had assets of $50.35 billion, deposits of $33.97 billion
and stockholders' equity of $3.61 billion. The Company issued 205,582,840 shares
of common stock to complete the merger. The results of operations of Ahmanson
for 1997 have been reduced as a result of reclassifying to equity the $10.4
million after-tax gain reported by Ahmanson in connection with its purchase and
subsequent sale of common stock of Great Western.
Total revenue (defined as interest income plus other income) and net income
of the Company and Ahmanson were as follows:
NINE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------
WASHINGTON
MUTUAL AHMANSON COMBINED
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Total revenue.................................. $6,329,548 $3,257,380 $9,586,928
Net income..................................... 792,039 537,806 1,329,845
Reconciliations of total revenue and net income previously presented by the
Company with the combined amounts presented in the accompanying Consolidated
Statements of Income were as follows:
YEAR ENDED DECEMBER 31, 1997
---------------------------------------
WASHINGTON
MUTUAL AHMANSON COMBINED
---------- ---------- -----------
(DOLLARS IN THOUSANDS)
Total revenue................................. $7,524,364 $3,674,329 $11,198,693
Net income.................................... 481,778 403,340 885,118
YEAR ENDED DECEMBER 31, 1996
---------------------------------------
WASHINGTON
MUTUAL AHMANSON COMBINED
---------- ---------- -----------
(DOLLARS IN THOUSANDS)
Total revenue................................. $7,045,254 $3,680,732 $10,725,986
Net income.................................... 230,100 145,258 375,358
83
86
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On February 13, 1998, Ahmanson completed the Coast Acquisition. At the date
of acquisition, Coast had total assets of $8.90 billion and deposits of $6.40
billion. Ahmanson reissued 16,263,796 shares of its common stock held in
treasury to complete the acquisition. The value of Ahmanson common stock issued
to complete the acquisition was $925.1 million as of the purchase date. Ahmanson
recorded $431.5 million in goodwill, which included $79.0 million of
transaction-related expenses, which were capitalized. In addition, Ahmanson
recognized core deposit intangibles of $85.0 million.
On July 1, 1997, Washington Mutual completed the Great Western Merger. On
that date, Great Western had assets of $43.77 billion, deposits of $27.79
billion and stockholders' equity of $2.69 billion. The Company issued
188,474,327 shares of common stock to complete the merger.
The conversion of 4.7 million deposit accounts and 1.5 million transaction
card accounts at nearly 370 former GWB locations in Florida and northern and
southern California was completed in three phases during the second quarter of
1998. In addition, 86 California financial centers were consolidated into
existing Washington Mutual locations in 1998. The GWB and ASB loan portfolios
were consolidated in a process that involved approximately 650,000 mortgage and
consumer loans.
On December 20, 1996, the Company completed the Keystone Transaction. At
November 30, 1996, Keystone Holdings had assets of $21.89 billion, deposits of
$12.82 billion and stockholders' equity of $808.6 million. The Company issued
71,825,000 shares of common stock to complete the Keystone Transaction.
During 1996, Great Western 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 charges were
severance and related payments, and facilities and equipment impairment. The
incomplete Great Western 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 Ahmanson Merger and the Coast Acquisition in 1998, the
Great Western Merger in 1997 and the Keystone Transaction in 1996, the Company
recorded transaction-related expenses of $508.3 million, $431.1 million and
$226.4 million (inclusive of $68.3 million of restructuring charges related to
Great Western, as discussed above) during 1998, 1997 and 1996. The majority of
the expenses were for severance and related payments, facilities and equipment
impairment, and various investment banking, legal and contract exit fees. The
accrual of $262.0 million at year-end 1998 and $196.1 million at year-end 1997
related primarily to expenses 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 of approximately 2,850 and additional staff reductions
of 3,400 related to the Ahmanson Merger. As of December 31, 1998, all staff
reductions related to the Keystone Transaction and the Great Western Merger were
completed and approximately 800 employee separations had occurred as a result of
the Ahmanson Merger. The remaining employee separations are planned to be
completed by the end of September 1999.
Offices used by the Company on the Irwindale, California campus are
expected to be closed by the end of the third quarter of 1999. The 646,000
square feet of office space at the Irwindale campus is expected to become
available to sublet to third party tenants beginning in mid-1999.
The Company has identified 162 branch consolidations in California that
will result from the Ahmanson Merger. The consolidations are scheduled for
mid-1999 and will coincide with the conversion of the Home Savings branches in
California to Washington Mutual's systems and signage.
84
87
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amount of all assets acquired through mergers and held for
disposal at December 31, 1998 was $80.2 million.
Reconciliations of the transaction-related expenses and accrual activity
were as follows:
1996
AMOUNTS DECEMBER 31,
1996 1996 CHARGED 1996
PERIOD 1996 TOTAL AGAINST ACCRUED
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
AMOUNTS DECEMBER 31,
1997 1997 CHARGED 1997
PERIOD 1997 TOTAL AGAINST ACCRUED
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
======== ======== ======== ========= ========
1998
AMOUNTS DECEMBER 31,
1998 1998 CHARGED 1998
PERIOD 1998 TOTAL AGAINST ACCRUED
COSTS ACCRUAL EXPENSES ACCRUAL BALANCE
-------- -------- -------- --------- ------------
(DOLLARS IN THOUSANDS)
Severance........................ $ -- $186,845 $186,845 $(193,935) $ 86,014
Premises......................... 5,905 117,341 123,246 (15,713) 158,932
Equipment........................ 71,721 -- 71,721 -- --
Legal, underwriting and other
direct transaction costs....... 47,548 -- 47,548 (742) --
Contract cancellation costs...... 2,071 563 2,634 (18,584) 15,678
Other............................ 78,778 (2,486) 76,292 (7,351) 1,406
-------- -------- -------- --------- --------
$206,023 $302,263 $508,286 $(236,325) $262,030
======== ======== ======== ========= ========
On December 31, 1998, the Company acquired Industrial Bank ("Industrial")
of Van Nuys, California for $2.8 million in cash. The acquisition was effected
by the merger of Industrial into WMB. At December 31, 1998, Industrial had
assets of $27.2 million, deposits of $26.1 million and stockholders' equity of
$355,000. The acquisition of Industrial was accounted for as a purchase for
accounting purposes. Under purchase
85
88
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounting, the assets, liabilities and stockholders' equity of the acquired
entity were recorded on the books of Washington Mutual at their respective fair
values at the time of the acquisition. The resulting goodwill was not material.
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. The
resulting goodwill was not material.
On January 31, 1996, the Company acquired Western Bank ("Western") through
a merger of Western with and into WMB. 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 8,797,853 shares of common stock to complete the
merger with Western. The merger was treated as a pooling of interests and 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 consummation of the merger with Western. This
presentation required the restatement of prior periods as if the companies had
been combined for all years presented.
NOTE 3: CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following:
DECEMBER 31,
------------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
Cash........................................................ $2,695,454 $1,889,019
Cash equivalents:
MMDAs..................................................... 26,822 --
U.S. Treasury bills....................................... 19,971 3,656
Overnight investments..................................... 7,996 307,583
Time deposit accounts..................................... 6,731 8,564
Securities purchased under agreements to resell
("repurchase agreements").............................. -- 500,200
Commercial paper.......................................... -- 10,975
---------- ----------
61,520 830,978
---------- ----------
$2,756,974 $2,719,997
========== ==========
For the purpose of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, U.S. Treasury bills, overnight
investments, commercial paper and repurchase agreements.
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 $146.5 million and
$201.3 million at December 31, 1998 and 1997.
86
89
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, 1998
--------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE YIELD(1)
----------- ---------- ---------- ----------- --------
(DOLLARS IN THOUSANDS)
Available-for-sale securities
- -----------------------------
Investment securities:
U.S. government and agency......... $ 64,149 $ 172 $ -- $ 64,321 6.36%
Corporate debt..................... 283,441 194 (3,304) 280,331 6.23
Municipal.......................... 2,020 1 -- 2,021 5.10
Equity securities:
Preferred stock................. 157,854 11,265 -- 169,119 3.97
Other securities................ 1,657 13 -- 1,670 3.29
----------- -------- -------- -----------
509,121 11,645 (3,304) 517,462 5.53
MBS:
U.S. government and agency......... 24,254,100 122,023 (27,547) 24,348,576 6.71
Private issue...................... 8,098,597 1,707 (46,477) 8,053,827 6.43
----------- -------- -------- -----------
32,352,697 123,730 (74,024) 32,402,403 6.64
Derivative instruments:
Interest rate exchange
agreements...................... -- -- (2,812) (2,812) --
----------- -------- -------- -----------
32,352,697 123,730 (76,836) 32,399,591 6.64
----------- -------- -------- -----------
$32,861,818 $135,375 $(80,140) $32,917,053 6.62
=========== ======== ======== ===========
Held-to-maturity securities
- ---------------------------
Investment securities:
U.S. government and agency......... $ 6,906 $ 17 $ -- $ 6,923 5.24%
Corporate debt..................... 20,173 2,060 -- 22,233 7.97
Municipal.......................... 110,168 6,750 (5) 116,913 5.85
----------- -------- -------- -----------
137,247 8,827 (5) 146,069 6.13
MBS:
U.S. government and agency......... 10,347,739 15,378 -- 10,363,117 6.46
Private issue...................... 3,644,496 41,089 (82,151) 3,603,434 7.13
----------- -------- -------- -----------
13,992,235 56,467 (82,151) 13,966,551 6.64
----------- -------- -------- -----------
$14,129,482 $ 65,294 $(82,156) $14,112,620 6.63
=========== ======== ======== ===========
- ---------------
(1) Weighted average yield at end of year.
87
90
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $ 2,215 $ (173) $ 530,570 6.67%
Corporate debt.................... 456,064 2,849 (363) 458,550 6.51
Municipal......................... 25 1 -- 26 9.61
Equity securities:
Preferred stock................ 172,199 13,188 (75) 185,312 6.33
Other securities............... 17,771 967 (133) 18,605 5.68
----------- -------- --------- -----------
1,174,587 19,220 (744) 1,193,063 6.54
MBS:
U.S. government and agency........ 16,627,481 137,288 (158,747) 16,606,022 7.08
Private issue..................... 2,021,130 14,577 (18,550) 2,017,157 7.35
----------- -------- --------- -----------
18,648,611 151,865 (177,297) 18,623,179 7.11
Derivative instruments:
Interest rate exchange
agreements..................... -- -- (218) (218) --
Interest rate cap agreements...... 1,033 169 -- 1,202 --
----------- -------- --------- -----------
1,033 169 (218) 984 --
----------- -------- --------- -----------
18,649,644 152,034 (177,515) 18,624,163 7.11
----------- -------- --------- -----------
$19,824,231 $171,254 $(178,259) $19,817,226 7.08
=========== ======== ========= ===========
Held-to-maturity securities
- ---------------------------
Investment securities:
U.S. government and agency........ $ 2,421 $ 6 $ -- $ 2,427 5.86%
Corporate debt.................... 20,273 1,152 (7) 21,418 8.21
Municipal......................... 100,124 5,429 -- 105,553 5.84
----------- -------- --------- -----------
122,818 6,587 (7) 129,398 6.23
MBS:
U.S. government and agency........ 12,593,241 48,373 (134,873) 12,506,741 6.38
Private issue..................... 4,491,795 60,779 (88,969) 4,463,605 7.39
----------- -------- --------- -----------
17,085,036 109,152 (223,842) 16,970,346 6.64
----------- -------- --------- -----------
$17,207,854 $115,739 $(223,849) $17,099,744 6.64
=========== ======== ========= ===========
- ---------------
(1) Weighted average yield at end of year.
88
91
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Securities (exclusive of trading securities) by contractual maturity were
as follows:
DECEMBER 31, 1998
-----------------------------------------------------------------------------------
DUE AFTER ONE AFTER FIVE
CARRYING WITHIN BUT WITHIN BUT WITHIN
VALUE YIELD(1) ONE YEAR YIELD(1) FIVE YEARS YIELD(1) TEN YEARS
----------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Available-for-sale
- ------------------
securities
----------
Investment securities:
U.S. government and
agency.................. $ 64,321 6.36% $ 46,721 6.49% $ 10,181 5.74% $ 7,061
Corporate debt............ 280,331 6.23 159,139 6.29 74,235 6.21 32,972
Municipal................. 2,021 5.10 21 9.70 -- -- --
Equity securities:
Preferred stock........... 169,119 3.97 -- -- -- -- --
Other securities.......... 1,670 3.29 1,489 3.68 -- -- --
MBS:
U.S. government and
agency.................. 24,348,576 6.71 22,628 6.16 1,210,604 7.29 307,751
Private issue............. 8,053,827 6.43 -- -- -- -- 6,613
Derivative instruments:
Interest rate exchange
agreements.............. (2,812) -- (2,812) -- -- -- --
----------- ---------- ---------- --------
$32,917,053 6.62 $ 227,186 6.38 $1,295,020 7.22 $354,397
=========== ========== ========== ========
Held-to-maturity securities
- ---------------------------
Investment securities:
U.S. government and
agency.................. $ 6,906 5.24% $ 6,906 5.24% $ -- --% $ --
Corporate debt............ 20,173 7.97 -- -- -- -- --
Municipal................. 110,168 5.85 100 8.11 8,199 5.36 22,478
MBS:
U.S. government and
agency.................. 10,347,739 6.46 -- -- 11,654 6.77 62,449
Private issue............. 3,644,496 7.13 3,491,405 7.20 1,959 6.36 444
----------- ---------- ---------- --------
$14,129,482 6.63 $3,498,411 7.20 $ 21,812 6.21 $ 85,371
=========== ========== ========== ========
DECEMBER 31, 1998
---------------------------------
AFTER
YIELD(1) TEN YEARS YIELD(1)
-------- ----------- --------
(DOLLARS IN THOUSANDS)
Available-for-sale
- ------------------
securities
----------
Investment securities:
U.S. government and
agency.................. 6.44% $ 358 6.82%
Corporate debt............ 6.61 13,985 6.32
Municipal................. -- 2,000 5.05
Equity securities:
Preferred stock........... -- 169,119 3.97
Other securities.......... -- 181 *
MBS:
U.S. government and
agency.................. 7.21 22,807,593 6.69
Private issue............. 7.67 8,047,214 6.33
Derivative instruments:
Interest rate exchange
agreements.............. -- -- --
-----------
7.15 $31,040,450 6.59
===========
Held-to-maturity securities
- ---------------------------
Investment securities:
U.S. government and
agency.................. --% $ -- --%
Corporate debt............ -- 20,173 7.97
Municipal................. 5.89 79,391 5.84
MBS:
U.S. government and
agency.................. 7.11 10,273,636 6.43
Private issue............. 6.36 150,688 5.58
-----------
6.78 $10,523,888 6.41
===========
- ---------------
* Less than 1%.
(1) Weighted average yield at end of year.
In addition to agency securities, the securities portfolio contained
investment grade private issue MBS of $11.73 billion and $6.53 billion at
December 31, 1998 and 1997. At December 31, 1998, the Company had private issue
MBS with an amortized cost of $986.2 million and a fair value of $980.4 million
from a single issuer, General Electric Capital Mortgage Services, which exceeded
10% of the Company's equity.
Proceeds from sales of securities in the available-for-sale portfolio
during 1998, 1997 and 1996 were $2.16 billion, $2.36 billion and $4.76 billion.
The Company realized $19.1 million in gains and $1.0 million in losses on these
sales during 1998. The Company realized $8.3 million in gains and $0.9 million
in losses on sales during 1997. Similarly, the Company realized $42.4 million in
gains and $34.1 million in losses during 1996.
MBS with an amortized cost of $25.93 billion and a fair value of $26.10
billion at December 31, 1998 were pledged to secure public deposits, reverse
repurchase agreements, other borrowings, interest rate exchange agreements, and
access to the Federal Reserve discount window.
In connection with the Great Western Merger, the Company reclassified
certain MBS from available for sale to held to maturity. The unrealized pretax
gain at the time of the reclassification of $102.7 million was retained in
equity and is being amortized over the life of the related securities. At
December 31, 1998 and 1997, the unamortized pretax gain, included as a component
of accumulated other comprehensive income, was $73.0 million and $99.4 million.
89
92
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5: LOANS
Loans consisted of the following:
DECEMBER 31,
---------------------------
1998 1997
------------ -----------
(DOLLARS IN THOUSANDS)
SFR...................................................... $ 81,101,706 $72,160,696
SFR construction......................................... 1,020,082 877,449
Manufactured housing..................................... 1,088,153 1,081,193
Second mortgage and other consumer....................... 4,390,197 3,832,190
Commercial business...................................... 1,129,329 838,436
Commercial real estate(1)................................ 18,134,881 17,572,822
Consumer finance......................................... 2,574,398 2,309,407
Reserve for loan losses.................................. (1,067,840) (1,047,845)
------------ -----------
$108,370,906 $97,624,348
============ ===========
- ---------------
(1) Included $221.7 million of commercial real estate construction lending at
December 31, 1998.
Real estate construction (including SFR construction and commercial real
estate construction) and commercial business loans by maturity date were as
follows:
DECEMBER 31, 1998
--------------------------------------------------------------
REAL ESTATE
CONSTRUCTION COMMERCIAL BUSINESS
---------------------- ----------------------
ARMS FIXED RATE ARMS FIXED RATE TOTAL
-------- ---------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
Due within one year...... $539,869 $392,395 $536,902 $ 76,725 $1,545,891
After one but within five
years.................. 105,234 28,991 171,532 104,288 410,045
After five years......... 3,330 171,944 137,279 102,603 415,156
-------- -------- -------- -------- ----------
$648,433 $593,330 $845,713 $283,616 $2,371,092
======== ======== ======== ======== ==========
Nonaccrual loans totaled $938.0 million and $1.03 billion at December 31,
1998 and 1997. If interest on nonaccrual loans had been recognized, such income
would have been $66.4 million in 1998, $66.2 million in 1997 and $99.4 million
in 1996.
90
93
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,
----------------------------------------------
1998 1997
--------------------- ---------------------
LOAN ALLOCATED LOAN ALLOCATED
AMOUNT RESERVES AMOUNT RESERVES
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Nonaccrual loans:
With allocated reserves....................... $ 30,251 $ 11,187 $ 44,660 $ 10,902
Without allocated reserves.................... 16,378 -- 29,386 --
-------- -------- -------- --------
46,629 11,187 74,046 10,902
Other impaired loans:
With allocated reserves....................... 528,379 132,522 740,394 117,420
Without allocated reserves.................... 144,210 -- 170,607 --
-------- -------- -------- --------
672,589 132,522 911,001 117,420
-------- -------- -------- --------
$719,218 $143,709 $985,047 $128,322
======== ======== ======== ========
The average balance of impaired loans and the related interest income
recognized were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
Average balance of impaired loans................ $833,550 $939,346 $941,071
Interest income recognized....................... 58,831 71,822 54,469
Loans totaling $47.70 billion and $30.14 billion at December 31, 1998 and
1997 were pledged to secure advances from FHLBs. At December 31, 1998, the
Company had $2.86 billion in fixed-rate SFR loan commitments, $2.14 billion in
ARM commitments, $882.3 million in SFR construction loan commitments, $627.2
million in commercial business loan commitments, $200.4 million in commercial
real estate loan commitments, and $3.25 billion in undisbursed lines of credit.
The Company had net unamortized deferred loan costs of $68.2 million at the
end of 1998. At December 31, 1997, the Company had net unamortized deferred loan
fees of $56.1 million. The amortization of net deferred loan fees included in
interest income totaled $6.6 million in 1998, $51.3 million in 1997 and $72.0
million in 1996.
91
94
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6: RESERVE FOR LOAN LOSSES AND RECOURSE LIABILITY
Changes in the reserve for loan losses were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Balance, beginning of year..................... $1,047,845 $1,066,276 $ 979,010
Provision for loan losses...................... 161,968 246,642 498,568
Reserves added through business combinations... 107,968 10,908 15,787
Reserves transferred to recourse liability..... (74,409) (24,502) --
Loans charged off:
SFR.......................................... (65,260) (141,488) (297,468)
SFR construction............................. (870) (52) (16)
Manufactured housing, second mortgage and
other consumer............................ (33,795) (23,068) (11,525)
Commercial business.......................... (5,280) (3,028) (504)
Commercial real estate....................... (31,370) (57,873) (115,215)
Consumer finance............................. (90,123) (79,697) (60,520)
---------- ---------- ----------
(226,698) (305,206) (485,248)
Recoveries of loans previously charged off:
SFR.......................................... 18,459 21,880 26,967
SFR construction............................. -- 90 --
Manufactured housing, second mortgage and
other consumer............................ 1,888 2,916 1,221
Commercial business.......................... 882 221 74
Commercial real estate....................... 13,630 11,245 13,700
Consumer finance............................. 16,307 17,375 16,197
---------- ---------- ----------
51,166 53,727 58,159
---------- ---------- ----------
Net charge offs................................ (175,532) (251,479) (427,089)
---------- ---------- ----------
Balance, end of year........................... $1,067,840 $1,047,845 $1,066,276
========== ========== ==========
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 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.
92
95
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. An analysis of the reserve for loan losses was
as follows:
DECEMBER 31,
------------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
Specific and allocated reserves:
Commercial real estate.................................... $ 133,167 $ 122,838
Commercial business....................................... 9,690 3,277
Builder construction...................................... 852 2,207
---------- ----------
143,709 128,322
Unallocated reserves........................................ 924,131 919,523
---------- ----------
$1,067,840 $1,047,845
========== ==========
Total reserve for loan losses as a percentage of:
Nonaccrual loans.......................................... 114% 101%
Nonperforming assets...................................... 88 76
Total loans (exclusive of the reserve for loan losses).... 0.98 1.06
Changes in the recourse liability were as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- ------- -------
(DOLLARS IN THOUSANDS)
Balance, beginning of year........................... $ 80,157 $27,940 $23,305
Transfer from reserve for loan losses................ 74,409 24,502 --
Provision (recovery of reserve) for losses........... (10,309) 27,715 4,635
-------- ------- -------
Balance, end of year................................. $144,257 $80,157 $27,940
======== ======= =======
NOTE 7: MORTGAGE SERVICING
Loans serviced consisted of the following:
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS)
Loans held in portfolio and held for sale (exclusive of
loans
serviced by others)....................................... $106,366,964 $ 97,004,686
Loans securitized and retained (with and without
recourse)................................................. 24,713,174 29,693,499
Loans serviced for others................................... 51,737,736 43,623,875
------------ ------------
$182,817,874 $170,322,060
============ ============
As of December 31, 1998, the Company serviced 385 Government National
Mortgage Association ("GNMA") loan pools with an outstanding security balance of
$269.3 million. The Company did not issue any additional GNMA loan pools during
1998.
93
96
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the balance of mortgage servicing rights were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
Balance, beginning of year......................... $311,480 $274,057 $200,054
Additions.......................................... 239,570 104,898 136,445
Sales.............................................. -- -- (5,395)
Amortization of mortgage servicing rights.......... (89,260) (64,211) (54,263)
Impairment adjustment.............................. (495) (3,264) (2,784)
-------- -------- --------
Balance, end of year............................... $461,295 $311,480 $274,057
======== ======== ========
Changes in the balance of short servicing were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
Balance, beginning of year............................ $17,984 $20,714 $21,214
Amortization.......................................... (3,743) (3,858) (2,143)
Impairment adjustment................................. -- 1,128 1,643
------- ------- -------
Balance, end of year.................................. $14,241 $17,984 $20,714
======= ======= =======
Changes in the valuation for impairment of mortgage servicing rights were
as follows:
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
Balance, beginning of year............................... $7,439 $4,175 $1,391
Net change............................................... 495 3,264 2,784
------ ------ ------
Balance, end of year..................................... $7,934 $7,439 $4,175
====== ====== ======
NOTE 8: INVESTMENT IN FHLBS
The investment in the FHLBs of Seattle and San Francisco consisted of
capital stock, at cost, totaling $2.03 billion at December 31, 1998 and $1.47
billion at December 31, 1997. The Company earned yields of 6.37% in 1998, 6.51%
in 1997 and 6.52% in 1996 from its investment in FHLBs. The investment in FHLB
stock is required to permit the Company to borrow from the FHLBs.
NOTE 9: FORECLOSED ASSETS
Foreclosed assets consisted of the following:
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
Real estate acquired through foreclosure.................... $275,132 $348,951
Other repossessed assets.................................... 6,722 6,038
Reserve for losses.......................................... (7,087) (14,407)
-------- --------
$274,767 $340,582
======== ========
94
97
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreclosed asset operations were as follows:
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
-------- -------- ---------
(DOLLARS IN THOUSANDS)
Loss from operations.............................. $(32,185) $(68,975) $ (84,953)
Gain (loss) on sale of foreclosed assets.......... 24,059 11,751 (4,595)
Provision for losses.............................. (15,319) (23,480) (34,637)
-------- -------- ---------
$(23,445) $(80,704) $(124,185)
======== ======== =========
Changes in the reserve for losses were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
Balance, beginning of year............................ $14,407 $31,642 $65,542
Provision for losses.................................. 15,319 23,480 34,637
Reserves charged off, net of recoveries............... (22,639) (40,715) (68,537)
------- ------- -------
Balance, end of year.................................. $ 7,087 $14,407 $31,642
======= ======= =======
NOTE 10: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
Furniture and equipment................................... $ 846,597 $ 990,121
Buildings................................................. 714,412 751,898
Leasehold improvements.................................... 350,951 344,652
Work in progress.......................................... 274,835 108,638
----------- -----------
2,186,795 2,195,309
Accumulated depreciation.................................. (1,013,536) (1,168,891)
Land...................................................... 247,903 275,406
----------- -----------
$ 1,421,162 $ 1,301,824
=========== ===========
Depreciation expense for 1998, 1997 and 1996 was $145.9 million, $174.5
million and $180.7 million.
The Company leases various branch offices, office facilities and equipment
under capital and noncancelable operating leases which expire at various dates
through 2077. Some leases contain escalation provisions for adjustments in the
consumer price index and provide for renewal options for five- to ten-year
periods. Rental expense, including amounts paid under month-to-month cancelable
leases, amounted to $182.8 million, $186.1 million and $175.8 million in 1998,
1997 and 1996.
95
98
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 AND FURNITURE AND LAND AND FURNITURE AND
BUILDINGS EQUIPMENT BUILDINGS EQUIPMENT
---------- ------------- --------- -------------
(DOLLARS IN THOUSANDS)
Year ending December 31,
1999............................. $ 158,131 $18,464 $ 7,589 $1,666
2000............................. 144,586 12,150 7,711 1,713
2001............................. 130,176 7,778 7,711 1,713
2002............................. 115,118 4,523 7,711 338
2003............................. 99,688 423 7,583 --
Thereafter......................... 508,347 3,547 61,531 --
---------- ------- ------- ------
$1,156,046 $46,885 $99,836 $5,430
========== ======= ======= ======
NOTE 11: INTANGIBLE ASSETS
Intangible assets consisted of the following:
DECEMBER 31,
----------------------
1998 1997
---------- --------
(DOLLARS IN THOUSANDS)
Branch acquisitions, net of amortization of $446,733 and
$426,481.................................................. $ 475,257 $529,626
Business combinations, net of amortization of $151,484 and
$150,950 and tax benefit of $42,000....................... 534,154 107,017
Other, net of amortization of $231 and $11,010.............. 255 303
---------- --------
$1,009,666 $636,946
========== ========
Intangible assets result from acquisitions accounted for as the purchase of
assets and the assumption of liabilities and consist primarily of goodwill, core
deposit intangibles and covenants not to compete. Intangible assets are
amortized using the straight-line method over the period that is expected to be
benefitted, generally from five to 25 years. In February 1998, the Company
acquired Coast under the purchase accounting method, which created goodwill of
$431.5 million and core deposit intangibles of $85.0 million. Intangible assets
arising from business combinations were reduced by $42.0 million during 1998 as
a result of a reduction in the deferred tax asset valuation allowance for net
operating loss carryforwards the Company acquired in a business combination
accounted for as a purchase. The average remaining amortization period at
December 31, 1998 was approximately 15 years.
96
99
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12: DEPOSITS
Deposits consisted of the following:
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
Checking accounts:
Interest bearing...................................... $ 6,686,682 $ 6,535,662
Noninterest bearing................................... 6,774,049 4,650,292
----------- -----------
13,460,731 11,185,954
Savings accounts........................................ 7,794,622 4,917,964
MMDAs................................................... 20,491,246 18,010,852
Time deposit accounts:
Due within one year................................... 39,491,294 42,244,836
After one but within two years........................ 2,565,666 4,583,332
After two but within three years...................... 868,983 1,224,074
After three but within four years..................... 543,117 686,931
After four but within five years...................... 193,312 483,836
After five years...................................... 83,170 91,654
----------- -----------
43,745,542 49,314,663
----------- -----------
$85,492,141 $83,429,433
=========== ===========
Time deposit accounts in amounts of $100,000 or more totaled $6.42 billion
and $6.32 billion at December 31, 1998 and 1997. At December 31, 1998, $2.44
billion of these deposits mature within three months or less, $1.53 billion
mature in over three to six months, $1.73 billion mature in over six months to
one year, and $721.7 million mature after one year.
Financial data pertaining to the weighted average cost of deposits were as
follows:
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
Weighted average interest rate during the year.............. 4.15% 4.27% 4.32%
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 $49.2 million and $80.0 million
at December 31, 1998 and 1997.
Interest expense on deposits was as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Interest-bearing checking accounts................... $ 74,643 $ 80,014 $ 78,898
Savings accounts and MMDAs........................... 946,975 755,198 679,006
Time deposit accounts................................ 2,566,397 2,810,330 3,006,271
---------- ---------- ----------
$3,588,015 $3,645,542 $3,764,175
========== ========== ==========
97
100
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13: FEDERAL FUNDS PURCHASED AND COMMERCIAL PAPER
Federal funds purchased and commercial paper consisted of the following:
DECEMBER 31,
------------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
Federal funds purchased..................................... $1,967,007 $3,374,750
Commercial paper............................................ 515,823 357,532
---------- ----------
$2,482,830 $3,732,282
========== ==========
Federal funds purchased have maturities of up to 12 months, and at December
31, 1998, the average maturity was 37 days. Aristar issues commercial paper with
original maturities of less than 90 days, with an average maturity at December
31, 1998 of 31 days.
Financial data pertaining to federal funds purchased and commercial paper
were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Federal funds purchased
- -----------------------
Weighted average interest rate, end of year.... 5.25% 5.89% 5.74%
Weighted average interest rate during the
year......................................... 5.60 5.65 5.40
Average balance of federal funds purchased..... $3,757,701 $2,895,380 $1,396,686
Maximum amount of federal funds purchased at
any month end................................ 6,070,029 4,845,600 2,442,000
Interest expense............................... 210,538 163,694 75,478
Commercial paper
- ----------------
Weighted average interest rate, end of year.... 5.63% 5.99% 5.70%
Weighted average interest rate during the
year......................................... 5.65 6.06 5.40
Average balance of commercial paper............ $ 363,965 $ 440,057 $ 695,931
Maximum amount of commercial paper issued at
any month end................................ 515,823 694,006 967,962
Interest expense............................... 20,547 26,679 37,608
98
101
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.
Scheduled maturities or repricing of reverse repurchase agreements were as
follows:
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
Due within 30 days........................................ $ 2,579,348 $ 3,930,069
After 30 but within 90 days............................... 6,728,226 1,846,043
After 90 but within 180 days.............................. 2,447,428 840,000
After 180 days but within one year........................ 889,309 667,197
After one year............................................ 4,875,227 6,670,731
----------- -----------
$17,519,538 $13,954,040
=========== ===========
Financial data pertaining to reverse repurchase agreements were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Weighted average interest rate, end of year......... 5.37% 5.74% 5.51%
Weighted average interest rate during the year...... 5.67 5.69 5.51
Average balance of reverse repurchase agreements.... $16,875,176 $14,792,062 $16,596,812
Maximum amount of reverse repurchase agreements at
any month end..................................... 17,519,538 15,319,964 18,702,592
Interest expense.................................... 957,514 841,114 914,992
99
102
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
its agencies. 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 the borrowing.
Scheduled maturities of advances from FHLBs were as follows:
DECEMBER 31,
----------------------------------------------------------
1998 1997
--------------------------- ---------------------------
RANGES OF RANGES OF
INTEREST INTEREST
AMOUNT RATES AMOUNT RATES
----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
Due within one year........ $20,959,305 4.97% - 8.88% $13,877,100 4.69% - 8.50%
After one but within two
years.................... 14,730,417 4.50 - 9.34 8,621,601 5.26 - 8.53
After two but within three
years.................... 3,560,125 4.91 - 8.22 1,897,027 4.50 - 9.34
After three but within four
years.................... 101,245 3.50 - 8.22 496,738 5.68 - 8.22
After four but within five
years.................... 211,185 5.30 - 8.22 51,122 3.50 - 8.22
After five years........... 186,336 2.80 - 8.65 171,188 2.80 - 8.65
----------- -----------
$39,748,613 $25,114,776
=========== ===========
Financial data pertaining to advances from FHLBs were as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Weighted average interest rate, end of year..... 5.35% 5.78% 5.55%
Weighted average interest rate during the
year.......................................... 5.65 5.76 5.63
Average balance of advances from FHLBs.......... $30,109,943 $17,643,892 $10,801,707
Maximum amount of advances from FHLBs at any
month end..................................... 39,748,613 25,114,776 14,629,004
Interest expense................................ 1,701,312 1,016,925 608,503
100
103
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16: OTHER BORROWINGS
Other borrowings consisted of the following:
DECEMBER 31,
--------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
RANGES OF RANGES OF
AMOUNT INTEREST RATES AMOUNT INTEREST RATES
---------- ------------------ ---------- ------------------
Senior notes:
Due in 1998................. $ -- --% $ 649,903 5.00%- 8.63%
Due in 1999................. 199,993 5.52- 7.88 199,939 5.52 - 7.88
Due in 2000................. 549,260 5.63- 7.65 549,037 5.63 - 7.65
Due in 2001................. 649,170 5.88- 7.75 349,762 6.75 - 7.75
Due in 2002................. 612,897 6.30- 8.60 614,068 6.30 - 8.60
Due in 2003................. 149,415 6.50 149,314 6.50
Due in 2005................. 148,370 7.25 148,182 7.25
Subordinated notes:
Due in 1998................. -- -- 99,979 8.88
Due in 1999................. 412,975 7.50- 9.88 349,788 7.50 - 9.88
Due in 2000................. 349,322 5.23-10.50 413,275 6.00 -10.50
Due in 2001................. 149,825 9.88 149,764 9.88
Due in 2004................. 248,433 6.50- 7.88 250,000 6.50 - 7.88
Trust preferred securities(1):
Due in 2025................. 97,960 8.25 97,330 8.25
Due in 2026................. 148,636 8.36 148,464 8.36
Due in 2027................. 691,810 8.21- 8.38 690,753 8.21 - 8.38
Other:
Notes payable, due in
1998..................... -- -- 1,317,923 8.16
Notes payable, due in
1999..................... 570,000 5.52- 5.80 570,000 5.52 - 5.80
Notes payable, due in
2000..................... 250,000 5.60 250,000 5.60
Notes payable, due in
2006..................... 98,885 6.63 98,765 6.63
Other....................... 122,557 5.18-17.47 79,033 5.18 -17.47
---------- ----------
$5,449,508 $7,175,279
========== ==========
- ---------------
(1) Inclusive of capitalized issuance costs.
The Company is the guarantor of four separate issues of trust preferred
securities, as discussed below:
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. In connection with WMC I's issuance of these
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.
On January 27, 1997, Great Western Financial Trust II ("GWFT II"), a
wholly-owned subsidiary of Great Western, issued $300.0 million of 8.206% Trust
Originated Preferred Securities. In connection with GWFT II's issuance of these
securities, Great Western issued to GWFT II $309.3 million principal amount of
its 8.206% subordinated deferrable interest notes, due 2027 (the "subordinated
notes due 2027"). The sole assets of GWFT II are and will be the subordinated
notes due 2027.
101
104
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1996, Ahmanson Trust I (the "capital trust"), a wholly-owned
subsidiary of Ahmanson, issued $150.0 million of 8.36% Company-obligated
mandatorily redeemable capital securities, Series A, of subsidiary trust holding
solely Junior Subordinated Deferrable Interest Debentures of Ahmanson. In
connection with the capital trust's issuance of these securities, Ahmanson
issued to the capital trust $154.6 million principal amount of its 8.36%
subordinated notes, due December 2026 (the "subordinated notes due 2026"). The
sole assets of the capital trust are and will be the subordinated notes due
2026.
In December 1995, Great Western Financial Trust I ("GWFT I"), a
wholly-owned subsidiary of Great Western, issued $100.0 million of 8.25% Trust
Originated Preferred Securities. In connection with GWFT I's issuance of these
securities, Great Western issued to GWFT I $103.1 million principal amount of
its 8.25% subordinated deferrable interest notes, due 2025 (the "subordinated
notes due 2025"). The sole assets of GWFT I are and will be the subordinated
notes due 2025.
Obligations of Great Western and Ahmanson under the above described
arrangements were assumed by the Company. Washington Mutual's obligations under
these and related agreements, taken together, constitute a full and
unconditional guarantee by the Company of the obligations specified above.
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.
Financial data pertaining to trust preferred securities were as follows:
DECEMBER 31, 1998 AND 1997
-----------------------------------------------------------------------------------------------------
AGGREGATE
LIQUIDATION AGGREGATE AGGREGATE PER
AMOUNT OF LIQUIDATION PRINCIPAL STATED ANNUM
TRUST AMOUNT OF AMOUNT MATURITY INTEREST
PREFERRED COMMON OF OF RATE OF EXTENSION REDEMPTION
NAME OF TRUST SECURITIES SECURITIES NOTES NOTES NOTES PERIOD OPTION
------------- ----------- ----------- --------- -------- -------- ------------------- -----------------
(DOLLARS IN THOUSANDS)
Great Western Financial
Trust I................. $100,000 $ 3,093 $103,093 2025 8.250% 20 consecutive On or after
quarters December 31, 2000
Great Western Financial
Trust II................ 300,000 9,279 309,279 2027 8.206 Ten consecutive On or after
semi-annual periods February 1, 2007
Washington Mutual
Capital I............... 400,000 12,371 412,371 2027 8.375 Ten consecutive On or after
semi-annual periods June 1, 2007
Ahmanson Trust I.......... 150,000 4,640 154,640 2026 8.360 Ten consecutive On or after
semi-annual periods December 1, 2026
-------- ------- --------
$950,000 $29,383 $979,383 8.306
======== ======= ========
At December 31, 1998 and 1997, the Company had outstanding and unused
secured lines of credit totaling $150.0 million and $86.0 million with the
Federal Reserve Bank to cover overdrafts.
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, 1998 and 1997, the Company had entered into five other
credit agreements with various parties permitting aggregate borrowing up to
$986.0 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
102
105
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
program and a $428.0 million letter of credit with the FHLB of San Francisco to
provide credit enhancement on certain of the Company's private issue MBS.
As of December 31, 1998 and 1997, there were no outstanding borrowings
under these facilities.
NOTE 17: INCOME TAXES
Income taxes (benefits) from continuing operations consisted of the
following:
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- -------- --------
(DOLLARS IN THOUSANDS)
Current:
Federal............................... $ 865,875 $585,503 $ 81,852
State and local....................... 182,935 125,978 44,918
Payments in lieu...................... 34,960 17,018 25,187
---------- -------- --------
1,083,770 728,499 151,957
Deferred:
Federal............................... (324,623) (70,358) 130,048
State and local....................... (43,206) (5,204) (80,298)
Payments in lieu...................... 166,584 214 --
---------- -------- --------
(201,245) (75,348) 49,750
---------- -------- --------
$ 882,525 $653,151 $201,707
========== ======== ========
Income taxes (benefits) were allocated as follows:
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
-------- -------- ---------
(DOLLARS IN THOUSANDS)
Continuing operations..................... $882,525 $653,151 $ 201,707
Stockholders' equity...................... (50,982) (36,733) (101,059)
Intangible assets......................... (41,716) -- --
Other assets or liabilities............... -- -- (25)
-------- -------- ---------
$789,827 $616,418 $ 100,623
======== ======== =========
Provisions of the Small Business Job Protection Act of 1996 (the "Job
Protection Act") significantly altered the Company's tax bad debt deduction
method and the circumstances that would require a tax bad debt reserve
recapture. Prior to enactment of the Job Protection Act, savings institutions
were permitted to compute their tax bad debt deduction through use of either the
reserve method or the percentage of taxable income method. The Job Protection
Act repealed both of these methods for large savings institutions and allows for
bad debt deductions based only on actual current losses. While repealing the
reserve method for computing tax bad debt deductions, the Job Protection Act
allows thrifts to retain their existing base year bad debt reserves but requires
that reserves in excess of the balance at December 31, 1987, be recaptured into
taxable income. The tax liability for this recapture is included in the
accompanying Consolidated Financial Statements.
The base year reserve is recaptured into taxable income only in limited
situations, such as in the event of certain excess distributions or complete
liquidation. None of the limited circumstances requiring recapture are
contemplated by the Company. The amount of the Company's tax bad debt reserves
subject to recapture in these circumstances approximates $2.01 billion at
December 31, 1998. Due to the indefinite nature of the
103
106
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recapture provisions, no tax liability has been established in the accompanying
Consolidated Financial Statements.
During 1998, the Company completed a settlement with the Internal Revenue
Service (the "Service") for Great Western for 1987 and 1986, and Washington
Mutual for 1993 and 1992. The Service is currently examining Great Western for
1988 through 1992 and Washington Mutual for 1994 through 1997. The Service is in
the process of finalizing the Ahmanson 1990 through 1993 examination and has
referred one issue to the Service's National Office for Technical Advice. The
Service's National Office has notified the Company that they are tentatively
issuing an adverse ruling. The Company has not recorded any benefit with respect
to this issue. No additional adjustments were required as of December 31, 1998,
from the above examinations.
The significant components of the Company's net deferred tax asset
(liability) were as follows:
DECEMBER 31,
----------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards...................... $ 579,330 $ 800,669
Provision for losses on loans and foreclosed assets... 401,204 330,306
Merger costs.......................................... 339,490 187,565
Compensation differences.............................. 105,868 73,652
State and local taxes................................. 54,082 62,240
Investment in subsidiaries............................ 47,090 48,054
Recurring liabilities................................. 30,243 14,366
Purchase accounting differences....................... 23,282 29,410
Delinquent accrued interest........................... 18,006 1,603
Basis differences on REI and partnerships............. 3,293 16,165
Other................................................. 8,759 --
----------- -----------
1,610,647 1,564,030
Payments in lieu........................................ (230,485) (89,213)
Valuation allowance..................................... (188,690) (615,491)
----------- -----------
Deferred tax asset, net of payments in lieu and
valuation allowance................................ 1,191,472 859,326
Deferred tax liabilities:
Loan fees............................................. (445,752) (440,353)
Stock dividends from FHLBs............................ (384,460) (322,893)
Basis difference on premises and equipment............ (103,030) (124,338)
Gain on loan sales.................................... (88,726) (44,828)
Unrealized gains on securities........................ (62,051) (70,598)
Financing leases...................................... (59,820) (65,949)
Recurring liabilities................................. (7,213) (54,035)
Other................................................. -- (22,595)
----------- -----------
(1,151,052) (1,145,589)
----------- -----------
Net deferred tax asset (liability)...................... $ 40,420 $ (286,263)
=========== ===========
The Company establishes a valuation allowance for deferred tax assets when
it is not determined that those assets are more likely than not to be realized.
The valuation allowance of $188.7 million at December 31, 1998 and $615.5
million at December 31, 1997 relate primarily to net operating losses that are
limited by Internal Revenue Code Section 382 as a result of the Keystone
Transaction.
104
107
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the Keystone Transaction, the Company and certain of its
affiliates are parties to an agreement (the "Assistance Agreement") with a
predecessor of the Federal Savings and Loan Insurance Corporation ("FSLIC")
Resolution Fund (the "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 Federal Savings
and Loan Association, are to be paid by the Company to the FRF. The Assistance
Agreement sets forth certain special adjustments to federal taxable income to
arrive at "FSLIC taxable income," which is then offset by utilizable net
operating losses to compute the benefit due to the FRF.
The decrease in the valuation allowance of $426.8 million and the increased
payments in lieu liability during the year ended December 31, 1998 was due
primarily to a one-time favorable adjustment in the Company's deferred tax asset
attributable to the Keystone Transaction.
Federal and state income tax net operating loss carryforwards due to expire
under current law during the years indicated were as follows:
DECEMBER 31, 1998
-----------------------
FEDERAL STATE
---------- ----------
(DOLLARS IN THOUSANDS)
Expiring in:
2000...................................................... $ -- $ 103,522
2001...................................................... -- 599,241
2002...................................................... 7,243 577,803
2003...................................................... 707,797 --
2004...................................................... 243,000 --
2005...................................................... 243,000 --
2008...................................................... 16,203 --
2009...................................................... 6,543 --
2010...................................................... 24,251 --
2011...................................................... 1,011 --
2012...................................................... 327 --
---------- ----------
$1,249,375 $1,280,566
========== ==========
105
108
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,
----------------------------------------------------------------------
1998 1997 1996
---------------------- --------------------- ---------------------
AS A AS A AS A
PERCENTAGE PERCENTAGE PERCENTAGE
OF PRETAX OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
--------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Income taxes computed at statutory
rates............................... $ 829,310 35.00% $538,374 35.00% $206,707 35.00%
Tax effect of:
Payments in lieu.................... 201,544 8.51 17,232 1.12 25,187 4.26
State income tax, net of federal tax
benefit........................... 95,470 4.03 76,096 4.95 (30,014) (5.08)
Restructuring adjustments........... 33,728 1.42 68,276 4.44 9,321 1.58
Amortization of goodwill and other
intangible assets................. 12,990 * 9,649 * 7,865 1.33
Valuation allowance change from
prior year........................ (258,176) (10.90) (24,860) (1.62) (21,382) (3.62)
Basis difference in subsidiary...... (19,414) * -- -- -- --
Sale of stock of subsidiary......... (4,165) * (7,000) * -- --
Tax-exempt income................... (2,650) * (1,971) * (2,309) *
Life insurance...................... (2,639) * (2,009) * (618) *
Dividends received deduction........ (2,361) * (3,241) * (2,460) *
Tax credits......................... (1,203) * (9,600) * -- --
Reduction of liabilities from prior
periods........................... -- -- (2,900) * (1,000) *
Rate change......................... -- -- -- -- 7,158 1.21
Other............................... 91 * (4,895) * 3,252 *
--------- -------- --------
Income taxes included in the
Consolidated Statements of
Income....................... $ 882,525 37.25 $653,151 42.46 $201,707 34.15
========= ======== ========
- ---------------
* Less than 1%.
NOTE 18: 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 materially adverse effect on the
Company's results of operations or financial condition.
As part of the administration and oversight of the Assistance Agreement and
other agreements among ASB, certain of its affiliates and the Federal Deposit
Insurance Corporation ("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.
At December 31, 1998, Washington Mutual (as successor to Coast) had letters
of credit outstanding aggregating $235.8 million, which are conditional
commitments issued to guarantee the performance of a customer to a third party.
The credit risk involved in these letters of credit is essentially the same as
that involved in making real estate loans. The letters of credit generally
expire from one to ten years after the date of issuance.
106
109
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19: STOCKHOLDERS' EQUITY
Common Stock
Changes in common stock outstanding were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(NUMBER OF SHARES IN THOUSANDS)
Shares issued, beginning of year...................... 589,790 576,179 563,762
Common stock issued through employee stock plans...... 4,150 14,943 4,370
Common stock issued under dividend reinvestment
plan................................................ 8 30 138
Treasury shares retired............................... (539) (1,362) (9,234)
Conversion of preferred stock......................... -- -- 16,622
Immaterial business combinations accounted for as
poolings of interests............................... -- -- 521
------- ------- -------
Shares issued, end of year............................ 593,409 589,790 576,179
Treasury shares, end of year(1)....................... -- (46,948) (29,216)
------- ------- -------
Shares outstanding, end of year....................... 593,409 542,842 546,963
======= ======= =======
- ---------------
(1) Beginning in October 1995, Ahmanson commenced a program to repurchase its
own common stock and had purchased a total of 27,986,575 shares (or
47,017,446 equivalent common shares of WMI, based on a conversion rate of
1.68 shares of WMI common stock for each share of Ahmanson common stock)
before the program was discontinued in February 1998. The shares were
recorded as common stock in treasury. Prior to its merger with Washington
Mutual, Ahmanson reissued substantially all the shares for purposes of the
conversion of Ahmanson's 6.00% Cumulative Convertible Preferred Stock,
Series D, the Coast Acquisition, and employee stock option exercises. The
residual amount of treasury shares was retired upon the merger with
Washington Mutual, and no treasury shares remained at December 31, 1998.
Cash dividends paid per share were as follows(1):
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
Fourth quarter........................................... $0.220 $0.187 $0.160
Third quarter............................................ 0.207 0.180 0.153
Second quarter........................................... 0.200 0.173 0.147
First quarter............................................ 0.193 0.167 0.140
- ---------------
(1) These dividends have not been restated to reflect pooling combinations.
Prior to the business combination with Washington Mutual, acquired
companies paid total common cash dividends of $69.6 million, $154.6 million and
$288.3 million in 1998, 1997 and 1996.
In addition to being influenced by legal, regulatory and economic
restrictions, WMI'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, 1998 included a pre-1988
thrift bad debt reserve for tax purposes of $2.01 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
thrift subsidiaries no longer qualifies as either a bank or a qualified thrift
lender, 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
107
110
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 18: Contingencies" for discussion of the 12,000,000 shares of
common stock held in escrow.
Preferred Stock
There was no preferred stock (10,000,000 shares authorized without regard
to merged companies) issued or outstanding at December 31, 1998. Preferred stock
at December 31, 1997 consisted of the following:
DECEMBER 31, 1997
----------------------
(DOLLARS IN THOUSANDS)
Nonconvertible:
7.60% Noncumulative Perpetual Preferred Stock, Series E,
1,970,000 shares outstanding; liquidation preference
$49,250................................................ $ 49,250
8.40% Preferred Stock, Series C, 780,000 shares
outstanding; liquidation preference $195,000........... 195,000
9.12% Noncumulative Perpetual Preferred Stock, Series C,
2,752,500 shares outstanding; liquidation preference
$68,813................................................ 68,813
--------
313,063
Convertible:
6.00% Cumulative Convertible Preferred Stock, Series D,
568,398 shares outstanding; liquidation preference
$284,199............................................... 284,199
--------
$597,262
========
In 1993, the Company issued 2,000,000 shares of 7.60% Noncumulative
Perpetual Preferred Stock, Series E ("Series E Preferred Stock"), at $25.00 per
share for net proceeds of $48.2 million. The Series E Preferred Stock had a
liquidation preference of $25.00 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 $1.90 per share.
Dividends were declared and paid in all quarters from issuance to redemption. In
November 1995, the Company purchased and retired 30,000 shares of the Series E
Preferred Stock. The Company redeemed the remaining Series E Preferred Stock on
September 16, 1998, at the redemption price of $25.00 per share plus unpaid
dividends, for the then current dividend period up to the date fixed for
redemption.
In 1993, Ahmanson issued 575,000 shares of 6.00% Cumulative Convertible
Preferred Stock, Series D ("Series D Convertible Preferred Stock") and received
net proceeds of $280.7 million. The Series D Convertible Preferred Stock was
convertible into 11,814,238 million shares of Ahmanson's common stock at a rate
of $24.335 per share of common stock. Dividends, if and when declared by
Ahmanson's Board of Directors, were at an annual rate of $30.00 per share.
Dividends were declared and paid in all quarters from issuance to redemption or
conversion. On or before August 24, 1998, substantially all of these shares were
converted to Ahmanson common stock.
In 1993, Ahmanson issued 780,000 shares of 8.40% Preferred Stock, Series C
("Series C Preferred Stock-Ahmanson") and received net proceeds of $188.4
million. The Series C Preferred Stock-Ahmanson had a liquidation preference of
$195.0 million plus dividends accrued and unpaid for the then current dividend
period. Dividends, if and when declared by Ahmanson's Board of Directors, were
at an annual rate of $21.00 per share. Dividends were declared and paid in all
quarters from issuance to redemption. On March 2, 1998, Ahmanson redeemed at par
the entire $195.0 million of Series C Preferred Stock-Ahmanson.
108
111
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1992, the Company issued 2,800,000 shares of 9.12% Noncumulative
Perpetual Preferred Stock, Series C ("Series C Preferred Stock"), at $25.00 per
share for net proceeds of $67.4 million. The Series C Preferred Stock had a
liquidation preference of $25.00 per share plus dividends accrued and unpaid for
the then current dividend period. Dividends were at an annual rate of $2.28 per
share. Dividends were declared and paid in all quarters from issuance to
redemption. In November 1995, the Company purchased and retired 47,500 shares of
the Series C Preferred Stock. The Company redeemed the remaining Series C
Preferred Stock on January 1, 1998, at the redemption price of $25.00 per share
plus unpaid dividends, for the then current dividend period up to the date fixed
for redemption.
In 1992, Great Western 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 $250.00 per share. Each share of Cumulative Preferred Stock was
redeemable at the option of the Company on or after November 1, 1997, at $250.00
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 from issuance to redemption. On July 1, 1997, in connection with
the Great Western Merger, each outstanding share of Cumulative Preferred Stock
was converted into one share of WMI 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 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.
In 1992, the Company issued 1,400,000 shares of $6.00 Noncumulative
Convertible Perpetual Preferred Stock, Series D ("Series D Preferred Stock"), at
$100.00 per share for net proceeds of $136.4 million. The Series D Preferred
Stock had a liquidation preference of $100.00 per share plus dividends accrued
and unpaid for the then current dividend period. The Series D Preferred Stock
was convertible at a rate of 5.8063 shares of common stock per share of Series D
Preferred Stock. Dividends were at an annual rate of $6.00 per share. Dividends
were declared and paid in all quarters from issuance to redemption or
conversion. 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, Ahmanson issued 3,500,000 shares of 9.60% Preferred Stock, Series
B ("Series B Preferred Stock") and received net proceeds of $169.1 million. The
Series B Preferred Stock had a liquidation preference of $175.0 million plus
dividends accrued and unpaid for the then current dividend period. Dividends, if
and when declared by Ahmanson's Board of Directors, were at an annual rate of
$4.80 per share. Dividends were declared and paid in all quarters from issuance
to redemption. On September 3, 1996, Ahmanson redeemed at par the entire $175.0
million of Series B Preferred Stock.
In 1991, Great Western 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 $250.00 per share. The Convertible Preferred Stock
was redeemable prior to May 1, 1996. Each share of Convertible Preferred Stock
was redeemable at the option of Great Western, in whole or in part, at prices
declining to $250.00 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 Great Western common stock at a conversion price of $20.40 per share
of Great Western 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 6,295,556 shares of Great Western 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
109
112
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consolidated Financial Statements. The Cumulative Redeemable Preferred Stock was
redeemed on December 20, 1996.
NOTE 20: 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 with 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 attributable to common stock 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. This statement
required restatement of all prior periods.
Information used to calculate EPS was as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income
- ----------
Net income.................................. $1,486,932 $885,118 $375,358
Accumulated dividends on preferred
stock..................................... (15,942) (55,031) (83,635)
----------- ----------- -----------
Net income attributable to common stock..... 1,470,990 830,087 291,723
Accumulated dividends on convertible
preferred stock........................... 9,269 17,219 --
----------- ----------- -----------
Diluted net income attributable to common
stock..................................... $1,480,259 $847,306 $291,723
=========== =========== ===========
Weighted average shares
- -----------------------
Basic weighted average number of common
shares outstanding........................ 564,420,541 532,412,178 535,206,458
Dilutive effect of outstanding common stock
equivalents............................... 14,141,764 24,346,845 3,851,646
----------- ----------- -----------
Diluted weighted average number of common
shares outstanding........................ 578,562,305 556,759,023 539,058,104
=========== =========== ===========
Net income per common share
- ---------------------------
Basic....................................... $2.61 $1.56 $0.55
Diluted..................................... 2.56 1.52 0.54
Options to purchase 1,626,750 million shares of common stock at a weighted
average exercise price of $44.92 per share were outstanding at December 31,
1998, 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 stock during the period. Additionally, as part of the Keystone
Transaction, 12,000,000 shares of common stock, with an assigned value of
$27.7417 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 occurred at December 31,
1998, and therefore, the contingently issuable shares have not been included in
the above computations.
110
113
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 21: 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 also owns a small industrial bank that is subject to FDIC capital
requirements.
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 Tier 1
and total capital to risk-weighted assets, as well as Tier 1 capital to adjusted
total assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") created a statutory framework that increased the importance of
meeting applicable capital requirements. 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 Tier 1 capital to risk-weighted assets is 6.00% or more, its
ratio of Tier 1 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 Tier 1 capital ratio of not less than 4.00%.
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.
111
114
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998
------------------------------------------------------------
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(2)
- --------
Total capital to risk-weighted assets... $8,771,315 12.11% $5,793,557 8.00% $7,241,946 10.00%
Tier 1 capital to risk-weighted
assets................................ 7,404,210 10.22 n.a. n.a. 4,345,168 6.00
Tier 1 capital to adjusted total assets
(leverage)............................ 7,404,210 5.76 3,858,195 3.00 6,430,325 5.00
Tangible capital to tangible assets..... 7,401,708 5.76 1,929,060 1.50 n.a. n.a.
WMB
- ---
Total capital to risk-weighted assets... 1,939,187 11.47 1,352,948 8.00 1,691,185 10.00
Tier 1 capital to risk-weighted
assets................................ 1,790,565 10.59 676,474 4.00 1,014,711 6.00
Tier 1 capital to average assets
(leverage)............................ 1,790,565 5.90 1,212,989 4.00 1,516,236 5.00
WMBfsb
- ------
Total capital to risk-weighted assets... 87,356 13.35 52,367 8.00 65,459 10.00
Tier 1 capital to risk-weighted
assets................................ 79,124 12.09 n.a. n.a. 39,275 6.00
Tier 1 capital to adjusted total assets
(leverage)............................ 79,124 7.37 32,222 3.00 53,703 5.00
Tangible capital to tangible assets..... 79,124 7.37 16,111 1.50 n.a. n.a.
- ---------------
(1) Regulatory requirements listed in this column are not the same as capital adequacy requirements under
prompt corrective action provisions.
(2) On October 3, 1998, Home Savings merged with and into WMBFA. The regulatory capital information for
WMBFA reflected this merger.
112
115
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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... $4,497,262 11.11% $3,242,490 8.00% $4,050,336 10.00%
Tier 1 capital to risk-weighted
assets................................ 3,865,394 9.54 n.a. n.a. 2,434,644 6.00
Tier 1 capital to adjusted total assets
(leverage)............................ 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 n.a. n.a.
Home Savings(2)
- ---------------
Total capital to risk-weighted assets... 3,494,471 11.80 2,365,610 8.00 2,960,452 10.00
Tier 1 capital to risk-weighted
assets................................ 2,706,337 9.14 n.a. n.a. 1,776,271 6.00
Tier 1 capital to adjusted total assets
(leverage)............................ 2,706,337 5.87 1,383,251 3.00 2,305,419 5.00
Tangible capital to tangible assets..... 2,703,074 5.86 691,577 1.50 n.a. n.a.
WMB
- ---
Total capital to risk-weighted assets... 1,605,745 10.93 1,175,592 8.00 1,469,490 10.00
Tier 1 capital to risk-weighted
assets................................ 1,488,610 10.13 587,796 4.00 881,694 6.00
Tier 1 capital to average assets
(leverage)............................ 1,488,610 5.86 1,015,372 4.00 1,269,216 5.00
WMBfsb
- ------
Total capital to risk-weighted assets... 77,813 11.95 52,077 8.00 65,096 10.00
Tier 1 capital to risk-weighted
assets................................ 70,535 10.84 n.a n.a. 39,058 6.00
Tier 1 capital to adjusted total assets
(leverage)............................ 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 n.a. n.a.
- ---------------
(1) Regulatory requirements listed under this column are not the same as capital
adequacy requirements under prompt corrective action provisions.
(2) On October 3, 1998, Home Savings merged with and into WMBFA.
Management believes that WMBFA, WMB and WMBfsb individually met all capital
adequacy requirements, as of December 31, 1998, to which they were subject.
Additionally, as of the most recent notifications from the FDIC (for WMB) and
the OTS (for WMBFA, WMBfsb and Home Savings), the FDIC and OTS individually
categorized WMBFA, WMB, WMBfsb and Home Savings 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 or leverage capital ratios as set forth in the table above. There are
no conditions or events since that notification that management believes have
changed the well capitalized status of WMBFA, WMB, WMBfsb and Home Savings.
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
113
116
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 would 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 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 22: STOCK OPTION PLANS, EMPLOYEE STOCK PURCHASE PLAN, AND RESTRICTED STOCK
PLANS
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 WMI may be granted to
officers, 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 WMI's common stock. The
1994 Plan provides for the granting of options for a maximum of 18,000,000
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 have an option to purchase 150 shares of WMI
common stock, while part-time employees have an option to purchase 75 shares,
while employees who were designated to receive options under the 1994 Plan were
excluded. All grants were made using the fair market value of WMI'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 3,300,000 common
shares.
On December 15, 1998, the Company's Board of Directors approved the
adoption of a broad-based stock option plan ("WAMU Shares II") to provide a
performance incentive and encourage stock ownership by employees of the Company.
This plan provides for an award of nonqualified stock options to all eligible
employees who were employed by the Company on January 4, 1999. Full-time
employees received an option to purchase 100 shares of WMI 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. These
employee stock options were in addition to the Company's previous broad-based
stock option plan described above. Options under the WAMU Shares II plan were
granted at the fair market value of WMI's common stock on December 14, 1998, and
all options vest on January 4, 2001. The WAMU Shares II plan provides for the
granting of options up to a maximum of 3,300,000 common shares.
On April 26, 1988, Great Western stockholders approved the adoption of the
1988 Stock Option and Incentive Plan (the "Great Western Plan"). Options were
granted at the market value of the Great Western common stock on the date of
grant. The Great Western 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 Nonemployee Director Program, under which nonqualified
options were granted to nonemployee 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
114
117
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
date of exercise. As of July 1, 1997, this plan was amended to eliminate further
grants. At the close of the Great Western Merger, these options became fully
vested.
On May 21, 1985, Ahmanson stockholders approved the adoption of the 1984
Stock Incentive Plan (the "1984 Ahmanson Stock Plan"). The 1984 Ahmanson Stock
Plan provided for the issuance of incentive and nonqualified stock options,
stock appreciation rights, and restricted stock awards to certain officers and
employees at the discretion of Ahmanson's Board of Directors. On May 9, 1989,
Ahmanson stockholders approved the adoption of the 1988 Directors' Stock
Incentive Plan (the "1988 Ahmanson Directors' Stock Plan"). The 1988 Ahmanson
Directors' Stock Plan provided for the issuance of nonqualified stock options to
nonemployee directors. On May 10, 1994, Ahmanson stockholders approved the
adoption of the 1993 Stock Incentive Plan (the "1993 Ahmanson Stock Plan"). The
1993 Ahmanson Stock Plan provided for the issuance of stock bonuses, incentive
and nonqualified stock options, stock appreciation rights, and restricted stock
awards to certain officers, employees and directors at the discretion of
Ahmanson's Board of Directors. On May 13, 1996, Ahmanson stockholders approved
the adoption of the 1996 Nonemployee Directors' Stock Incentive Plan (the "1996
Ahmanson Directors' Stock Plan"). The 1996 Ahmanson Directors' Stock Plan
provided for the issuance of nonqualified stock options to nonemployee
directors. Upon the close of the Ahmanson Merger, all options vested and
restrictions on awards lapsed.
Stock options under all stock plans were generally exercisable on a
phased-in schedule over two to five years, depending upon the terms of the
grant, and expire three to ten years from the grant date. At December 31, 1998,
options to purchase 7,728,919 shares were fully exercisable.
Stock options granted, exercised, or forfeited were as follows:
WEIGHTED WEIGHTED AVERAGE
AVERAGE FAIR VALUE PER SHARE
NUMBER OF EXERCISE PRICE OF OF OPTIONS AT
OPTION SHARES OPTION SHARES DATE OF GRANT
------------- ----------------- --------------------
Balance, December 31, 1995....................... 16,513,987 $11.64
Granted in 1996.................................. 9,054,389 19.38 $ 6.98
Exercised in 1996................................ (3,426,237) 11.44
Forfeited in 1996................................ (500,330) 13.02
-----------
Balance, December 31, 1996....................... 21,641,809 14.87
Granted in 1997.................................. 6,456,190 37.06 10.25
Exercised in 1997................................ (14,262,878) 14.89
Forfeited in 1997................................ (343,758) 15.52
-----------
Balance, December 31, 1997....................... 13,491,363 25.46
Granted in 1998.................................. 3,486,639 32.94 7.83
Exercised in 1998................................ (3,359,459) 13.93
Forfeited in 1998................................ (339,316) 34.52
-----------
Balance, December 31, 1998....................... 13,279,227 30.11
===========
115
118
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial data pertaining to outstanding stock options were as follows:
DECEMBER 31, 1998
- ----------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED AVERAGE
NUMBER OF AVERAGE AVERAGE NUMBER OF EXERCISE PRICE OF
RANGES OF OPTION REMAINING EXERCISE PRICE EXERCISABLE EXERCISABLE
EXERCISE PRICES SHARES YEARS OF OPTION SHARES OPTION SHARES OPTION SHARES
- --------------- ---------- --------- ---------------- ------------- -----------------
$ 5.02 - $10.97 1,012,869 3.8 $ 8.45 1,012,869 $ 8.45
11.20 - 20.00 2,393,702 6.2 15.63 2,226,930 15.41
21.00 - 30.49 1,855,478 8.0 25.34 1,575,350 24.81
31.67 - 39.94 6,285,714 7.1 36.39 2,279,555 38.28
42.83 - 49.88 1,731,464 9.0 45.10 634,215 45.43
---------- ---------
13,279,227 30.11 7,728,919 25.62
========== =========
Under the terms of the Company's Employee Stock Purchase Plan ("ESPP"), an
employee may 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 each employee's 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 disclosure of stock-based
compensation arrangements with employees and encourages (but does not require)
application of its fair value recognition provisions. SFAS No. 123 does not
rescind or interpret the existing accounting rules for employee stock-based
arrangements. Companies may continue following those rules to recognize and
measure compensation as outlined in Accounting Principles Board ("APB") Opinion
25, Accounting for Stock Issued to Employees, but they are now required to
disclose the pro forma amounts of net income and earnings per share that would
have been reported had the Company elected to follow the fair value recognition
provisions of SFAS No. 123. Effective January 1, 1996, the Company adopted the
disclosure requirements of SFAS No. 123, but has determined 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,
116
119
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's net income attributable to common stock and net income per common
share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
------------ ------------ -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income attributable to common stock
- ---------------------------------------
Basic:
As reported........................... $1,470,990 $830,087 $291,723
Pro forma............................. 1,446,139 792,311 282,589
Diluted:
As reported........................... 1,480,259 847,306 291,723
Pro forma............................. 1,455,408 809,530 282,589
Net income per common share
- ---------------------------
Basic:
As reported........................... $2.61 $1.56 $0.55
Pro forma............................. 2.56 1.49 0.53
Diluted:
As reported........................... 2.56 1.52 0.54
Pro forma............................. 2.52 1.45 0.52
The compensation expense included in the pro forma net income attributable
to common stock 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
was estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions: annual dividend yield of 2.68%
for 1998, 2.67% for 1997 and 2.50% for 1996; expected volatility of 27.71% for
1998, 27.37% for 1997 and 23.99% for 1996; risk free interest rate of 5.44% for
1998, 6.01% for 1997 and 5.78% for 1996; and expected life of five years for
1998, 1997 and 1996.
The Company maintains a restricted stock plan for the benefit of directors,
key officers, loan officers and investment representatives. Under the plan, the
Company granted 203,904, 331,936, and 644,163 shares of restricted stock in
1998, 1997, and 1996. Upon grant, shares are issued to a trustee and are
released to recipients when the restrictions lapse. The restrictions are based
upon either a continuous service or performance requirement. At the date of
grant, unearned compensation is recorded as an offset to stockholders' equity
and is amortized as compensation expense over the restricted period. The balance
of unearned compensation related to these restricted shares as of December 31,
1998 was $18.8 million.
Great Western and Ahmanson maintained restricted stock plans for key
officers. As of the date of the change in control, all restrictions on these
shares lapsed.
The total compensation expense recognized for the restricted shares was
$9.4 million, $3.3 million, and $5.1 million in 1998, 1997, and 1996. Restricted
shares accrue dividends. All canceled or forfeited shares become available for
future grants.
NOTE 23: EMPLOYEE BENEFITS PROGRAMS
Pension Plans
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
117
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's policy to fund the Pension Plan on a current basis to the extent
deductible under federal income tax regulations. The Company maintained a
substantially similar plan as a result of the Great Western Merger, (the "Great
Western Plan" and together with the Pension Plan, the "Pension Plans"), which
was merged into the Pension Plan effective July 1, 1998. 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. The Pension Plans' assets consist primarily of
listed common stocks, U.S. government obligations, asset-backed securities,
corporate debt obligations, and annuity contracts.
ASB provided a noncontributory defined benefit pension plan (the "ASB
Plan"), which was terminated effective June 30, 1995. 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. The Company recognized a gain of $1.7 million as a result
of the settlement. The benefit obligation was settled in 1996.
The Company, as successor to Ahmanson and Coast, maintains noncontributory
defined benefit pension plans (the "Ahmanson Plan" and the "Coast Plan")
covering eligible employees of Ahmanson or Coast who meet minimum service
requirements. The benefits are generally based on years of service and the
employee's average earnings in the final years of employment. Assets in the
Ahmanson Plan and the Coast Plan consist primarily of listed common stocks, U.S.
government obligations and corporate bonds and debentures. The Ahmanson Plan and
the Coast Plan will be merged into the Company's Pension Plan on October 1,
1999.
Changes in the benefit obligation were as follows:
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
Benefit obligation, beginning of year....................... $559,354 $489,453
Actuarial loss.............................................. 51,634 63,973
Business combinations (acquisitions)........................ 47,055 --
Interest cost............................................... 42,588 36,274
Service cost................................................ 32,654 24,439
Benefits paid............................................... (50,326) (38,955)
Expenses.................................................... (1,693) (1,740)
Amendments.................................................. -- (14,090)
-------- --------
Benefit obligation, end of year............................. $681,266 $559,354
======== ========
Changes in Pension Plans' assets were as follows:
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
Fair value of assets, beginning of year..................... $672,665 $613,368
Actual return on assets..................................... 78,429 99,992
Business combinations (acquisitions)........................ 57,310 --
Benefits paid............................................... (50,326) (38,955)
Expenses.................................................... (1,693) (1,740)
-------- --------
Fair value of assets, end of year........................... $756,385 $672,665
======== ========
118
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliations of funded status were as follows:
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
Funded status............................................... $ 75,119 $113,311
Unrecognized net loss....................................... 60,200 24,612
Unamortized prior service cost.............................. (29,189) (33,965)
Remaining unamortized, unrecognized net obligation
(asset)................................................... (2,154) (2,536)
-------- --------
Prepaid benefit cost........................................ $103,976 $101,422
======== ========
Net periodic expense for the Pension Plans was as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
Interest cost...................................... $ 42,588 $ 36,274 $ 33,915
Service cost....................................... 32,654 24,439 22,157
Expected return on assets.......................... (62,382) (52,506) (47,217)
Amortization of prior service cost (credit)........ (4,776) (4,203) (1,866)
Amortization of unrecognized transition asset...... (382) (958) (1,400)
-------- -------- --------
Net periodic expense............................... $ 7,702 $ 3,046 $ 5,589
======== ======== ========
Weighted average assumptions used in accounting for the Pension Plans were
as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
Assumed discount rate....................................... 6.75% 7.25% 7.50%
Rate of compensation increase............................... 4.83 4.87 5.38
Expected return on assets................................... 9.00 9.00 9.00
Nonqualified Defined Benefit Plans and Other Postretirement Benefit Plans
The Company, as successor to Ahmanson, Coast, and Great Western, has
assumed responsibility for nonqualified, noncontributory unfunded postretirement
benefit plans, including retirement restoration plans for certain employees, a
number of supplemental retirement plans for certain officers, and multiple
outside directors' retirement plans. Benefits under the retirement restoration
plans are generally determined by the Company. Benefits under the supplemental
retirement plans are generally based on years of service. Benefits under the
outside directors' retirement plans generally are payable for a period equal to
the participants' service on the Board of Directors, with a lifetime benefit
payable to participants with 15 or more years of service.
The Company, as successor to Ahmanson and Great Western, maintains unfunded
defined benefit postretirement plans that make medical and life insurance
coverage available to eligible retired employees and dependents. The expected
cost of providing these benefits to retirees, their beneficiaries and covered
dependents was accrued during the years each employee provided services. During
1997, benefits provided under the Great Western plan were eliminated for current
employees resulting in a $23.8 million curtailment gain. This gain was included
as an offset in transaction-related expense.
119
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the benefit obligation were as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
NONQUALIFIED OTHER NONQUALIFIED OTHER
DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT
PLANS BENEFITS PLANS BENEFITS
--------------- -------------- --------------- --------------
(DOLLARS IN THOUSANDS)
Benefit obligation, beginning of year..... $ 93,417 $47,975 $73,193 $ 70,227
Special termination benefits.............. 10,386 -- -- --
Interest cost............................. 6,855 2,447 5,848 4,427
Actuarial loss (gain)..................... 6,701 (250) 7,373 124
Business combinations (acquisitions)...... 6,495 -- -- --
Service cost.............................. 692 546 924 1,533
Settlements............................... (7,714) -- -- --
Benefits paid............................. (7,673) (2,779) (5,802) (4,536)
Curtailment loss (gain)................... (5,032) -- 12,166 (23,800)
Amendments................................ (320) (9,300) (285) --
-------- ------- ------- --------
Benefit obligation, end of year........... $103,807 $38,639 $93,417 $ 47,975
======== ======= ======= ========
Changes in the fair value of plan assets were as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
NONQUALIFIED OTHER NONQUALIFIED OTHER
DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT
PLANS BENEFITS PLANS BENEFITS
--------------- -------------- --------------- --------------
(DOLLARS IN THOUSANDS)
Fair value of plan assets, beginning of
year.................................... $ -- $ -- $ -- $ --
Employer contributions.................... 15,707 927 6,087 2,495
Benefits paid............................. (7,993) (927) (6,087) (2,495)
Settlements............................... (7,714) -- -- --
------- ----- ------- -------
Fair value of plan assets, end of year.... $ -- $ -- $ -- $ --
======= ===== ======= =======
Reconciliations of funded status were as follows:
DECEMBER 31,
-------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
NONQUALIFIED OTHER NONQUALIFIED OTHER
DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT
PLANS BENEFITS PLANS BENEFITS
--------------- -------------- --------------- --------------
(DOLLARS IN THOUSANDS)
Funded status............................. $(103,807) $(38,639) $(93,417) $(47,975)
Unrecognized net loss (gain).............. 10,161 (2,507) 14,862 (2,536)
Unamortized prior service cost (credit)... 477 (8,636) 4,156 --
Remaining unamortized, unrecognized net
obligation.............................. -- 10,253 1,114 10,946
--------- -------- -------- --------
Net amount recognized..................... $ (93,169) $(39,529) $(73,285) $(39,565)
========= ======== ======== ========
120
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amounts recognized in the Consolidated Statements of Financial Condition
were as follows:
DECEMBER 31,
-------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
NONQUALIFIED OTHER NONQUALIFIED OTHER
DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT
PLANS BENEFITS PLANS BENEFITS
--------------- -------------- --------------- --------------
(DOLLARS IN THOUSANDS)
Accumulated other comprehensive income.... $ 10,271 $ -- $ 11,164 $ --
Intangible asset.......................... 477 -- 5,231 --
Accrued benefit liability................. (70,672) (39,529) (71,042) (39,565)
Accrued benefit cost...................... (33,245) -- (18,638) --
-------- -------- -------- --------
Net amount recognized..................... $(93,169) $(39,529) $(73,285) $(39,565)
======== ======== ======== ========
Net periodic expense for the benefit plans was as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
NONQUALIFIED OTHER NONQUALIFIED OTHER NONQUALIFIED OTHER
DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT
PLANS BENEFITS PLANS BENEFITS PLANS BENEFITS
--------------- -------------- --------------- -------------- --------------- --------------
(DOLLARS IN THOUSANDS)
Special termination
benefits........... $10,386 $ -- $ -- $ -- $ -- $ --
Curtailment loss..... 9,829 -- -- -- -- --
Interest cost........ 6,855 2,447 5,848 4,427 5,315 5,172
Service cost......... 692 546 925 1,533 2,157 2,576
Amortization of prior
service cost
(credit)........... 411 (664) 992 -- 2,291 --
Recognized net
actuarial loss
(gain)............. 366 (279) 2,356 (220) (1,943) (580)
Settlement loss...... 334 -- -- -- -- --
Amortization of
unrecognized
transition
obligation......... 222 693 608 693 2,124 953
------- ------ ------- ------ ------- ------
Net periodic
expense............ $29,095 $2,743 $10,729 $6,433 $ 9,944 $8,121
======= ====== ======= ====== ======= ======
Weighted average assumptions used in accounting for the benefit plans were
as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
NONQUALIFIED OTHER NONQUALIFIED OTHER NONQUALIFIED OTHER
DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT
PLANS BENEFITS PLANS BENEFITS PLANS BENEFITS
--------------- -------------- --------------- -------------- --------------- --------------
Assumed discount rate..... 6.75% 6.75% 7.29% 7.14% 7.64% 7.34%
Rate of compensation
increase................ 5.00 -- 5.18 -- 5.04 --
The rate of compensation increase is not applicable to all nonqualified
defined benefit plans.
For measurement of the net periodic cost of other postretirement benefit
plans, a 7.75% annual increase in the medical care trend rate was assumed for
1998, thereafter decreasing 1% per year until a stable 5.75% medical inflation
rate is reached in 2000. The effect of a 1% increase or decrease in the trend
rates is not significant.
121
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Account Balance Plans
Savings Plans. The Company sponsors a retirement savings and investment
plan (the "RSIP") for 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. Employee contributions vest
immediately. The Company's matching contributions and any profit sharing
contributions made to employees vest based on years of service.
The Company, as successor to Great Western, maintained a savings plan for
substantially all eligible employees formerly of Great Western, which allowed
participants to make contributions equal to 14% or less of their salary pursuant
to Section 401(k) of the Internal Revenue Code. Contributions to this plan were
frozen at December 31, 1997 and all participants became eligible to participate
in the RSIP. The Great Western savings plan was merged into the RSIP on July 1,
1998. The Company, as successor to Ahmanson and Coast, maintains a savings plan
for employees formerly of Ahmanson and Coast, which allows participants to make
contributions equal to 15% or less of their salary pursuant to Section 401(k) of
the Internal Revenue Code. Employees vest immediately in their own contributions
and they vest in the Company's contributions based on years of service. The
Coast savings plan was merged into the Ahmanson savings plan at the close of
business on June 30, 1998.
Contributions to savings plans were $35.6 million, $27.4 million and $28.0
million in 1998, 1997 and 1996.
Other Account Balance Plans. The Company sponsors supplemental employee
and executive retirement plans for the benefit of certain officers. The plans
are designed to supplement the benefits that are accrued under the Pension
Plans.
The Company provides an optional deferred compensation plan for certain
employees and directors. Eligible participants can defer a portion of their
compensation, and the Company agrees to pay interest on the balance of funds
deferred. The Company also maintains similar optional deferred compensation
plans for directors and certain employees formerly with Ahmanson, Coast, Great
Western and ASB. No additional compensation may be deferred under the Coast,
Great Western and ASB plans. Compensation may be deferred for another two years
under the Ahmanson Plan. Expense related to deferred compensation plans was $8.1
million, $7.9 million and $9.1 million in 1998, 1997 and 1996.
The Company has purchased life insurance, primarily with two carriers, on
the lives of the participants in certain nonqualified defined benefit plans and
the deferred compensation plans (described above). The net cash surrender value
of this life insurance, included in other assets, was $401.0 million at December
31, 1998 and $338.2 million at December 31, 1997 and net premium income related
to insurance purchased was $5.0 million in 1998, $12.6 million in 1997 and $10.1
million in 1996.
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.
NOTE 24: 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, 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
122
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
used to sell 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 mortgage banking income. As of December 31, 1998 and 1997, the
Company had $2.50 billion and $1.55 billion in forward sales contracts to hedge
fixed-rate SFR loan commitments, which were expected to close, and SFR loans,
which were held for sale.
Interest rate exchange agreements, interest rate cap agreements, 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.
The Company's use of derivative instruments reduces the 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 1998 and 1997, the Company did not terminate any interest rate exchange
agreements or interest rate cap agreements.
Scheduled maturities of interest rate exchange agreements were as follows:
DECEMBER 31, 1998
-----------------------------------------------------------------
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................. $ 500,000 5.45% 5.96% $(2,812) $ (2,812)
Designated against deposits and
borrowings:
Due within one year................. 777,600 5.26 6.54 -- (5,936)
After one but within two years...... 2,209,000 5.43 5.68 -- (15,131)
After two but within three years.... 234,600 4.76 5.48 -- (6,786)
After three years................... 9,200 4.76 5.58 -- (516)
---------- ------- --------
$3,730,400 5.35 5.89 $(2,812) $(31,181)
========== ======= ========
DECEMBER 31, 1997
----------------------------------------------------------------
NOTIONAL SHORT-TERM LONG-TERM CARRYING FAIR
AMOUNT RECEIPT RATE(1) PAYMENT RATE VALUE VALUE
---------- --------------- ------------ -------- -------
(DOLLARS IN THOUSANDS)
Designated against repurchase
agreements:
Due within one year.................. $ 51,409 5.73% 5.71% $ -- $ (85)
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 loans:
Due within one year.................. 88,450 4.96 5.51 -- (146)
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)
---------- ----- -------
$2,226,792 5.65 6.10 $(218) $(3,858)
========== ===== =======
123
126
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of interest rate cap agreements were as follows:
DECEMBER 31, 1998
----------------------------------------------------------
NOTIONAL STRIKE SHORT-TERM CARRYING FAIR
AMOUNT RATE RECEIPT RATE(1) VALUE VALUE
---------- ------ --------------- -------- -------
(DOLLARS IN THOUSANDS)
Designated against deposits and borrowings:
Due within one year(2)..................... $1,005,750 6.98% 5.03% $1,341 $ (314)
After one but within two years(3).......... 2,140,000 6.00 5.30 2,716 (5,273)
After two but within three years(4)........ 154,000 7.60 5.05 1,403 167
After three years(5)....................... 384,750 8.32 4.81 3,321 269
---------- ------ -------
$3,684,500 6.57 5.17 $8,781 $(5,151)
========== ====== =======
- ---------------
(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 corridors of $839.8 million notional amount with a weighted average
ceiling of 8.77% and collars of $150.0 million notional amount with a
weighted average floor of 5.17%.
(3) Included collars of $1.88 billion notional amount with a weighted average
floor of 5.01% and corridors of $112.0 million notional amount with a
weighted average ceiling of 9.50%.
(4) Included corridors of $98.5 million notional amount with a weighted average
ceiling of 9.48%.
(5) Included corridors of $361.3 million notional amount with a weighted average
ceiling of 9.49%.
DECEMBER 31, 1997
--------------------------------------------------------
SHORT-TERM
NOTIONAL STRIKE RECEIPT CARRYING FAIR
AMOUNT RATE 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 corridors of $550.0 million notional amount with a weighted average
ceiling of 7.64% and collars of $100.0 million notional amount with a binary
1.00% cap.
(3) Included collars of $150.0 million notional amount with a weighted average
floor of 5.50% and corridors of $240.0 million notional amount with a
weighted average ceiling of 9.50%.
(4) Included corridors of $839.8 million notional amount with a weighted average
ceiling of 8.77%.
(5) Included corridors of $112.0 million notional amount with a weighted average
ceiling of 9.50%
(6) Included corridors of $459.8 million notional amount with a weighted average
ceiling of 9.49%.
124
127
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,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Weighted average net effective cost, end of year....... 0.54% 0.45% 0.29%
Weighted average net effective cost during the year.... 0.37 0.67 0.21
Monthly average notional amount of interest rate
exchange agreements.................................. $3,042,438 $2,322,355 $3,699,703
Maximum notional amount of interest rate exchange
agreements at any month end.......................... 3,824,400 2,926,833 4,624,617
Net (benefit) included in interest on repurchase
agreements........................................... (31) (17) (176)
Net cost (benefit) included in interest on
available-for-sale securities........................ 1,894 2,637 (2,984)
Net cost included in interest on loans................. -- 2,835 15,215
Net cost (benefit) included in interest on deposits.... 2,575 3,951 (14,471)
Net cost included in interest on borrowings............ 6,241 5,975 9,951
Financial data pertaining to interest rate cap agreements were as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
---------- ---------- -----------
(DOLLARS IN THOUSANDS)
Monthly average notional amount of interest rate cap
agreements.......................................... $3,260,115 $3,897,769 $10,433,750
Maximum notional amount of interest rate cap
agreements at any month end......................... 3,874,500 3,965,000 12,514,500
Net cost (benefit) included in interest on
available-for-sale securities....................... 1,033 3,612 (4,686)
Net cost included in interest on deposits............. 4,593 5,773 6,206
Net cost included in interest on borrowings........... 945 -- 2,162
Changes in interest rate exchange agreements and interest rate cap
agreements were as follows:
YEAR ENDED DECEMBER 31, 1998
------------------------------
INTEREST RATE INTEREST RATE
EXCHANGE CAP
AGREEMENTS AGREEMENTS
------------- -------------
(DOLLARS IN THOUSANDS)
Notional balance, beginning of year......................... $2,226,792 $2,875,000
Additions................................................... 2,450,000 2,025,000
Maturities.................................................. (946,392) (1,215,500)
---------- ----------
Notional balance, end of year............................... $3,730,400 $3,684,500
========== ==========
NOTE 25: 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. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because an active secondary market does not
exist for a portion of the Company's financial instruments, fair value estimates
were based on management's judgment concerning future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. In addition, considerable judgment was 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
125
128
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Fair value estimates were determined for existing balance sheet and
off-balance sheet financial instruments, including derivative instruments,
without attempting to estimate the value of anticipated future business and the
value of certain assets and liabilities that were not considered financial
instruments. Significant assets that were not considered financial instruments
include premises and equipment, net tax assets, REI, foreclosed assets and
intangible assets. In addition, the tax ramifications related to the realization
of the unrealized gains and losses could have a significant effect on fair value
estimates and have not been considered in any of the valuations.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument as of December 31, 1998 and 1997:
Cash and cash equivalents -- The carrying amount represented fair value.
Trading securities -- Fair values were based on quoted market prices.
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 analysis.
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 analysis.
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 were not included.
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 values were 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 and interest rate cap 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.
126
129
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The estimated fair value of the Company's financial instruments was as
follows:
DECEMBER 31,
----------------------------------------------------------
1998 1997
---------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ----------- -----------
(DOLLARS IN THOUSANDS)
Financial assets:
Cash and cash equivalents......... $ 2,756,974 $ 2,756,974 $ 2,719,997 $ 2,719,997
Trading securities................ 39,068 39,068 23,364 23,364
Available-for-sale securities..... 32,919,865 32,919,865 19,816,242 19,816,242
Held-to-maturity securities....... 14,129,482 14,112,620 17,207,854 17,099,744
Loans............................. 108,370,906 109,876,632 97,624,348 99,491,118
Investment in FHLBs............... 2,030,027 2,030,027 1,471,469 1,471,469
Mortgage servicing rights......... 461,295 481,608 311,480 364,897
Financial liabilities:
Deposits.......................... 85,492,141 85,561,818 83,429,433 83,392,959
Federal funds purchased and
commercial paper............... 2,482,830 2,482,742 3,732,282 3,735,519
Reverse repurchase agreements..... 17,519,538 17,543,305 13,954,040 13,973,890
Advances from FHLBs............... 39,748,613 39,808,157 25,114,776 25,194,996
Trust preferred securities........ 938,406 1,039,885 936,547 1,005,273
Other borrowings.................. 4,511,102 4,602,039 6,238,732 6,402,278
Derivative financial instruments(1):
Interest rate exchange agreements:
Designated against repurchase
agreements................... -- -- -- (85)
Designated against
available-for-sale
securities................... (2,812) (2,812) (218) (218)
Designated against loans....... -- -- -- (146)
Designated against deposits and
borrowings................... -- (28,369) -- (3,409)
Interest rate cap agreements:
Designated against
available-for-sale
securities................... -- -- 1,202 1,202
Designated against deposits and
borrowings................... 8,781 (5,151) 11,388 202
Other off-balance sheet instruments:
Forward sales contracts designated
against loans.................. -- 3,186 -- (4,861)
Off-balance sheet loan
commitments.................... -- 14,032 -- (781)
- ---------------
(1) See Note 24: Interest Rate Risk Management.
127
130
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 26: FINANCIAL INFORMATION -- WMI
The following WMI (parent company only) financial information should be
read in conjunction with the other Notes to Consolidated Financial Statements.
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
---------- --------- --------
(DOLLARS IN THOUSANDS)
INTEREST INCOME
Loans.................................................... $ 223 $ 3,895 $ --
Notes receivable from subsidiaries....................... 36,091 39,032 33,401
Available-for-sale securities............................ 304 1,769 6,777
Cash equivalents......................................... 1,831 4,439 7,165
---------- --------- --------
Total interest income.................................. 38,449 49,135 47,343
INTEREST EXPENSE
Borrowings from subsidiaries............................. 55,352 44,336 3,324
Other borrowings......................................... 85,056 90,271 83,878
---------- --------- --------
Total interest expense................................. 140,408 134,607 87,202
---------- --------- --------
Net interest expense................................... (101,959) (85,472) (39,859)
OTHER INCOME
Gain (loss) on sale of other assets...................... (1,009) 20,845 --
Other operating income................................... 1,680 388 792
---------- --------- --------
Total other income..................................... 671 21,233 792
OTHER EXPENSE
Salaries and employee benefits........................... 26,593 10,938 11,645
Transaction-related expense.............................. 57,550 32,308 --
Amortization of goodwill................................. -- 731 629
Other operating expense.................................. 12,443 29,536 26,804
---------- --------- --------
Total other expense.................................... 96,586 73,513 39,078
---------- --------- --------
Net loss before income tax benefit and equity in net
income of subsidiaries.............................. (197,874) (137,752) (78,145)
Income tax benefit....................................... 85,571 73,357 69,429
Equity in net income of subsidiaries..................... 1,599,235 949,513 384,074
---------- --------- --------
Net income............................................... $1,486,932 $ 885,118 $375,358
========== ========= ========
128
131
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-------------------------
1998 1997
----------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents................................... $ 317,730 $ 636,255
Trading securities.......................................... 9,669 --
Available-for-sale securities............................... 9,263 1,000
Loans....................................................... 45,597 13,256
Accounts and notes receivable from subsidiaries............. 213,792 173,261
Investment in subsidiaries.................................. 10,172,632 8,382,005
Other assets................................................ 385,951 303,875
----------- ----------
Total assets.............................................. $11,154,634 $9,509,652
=========== ==========
LIABILITIES
Notes payable to subsidiaries............................... $ 669,982 $ 673,407
Other borrowings............................................ 963,415 1,109,529
Other liabilities........................................... 176,837 125,631
----------- ----------
Total liabilities......................................... 1,810,234 1,908,567
STOCKHOLDERS' EQUITY........................................ 9,344,400 7,601,085
----------- ----------
Total liabilities and stockholders' equity................ $11,154,634 $9,509,652
=========== ==========
129
132
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
----------- ---------- ---------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................ $ 1,486,932 $ 885,118 $ 375,358
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
(Gain) loss on sale of assets.................... 1,009 (20,845) --
(Increase) in trading securities................. (10,678) -- --
(Decrease) increase in interest payable.......... (204) 2,624 530
Increase (decrease) in income taxes payable...... 14,706 (88,809) (8,105)
Equity in undistributed earnings of
subsidiaries................................... (1,591,298) (949,513) (384,074)
(Increase) decrease in other assets.............. (74,662) 6,373 (16,688)
Increase in other liabilities.................... 30,900 8,377 25,953
----------- ---------- ---------
Net cash (used) by operating activities........ (143,295) (156,675) (7,026)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities............ -- (1,000) (12,731)
Sales of available-for-sale securities................ -- 75,866 12,731
Principal payments of available-for-sale securities... 654 4,191 16,118
Origination of loans, net of principal payments....... (32,341) 80,528 55,784
(Increase) decrease in notes receivable from
subsidiaries........................................ (44,605) 111,034 (40,008)
Investment in subsidiary.............................. (42,529) (572,412) (205,969)
Dividends received from subsidiaries.................. 848,594 1,002,736 622,226
Proceeds from sale of subsidiary...................... -- 102,775 12,988
Other, net............................................ -- 882 (4,822)
----------- ---------- ---------
Net cash provided by investing activities...... 729,773 804,600 456,317
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) in reverse repurchase agreements........... -- (68,326) (14,155)
Repayments of notes payable to subsidiaries........... (3,425) -- --
(Repayments of) proceeds from other borrowings........ (189,020) 538,514 289,142
Issuance of common stock through employee stock
plans............................................... 80,562 146,266 20,604
Redemption of preferred stock......................... (313,063) (165,000) (175,000)
Repurchase of common stock, net....................... (24,082) (481,379) (381,933)
Conversion of preferred to common stock............... -- -- (107)
Cash dividends paid................................... (455,975) (338,780) (284,981)
Other, net............................................ -- 28,343 18,827
----------- ---------- ---------
Net cash (used) by financing activities........ (905,003) (340,362) (527,603)
----------- ---------- ---------
(Decrease) increase in cash and cash
equivalents................................. (318,525) 307,563 (78,312)
Cash and cash equivalents, beginning of year... 636,255 328,692 407,004
----------- ---------- ---------
Cash and cash equivalents, end of year......... $ 317,730 $ 636,255 $ 328,692
=========== ========== =========
130
133
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 27: LINES OF BUSINESS
Washington Mutual is managed along five major lines of business: mortgage
banking, consumer banking, commercial banking, financial services, and consumer
finance. The treasury group, although not considered a line of business, is
responsible for the management of investments and interest rate risk. Prior to
the Ahmanson Merger and during the fourth quarter of 1998, Ahmanson was managed
as a distinct business segment of Washington Mutual, and is therefore so
presented. The financial performance of these business lines is measured by the
Company's profitability reporting processes, which utilize various management
accounting techniques to ensure that each business line's financial results
reflect the underlying performance of that business.
The principal activities conducted by mortgage banking are the origination
of SFR and residential construction loans, and the associated loan servicing
activities. Consumer banking includes all deposit products, with their related
fee income, and all consumer loan products offered in our financial centers.
These consumer loan products include second equity mortgage loans and lines of
credit, manufactured housing loans, automobile, boat and recreational vehicle
loans, and education loans. Commercial banking offers commercial business loans,
multi-family residential loans and loans secured by nonresidential real estate.
Financial services offers a wide range of investment products to the Company's
customers, including mutual funds, variable and fixed annuities and general
securities. Consumer finance offers direct consumer installment loans and retail
sales financing.
In June 1997, SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, was issued effective for fiscal years ending after December
15, 1998. This standard requires the Company to provide information on the
performance of its reportable business segments, noted above, which are
strategic lines of business managed by the Executive Committee under the
direction of the Chief Executive Officer. The Executive Committee, which is the
senior decision making group of the Company, is comprised of eight members
including the Chairman, President and Chief Executive Officer.
During 1998, the Company developed a management reporting system that
enables management to monitor the Company's performance on a line of business
basis instead of on a traditional legal entity basis. To better assess the true
profitability of its various business lines, the Company generates segment
results that include balances directly attributable to business line activities
as well as balances that are allocated from traditionally undistributed units.
In this way, management can better assess the fully burdened financial
performance of a particular business. Washington Mutual is constantly analyzing
its line of business performance and developing better ways to measure
profitability.
Each segment is managed by an executive team responsible for sales,
marketing, sales support and operations, and certain administrative functions.
Back office support is provided to each segment through executives responsible
for lending administration, deposit operations, information systems, finance,
legal, and administration.
The accounting policies of the segments are the same as those described in
"Note 1: Summary of Significant Accounting Policies." Whenever feasible,
revenues and expenses are directly assigned to business segments in determining
their net income. Loans originated by the Company's mortgage lending operations
are transferred to the consumer banking segment at a transfer price that
reflects the risk-adjusted value of such loans. In addition, corporate overhead,
centralized support costs, and other costs are allocated to each business
segment based on appropriate allocation methodologies. The Company evaluates
performance based on net income of the respective business segments.
The financial results of each segment were derived from the Company's
general ledger system, and prepared using a profitability reporting system. The
system makes certain adjustments to recorded general ledger accounts to
appropriately reflect balance sheet and income statement transfers among
segments. Since the Company was not specifically organized around lines of
business, most segments were comprised of more
131
134
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
than one functional division. Expenses incurred directly by sales and back
office support units were assigned directly to segments while support units were
either apportioned based on specific services performed or allocated on another
rational and systematic basis.
Since SFAS No. 131 requires no segmentation or methodology standardization,
the organizational structure of the Company and the allocation methodologies it
employs result in business line financial results that are not necessarily
comparable across companies. As such, Washington Mutual's business line
performance may not be directly comparable with similar information from other
financial institutions.
Financial highlights by lines of business:
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------------------------------
MORTGAGE CONSUMER COMMERCIAL FINANCIAL CONSUMER TREASURY/
BANKING BANKING BANKING SERVICES FINANCE OTHER(1) AHMANSON TOTAL
-------- ---------- ---------- --------- -------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
Condensed income statement
- --------------------------
Net interest income after
provision for loan losses..... $589,561 $1,472,203 $215,850 $ 889 $203,432 $247,482 $1,400,340 $4,129,757
Other income.................... 153,037 512,597 17,374 178,885 27,147 48,660 586,448 1,524,148
Transaction-related expense..... 18,044 65,791 452 4,196 -- 8,762 411,041 508,286
Other expense................... 293,009 1,167,952 84,444 126,709 142,992 44,895 916,161 2,776,162
-------- ---------- -------- -------- -------- -------- ---------- ----------
Income before income taxes...... 431,545 751,057 148,328 48,869 87,587 242,485 659,586 2,369,457
Income taxes.................... 156,044 271,577 54,245 18,999 34,700 87,963 258,997 882,525
-------- ---------- -------- -------- -------- -------- ---------- ----------
Net income...................... $275,501 $ 479,480 $ 94,083 $ 29,870 $ 52,887 $154,522 $ 400,589 $1,486,932
======== ========== ======== ======== ======== ======== ========== ==========
DECEMBER 31, 1998
-----------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
Total assets.................... $ 28,453 $ 52,743 $ 7,749 $ 76 $ 2,769 $ 25,348 $ 48,355 $ 165,493
- ---------------
(1) Includes intercompany eliminations.
Prior to 1998, the Company was managed by legal entity, not by discrete
operating segment. In addition, given the nature and magnitude of acquisition
activity since 1996, the Company has determined that it is not possible to
gather the information and data necessary to restate prior year segment results.
For this reason, the Company has disclosed results by legal entity for both
current and prior years.
Financial highlights by legal entity were as follows:
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------
WMBFA WMB WMBFSB ARISTAR AHMANSON OTHER(2) TOTAL
---------- -------- ------- -------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
Condensed income statement
- --------------------------
Net interest income (expense) after
provision for loan losses................ $1,770,456 $833,216 $25,142 $203,432 $1,400,340 $(102,829) $4,129,757
Other income............................... 535,207 256,587 27,585 27,147 586,448 91,174 1,524,148
Transaction-related expense................ 70,216 2,486 -- -- 411,041 24,543 508,286
Other expense.............................. 1,042,973 547,581 28,614 142,992 916,161 97,841 2,776,162
---------- -------- ------- -------- ---------- --------- ----------
Income (loss) before income taxes.......... 1,192,474 539,736 24,113 87,587 659,586 (134,039) 2,369,457
Income taxes (benefit)..................... 407,030 196,649 9,115 34,700 258,997 (23,966) 882,525
---------- -------- ------- -------- ---------- --------- ----------
Net income (loss).......................... $ 785,444 $343,087 $14,998 $ 52,887 $ 400,589 $(110,073) $1,486,932
========== ======== ======= ======== ========== ========= ==========
DECEMBER 31, 1998
--------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
Total assets............................... $ 80,949 $ 32,446 $ 1,070 $ 2,769 $ 48,355 $ (96) $ 165,493
132
135
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------------------------
WMBFA WMB WMBFSB ARISTAR AHMANSON OTHER(2) TOTAL
---------- -------- ------- -------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
Condensed income statement
- --------------------------
Net interest income (expense) after
provision for loan losses................ $1,570,468 $738,741 $29,125 $180,605 $1,219,517 $ (69,605) $3,668,851
Other income............................... 325,429 199,121 14,666 26,555 282,762 147,629 996,162
Transaction-related expense................ 262,456 233 -- -- -- 168,436 431,125
Other expense.............................. 1,044,458 465,260 24,946 131,129 865,136 164,690 2,695,619
---------- -------- ------- -------- ---------- --------- ----------
Income (loss) before income taxes.......... 588,983 472,369 18,845 76,031 637,143 (255,102) 1,538,269
Income taxes (benefit)..................... 274,189 183,473 7,275 29,744 233,803 (75,333) 653,151
---------- -------- ------- -------- ---------- --------- ----------
Net income (loss).......................... $ 314,794 $288,896 $11,570 $ 46,287 $ 403,340 $(179,769) $ 885,118
========== ======== ======= ======== ========== ========= ==========
DECEMBER 31, 1997
--------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
Total assets............................... $ 67,185 $ 26,018 $ 1,057 $ 2,542 $ 46,503 $ 217 $ 143,522
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------------------------------
WMBFA WMB WMBFSB ARISTAR AHMANSON OTHER(2) TOTAL
---------- -------- ------- -------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
Condensed income statement
- --------------------------
Net interest income (expense) after
provision for loan losses................ $1,375,833 $658,109 $26,883 $196,375 $1,186,033 $ (76,688) $3,366,545
Other income............................... 357,544 122,237 5,006 27,205 175,532 146,172 833,696
Transaction-related expense................ 156,626 -- -- -- -- 69,788 226,414
Other expense.............................. 1,443,956 429,238 19,716 124,062 1,181,007 185,213 3,383,192
---------- -------- ------- -------- ---------- --------- ----------
Income (loss) before income taxes and
minority interest........................ 132,795 351,108 12,173 99,518 180,558 (185,517) 590,635
Income taxes (benefit)..................... 43,741 130,862 4,266 37,000 35,300 (49,462) 201,707
Minority interest in earnings of
consolidated subsidiaries................ -- -- -- -- -- 13,570 13,570
---------- -------- ------- -------- ---------- --------- ----------
Net income (loss).......................... $ 89,054 $220,246 $ 7,907 $ 62,518 $ 145,258 $(149,625) $ 375,358
========== ======== ======= ======== ========== ========= ==========
DECEMBER 31, 1996
--------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
Total assets............................... $ 61,960 $ 20,600 $ 935 $ 2,392 $ 49,902 $ 1,540 $ 137,329
- ---------------
(2) Includes intercompany eliminations and other legal entities.
133
136
WASHINGTON MUTUAL, INC.
INDEX OF EXHIBITS
3.1 Restated Articles of Incorporation of the Registrant, as amended (the
"Articles") (filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998. File No.
0-25188).
3.2 Bylaws of the Registrant, as amended (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998. File No. 0-25188).
4.1* Rights Agreement, dated October 16, 1990.
4.2* Amendment No. 1 to Rights Agreement, dated October 31, 1994.
4.3* Supplement to Rights Agreement, dated November 29, 1994.
4.4 Washington Mutual agrees to furnish the Securities and Exchange
Commission, upon request, with copies of all instruments defining
rights of holders of long-term debt of Washington Mutual and its
consolidated subsidiaries.
10.1* Lease Agreement between Third and University Limited Partnership and
Washington Mutual Savings Bank, dated September 1, 1988.
10.2 Escrow Agreement, dated December 20, 1996, by and among Washington
Mutual, Inc., Keystone Holdings Partners, L.P., the Federal Deposit
Insurance Corporation as manager of the FSLIC Resolution Fund, and
The Bank of New York (filed as an exhibit to the Company's Current
Report on Form 8-K dated January 3, 1997. File No. 0-25188).
10.3 Registration Rights Agreement, dated July 21, 1996, by and among
Washington Mutual, Inc., Keystone Holdings Partners, L.P., and the
Federal Deposit Insurance Corporation as manager of the FSLIC
Resolution Fund (filed as an exhibit to the Company's Current Report
on Form 8-K dated January 3, 1997. File No. 0-25188).
10.4 Agreement and Plan of Merger by and Among Washington Mutual, Inc.,
New American Capital, Inc., and Great Western Financial Corporation,
dated as of March 5, 1997 (filed as an appendix to the Company's
Registration Statement on Form S-4 dated May 13, 1997. Registration
No. 333-23221).
10.5 Agreement and Plan of Merger between the Company and H.F. Ahmanson &
Company ("Ahmanson") dated as of March 16, 1998 (filed as an appendix
to the Company's Registration Statement on Form S-4, dated July 27,
1998. Registration No. 333-52785).
10.6** Amended and Restated 364-Day Credit Agreement between the Registrant
and The Chase Manhattan Bank as Administrative Agent.
10.7** Amended and Restated Four-Year Credit Agreement between the
Registrant and The Chase Manhattan Bank as Administrative Agent.
Management Contracts and Compensatory Plans and Arrangements (Exhibits
10.8-10.72)
134
137
10.8 Amended and Restated Washington Mutual 1994 Stock Option Plan (filed
as an appendix to the Company's Definitive Proxy Statement on
Schedule 14A filed on March 18, 1998. File No. 0-25188).
10.9* Amended and Restated Incentive Stock Option Plan.
10.10* Amended and Restated Washington Mutual Restricted Stock Plan (1986).
10.11* Washington Mutual Employees' Stock Purchase Program.
10.12 Fourth Amendment to the Washington Mutual Employees' Stock Purchase
Program (filed as an exhibit to the Company's Current Report on Form
8-K dated December 22, 1998. File No. 0-25188).
10.13 Washington Mutual Retirement Savings and Investment Plan (as amended
and restated) (filed as an exhibit to the Company's Current Report on
Form 8-K dated December 22, 1998. File No. 0-25188).
10.14* Washington Mutual Employee Service Award Plan.
10.15*** Supplemental Employee's Retirement Plan for Salaried Employees of
Washington Mutual.
10.16*** Washington Mutual Supplemental Executive Retirement Accumulation
Plan.
10.17*** Deferred Compensation Plan for Directors and Certain Highly
Compensated Employees.
10.18*** Deferred Compensation Plan for Certain Highly Compensated Employees.
10.19** Employment Contract of Kerry K. Killinger.
10.20** Employment Contract for Executive Officers.
10.21 Form of Employment Contract for Senior Vice Presidents (filed
herewith).
10.22 The 1988 Stock Option and Incentive Plan (as amended effective July
26, 1994) (filed as an exhibit to the Quarterly Report of Great
Western Financial Corporation ("Great Western"), on Form 10-Q for the
quarter ended September 30, 1994. File No. 001-04075).
10.23 Amendment No. 1996-1 to the Great Western Financial Corporation 1988
Stock Option and Incentive Plan, effective December 10, 1996 (filed
as an exhibit to Great Western's Annual Report on Form 10-K for the
year ended December 31, 1996. File No. 001-04075).
10.24 Form of Director Stock Option Agreement (filed as an exhibit to Great
Western's Registration Statement on Form S-8 Registration No.
33-21469 pertaining to Great Western's 1988 Stock Option and
Incentive Plan).
10.25 Form of Director Stock Option Agreement effective January 3, 1994,
(filed as an exhibit to Great Western's Annual Report on Form 10-K
for the year ended December 31, 1993. File No. 001-04075).
135
138
10.26 Great Western Financial Corporation Directors' Deferred Compensation
Plan (1992 Restatement) (filed as an exhibit to Great Western's
Annual Report on Form 10- K for the year ended December 31, 1991.
File No. 001-04075).
10.27 Amendment to Great Western Financial Corporation Directors', Senior
Officers' and basic Deferred Compensation Plans (1992 Restatement)
(filed as an exhibit to Great Western's Annual on Form 10-K for the
year ended December 31, 1994. File No. 001-04075).
10.28 Amendment No. 2 to Directors' Deferred Compensation Plan 1992
Restatement. (filed as an exhibit to Great Western's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996. File No.
001-04075).
10.29 Amendment No. 1996-2 to Directors' Deferred Compensation Plan, dated
December 10, 1996 (filed as an exhibit to Great Western's Annual
Report on Form 10-K for the year ended December 31, 1996. File No.
001-04075).
10.30 Great Western Financial Corporation Umbrella Trust for Directors
(filed as an exhibit to Great Western's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1989. File No. 001-04075).
10.31 Amendment No. 1996-1 to Umbrella Trust for Directors, dated December
16, 1996 (filed as an exhibit to Great Western's Annual Report on
Form 10-K for the year ended December 31, 1996. File No. 001-04075).
10.32 Omnibus Amendment 1995-1 to the Umbrella Trusts replacing the Finance
Committee of the Board of Directors with the Compensation Committee
of the Board of Directors as administrator of the plans (filed as an
exhibit to Great Western's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995. File No. 001-04075).
10.33 Restated Retirement Plan for Directors (filed as an exhibit to Great
Western's Quarterly Report on Form 10-Q for the quarter ended June
30, 1993. File No. 001-04075).
10.34 Employee Home Loan Program (filed as an exhibit to Great Western's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.
File No. 001-04075).
10.35 Amendment No. 1996-1 to Employee Home Loan Programs, effective
December 10. 1996 (filed as an exhibit to Great Western's Annual
Report on Form 10-K for the year ended December 31, 1996. File No.
001-04075).
10.36 Omnibus Amendment 1997-1 amending the definition of change in control
in the Great Western Financial Corporation 1988 Stock Option and
Incentive Plan, as amended December 10, 1996, the Great Western
Financial Corporation Directors' Deferred Compensation Plan (1992
Restatement), as amended December 10, 1996, the Umbrella Trust for
Directors as amended December 10, 1996, and the Employee Home Loan
Program (Revised and restated as of April 27, 1993), as Amended
December 10, 1996 (filed as an exhibit to Great Western's Annual
Report on Form 10-K for the year ended December 31, 1996. File No.
001-04075).
10.37 Washington Mutual, Inc. WAMU Share Program (filed as an exhibit to
the Company's Registration Statement on Form S-8, File No.
333-69503).
10.38 January 1999 WAMU Share Program. (filed as an exhibit to the
Company's Registration Statement on Form S-8, File No. 333-69503).
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139
10.39 H. F. Ahmanson & Company 1984 Stock Incentive Plan (filed as an
exhibit to Ahmanson's Annual Report on Form 10-K for the year ended
December 31, 1984. File No. 1-08930).
10.40 Amendment to H. F. Ahmanson & Company 1984 Stock Incentive Plan
(filed as an exhibit to Ahmanson's Annual Report on Form 10-K for the
year ended December 31, 1989. File No. 1-08930).
10.41 H. F. Ahmanson & Company 1993 Stock Incentive Plan as amended (filed
as an exhibit to Ahmanson's Annual Report on Form 10-K for the year
ended December 31, 1996. File No. 1-08930).
10.42 H. F. Ahmanson & Company 1988 Directors' Stock Incentive Plan, as
amended (filed as an exhibit to Ahmanson's Annual Report on Form 10-K
for the year ended December 31, 1989. File No. 1-08930).
10.43 H. F. Ahmanson & Company 1996 Nonemployee Directors' Stock Incentive
Plan (filed as an exhibit to Ahmanson's Annual Report on Form 10-K
for the year ended December 31, 1995. File No. 1-08930).
10.44 1989 Contingent Deferred Compensation Plan of H. F. Ahmanson &
Company (filed as an exhibit to Ahmanson's Quarterly Report on Form
10-Q for the quarter ended June 30, 1991. File No. 1-08930).
10.45 First Amendment to 1989 Contingent Deferred Compensation Plan of H.
F. Ahmanson & Company (filed as an exhibit to Ahmanson's Annual
Report on Form 10-K for the year ended December 31, 1995. File No.
1-08930).
10.46 Second Amendment to 1989 Contingent Deferred Compensation Plan of H.
F. Ahmanson & Company (filed as an exhibit to Ahmanson's Annual
Report on Form 10-K for the year ended December 31, 1996. File No.
1-08930).
10.47 Elective Deferred Compensation Plan of H. F. Ahmanson & Company
(filed as an exhibit to Ahmanson's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1991. File No. 1-08930).
10.48 First Amendment to Elective Deferred Compensation Plan of H. F.
Ahmanson & Company (filed as an exhibit to Ahmanson's Annual Report
on Form 10-K for the year ended December 31, 1995. File No. 1-08930).
10.49 Second Amendment to Elective Deferred Compensation Plan of H. F.
Ahmanson & Company (filed as an exhibit to Ahmanson's Annual Report
on Form 10-K for the year ended December 31, 1996. File No. 1-08930).
10.50 Capital Accumulation Plan of H. F. Ahmanson & Company (filed as an
exhibit to Ahmanson's Annual Report on Form 10-K for the year ended
December 31, 1996. File No. 1-08930).
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10.51 First Amendment to Capital Accumulation Plan of H. F. Ahmanson &
Company (filed as an exhibit to Ahmanson's Annual Report on Form 10-K
for the year ended December 31, 1996. File No. 1-08930).
10.52 Supplemental Executive Retirement Plan of H. F. Ahmanson & Company,
as amended and restated (filed as an exhibit to Ahmanson's Annual
Report on Form 10-K for the year ended December 31, 1995. File No.
1-08930).
10.53 First Amendment to Supplemental Executive Retirement Plan of H. F.
Ahmanson & Company (filed as an exhibit to Ahmanson's Annual Report
on Form 10-K for the year ended December 31, 1996. File No. 1-08930).
10.54 Senior Supplemental Executive Retirement Plan of H. F. Ahmanson and
Company, as amended and restated (filed as an exhibit to Ahmanson's
Annual Report on Form 10-K for the year ended December 31, 1995. File
No. 1-08930).
10.55 Executive Life Insurance Plan of H. F. Ahmanson & Company (filed as
an exhibit to Ahmanson's Annual Report on Form 10-K for the year
ended December 31, 1989. File No. 1-08930).
10.56 First Amendment to Executive Life Insurance Plan of H. F. Ahmanson &
Company (filed as an exhibit to Ahmanson's Annual Report on Form 10-K
for the year ended December 31, 1995. File No. 1-08930).
10.57 Second Amendment to Executive Life Insurance Plan of H. F. Ahmanson &
Company (filed as an exhibit to Ahmanson's Annual Report on Form 10-K
for the year ended December 31, 1996. File No. 1-08930).
10.58 Senior Executive Life Insurance Plan of H. F. Ahmanson & Company, as
amended and restated (filed as an exhibit to Ahmanson's Annual Report
on Form 10-K for the year ended December 31, 1995. File No. 1-08930).
10.59 H. F. Ahmanson & Company Supplemental Long Term Disability Plan
(filed as an exhibit to Ahmanson's Annual Report on Form 10-K for the
year ended December 31, 1989. File No. 1-08930).
10.60 Outside Directors' Elective Deferred Compensation Plan of H. F.
Ahmanson & Company (filed as an exhibit to Ahmanson's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1991. File No.
1-08930).
10.61 First Amendment to Outside Directors' Elective Deferred Compensation
Plan of H. F. Ahmanson & Company (filed as an exhibit to Ahmanson's
Annual Report on Form 10-K for the year ended December 31, 1995. File
No. 1-08930).
10.62 Second Amendment to Outside Directors' Elective Deferred Compensation
Plan of H. F. Ahmanson & Company (filed as an exhibit to Ahmanson's
Annual Report on Form 10-K for the year ended December 31, 1996. File
No. 1-08930).
10.63 Outside Directors' Capital Accumulation Plan of H. F. Ahmanson &
Company (filed as an exhibit to Ahmanson's Annual Report on Form 10-K
for the year ended December 31, 1996. File No. 1-08930).
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141
10.64 First Amendment to Outside Directors' Capital Accumulation Plan of H.
F. Ahmanson & Company (filed as an exhibit to Ahmanson's Annual
Report on Form 10-K for the year ended December 31, 1996. File No.
1-08930).
10.65 Outside Director Retirement Plan of H. F. Ahmanson & Company, as
amended and restated (filed as an exhibit to Ahmanson's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1991. File No.
1-08930).
10.66 First Amendment to Outside Director Retirement Plan of H. F. Ahmanson
& Company (filed as an exhibit to Ahmanson's Annual Report on Form
10-K for the year ended December 31, 1995. File No. 1-08930).
10.67 Amended Form of Indemnity Agreement between H. F. Ahmanson & Company
and directors and executive officers (filed as an exhibit to
Ahmanson's Annual Report on Form 10-K for the year ended December 31,
1989. File No. 1-08930).
10.68 Board of Directors Retirement Plan of Coast (filed as an exhibit to
the Current Report of Coast Savings Financial Inc. ("Coast") on
Form 8-K dated September 1, 1989. File No. 1-10264).
10.69 Pension Plan of Coast (filed as an exhibit to Coast's Current Report
on Form 8-K dated September 1, 1989. File No. 1-10264).
10.70 First Amendment to Pension Plan of Coast (filed as an exhibit to
Coast's Current Report on Form 8-K dated September 1, 1989. File No.
1-10264).
10.71 Form of Post-Retirement Compensation Arrangement of Coast (filed as
an exhibit to Coast's Annual Report on Form 10-K for the year ended
December 31, 1989. File No. 1-10264).
10.72 Amended and Restated Executive Supplemental Retirement Plan of Coast,
dated February 28, 1996 (filed as an exhibit to Coast's Annual Report
on Form 10-K for the year ended December 31, 1995. File No. 1-10264).
21 List of Subsidiaries of the Registrant (filed herewith).
23 Consent of Deloitte & Touche LLP (filed herewith).
23.1 Consent of KPMG LLP (filed herewith).
23.2 Consent of PricewaterhouseCoopers LLP (filed herewith).
27.1 Financial Data Schedule for the year ended December 31, 1998, and
restated Financial Data Schedule for the years ended December 31,
1997 and 1996 (filed herewith).
27.2 Restated Financial Data Schedule for the three month period ended
March 31, 1998, for the six month period ended June 30, 1998, and for
the nine month period ended September 30, 1998 (filed herewith).
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27.3 Restated Financial Data Schedule for the three month period ended
March 31, 1997, for the six month period ended June 30, 1997, and for
the nine month period ended September 30, 1997 (filed herewith).
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* Filed as an exhibit to the Company's Current Report on Form 8-K dated
November 29, 1994. File No. 0-25188.
** Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997. File No. 0-25188.
*** Filed as an exhibit to the Washington Mutual, Inc. Annual Report on Form
10-K for the year ended December 31, 1996. File No. 0-25188.
Exhibits followed by a parenthetical reference are incorporated by
reference herein from the documents described therein. Documents
relating to Ahmanson filed prior to May 1985 were filed by H. F.
Ahmanson & Company, a California corporation, Commission File No.
1-7108.
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