1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20529
FORM 10-Q
(Mark one)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-25188
WASHINGTON MUTUAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
WASHINGTON 91-1653725
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1201 THIRD AVENUE SEATTLE, WASHINGTON 98101
(Address of Principal Executive Offices) (Zip Code)
(206) 461-2000
(Registrant's Telephone Number, Including Area Code)
________________________________________________________________________________
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports, and (2) has been subject to such
filing requirements for the last 90 days. Yes /x/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the issuer's classes of common stock as
of June 30, 1996:
COMMON STOCK - 72,200,356
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated financial statements of Washington Mutual, Inc. ("Washington
Mutual" or the "Company") begin on page 12.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
- - Net income for second quarter 1996 was $61.4 million, up 28 percent from
earnings of $47.8 million during second quarter 1995. Fully diluted earnings per
share were 76 cents for second quarter 1996 compared with 60 cents in 1995. For
the six months ended June 30, 1996, net income was $120.9 million or $1.50 per
fully diluted share compared with $93.0 million or $1.18 per fully diluted share
for the first six months of 1995. For the quarter and six months ended June 30,
1996, the Company's return on assets was 1.10 percent and 1.09 percent,
respectively, compared with 0.94 percent for both periods a year earlier.
- - On January 31, 1996, Washington Mutual completed the merger of Western Bank
("Western"), a commercial bank in Oregon. At December 31, 1995, Western had
assets of $787.1 million, deposits of $709.7 million and stockholders' equity of
$68.6 million. Results from 1995 have been restated to reflect the merger with
Western, which was accounted for as a pooling-of-interests.
- - Lower market interest rates during second quarter 1996 helped increase loan
production for the second quarter of 1996 to $2,058.2 million compared with
$1,047.7 million for the same quarter in 1995, an increase of 96 percent. Loan
production during the quarter just ended included $457.2 million of refinancing
activity compared with $97.0 million in second quarter 1995. If a recent upward
trend in mortgage rates continues, it could make sustaining such strong growth
in loan production difficult during the last half of 1996.
- - During the first quarter of 1996, the Company announced the signing of an
agreement to acquire Utah Federal Savings Bank ("Utah FSB"). Utah FSB is an
Ogden-based savings bank operating five branches and three loan production
centers in Utah. At March 31, 1996, Utah FSB had assets of $124.1 million,
deposits of $110.5 million and stockholder's equity of $10.8 million. The merger
has received regulatory approval and is scheduled to be completed during the
fourth quarter of 1996, subject to the receipt of Utah FSB shareholder approval.
- - On July 22, 1996, the Company announced the signing of an agreement to acquire
through a stock merger Keystone Holdings, Inc. ("Keystone") and its subsidiary,
American Savings Bank ("American"). American is based in Irvine, California and
has 158 branches and 61 loan offices throughout California and one loan office
in Arizona. At June 30, 1996, Keystone had assets of $20,480.7 million and
deposits of $12,729.0 million. Under the terms of the merger agreement,
Washington Mutual will issue 48 million shares of its common stock. Of the 48
million shares, 26 million will be issued to the investors in a partnership that
owns Keystone and 14 million shares will be issued to the Federal Deposit
Insurance Corporation ("FDIC") as manager of the FSLIC Resolution Fund under a
separate agreement in exchange for the interest the FDIC has maintained in a
Keystone subsidiary that has owned American since its recapitalization in 1988.
The remaining 8 million shares will be issued and placed in escrow and
distributed 65 percent to the investors and 35 percent to the FDIC, if the
Company receives cash proceeds from certain litigation filed by Keystone against
the federal government, which is being assumed by Washington Mutual in the
merger. The Company expects the merger to be completed during the fourth quarter
of 1996, pending the receipt of regulatory and Washington Mutual shareholder
approval. On July 22, 1996, the Company filed with the Securities and Exchange
Commission a Current Report on Form 8-K describing the terms of the merger in
greater detail.
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RESULTS OF OPERATIONS
NET INTEREST INCOME. The Company's net interest income was $178.1 million for
the quarter and $349.1 million for the six months ended June 30, 1996 compared
with $149.4 million and $298.5 million for the same periods a year earlier. Net
interest income was up 19 percent from the second quarter and 17 percent from
the first six months of 1995. The 1996 increases reflected growth in
interest-earning assets and the continuing effect of low short-term interest
rates on the Company's net interest margin which was 3.35 percent for the
quarter just ended compared with 3.05 percent in second quarter 1995. (The net
interest margin measures the Company's annualized net interest income as a
percentage of interest-earning assets.)
The Company's combined yield on loans and investments decreased to 7.85
percent and 7.88 percent for the quarter and six months ended June 30, 1996
compared with 8.02 percent and 8.00 percent for the same periods in 1995,
reflecting lower interest rates than a year ago. However, because market
short-term interest rates decreased even more, the Company's cost of funds
dropped to 4.70 percent and 4.78 percent for the quarter and six months ended
June 30, 1996, from 5.17 percent and 5.09 percent for the same periods a year
ago. The net interest spread was 3.15 percent in the second quarter compared
with 2.85 percent for the same period in 1995 and it rose to 3.10 percent for
the first six months of 1996 from 2.91 percent a year earlier. (The net interest
spread is the difference between the Company's yield on assets and its cost of
funds.)
If short-term interest rates rise during the second half of 1996, it will
be difficult to maintain the current levels for the net interest margin, net
interest spread and net interest income.
OTHER INCOME. Other income was $36.8 million and $73.5 million for the quarter
and six months ended June 30, 1996 compared with $29.6 million and $58.4 million
for the same periods in 1995.
Depositor fees for the quarter just ended were $18.9 million, an increase
of 37 percent from $13.8 million in second quarter 1995 while depositor fees
year-to-date increased to $35.7 million from $25.5 million last year. A revised
fee structure on non-sufficient funds ("nsf") and overdraft fees combined with
an aggressive marketing campaign of checking accounts resulted in a 40 percent
increase in depositor fees for the six months ended June 30, 1996 compared with
the same period last year.
Loan servicing fees were $4.8 million and $8.7 million for the quarter and
six months just ended, up 52 percent and 57 percent from the same periods a year
ago. Loans serviced for others increased to $7,155.6 million at June 30, 1996
from $4,683.4 million one year earlier due to substantial securitizations of
loans throughout 1995.
Other service frees were $8.6 million and $16.6 million for the quarter
and six months ended June 30, 1996 compared with $6.8 million and $16.8 million
for the same periods last year. In 1996, fees related to security sales by the
Company's securities subsidiary were up substantially. Offsetting this increase
was the loss of $3.6 million of fee income as a result of the sale of the
Company's travel agency subsidiary in March 1995.
Other operating income increased to $5.3 million for second quarter 1996
from $4.6 million a year ago but decreased 2 percent to $9.1 million for the
first six months this year. In first quarter 1995, the Company recorded $1.0
million of interest income on a tax refund.
Gains on the sale of loans were $3.0 million and $5.8 million for second
quarter and the first six months of 1996 compared with $934,000 and $1.1 million
for the same periods in 1995. The higher level of gains in the periods just
ended reflected the continued sale of fixed-rate loans as the Company
restructures its asset base with the objective of reducing the effect of future
movements in interest rates. The Company offsets reductions in the value of
mortgage servicing rights against its gains on the sale of loans. No write-downs
of mortgage servicing rights were made during the first six months in either
1996 or 1995.
On January 1, 1996, the Company adopted Statement of Accounting Standards
("SFAS") No. 122, Accounting for Mortgage Servicing Rights. The statement
eliminates the distinctions between servicing rights that are purchased and
those that are retained upon the sale or securitization of loans. The statement
requires mortgage servicers to record the servicing rights on loans as separate
assets, no matter how acquired. Banks that sell or securitize loans and retain
the servicing rights will be required to allocate the total cost of the loans
between servicing rights and principal balance.
During the first half of 1996, the Company capitalized $16.9 million of
mortgage servicing rights as a result of SFAS No. 122. Gains on the sale of
loans as a result of capitalizing mortgage servicing rights under the provisions
of this statement were $4.0 million and $4.9 million more for the quarter and
six months just ended than would have been recognized under prior accounting
policies. At June 30, 1996, the Company's balance sheet included unamortized
mortgage servicing rights valued at $16.1 million as a result of this statement.
Losses on the sale of other assets were $3.8 million and $2.3 million for
the quarter and six months ending June 30, 1996 compared with gains of $242,000
and $66,000 for the same periods in 1995. Most of the second quarter 1996 loss
resulted from securities transaction losses of $3.9 million. The year-to-date
1996 loss consisted
2
4
of a $4.1 million gain on the sale of Mutual Travel, securities transaction
losses of $6.6 million and net gains of $230,000 on the sale of other bank
assets. In 1995, most of the second quarter gain of $242,000 resulted from the
sale of bank property.
OTHER EXPENSE. For the quarter, operating expenses totaled $114.7 million, an 8
percent increase from $106.3 million in the second quarter of 1995. Operating
expenses for the six months ending June 30, 1996 totaled $224.8 million compared
with $209.4 million during the same period in 1995.
Salaries and employee benefits were $52.6 million and $103.5 million for
the quarter and six months just ended compared with $47.0 million and $93.2
million a year ago due primarily to increases in staffing levels in commercial
banking, financial centers, lending support, and telephone banking services. The
staffing level of full-time equivalent employees was 4,932 at June 30, 1996, up
from 4,742 a year earlier. The increase in full-time equivalent employees was
moderated by the sale of the Company's item processing operation which resulted
in a decrease of 98 employees and significant outsourcing in the information
systems and property management departments.
Occupancy and equipment expense increased 14 percent to $21.6 million and 8
percent to $39.9 million for the quarter and six months just ended compared with
$19.0 million and $37.0 million a year earlier as a result of expenses to
upgrade voice and data communications and desk top technology.
Regulatory assessments were $4.2 million and $7.6 million, decreases of 34
percent and 41 percent, respectively, from last year totals of $6.4 million and
$12.7 million due to a reduction in the assessment rate on the Company's
deposits insured by the Bank Insurance Fund ("BIF"). (See Item 5, Other
Information on page 9 for a discussion of deposit assessments.)
Other operating expense for the quarter was $29.7 million, up 7 percent
from $27.6 million in second quarter 1995. For the six months ended June 30,
1996, other operating expense increased 11 percent to $60.8 million compared
with $55.0 million for the same period last year. Increases for both the quarter
and first half of 1996 were due in part to higher telecommunications expenses,
other professional fees associated with reengineering projects and
acquisition-related charges.
Amortization of goodwill and intangible assets was $7.0 million and $13.9
million for the quarter and half year ended June 30, 1996 compared with $7.1
million and $14.4 million from the same periods in 1995.
Real estate owned ("REO") operations, inclusive of write-downs resulted in
income of $415,000 and $905,000 for the quarter and six months ended June 30,
1996 compared with $779,000 and $2.9 million for the same periods last year. REO
operations in first quarter 1995 included a recovery on one large commercial
property.
OPERATING EFFICIENCY RATIO. The Company's operating efficiency ratio - other
expense as a percentage of net interest income plus other income - was 53.4
percent and 53.2 percent for the second quarter and six months ended June 30,
1996, respectively, compared with 59.4 percent and 58.7 percent for the same
periods in 1995. The effect of increases in other expenses during 1996 was
offset by substantial increases in net interest income and other income during
the quarter and six months just ended.
NONBANKING SUBSIDIARY OPERATIONS. Pretax operating income (net income before
amortization of goodwill and intangible assets and elimination of intercompany
transactions) for the quarter and six months ended June 30, 1996 was $5.8
million and $15.5 million, respectively, compared with $4.9 million and $8.6
million for the same periods in 1995. The Company's insurance subsidiaries
reported pretax operating income of $3.7 million and $7.8 million for the
quarter and six months just ended compared with $3.9 million and $7.7 million a
year earlier. The securities subsidiaries had pretax operating income of $1.8
million and $3.4 million for the quarter and six months just ended compared with
$1.1 million and $1.3 million in the same periods a year ago. The increase in
operating income resulted from an increase in securities sales during 1996 and
from the fact that operating income in 1995
3
5
was reduced by a legal settlement of $687,500. The results of operations during
the first half of 1996 for other nonbanking subsidiaries included the
recognition of a deferred gain of $4.1 million on the sale of Mutual Travel in
1995. Results of operations for nonbanking subsidiaries were as follows:
Quarter Ended Six Months Ended
June 30, June 30,
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Securities:
Murphey Favre, Inc. $ 933 $ 415 $ 1,675 $ 15
Composite Research & Management Co. 853 680 1,682 1,329
- -----------------------------------------------------------------------------------------------------------------------
Total securities 1,786 1,095 3,357 1,344
WM Life Insurance Co. 3,692 3,882 7,751 7,710
Other 304 (69) 4,422 (452)
- -----------------------------------------------------------------------------------------------------------------------
Net income before taxes, amortization of goodwill and other
intangible assets, and elimination of intercompany transactions 5,782 4,908 15,530 8,602
Amortization of goodwill and other intangible assets 1 185 104 565
- -----------------------------------------------------------------------------------------------------------------------
Net income before taxes and elimination of intercompany transactions $5,781 $4,723 $15,426 $8,037
=======================================================================================================================
FINANCIAL POSITION
ASSETS. At June 30, 1996, the Company's assets were $22,323.5 million down
slightly from $22,420.4 million at year-end 1995.
INVESTMENT ACTIVITIES. Washington Mutual's investment portfolio at June 30, 1996
was carried at $7,401.8 million, a 7 percent decrease from the year-end 1995
balance of $7,940.9 million. During the six months just ended, the Company
continued the restructuring of its investment portfolio by selling fixed-rate
securities and replacing them with adjustable-rate securities This portfolio
restructuring is intended to reduce Washington Mutual's sensitivity to future
changes in market interest rates.
At June 30, 1996, the Company's investment portfolio included $7,221.2
million in available-for-sale securities and $180.6 million in held-to-maturity
securities. Mortgage-backed securities constituted $6,343.7 million or 86
percent of the total investment portfolio at quarter end.
LOAN ORIGINATIONS. For the first six months of 1996, total lending was $3,731.8
million compared with $1,744.2 million a year earlier. Lower market interest
rates compared to 1995 levels helped generate increases in lending volumes in
all loan categories. The Company remained the leading residential first-mortgage
lender in Washington and Oregon with residential loan originations of $2,152.5
million during the six months just ended, more than triple the 1995 total of
$691.2 million. Originations of residential loans to purchase homes were
$1,088.6 million compared with $554.8 million a year ago, while home loan
refinancings were $1,063.9 million compared with $136.4 million in the first six
months of 1995.
Year-to-date originations of residential construction loans were $606.8
million, an increase of 43 percent from $423.3 million for the first six months
of 1995. Consumer loan originations, primarily home equity and manufactured home
loans, increased to $585.1 million for the first six months of 1996 from $466.1
million a year ago. Commercial real estate lending increased to $221.2 million
for the six months just ended from $94.2 million for the same period in 1995.
Commercial business lending for the first half of 1996 was $166.2 million, an
increase of 139 percent from $69.4 million for the first six months of 1995. The
growth in commercial business lending resulted from new loan production offices
in Washington and Oregon, an emphasis on small business lending and the
implementation of an aggressive marketing strategy.
Though loan volumes in the first six months of 1996 were greater than 1995
levels in all categories and second quarter 1996 production was 23 percent above
first quarter 1996, the rise in mortgage interest rates during the second
quarter of 1996 could slow loan originations during the second half of 1996.
4
6
DEPOSITS. Total deposits decreased to $11,026.7 million at June 30, 1996 from
$11,306.4 million at December 31, 1995. Retail deposits were down $184.8 million
to $10,414.6 million. Wholesale activities - predominantly time deposits greater
than $100,000 - decreased $94.9 million, ending the quarter at $612.1 million.
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 securities
sold under agreements to repurchase and advances from the Federal Home Loan Bank
of Seattle. These two borrowing sources totaled $4,645.7 million and $2,962.2
million at June 30, 1996 compared with $3,965.8 million and $3,711.4 million at
year-end 1995. The exact mix at any given time is dependent upon the market
pricing of the two borrowing sources.
INTEREST RATE RISK MANAGEMENT. Washington Mutual engages in a comprehensive
asset and liability management program that attempts to reduce the risk of
significant decreases in net interest income caused by interest rate changes.
One of the Company's strategies to reduce the effect of future movements in
interest rates is to increase the percentage of adjustable-rate assets in its
portfolio. A conventional measure of interest rate sensitivity for thrift
institutions is the one-year gap, which is calculated by dividing the difference
between assets maturing or repricing within one year and total liabilities
maturing or repricing within one year by total assets.
The Company's assets and liabilities that mature or reprice within one year
were as follows:
June 30, Dec. 31,
(dollars in millions) 1996 1995
- --------------------------------------------------------------------------------------------------
Interest-sensitive assets $10,868 $ 9,885
Interest-sensitive liabilities 15,615 14,679
Derivative instruments (1,950) (1,825)
- --------------------------------------------------------------------------------------------------
Net liability sensitivity $(2,797) $(2,969)
==================================================================================================
Net liability sensitivity as a percentage of total assets (12.5)% (13.3)%
During the first half of 1996, the Company continued its efforts to replace
fixed-rate mortgages and mortgage-backed securities with adjustable-rate
instruments to moderate its interest rate risk profile. Through June 30, 1996,
the Company purchased $1.2 billion of adjustable-rate assets while selling $1.8
billion of fixed-rate assets.
ASSET QUALITY
Classified assets, which consist of nonaccrual loans, loans under
foreclosure, REO and performing loans (including substandard troubled debt
restructurings) and securities that exhibit credit quality weaknesses, were as
follows:
June 30, Dec. 31,
(dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------
Nonaccrual loans and loans under foreclosure $ 76,136 $ 69,707
REO 27,072 25,064
- ------------------------------------------------------------------------------------------------
Total nonperforming assets 103,208 94,771
Troubled debt restructurings (classified as substandard) 14,082 13,094
Other classified assets 85,139 97,946
Classified securities 27,884 37,645
- ------------------------------------------------------------------------------------------------
$230,313 $243,456
================================================================================================
Nonperforming assets increased to 0.46 percent of total assets at June 30,
1996 or $103.2 million compared with $94.8 million or 0.42 percent of total
assets at December 31, 1995.
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The level of nonperforming commercial real estate loans increased to $36.7
million at June 30, 1996 compared with $32.9 million at year-end 1995. During
the period, a medical office building in California at $4.4 million was sold and
an apartment building in Washington at $1.5 million returned to performing
status while four commercial properties - including three retail/office
properties in California totaling $8.7 million - became nonperforming.
Nonperforming assets consisted of the following:
June 30, Dec. 31,
(dollars in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------
Nonperforming assets (loans and REO) by collateral type:
Residential real estate $ 50,968 $46,414
Residential construction 8,161 10,245
Apartment buildings 2,988 3,934
Other commercial real estate 33,702 28,937
Consumer and manufactured housing 11,621 10,792
Commercial business 719 824
Reserve for REO losses (4,951) (6,375)
- ----------------------------------------------------------------------------------------------
Total $103,208 $94,771
==============================================================================================
Nonperforming assets as a percentage of total loans 0.75% 0.73%
Nonperforming assets as a percentage of total assets 0.46 0.42
On January 1, 1995, Washington Mutual adopted SFAS No. 114, Accounting by
Creditors for Impairment of a Loan. It is applicable to all loans except: large
groups of smaller-balance homogeneous loans that are collectively evaluated for
impairment; loans measured at fair value or at the lower of cost or fair value;
leases; and debt securities (as defined by SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities). It applies to all loans that are
restructured in a troubled debt restructuring as defined by SFAS 15. A troubled
debt restructuring is a restructuring in which the creditor grants a concession
to the borrower that it would not otherwise consider. At June 30, 1996, the
Company had $19.6 million of restructured loans of which $14.1 million, though
performing, were classified substandard.
A loan is impaired when it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. At June 30, 1996, loans totaling $87.4 million were impaired of which
$72.8 million had allocated reserves of $10.6 million. The remaining $14.6
million were previously written down and have no reserves allocated to them. Of
the $87.4 million of impaired loans, $10.9 million were on nonaccrual status and
$4.6 million were under foreclosure. The average balance of impaired loans
during the quarter was $88.0 million and the Company recognized $1.7 million of
related interest income. Interest income is normally recognized on an accrual
basis, however, if the impaired loan is nonperforming, interest income is then
recorded on the receipt of cash.
PROVISION FOR LOAN LOSSES AND RESERVE FOR LOAN AND REO LOSSES. The provision for
loan losses for the quarter and six months ending June 30, 1996 was $2.9 million
and $5.8 million, respectively, compared with $2.9 million and $5.7 million for
the same periods in 1995, and continued to reflect the Company's high level of
reserves and asset quality. The reserve for loan losses increased slightly to
$144.2 million at June 30, 1996 from $143.3 million at December 31, 1995.
Reserves charged off, net of recoveries, totaled $4.9 million for the first six
months of 1996 compared with $2.2 million for the same period in 1995. At June
30, 1996, the reserve for loan losses represented 1.05 percent of outstanding
loans and 189.45 percent of nonperforming loans, compared with 1.10 percent and
205.60 percent six months earlier.
As part of the process of determining the adequacy of the reserve for loan
losses, management reviews its loan portfolio for specific weaknesses. A portion
of the reserve is then allocated to reflect the loss exposure. The June 30, 1996
analysis of residential construction and commercial real estate resulted in an
allocation for impaired loans of $10.6 million of the reserve for loan loss
exposure. At December 31, 1995, the Company had allocated reserves of $10.9
million. The remaining reserve of $133.6 million at June 30, 1996 was
unallocated and available for potential losses from any of the Company's loans.
6
8
A reserve for REO losses is maintained for any subsequent decline in the
value of foreclosed property. The reserve for REO losses was $5.0 million at
June 30, 1996, compared with $6.4 million at December 31, 1995. The level is
based upon a routine review of the REO portfolio and the strength of national
and local economies.
LIQUIDITY AND CAPITAL REQUIREMENTS
LIQUIDITY. Washington Mutual monitors its ability to meet short-term cash
requirements under both normal (operating) and extreme (contingent)
circumstances using guidelines established by its Board of Directors. The
operating liquidity ratio is used to ensure that normal short-term secured
borrowing capacity is sufficient to satisfy unanticipated cash needs. The
contingent liquidity ratio measures the ability to raise cash by liquidating
assets in the event of a very adverse business environment. At June 30, 1996,
the Company had substantial liquidity compared with its established guidelines.
It is anticipated that upon the closing of the merger with Keystone the Company
may need to obtain additional short-term financing. The Company has a variety of
sources from which it could obtain such financing, including the issuance of
additional senior notes, loans, letters of credit or other borrowings.
The FDIC uses two ratios to monitor the liquidity position of Washington
Mutual Bank ("WMB"), a subsidiary of the Company. The liquidity ratio measures
WMB's ability to use liquid assets to meet unusual cash demands. The dependency
ratio measures WMB's reliance upon potentially volatile liabilities to fund
long-term assets. WMB manages both ratios to remain within the acceptable ranges
and, at June 30, 1996, met the established FDIC guidelines.
To meet its immediate needs for funds as well as long-term lending demands,
Washington Mutual maintains various sources of liquid assets and borrowing
capabilities. At June 30, 1996, the Company's banking subsidiaries were able to
borrow an additional $7,648.8 million through the use of collateralized
borrowings using unpledged mortgage-backed securities and other wholesale
sources. The ability of the Company's banking subsidiaries to make dividends to
the Company is influenced by legal, regulatory and economic restrictions.
Because the low interest rate environment of recent years and competition
from non-regulated activities (such as mutual funds) has inhibited consumer
deposits, Washington Mutual has supported its growth through business
combinations with other financial institutions and by increasing its use of
wholesale borrowings. Should the Company not be able to increase deposits either
internally or through acquisitions, its ability to grow would be dependent upon,
and to a certain extent limited by, its borrowing capacity.
CAPITAL REQUIREMENTS. At June 30, 1996, Washington Mutual's banking subsidiaries
exceeded all current regulatory capital requirements and were classified as well
capitalized institutions, the highest regulatory standard. In order to be
categorized as a well capitalized institution, the FDIC requires banks it
regulates to maintain a leverage ratio, defined as Tier 1 capital divided by
total regulatory assets, of at least 5.00 percent; total capital of at least
10.00 percent of risk-weighted assets; and Tier 1 (or core) capital of at least
6.00 percent of risk-weighted assets. At June 30, 1996, WMB's (consolidated with
its subsidiaries) ratio of leverage capital to assets was 5.65 percent, its
ratio of total capital to risk-weighted assets was 11.06 percent, and the ratio
of core capital (Tier I) to risk-weighted assets was 10.27 percent.
Washington Mutual's federal savings bank subsidiary is required by the
Office of Thrift Supervision ("OTS") to maintain certain capital levels. In
order to be classified as a well capitalized institution, the OTS requires banks
it regulates to maintain a leverage ratio of at least 5.00 percent, total
capital of a least 10.00 percent of risk-weighted assets, and core capital of at
least 6.00 percent of risk-weighted assets. At June 30, 1996, the subsidiary was
in compliance with all well capitalized requirements.
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9
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Washington Mutual has certain litigation and negotiations in progress
resulting from activities arising from normal operations. In the opinion of
management, none of these matters is likely to have a materially adverse effect
on the Company's financial position or results of operation.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE SECURITY-HOLDERS
On April 16, 1996, the Company held its Annual Meeting of Shareholders. On
February 26, 1996, the record date, there were issued and outstanding 72,075,218
shares of common stock. Present at the Annual Meeting of Shareholders in person
or by proxy were the holders of 64,921,731 shares of common stock.
Election of Directors. The following table presents the results of the election
of directors at the Company's Annual Meeting of Shareholders:
NOMINEE For For Percent Withheld Withheld Percent
- -------------------------------------------------------------------------------------
Roger H. Eigsti 64,320,872 89.24% 600,859 0.83%
William G. Reed, Jr. 64,320,708 89.24 601,023 0.83
John W. Ellis 64,292,791 89.20 628,940 0.87
James H. Stever 64,317,946 89.24 603,785 0.84
Amendment to the Company's Articles of Incorporation. The Board of Directors
approved and submitted to Company shareholders a proposal to adopt an amendment
to the Company's Articles of Incorporation changing the procedure for future
amendments to the Articles of Incorporation. Currently the Company's Articles of
Incorporation contains a procedure for amendments that was statutorily required
to be included in its predecessor's Articles of Incorporation as a publicly
traded savings bank. When the Company's predecessor reorganized into a holding
company structure, the Company's Articles were adopted in substantially
identical form to those of its predecessor. The proposal would eliminate the
requirement to publish notice once a week for four consecutive weeks in a
Seattle, Washington newspaper of any shareholders' meeting called for the
purpose of voting on a change in the number of authorized capital stock of the
Company and would allow amendment procedures permitted by Washington corporate
law, which requires in most cases that amendments be approved by a majority of
all outstanding shares of any class or series entitled to vote as a voting
group. Under the Company's current Articles of Incorporation, approval of the
amendment requires a two thirds vote of all the Company's outstanding capital
stock voting as a group, and of each series of preferred stock voting
separately. The Company withdrew the proposal to amend the Company's Articles of
Incorporation from consideration by the shareholders after proxies
8
10
with regard to the proposal had been initially solicited. At the time the
proposal was withdrawn, the following votes has been received:
STOCK FOR Against Abstain Broker Nonvotes
- --------------------------------------------------------------------------------------------------------------------
Common Stock 55,529,175 2,039,592 653,926 6,699,038
Preferred Stock Series C 1,540,920 88,135 104,667 -
Preferred Stock Series D 955,560 3,407 1,931 -
Preferred Stock Series E 1,075,928 68,848 76,777 -
Bonus and Incentive Plan for Executive Officers and Senior Management. The Board
of Directors approved and submitted to Company shareholders a proposal to
approve a plan adopted by the Compensation Committee of the Board of Directors
under which executive officers and senior managers will be eligible to receive
performance-based incentive compensation in the form of cash bonuses. The plan
is designed to promote the achievement of the Company's year-to-year financial
objectives by offering to its senior management the incentive of awards that
will be realized only upon the attainment by the Company of certain performance
objectives. Under the plan, specific targets for the Company's return on average
assets, return on common stockholders' equity and/or efficiency ratio will be
used to measure the Company's performance and hence contribution to shareholder
value; and participant's incentive awards will reflect such contribution.
Approval of the plan by the shareholders was not legally required, but qualifies
bonuses paid under the plan as performance-based compensation that may be
deducted by the Company without limitation in amount under federal tax law. The
plan, which required the approval of a majority of the shares of common stock
present in person or by proxy at the meeting, was approved by the Company's
shareholders. Of the holders of 64,921,731 shares of Common Stock present in
person or by proxy at the meeting, 58,375,761 shares, or approximately 89.9% of
the shares present, were voted for the plan, 3,183,043 shares, or approximately
4.9% of the shares present, were voted against the plan, 1,069,532 shares, or
approximately 1.6% of the shares present, abstained and there were 2,293,395
broker nonvotes, or approximately 3.5% of the shares present.
ITEM 5. OTHER INFORMATION
On May 14, 1996, the FDIC approved a continuance of assessment rates of
between 0 percent and 0.27 percent per annum of total adjusted deposits for all
deposits insured through the BIF, effective as of July 1, 1996. The FDIC also
approved an assessment rate schedule applicable to deposits insured through the
Savings Association Insurance Fund ("SAIF") of between 0.23 percent and 0.31
percent per annum of total adjusted SAIF deposits. The assessment rates are
calculated to keep the respective insurance funds capitalized at 1.25 percent of
estimated insured deposits. Since the BIF has reached the required reserve
ratio, under the current assessment rate schedule, most institutions are being
assessed the statutory annual minimum of $2,000 for their BIF deposits. In
contrast, because the SAIF is still undercapitalized, the assessment rate for
SAIF deposits is expected to continue at between 0.23 percent and 0.31 percent
per annum. The resulting premium differential will have adverse consequences on
those institutions with SAIF deposits, including a competitive disadvantage with
respect to pricing of loans and deposits and with respect to the ability to
control costs.
Several alternatives to mitigate the effect of the premium disparity
between BIF and SAIF have been suggested. At one time, the federal budget
reconciliation bill contained a provision designed to recapitalize the SAIF by
means of a one-time assessment, now estimated at 0.68 percent of SAIF deposits.
Such a proposal would lead to elimination of the ongoing differential. The
budget bill signed by the President in April 1996 did not include such a
one-time assessment, however, and it is not known when or if such a proposal
will be adopted. Such an assessment on Washington Mutual's SAIF deposits at
March 31, 1995 (the date currently established as the assessment date) would
result in a charge to earnings of approximately $44.4 million or $28.4 million
on an after-tax basis.
9
11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
10.1 Registration Rights Agreement dated as of July 21, 1996 by and
among Keystone Holdings Partners L.P., the Federal Deposit
Insurance Corporation and Washington Mutual, Inc.
11.1 Statement re computation of per share earnings
27.1 Financial Data Schedule
(b) During the quarter, the Company did not file any Current Report on Form
8-K.
10
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on August 13, 1996.
Washington Mutual, Inc.
/s/ Kerry K. Killinger
------------------------------------
Kerry K. Killinger
Chairman, President and Chief Executive Officer
/s/ Douglas G. Wisdorf
------------------------------------
Douglas G. Wisdorf
Senior Vice President and Controller
11
13
CONSOLIDATED STATEMENTS OF INCOME
Quarter Ended Six Months Ended
June 30, June 30,
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share amounts) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
(Unaudited)
Interest income
Loans $284,595 $273,577 $563,495 $540,464
Available-for-sale securities 130,393 62,443 262,662 115,361
Held-to-maturity securities 3,292 53,304 6,606 100,702
Cash equivalents 471 692 1,408 936
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 418,751 390,016 834,171 757,463
Interest expense
Deposits 116,454 124,689 239,374 239,016
Borrowings 124,153 115,896 245,658 219,943
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 240,607 240,585 485,032 458,959
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 178,144 149,431 349,139 298,504
Provision for loan losses 2,913 2,850 5,825 5,650
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 175,231 146,581 343,314 292,854
Other income
Depositor fees 18,913 13,823 35,663 25,516
Loan servicing fees 4,784 3,139 8,654 5,528
Other service fees 8,624 6,848 16,629 16,812
Other operating income 5,250 4,568 9,148 9,354
Gain on sale of loans 3,007 934 5,754 1,133
Gain (loss) on sale of other assets (3,826) 242 (2,334) 66
- -----------------------------------------------------------------------------------------------------------------------
Total other income 36,752 29,554 73,514 58,409
Other expense
Salaries and employee benefits 52,646 46,985 103,474 93,227
Occupancy and equipment 21,607 19,029 39,937 37,001
Regulatory assessments 4,235 6,421 7,551 12,740
Other operating expense 29,652 27,624 60,792 54,966
Amortization of goodwill and other intangible assets 6,962 7,052 13,930 14,369
Real estate owned ("REO") operations, inclusive of write-downs (415) (779) (905) (2,890)
- -----------------------------------------------------------------------------------------------------------------------
Total other expense 114,687 106,332 224,779 209,413
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 97,296 69,803 192,049 141,850
Income taxes 35,937 22,030 71,161 48,827
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 61,359 $ 47,773 $120,888 $ 93,023
=======================================================================================================================
Net income attributable to common stock $ 56,754 $ 43,127 $111,678 $ 83,731
=======================================================================================================================
Net income per common share:
Primary $0.79 $0.62 $1.55 $1.22
Fully Diluted 0.76 0.60 1.50 1.18
Dividends declared per common share 0.22 0.19 0.43 0.38
See Notes to Consolidated Financial Statements
12
14
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
June 30, Dec. 31,
(dollars in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 303,851 $ 598,272
Trading account securities 3,715 238
Available-for-sale securities 7,221,172 7,768,115
Held-to-maturity securities 180,658 172,786
Loans 13,800,209 13,035,250
REO 27,072 25,064
Bank premises and equipment 222,830 219,056
Goodwill and other intangible assets 147,251 161,127
Other assets 416,714 440,471
- ---------------------------------------------------------------------------------------------------------------------
Total assets $22,323,472 $22,420,379
=====================================================================================================================
LIABILITIES
Deposits:
Checking accounts $ 1,450,821 $ 1,336,340
Savings and money market accounts 4,160,068 3,983,267
Time certificates 5,415,830 5,986,829
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 11,026,719 11,306,436
Annuities 866,349 855,503
Federal funds purchased 770,000 430,000
Securities sold under agreements to repurchase 4,645,682 3,965,820
Advances from the Federal Home Loan Bank of Seattle 2,962,205 3,711,402
Other borrowings 224,314 224,250
Other liabilities 181,130 266,884
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 20,676,399 20,760,295
STOCKHOLDERS' EQUITY
Preferred stock, no par value: 10,000,000 shares authorized -
6,122,400 and 6,122,500 shares issued and outstanding -- --
Common stock, no par value: 100,000,000 shares authorized -
72,086,750 and 71,804,527 shares issues and outstanding -- --
Capital surplus 728,914 722,986
Valuation reserve for available-for-sale securities (21,267) 78,348
Retained earnings 939,426 858,750
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,647,073 1,660,084
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $22,323,472 $22,420,379
=====================================================================================================================
See Notes to Consolidated Financial Statements
13
15
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Number of Shares
------------------------ Valuation Total
Preferred Common Capital Retained Reserve for Stockholders'
(in thousands) Stock Stock Surplus Earnings Securities Equity
- ------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Balance at March 31, 1996 6,123 72,007 $726,948 $898,549 $ 24,382 $1,649,879
Net income - - - 61,359 - 61,359
Cash dividends on preferred stock - - - (4,605) - (4,605)
Cash dividends on common stock - - - (15,877) - (15,877)
Common stock issued through stock
options and employee stock plans - 80 1,976 - - 1,976
Adjustment in valuation reserve
for available-for-sale securities - - - - (45,649) (45,649)
Conversion of preferred stock to
common stock (1) - (10) - - (10)
- --------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 6,122 72,087 $728,914 $939,426 $(21,267) $1,647,073
==========================================================================================================================
Balance at March 31, 1995 6,200 68,014 $695,795 $731,454 $ (6,906) $1,420,343
Net income - - - 47,773 - 47,773
Cash dividends on preferred stock - - - (4,646) - (4,646)
Cash dividends on common stock - - - (12,657) - (12,657)
Common stock issued through stock
options and employee stock plans - 76 1,326 - - 1,326
Adjustment in valuation reserve
for available-for-sale securities - - - - 31,035 31,035
Immaterial business combination
accounted for as a pooling-of-interest - 2,395 10,550 26,654 - 37,204
- --------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 6,200 70,485 $707,671 $788,578 $ 24,129 $1,520,378
==========================================================================================================================
Balance at December 31, 1995 6,123 71,805 $722,986 $858,750 $ 78,348 $1,660,084
Net income - - - 120,888 - 120,888
Cash dividends on preferred stock - - - (9,210) - (9,210)
Cash dividends on common stock - - - (31,002) - (31,002)
Common stock issued through stock
options and employee stock plans - 282 5,938 - - 5,938
Adjustment in valuation reserve
for available-for-sale securities - - - - (99,615) (99,615)
Conversion of preferred stock to
common stock (1) - (10) - - (10)
- --------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 6,122 72,087 $728,914 $939,426 $(21,267) $1,647,073
==========================================================================================================================
Balance at December 31, 1994 6,200 67,837 $692,923 $703,422 $(32,088) $1,364,257
Net income - - - 93,023 - 93,023
Cash dividends on preferred stock - - - (9,292) - (9,292)
Cash dividends on common stock - - - (25,229) - (25,229)
Common stock issued through stock
options and employee stock plans - 253 4,198 - - 4,198
Adjustment in valuation reserve
for available-for-sale securities - - - - 56,217 56,217
Immaterial business combination
accounted for as a pooling-of-interest - 2,395 10,550 26,654 - 37,204
- --------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 6,200 70,485 $707,671 $788,578 $ 24,129 $1,520,378
==========================================================================================================================
See Notes to Consolidated Financial Statements
14
16
CONSOLIDATED STATEMENTS OF CASH FLOW
Quarter Ended Six Months Ended
June 30, June 30,
- ------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited)
Net income $ 61,359 $ 47,773 $ 120,888 $ 93,023
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 2,913 2,850 5,825 5,650
(Gain) on sale of loans (3,007) (934) (5,754) (1,133)
(Gain) loss on sale of other assets 3,826 (242) 2,334 66
REO operations, exclusive of write-downs (415) (779) (905) (2,890)
Depreciation and amortization 7,001 4,919 17,699 9,476
FHLB stock dividend (5,031) (3,550) (9,775) (10,506)
(Increase) decrease in trading account securities (1,268) 395 (3,472) (1,135)
(Increase) in interest receivable (159) (5,043) (2,861) (14,923)
(Decrease) increase in interest payable (10,463) (2,491) (5,731) 5,745
(Decrease) increase in federal income taxes payable (14,808) (25,264) 13,974 1,954
Decrease (increase) in other assets 58,351 1,137 102,712 (7,497)
Increase (decrease)in other liabilities 1,370 (27,041) (27,205) (6,067)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 99,669 (8,270) 207,729 71,763
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities (676,593) (376,701) (1,192,368) (760,428)
Maturities and principal payments on
available-for-sale securities 300,819 52,469 589,614 120,252
Sales of available-for-sale securities 937,671 151,333 1,787,942 151,333
Purchases of held-to-maturity securities (2,466) (26,312) (15,243) (55,793)
Maturities, calls and principal payments on
held-to-maturity securities 3,281 39,821 7,939 67,954
Sales of loans 461,352 5,421 565,258 11,205
Principal payments on loans 830,784 582,635 1,589,359 1,060,066
Origination and purchases of loans (1,950,796) (1,040,446) (3,799,124) (1,776,889)
Sales of REO 4,571 4,106 13,282 7,448
Other REO operations 133 779 311 2,890
Expenditures for premises and equipment (9,790) (9,174) (15,984) (17,994)
Acquisitions, net of cash acquired -- 9,798 -- 9,798
- -------------------------------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (101,034) (606,271) (469,014) (1,180,158)
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in deposits (246,001) (64,218) (280,908) 112,186
Increase in annuities 6,410 17,669 10,846 36,985
Increase in federal funds purchased 96,000 -- 340,000 --
(Decrease) increase in securities sold under
agreements to repurchase (44,329) 945,327 679,862 1,383,387
Proceeds from FHLB advances 686,499 264,614 1,416,290 590,694
Payments for maturing and prepaid FHLB advances (464,750) (455,000) (2,164,750) (875,000)
Payments of other borrowings (128) (12) (192) (86)
Common stock issued through stock options
and employee stock plans 1,966 1,326 5,928 4,198
Cash dividends paid (20,482) (17,303) (40,212) (34,521)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 15,185 692,403 (33,136) 1,217,843
- -------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 13,820 77,862 (294,421) 109,448
Cash and cash equivalents at beginning of period 290,031 293,842 598,272 262,256
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 303,851 $ 371,704 $ 303,851 $ 371,704
=========================================================================================================================
15
17
SUPPLEMENTAL DISCLOSURES RELATED TO THE CONSOLIDATED
STATEMENTS OF CASH FLOWS
Quarter Ended Six Months Ended
June 30, June 30,
- ------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
(Unaudited)
NONCASH INVESTING ACTIVITIES
Loans exchanged for mortgage-backed securities
and held for investment $422,999 $473,542 $884,314 $582,659
Real estate acquired through foreclosure 4,527 7,555 9,973 15,788
CASH PAID DURING THE PERIOD FOR
Interest on deposits 116,454 125,680 233,763 232,631
Interest on borrowings 124,153 116,283 246,537 219,467
Income taxes 61,000 48,128 61,000 48,128
See Notes to Consolidated Financial Statements
16
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING ADJUSTMENTS
The information included in the consolidated statements of financial
position as of June 30, 1996 and December 31, 1995 and the consolidated
statements of income, stockholders' equity and cash flows of Washington Mutual,
Inc. ("Washington Mutual" or the "Company") for the quarter and six months ended
June 30, 1996 and 1995 reflect all adjustments which are, in the opinion of
management, necessary for a fair statement of the results for the period
presented.
2. CONTINGENCIES
On May 14, 1996, the Federal Deposit Insurance Corporation ("FDIC")
approved a continuance of assessment rates of between 0 percent and 0.27 percent
per annum of total adjusted deposits for all deposits insured through the Bank
Insurance Fund ("BIF"), effective as of July 1, 1996. The FDIC also approved an
assessment rate schedule applicable to deposits insured through the Savings
Association Insurance Fund ("SAIF") of between 0.23 percent and 0.31 percent per
annum of total adjusted SAIF deposits. The assessment rates are calculated to
keep the respective insurance funds capitalized at 1.25 percent of estimated
insured deposits. Since the BIF has reached the required reserve ratio, under
the current assessment rate schedule, most institutions are being assessed the
statutory annual minimum of $2,000 for their BIF deposits. In contrast, because
the SAIF is still undercapitalized, the assessment rate for SAIF deposits is
expected to continue at between 0.23 percent and 0.31 percent per annum. The
resulting premium differential will have adverse consequences on those
institutions with SAIF deposits, including a competitive disadvantage with
respect to pricing of loans and deposits and with respect to the ability to
control costs.
Several alternatives to mitigate the effect of the premium disparity
between BIF and SAIF have been suggested. At one time, the federal budget
reconciliation bill contained a provision designed to recapitalize the SAIF by
means of a one-time assessment, now estimated at 0.68 percent of SAIF deposits.
Such a proposal would lead to elimination of the ongoing differential. The
budget bill signed by the President in April 1996 did not include such a
one-time assessment, however, and it is not known when or if such a proposal
will be adopted. Such an assessment on Washington Mutual's SAIF deposits at
March 31, 1995 (the date currently established as the assessment date) would
result in a charge to earnings of approximately $44.4 million or $28.4 million
on an after-tax basis.
3. MORTGAGE SERVICING RIGHTS
In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 122, Accounting for
Mortgage Servicing Rights. The statement eliminates the distinctions between
servicing rights that are purchased and those that are retained upon the sale or
securitization of loans. The statement requires mortgage servicers to recognize
the servicing rights on loans as separate assets, no matter how acquired. Banks
who sell loans and retain the servicing rights will be required to allocate the
total cost of the loans between servicing rights and loans based on their
relative fair values if their values can be estimated. Effective January 1,
1996, the Company adopted SFAS No. 122.
During the first half of 1996, the Company capitalized $16.9 million of
mortgage servicing rights as a result of this statement. Gains on the sale of
loans as a result of capitalizing mortgage servicing rights under the provisions
of SFAS No. 122 were $4.0 million and $4.9 million more for the quarter and six
months just ended than would have been recognized under prior accounting
policies. At June 30, 1996, the Company's balance sheet included $16.1 million
of unamortized mortgage rights as a result of this statement.
17
19
Washington Mutual, Inc.
List of Exhibits
Exhibit Page
- -----------------------------------------------------------------------------------------------
10.1 Registration Rights Agreement dated as of July 21, 1996 by and among
Keystone Holdings Partners L.P., the Federal Deposit Insurance
Corporation and Washington Mutual, Inc......................................
11.1 Statement re computation of per share earnings
27.1 Financial Data Schedule.....................................................
18