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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, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-25188
WASHINGTON MUTUAL, INC.
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(Exact Name of Registrant as Specified in Its Charter)
WASHINGTON 91-1653725
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1201 THIRD AVENUE SEATTLE, WASHINGTON 98101
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(Address of Principal Executive Offices) (Zip Code)
(206) 461-2000
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(Registrant's Telephone Number, Including Area Code)
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(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, 1997:
COMMON STOCK - 126,471,072
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated financial statements of Washington Mutual, Inc. ("Washington
Mutual" or the "Company") begin on page 13.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Net income for second quarter 1997 was $118.8 million, up 19% from
earnings of $99.6 million during second quarter 1996. Fully diluted earnings per
share were 96 cents for second quarter 1997 compared with 83 cents in 1996. For
the six months ended June 30, 1997, net income was $232.8 million or $1.88 per
fully diluted share compared with $188.4 million or $1.56 per fully diluted
share for the first six months of 1996. For both the quarter and six months
ended June 30, 1997, the Company's return on assets was 1.01% compared with
0.94% and 0.87% for the same periods a year earlier
On July 1, 1997, the Company completed its merger with Great Western
Financial Corporation ("GWFC") including its banking subsidiary, Great Western
Bank, a Federal Savings Bank ("GWB") and its consumer finance subsidiary,
Aristar, Inc. ("Aristar"). GWFC, which merged with and into a subsidiary of
Washington Mutual, was a diversified financial services company with more than
1,150 mortgage lending, retail banking and consumer finance offices nationwide.
GWB conducts most of its retail banking business through a branch network
concentrated in California and Florida. In addition, GWB has, directly or
through subsidiaries, real estate lending operations in 27 states with business
concentrated in California, Florida, Texas and Washington. Aristar operates over
500 offices in 23 states primarily in the Southeast and Southwest regions of the
United States principally under the names Blazer Financial Services and City
Finance Company.
At June 30, 1997, GWFC had assets of $43.8 billion and deposits of $27.8
billion. Under the terms of the agreement, each outstanding share of GWFC common
stock was exchanged for 0.9 shares of Washington Mutual common stock and each
outstanding share of GWFC preferred stock was converted into one share of
Washington Mutual Series F preferred stock.
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RESULTS OF OPERATIONS
NET INTEREST INCOME. The Company's net interest income was $322.3 million for
the quarter and $639.3 million for the six months ended June 30, 1997 compared
with $299.8 million and $586.8 million for the same periods in 1996. Net
interest income was up 8% from the second quarter and 9% from the first six
months of 1996. The increase in net interest income was primarily due to a 10%
increase in average interest-earning assets during the first six months of 1997
compared with the same period in 1996. The Company's net interest margin was
2.84% for the quarter and 2.86% for the six months ended June 30, 1997 compared
with 2.96% and 2.89% for the same periods in 1996 (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 was 7.72% for the
quarter ended June 30, 1997 compared with 7.73% for the same period in 1996. For
the six months ended June 30, 1997, the combined yield on assets rose to 7.70%
compared with 7.67% for the same period in 1996, reflecting higher market rates
during the current period. Interest rates on deposits decreased for both the
quarter and six months ended June 30, 1997 as higher cost time deposits matured
and money market deposit and checking accounts were added. However, the
Company's combined cost of funds for the same periods rose from the 1996 levels
as a result of the Company's increased reliance on borrowings, which typically
are more expensive than deposits. Average borrowings outstanding during the
first six months of 1997 were $19.1 billion, an increase of 29% from the same
period in 1996 while deposits were unchanged. As a result, the Company's
combined cost of funds was 5.00% and 4.96% for the quarter and six months ended
June 30, 1997 compared with 4.92% and 4.93% for the same periods in 1996. The
net interest spread was 2.72% in the second quarter of 1997 compared with 2.81%
for the same period in 1996 while it was 2.74% for the first six months of both
1997 and 1996. (The net interest spread is the difference between the Company's
yield on assets and its cost of funds.)
OTHER INCOME. Other income was $78.3 million and $153.7 million for the quarter
and six months ended June 30, 1997 compared with $58.6 million and $115.6
million for the same periods in 1996.
Depositor fees for the quarter ended June 30, 1997 were $33.6 million, an
increase of 36% from $24.8 million in second quarter 1996 while depositor fees
year-to-date increased to $62.3 million from $47.3 million last year. The
increases reflected a substantial increase in the number of checking accounts.
The Company opened nearly 132,000 net new checking accounts. The profitability
of these accounts is tempered somewhat by the amount of deposit account-related
losses (included with other expenses) incurred by the Company related to the
increased number of checking accounts. Management closely monitors the amount of
such losses to assure the profitability of its deposit products.
Securities and insurance commissions were $10.8 million and $20.3 million
for the quarter and six months ended June 30, 1997, down slightly from $11.2
million and $21.3 million from the same periods a year ago.
Loan servicing fees were $12.4 million and $26.7 million for the quarter
and six months ended June 30, 1997, up 29% and 48% from the same periods a year
ago. Loans serviced for others increased to $23.7 billion at June 30, 1997 from
$20.3 billion one year earlier due to additions to the servicing portfolio
throughout 1996 and the first half of 1997. Contributing to the increase in fee
income was a change in the accounting treatment of fee income associated with
available-for-sale mortgage-backed securities.
Other service fees were $3.6 million and $7.0 million for the quarter and
six months ended June 30, 1997 compared with $2.6 million and $5.6 million for
the same periods last year. Approximately $600,000 of the year-to-date increase
in other service fees were fees generated as a result of the Company's
acquisition of United Western Financial Group ("United Western") in January
1997, which was treated as a purchase for accounting purposes.
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Other operating income increased to $12.0 million and $25.7 million for the
quarter and six months ended June 30, 1997 compared with $9.8 million and $17.6
million during the same periods in 1996 due primarily to the United Western
acquisition and several one-time adjustments totaling $2.3 million.
Gains on the sale of loans were $4.2 million and $9.9 million for second
quarter and the first six months of 1997 compared with $4.3 million and $8.7
million for the same periods in 1996. The Company sold $1.1 billion of loans
during the first six months of both 1997 and 1996.
Gains on the sale of other assets were $1.6 million and $1.8 million for
the quarter and six months ending June 30, 1997 compared with losses of $3.7
million and $2.9 million for the same periods in 1996. Securities transaction
gains totaled $1.6 million for the quarter and $2.0 million for the six months
ended June 30, 1997. The year-to-date 1996 loss consisted primarily of $6.9
million of securities transaction losses arising from the Company's efforts to
replace fixed-rate assets with adjustable-rate assets partially offset by a $4.1
million gain on the sale of Mutual Travel.
OTHER EXPENSE. For the quarter ended June 30, 1997, operating expenses totaled
$196.1 million, a 5% increase from $186.1 million in the second quarter of 1996.
Operating expenses for the six months ending June 30, 1997 totaled $388.8
million compared with $367.1 million during the same period in 1996.
Salaries and employee benefits were $88.7 million and $175.5 million for
the quarter and six months ended June 30, 1997 compared with $84.3 million and
$166.2 million for the comparable periods in 1996, due primarily to increases in
staffing levels in commercial banking, consumer financial centers and loan
administration. The staffing level of full-time equivalent employees was 9,077
at June 30, 1997 compared with 8,322 at December 31, 1996 and 7,970 at June 30,
1996.
Occupancy and equipment expense increased 23% to $33.9 million and 21% to
$66.7 million for the quarter and six months ended June 30, 1997 compared with
$27.6 million and $55.3 million for the comparable periods in 1996, primarily as
a result of expenses associated with new financial centers and the acquisition
of United Western.
Outside telecommunications and data processing services were $25.7 million
and $50.7 million for the quarter and six months ended June 30, 1997 compared
with $17.7 million and $29.9 million for the same periods in 1996. Most of the
1997 increases resulted from higher levels of customer support services and
company usage.
Regulatory assessments were $4.0 million and $8.1 million for the quarter
and six months ended June 30, 1997, decreases of 68% and 67% from $12.7 million
and $24.3 million for the comparable periods in 1996, due to a reduction in the
assessment rate on the Company's deposits insured by the Savings Association
Insurance Fund ("SAIF").
Other operating expense for the quarter was $38.3 million, up 15% from
$33.4 million in second quarter 1996. For the six months ended June 30, 1997,
other operating expense increased 9% to $77.5 million compared with $71.0
million for the same period last year. Increases for both the quarter and first
half of 1997 were due in part to other professional fees associated with
reengineering projects and the acquisition of United Western.
Amortization of goodwill and intangible assets was $6.7 million and $13.5
million for the quarter and six months ended June 30, 1997 compared with $7.0
million and $13.9 million from the same periods in 1996.
Real estate owned ("REO") operations, inclusive of write-downs resulted in
income of $1.1 million and $3.3 million for the quarter and six months ended
June 30, 1997 compared with expense of $3.4 million and $6.6 million for the
same periods last year. During 1997, the Company's REO portfolio yield on
operations improved and substantial gains were recognized on sales of REO
property.
OPERATING EFFICIENCY RATIO. The Company's operating efficiency ratio - other
expense as a percentage of net interest income plus other income - was 49.0% for
both the quarter and six months ended June 30, 1997 compared
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with 51.9% and 52.3% for the same periods in 1996. The effect of increases in
other expenses during 1997 was offset by substantial increases in net interest
income and other income during the quarter and six months ended June 30, 1997.
NONBANKING SUBSIDIARY OPERATIONS. Net income from subsidiary operations for the
quarter and six months ended June 30, 1997 was $6.7 million and $12.3 million
compared with $5.9 million and $11.9 million for the same periods in 1996. Most
of the increase was at the insurance subsidiaries where results included a
higher yield on interest-earning assets and increases in premiums on credit
mortgage life insurance and policy surrender charges. Year-to-date earnings at
the securities subsidiaries was negatively affected by increased direct selling
costs. Results of operations for nonbanking subsidiaries were as follows:
Quarter Ended Six Months Ended
June 30, June 30,
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(dollars in thousands) 1997 1996 1997 1996
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Insurance
Net interest income $ 6,129 $ 6,189 $12,328 $11,978
Other income 3,257 1,875 5,034 3,752
Other expenses 3,832 3,869 7,419 7,043
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Net income before income taxes 5,554 4,195 9,943 8,687
Income taxes 1,941 1,418 3,447 3,009
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Net income 3,613 2,777 6,496 5,678
Securities
Net interest income 86 100 155 205
Other income 13,290 12,991 25,570 25,496
Other expenses 8,292 7,819 16,412 15,549
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Net income before income taxes 5,084 5,272 9,313 10,152
Income taxes 1,953 2,197 3,556 3,938
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Net income 3,131 3,075 5,757 6,214
------- ------- ------- -------
Net income from nonbanking subsidiaries $ 6,744 $ 5,852 $12,253 $11,892
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FINANCIAL POSITION
ASSETS. At June 30, 1997, due to the record lending activity during the period,
the Company's assets were $48.8 billion up 9% from $44.6 billion at year-end
1996.
INVESTMENT ACTIVITIES. Washington Mutual's investment portfolio at June 30, 1997
was $14.2 billion, a 19% increase from the year-end 1996 balance of $12.0
billion. The Company's mortgage-backed securities ("MBS") were $12.5 billion or
88% of the total investment portfolio at quarter end while other investment
securities totaled $1.7 billion.
MBS that the Company securitized from its own single-family residential
loan origination activity totaled $8.1 billion at June 30, 1997 while the
remaining $4.4 billion was purchased in the secondary market. During the six
months ended June 30, 1997, Washington Mutual securitized and retained $2.7
billion of loans and purchased $119.8 million of MBS. Amortization of
outstanding MBS principal during the first half of 1997 totaled $621.5 million.
LOAN ORIGINATIONS. For the first half of 1997, total lending increased 22% to
$8.0 billion compared with $6.6 billion for the same period a year earlier. The
Company's growing franchise and aggressive marketing strategy together with
strong regional economies in its primary markets helped generate increases in
lending volumes in all
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loan categories. Loans originated were as follows:
Quarter Ended June 30 Six Months Ended June 30
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(dollars in thousands) 1997 1996 1997 1996
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Single-family residential ("SFR")
Adjustable rate ("ARMs") $2,497,188 $1,728,374 $4,057,438 $2,643,612
Fixed rate 839,600 843,427 1,653,431 2,151,900
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3,336,788 2,571,801 5,710,869 4,795,512
SFR custom construction 238,371 206,496 406,713 331,109
SFR builder construction 150,701 150,635 307,485 275,720
Multifamily residential 160,217 117,650 299,944 247,777
Nonresidential real estate 119,824 85,144 196,045 128,956
Consumer 470,413 380,960 837,601 651,140
Commercial business 123,448 129,282 271,852 166,217
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$4,599,762 $3,641,968 $8,030,509 $6,596,431
========== ========== ========== ==========
The Company remained the leading residential first-mortgage lender in
Washington and Oregon and second in California. For the first six months of
1997, originations of residential loans to purchase homes were $3.6 billion
compared with $2.5 billion a year ago, while home loan refinancings were $2.1
billion compared with $2.3 billion in the first half of 1996. ARM loan
originations for the six months ended June 30, 1997 were 71% of total
residential first-mortgage originations. The Company continues to sell the
majority of its fixed-rate residential loan production.
DEPOSITS. Total deposits decreased to $24.0 billion at June 30, 1997 from $24.1
billion at December 31, 1996. Retail money market and checking accounts - both
of which have the benefit of lower interest costs - increased $378.9 million
partially offsetting a $521.9 million decline in retail time deposits. The
increase in retail money market and checking accounts was primarily the result
of the acquisition of United Western, which added $299.9 million in total
deposits. Retail time deposits declined in part because the Company chose not to
aggressively price to maintain the 1996 year-end level. While the vast majority
of its deposits are retail in nature, the Company does engage in certain
wholesale activities -- primarily accepting time deposits from political
subdivisions and public agencies. The Company considers wholesale deposits to be
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 are primarily securities sold under
agreements to repurchase, federal funds purchased and advances from the Federal
Home Loan Banks ("FHLB") of Seattle and San Francisco. These three borrowing
sources totaled $8.0 billion, $2.2 billion and $9.9 billion at June 30, 1997,
compared with $7.8 billion, $1.1 billion and $7.2 billion at year-end 1996,
respectively. The exact mix at any given time is dependent upon the market
pricing of the various borrowing sources. Specifically, due to relative pricing
advantages, the Company primarily used FHLB advances to fund its balance sheet
growth during the quarter ended June 30, 1997.
In June 1997, the Company's trust subsidiary, Washington Mutual Capital I
(the "Trust") issued $400.0 million of 8 3/8% Subordinated Capital Income
Securities ("Capital Securities"). Subsequently, the Trust used the proceeds of
the Capital Securities to purchase 8 3/8% Junior Subordinated Debentures
("Junior Debentures") from the Company. The Company expects to use the proceeds
from the sale of the Junior Debentures for general corporate purposes including
repayment of indebtedness, investments in subsidiaries and the financing of
possible acquisitions.
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
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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:
(dollars in millions) June 30, 1997 Dec. 31,1996
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Interest-sensitive assets $ 33,919 $ 30,613
Derivative instruments 2,187 2,749
Interest-sensitive liabilities (37,020) (34,985)
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Net liability sensitivity $ (914) $ (1,623)
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One-year gap (1.9)% (3.6)%
ASSET QUALITY
Nonperforming assets decreased 9% to $302.8 million at June 30, 1997
compared with $329.5 million at December 31, 1996. Nonperforming assets by type
consisted of the following:
(dollars in thousands) June 30, 1997 Dec. 31, 1996
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Nonperforming loans and REO by collateral type:
Residential real estate $230,395 $253,339
Custom construction 6,205 2,511
Builder construction 6,332 8,388
Apartment buildings 19,961 22,220
Other commercial real estate 22,046 25,016
Consumer and manufactured housing 22,719 24,125
Commercial business 1,247 1,068
Reserve for REO losses (6,078) (7,144)
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Total nonperforming assets $302,827 $329,523
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Nonperforming assets as a percentage of total assets 0.62% 0.74%
The primary reason for the reduction in nonperforming assets was a change
during the second quarter of 1997 in the classification measure to conform the
Company's reporting with other financial services companies.
As required by Statement of Financial Accounting Standards No. 114, the
Company evaluates all builder construction, commercial real estate and
commercial business loans for impairment. A loan is considered impaired when it
is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. At June 30, 1997, loans totaling
$272.1 million were impaired compared with $317.3 million at year-end 1996.
Most of the decline was due to loans either transferring to REO or being
paid-off. Impaired loans totaling $210.1 million had specific and allocated
reserves of $41.5 million. Impaired loans consisted of the following:
(dollars in thousands) June 30,1997 Dec. 31, 1996
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Nonaccrual loans included in nonperforming assets above $ 16,507 $ 22,749
Other impaired loans 255,585 294,569
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Total impaired loans $272,092 $317,318
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The average balance of impaired loans during the first six months of 1996
was $283.7 million and the Company recognized $10.2 million of related interest
income. Interest income is normally recognized on an accrual basis. If the
impaired loan is nonperforming, interest income is recorded only on the receipt
of cash.
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, 1997 was $16.0
million and $31.6 million compared with $20.1 million and $41.0 million for the
same periods in 1996. The reserve for loan losses increased slightly to $366.3
million at June 30,
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1997 from $363.4 million at December 31, 1996, and continued to reflect the
Company's high level of asset quality. Reserves charged off, net of recoveries,
totaled $37.0 million for the first six months of 1997 compared with $42.0
million for the same period in 1996. At June 30, 1997, the reserve for loan
losses represented 1.10% of outstanding loans and 171% of nonperforming assets,
less REO loans, compared with 1.20% and 161% six months earlier.
Changes in the reserve for loan losses were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
(dollars in thousands) 1997 1996 1997 1996
-------- -------- -------- --------
Balance, beginning of period $367,215 $232,841 $363,442 $235,276
Provision for loan losses 16,026 20,115 31,559 41,004
Reserves acquired through business combinations - - 8,261 -
Reserves charged-off:
Residential (10,585) (14,292) (25,490) (27,188)
Residential construction - - - (14)
Commercial real estate (4,633) (4,072) (7,503) (14,512)
Manufactured housing, second mortgage and other consumer (2,790) (1,811) (5,306) (3,551)
Commercial business (45) (250) (61) (253)
-------- -------- -------- --------
(18,053) (20,425) (38,360) (45,518)
Reserves recovered:
Residential 53 1,105 70 1,994
Residential construction 69 - 69 -
Commercial real estate 400 429 406 1,092
Manufactured housing, second mortgage and other consumer 503 179 719 371
Commercial business 38 14 85 39
-------- -------- -------- --------
1,063 1,727 1,349 3,496
-------- -------- -------- --------
Balance, end of period $366,251 $234,258 $366,251 $234,258
======== ======== ======== ========
Annualized ratio of net charge-offs during the period to
average loans outstanding during the period 0.21% 0.30% 0.24% 0.33%
As part of the process of determining the adequacy of the reserve for loan
losses, management reviews its loan portfolio for specific weaknesses. A portion
of the reserve is then designated as either specific or allocated to reflect the
loss exposure. The June 30, 1997 analysis of commercial real estate, builder
construction and commercial loans resulted in specific and allocated reserves
totaling $72.0 million. At December 31, 1996, the Company had specific and
allocated reserves of $78.3 million. The remaining reserve of $294.3 million at
June 30, 1997 was unallocated and available for potential losses from any of the
Company's loans. An analysis of the reserve for loan losses was as follows:
(dollars in thousands) June 30, 1997 Dec. 31, 1996
------------- -------------
Specific and allocated reserves:
Commercial real estate $ 66,763 $ 77,054
Builder construction 1,899 --
Commercial business 3,352 1,285
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72,014 78,339
Unallocated reserves 294,237 285,103
--------- ---------
$366,251 $363,442
======== ========
Total reserve for loan losses as a percentage of:
Nonperforming assets 121% 110%
Nonperforming assets, less REO 171 161
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A reserve for REO losses is maintained for any subsequent decline in the
value of foreclosed property. The reserve for REO losses was $6.1 million at
June 30, 1997, compared with $7.1 million at December 31, 1996. 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, 1997,
the Company had substantial liquidity compared with its established guidelines.
The Company also computes ratios promulgated by the Federal Deposit
Insurance Corporation ("FDIC") to monitor the liquidity position of Washington
Mutual Bank ("WMB"), a subsidiary of the Company. The regulatory liquidity ratio
measures WMB's ability to use liquid assets to meet unusual cash demands. The
regulatory dependency ratio measures WMB's reliance upon potentially volatile
liabilities to fund long-term assets. WMB manages both ratios to remain within
the acceptable ranges and, at June 30, 1997, was within the established FDIC
guidelines.
Regulations promulgated by the Office of Thrift Supervision ("OTS") require
that American Savings Bank ("ASB") and Washington Mutual Bank fsb ("WMBfsb")
maintain for each calendar month an average daily balance of liquid assets at
least equal to 5.00% of the prior month's average daily balance of net
withdrawable deposits plus borrowings due within one year. For each month during
the first half of 1997, the liquidity ratio for ASB and for WMBfsb was above
5.00%.
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, 1997, the Company's banking subsidiaries were able to
borrow an additional $13.9 billion through the use of collateralized borrowings
using unpledged mortgage-backed securities and other wholesale sources. The
ability of the Company's banking subsidiaries to pay dividends to the Company is
influenced by legal, regulatory and economic restrictions.
Because the low interest rate environment of recent years and competition
from non-regulated entities (such as mutual funds) has inhibited consumer
deposits, Washington Mutual has supported its growth through business
combinations with other financial institutions and by increasing its use of
wholesale borrowings. Should the Company not be able to increase deposits either
internally or through acquisitions, its ability to grow would be dependent upon,
and to a certain extent limited by, its borrowing capacity.
As presented in the Consolidated Statements of Cash Flows, the sources of
liquidity vary between periods. The statement of cash flows includes operating,
investing and financing categories. Cash flows from operating activities
included net income for the first half of 1997 of $232.8 million, $50.0 million
of noncash items and $102.6 million of other net cash outflows from operating
activities. During the six months ended June 30, 1997, cash flows from investing
activities included sales and principal payments on available-for-sale
securities, principal payments on held-to-maturity securities and loans held for
investment totaling $2.9 billion. New loans originated and purchased for
investment required $7.0 billion and $213.9 million was used for the purchase
of available-for-sale securities. Cash flows from financing activities consisted
of the net change in deposit accounts and short-term borrowings, the proceeds
and repayments from both securities sold under long-term agreements to
repurchase and FHLB advances, and also the repayment of long-term debt. During
the six months ended June 30, 1997, the above mentioned financing activities
increased cash and cash equivalents by $3.9 billion on a net basis. Cash and
cash equivalents were $615.9 million at June 30, 1997. (See "Consolidated
Statements of Cash Flows".)
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CAPITAL REQUIREMENTS. At June 30, 1997, Washington Mutual's banking subsidiaries
exceeded all current regulatory capital requirements and were classified as well
capitalized institutions, the highest regulatory standard. The regulatory
capital ratios of WMB, ASB and WMBfsb and minimum regulatory requirements to be
categorized as well capitalized were as follows:
June 30, 1997 Well
--------------------------------------- Capitalized
WMB ASB WMBfsb Minimum
--------------------------------------- -----------
Capital ratios:
Leverage 5.62% 5.29% 6.16% 5.00%
Tier 1 risk-based 10.14 8.98 9.61 6.00
Total risk-based 10.96 10.89 10.69 10.00
In addition, ASB and WMBfsb are required by the OTS to maintain core
capital of at least 3.00% of assets and tangible capital of at least 1.50% of
assets. Both ASB and WMBfsb satisfied this requirement at June 30, 1997.
9
11
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
ANNUAL MEETING OF SHAREHOLDERS
On April 15, 1997, the Company held its Annual Meeting of Shareholders at
which shareholders voted on the election of directors, approval of the 1997
Amended and Restated Restricted Stock Plan, and the ratification of the
appointment of independent auditors.
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 % WITHHELD WITHHELD %
------------------- ----------- ------ ----------- ----------
David Bonderman 104,528,341 99.7% 340,901 0.3%
Douglas P. Beighle 102,632,881 97.9 2,236,361 2.1
Michael K. Murphy 102,640,135 97.9 2,229,107 2.1
Kerry K. Killinger 104,536,240 99.7 333,002 0.3
J. Taylor Crandall 104,554,484 99.7 314,758 0.3
The term of office for directors Roger H. Eigsti, John W. Ellis, Daniel J.
Evans, Anne V. Farrell, William P. Gerberding, Samuel B. McKinney, William G.
Reed, Jr. and James H. Stever also continued after the meeting. Effective July
1, 1997, the Board of Directors of the Company increased its size and Stephen E.
Frank, Enrique Hernandez, Jr. and Willis B. Wood, Jr., each of whom had until
that date served as a director of GWFC, were added to the Company's Board of
Directors. Each will serve until the next regular shareholders' meeting.
Approval of the 1997 Amended and Restated Restricted Stock Plan. The Board of
Directors adopted the 1997 Amended and Restated Stock Plan (the "Plan") subject
to shareholder approval. Pursuant to the Plan, employees, consultants, advisors
of the Company and its consolidated subsidiaries and members of the Company's
Board of Directors may be awarded shares of restricted stock at the discretion
of a committee comprised of two or more non-employee members of the Board of
Directors. The Plan was approved by shareholders with 89,325,175 votes cast for
and 13,821,884 cast against the Plan with 613,244 abstentions and 1,108,939
broker nonvotes.
Ratification of Appointment of Independent Auditors. Shareholders ratified the
selection of Deloitte & Touche LLP as independent auditors for the Company for
1997 with 104,315,157 votes cast for and 147,296 cast against ratification with
406,788 abstentions.
10
12
SPECIAL MEETING OF SHAREHOLDERS
On June 13, 1997, at a Special Meeting of Shareholders, shareholders
approved the issuance of shares of common stock pursuant to the Agreement and
Plan of Merger dated as of March 5, 1997, by and among the Company, New American
Capital, Inc. and GWFC with 103,287,775 common share votes cast for and 257,601
votes cast against the issuance with 4,452,474 abstentions.
The Special Meeting was reconvened on July 8, 1997, at which time the
Company's shareholders approved an amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of common stock from
350,000,000 to 800,000,000. Common shareholders cast 105,631,128 votes for and
1,089,785 votes against the amendment with 4,496,664 abstentions. An aggregate
of 108,289,484 common and preferred shares voted for and 1,201,917 shares voted
against the amendment with 4,615,888 abstentions.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
11.1 Statement re computation of per share earnings
27.1 Financial Data Schedule
(b) During the quarter, the Company filed the following Current Reports on
Form 8-K:
1. Related to press release dated March 31, 1997, dated April 1,
1997
2. Related to fact sheet for analysts and shareholders, dated
April 2, 1997
3. Related to materials to be used in investment community
presentations, dated April 3, 1997
4. Related to materials to be used in investment community
presentations, dated April 10, 1997
5. Related to press release dated April 9, 1997, dated April 10,
1997
6. Related to press release dated April 10, 1997, dated April
10, 1997
7. Related to earnings release, dated April 15, 1997
8. Related to presentation to investment analysts on April 28,
1997, dated April 28, 1997
9. Related to video presentation to investment analysts and
shareholders, dated April 30, 1997
10. Related to estimated future operating results for 1997, 1998
and 1999 for the Company and GWFC, dated April 30, 1997 as
amended by Form 8-K/A dated May 6, 1997
11. Related to slide presentation to investment analysts, dated
May 2, 1997
12. Related to slide presentation to investment analysts, dated
May 5, 1997
13. Related to press release dated May 6, 1997, dated May 6, 1997
14. Related to slide presentation to investment analysts, dated
May 8, 1997
15. Related to slide presentation to investment analysts, dated
May 14, 1997
16. Related to press release dated May 13, 1997, dated May 14,
1997 as amended by Form 8-K/A dated May 15, 1997
17. Related to press release dated May 14, 1997, dated May 14,
1997
18. Related to pro forma combined financial information giving
effect to the merger of the Company and GWFC, dated May 20,
1997
11
13
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, 1997.
Washington Mutual, Inc.
/s/ William A. Longbrake
---------------------------------------------
William A. Longbrake
Executive Vice President and
Chief Financial Officer
(Chief Financial Officer)
12
14
CONSOLIDATED STATEMENTS OF INCOME
Quarter Ended Six Months Ended
June 30, June 30,
-----------------------------------------------
(dollars in thousands, except for per share amounts) 1997 1996 1997 1996
-------- -------- ---------- ----------
(Unaudited)
Interest income
Loans $638,904 $515,163 $1,258,400 $1,011,892
Available-for-sale securities 152,726 204,891 306,970 416,014
Held-to-maturity securities 79,830 55,648 132,429 111,577
Cash equivalents 1,271 567 1,665 1,408
-------- -------- ---------- ----------
Total interest income 872,731 776,269 1,699,464 1,540,891
Interest expense
Deposits 259,157 263,681 516,869 537,731
Borrowings 291,229 212,827 543,297 416,397
-------- -------- ---------- ----------
Total interest expense 550,386 476,508 1,060,166 954,128
-------- -------- ---------- ----------
Net interest income 322,345 299,761 639,298 586,763
Provision for loan losses 16,026 20,116 31,552 41,005
-------- -------- ---------- ----------
Net interest income after provision for loan losses 306,319 279,645 607,746 545,758
Other income
Depositor fees 33,644 24,792 62,284 47,290
Securities and insurance commissions 10,822 11,190 20,254 21,289
Loan servicing fees 12,378 9,568 26,658 18,045
Other service fees 3,641 2,597 7,021 5,581
Other operating income 12,037 9,819 25,726 17,585
Gain on sale of loans 4,216 4,339 9,941 8,719
Gain (loss) on sale of other assets 1,551 (3,681) 1,794 (2,875)
-------- -------- ---------- ----------
Total other income 78,289 58,624 153,678 115,634
Other expense
Salaries and employee benefits 88,696 84,340 175,515 166,175
Occupancy and equipment 33,856 27,577 66,720 55,252
Outside telecommunications and data processing services 25,747 17,733 50,696 29,919
Regulatory assessments 4,036 12,693 8,102 24,265
Other operating expense 38,262 33,389 77,524 71,013
Amortization of goodwill and other intangible assets 6,707 6,962 13,495 13,930
Real estate owned ("REO") operations,
inclusive of write-downs (1,166) 3,357 (3,282) 6,591
-------- -------- ---------- ----------
Total other expense 196,138 186,051 388,770 367,145
-------- -------- ---------- ----------
Income before income taxes and minority interest 188,470 152,218 372,654 294,247
Income taxes 69,705 49,151 139,817 98,846
-------- -------- ---------- ----------
Income before minority interest 118,765 103,067 232,837 195,401
Minority interest in earnings of consolidated subsidiaries - (3,450) - (6,977)
-------- -------- ---------- ----------
Net income $118,765 $99,617 $232,837 $188,424
======== ======= ======== ========
Net income attributable to common stock $116,260 $95,012 $227,827 $179,214
======== ======= ======== ========
Net income per common share:
Primary $0.96 $0.85 $1.89 $1.60
Fully diluted 0.96 0.83 1.88 1.56
Dividends declared per common share 0.26 0.22 0.51 0.43
See Notes to Consolidated Financial Statements
13
15
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
June 30, Dec. 31,
(dollars in thousands) 1997 1996
----------- -----------
(Unaudited)
ASSETS
Cash and cash equivalents $ 615,897 $ 831,063
Trading account securities 1,170 1,647
Available-for-sale securities, amortized cost $9,298,904 and $9,050,960 9,345,701 9,111,274
Held-to-maturity securities, fair value $4,846,443 and $2,922,552 4,880,293 2,860,347
Loans 32,055,648 30,103,386
Loans held for sale 278,743 227,390
REO 88,443 103,111
Bank premises and equipment 510,667 482,391
Intangible assets arising from acquisitions 123,688 133,509
Other assets 862,903 697,807
----------- -----------
Total assets $48,763,153 $44,551,925
=========== ===========
LIABILITIES
Deposits:
Checking accounts 3,171,823 $2,979,962
Savings and money market accounts 7,091,428 6,842,061
Time certificates 13,719,792 14,258,118
----------- -----------
Total deposits 23,983,043 24,080,141
Annuities 888,454 878,057
Federal funds purchased 2,151,000 1,052,000
Securities sold under agreements to repurchase 8,011,956 7,835,453
Advances from the Federal Home Loan Bank of Seattle 9,939,527 7,241,492
Guaranteed preferred beneficial interest in Company subordinated notes 400,000 -
Other borrowings 314,136 676,986
Other liabilities 518,727 389,908
----------- -----------
Total liabilities 46,206,843 42,154,037
STOCKHOLDERS' EQUITY
Preferred stock, no par value: 10,000,000 shares authorized -
4,722,500 and 4,722,500 shares issued and outstanding; redemption value 118,063 118,063
Common stock, no par value: 350,000,000 shares authorized -
126,357,466 and 126,142,285 shares issues and outstanding -- --
Capital surplus 843,044 834,684
Valuation reserve for available-for-sale securities 28,040 41,666
Retained earnings 1,567,163 1,403,475
----------- -----------
Total stockholders' equity 2,556,310 2,397,888
----------- -----------
Total liabilities and stockholders' equity $48,763,153 $44,551,925
=========== ===========
See Notes to Consolidated Financial Statements
14
16
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Number of Shares Preferred
------------------ Stock Valuation Total
Preferred Common Capital Redemption Retained Reserve for Stockholders'
(in thousands) Stock Stock Surplus Value Earnings Securities Equity
--------- ------- -------- ----------- ---------- ----------- ------------
(Unaudited)
Balance at March 31, 1997 4,723 126,248 $839,171 $118,063 $1,483,698 $(12,935) $2,427,997
Net income -- -- -- -- 118,765 -- 118,765
Cash dividends on common stock -- -- -- -- (32,834) -- (32,834)
Cash dividends on preferred stock -- -- -- -- (2,504) -- (2,504)
Common stock issued through stock
options and employee stock plans -- 109 3,873 -- -- -- 3,873
Miscellaneous stock transactions -- -- -- -- 38 -- 38
Adjustment in valuation reserve
for available-for-sale securities -- -- -- -- -- 40,975 40,975
----- ------- -------- -------- ---------- -------- ----------
Balance at June 30, 1997 4,723 126,357 $843,044 $118,063 $1,567,163 $28,040 $2,556,310
===== ======= ======== ======== ========== ======= ==========
Balance at March 31, 1996 6,123 119,890 $666,305 $258,063 $1,501,660 $ 107,062 $2,533,090
Net income -- -- -- -- 99,617 -- 99,617
Cash dividends on common stock -- -- -- -- (75,877) -- (75,877)
Cash dividends on preferred stock -- -- -- -- (4,605) -- (4,605)
Common stock issued through stock
options and employee stock plans -- 80 1,974 -- -- -- 1,974
Conversion of preferred stock (1) -- (10) -- -- -- (10)
Adjustment in valuation reserve
for available-for-sale securities -- -- -- -- -- (129,740) (129,740)
----- ------- -------- -------- ---------- -------- ----------
Balance at June 30, 1996 6,122 119,970 $668,269 $258,063 $1,520,795 $ (22,678) $2,424,449
===== ======= ======== ======== ========== ======= ==========
Balance at December 31, 1996 4,723 126,142 $834,684 $118,063 $1,403,475 $41,666 $2,397,888
Net income -- -- -- -- 232,837 -- 232,837
Cash dividends on common stock -- -- -- -- (64,249) -- (64,249)
Cash dividends on preferred stock -- -- -- -- (5,008) -- (5,008)
Common stock issued through stock
options and employee stock plans -- 215 8,360 -- -- -- 8,360
Miscellaneous stock transactions -- -- -- -- 108 -- 108
Adjustment in valuation reserve
for available-for-sale securities -- -- -- -- -- (13,626) (13,626)
----- ------- -------- -------- ---------- -------- ----------
Balance at June 30, 1997 4,723 126,357 $843,044 $118,063 $1,567,163 $28,040 $2,556,310
===== ======= ======== ======== ========== ======= ==========
Balance at December 31, 1995 6,123 119,688 $662,343 $258,063 $1,432,583 $188,715 $2,541,704
Net income -- -- -- -- 188,424 -- 188,424
Cash dividends on common stock -- -- -- -- (91,002) -- (91,002)
Cash dividends on preferred stock -- -- -- -- (9,210) -- (9,210)
Common stock issued through stock
options and employee stock plans -- 282 5,936 -- -- -- 5,936
Conversion of preferred stock (1) -- (10) -- -- -- (10)
Adjustment in valuation reserve
for available-for-sale securities -- -- -- -- -- (211,393) (211,393)
----- ------- -------- -------- ---------- -------- ----------
Balance at June 30, 1996 6,122 119,970 $668,269 $258,063 $1,520,795 ($22,678) $2,424,449
===== ======= ======== ======== ========== ======== ==========
See Notes to Consolidated Financial Statements
15
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------------
(dollars in thousands) 1997 1996 1997 1996
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited)
Net income $ 118,765 $ 99,617 $ 232,837 $ 188,424
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 16,026 20,116 31,552 41,005
(Gain) on sale of loans (4,216) (4,339) (9,941) (8,719)
(Gain) loss on sale of other assets (1,551) 3,681 (1,794) 2,875
Depreciation and amortization 17,993 16,180 31,808 38,034
FHLB stock dividend (6,228) (7,351) (13,407) (14,169)
Decrease (increase) in trading account securities 1,634 (1,273) 477 (3,477)
Origination of loans, held for sale (574,808) (280,677) (1,067,411) (650,227)
Sale of loans, held for sale 508,571 269,975 1,016,058 561,428
(Increase) in other assets (47,676) (28,551) (168,770) (7,074)
(Decrease) increase in other liabilities (15,714) 206,284 137,530 260,177
------------ ------------ ------------ ------------
Net cash provided by operating activities 12,796 293,662 188,939 408,277
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities (77,438) (730,203) (213,857) (1,321,518)
Maturities and principal payments on
available-for-sale securities 224,706 433,978 498,668 907,885
Sales of available-for-sale securities 7,698 949,232 39,846 2,068,705
Purchases of held-to-maturity securities (16,387) (870,282) (19,773) (888,563)
Maturities, calls and principal payments on
held-to-maturity securities 64,660 945,210 121,041 1,029,098
Sales of loans 3,094 429,338 74,936 533,244
Principal payments on loans 1,034,268 1,225,501 2,163,699 2,259,734
Origination and purchases of loans (3,732,553) (3,400,279) (6,978,611) (6,176,451)
Sales of REO 49,648 42,502 99,919 72,666
Other REO operations (4,397) 14,689 (6,583) 18,101
Proceeds from sales of premises and equipment 717 196 4,486 960
Purchases of premises and equipment (27,484) (12,349) (51,074) (26,606)
------------ ------------ ------------ ------------
Net cash (used) by investing activities (2,473,468) (972,467) (4,267,303) (1,522,745)
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) in deposits (315,450) (360,436) (97,098) (594,542)
Increase in annuities 10,613 6,410 10,397 10,846
Increase in federal funds and commercial paper purchased 921,000 92,580 1,099,000 336,580
(Decrease) increase in securities sold under short-term
agreements to repurchase (1,484,264) (770,470) (2,678,917) 276,876
Proceeds from securities sold under long-term agreements
to repurchase 2,598,000 20,000 3,954,254 574,081
Repayment of securities sold under long-term agreements
to repurchase (663,000) -- (1,098,834) (202,672)
Proceeds from FHLB advances 7,114,929 2,344,892 15,291,600 3,547,134
Payments for maturing and prepaid FHLB advances (5,818,765) (664,399) (12,593,565) (3,287,229)
Proceeds (repayments) of other borrowings 212,290 (87,185) 37,150 11,760
Other capital transactions 3,911 1,964 8,468 5,926
Cash dividends paid (35,338) (80,482) (69,257) (100,212)
------------ ------------ ------------ ------------
Net cash provided by financing activities 2,543,926 502,874 3,863,198 578,548
------------ ------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 83,254 (175,931) (215,166) (535,920)
Cash and cash equivalents at beginning of period 532,643 623,844 831,063 983,833
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 615,897 $ 447,913 $ 615,897 $ 447,913
============ ============ ============ ============
16
18
SUPPLEMENTAL DISCLOSURES RELATED TO THE CONSOLIDATED
STATEMENTS OF CASH FLOWS
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------------------------------
(dollars in thousands) 1997 1996 1997 1996
---------- -------- ---------- --------
(Unaudited)
NONCASH INVESTING ACTIVITIES
Loans exchanged for mortgage-backed securities
and held for investment $2,621,590 $458,757 $2,702,031 $920,072
Real estate acquired through foreclosure 47,890 59,012 98,387 117,307
Loans originated to facilitate the sale of foreclosed
properties 8,694 17,791 19,719 40,533
CASH PAID DURING THE PERIOD FOR
Interest on deposits 257,689 247,942 501,214 515,706
Interest on borrowings 267,774 191,579 508,429 399,759
Income taxes 95,759 61,000 96,125 61,000
See Notes to Consolidated Financial Statements
17
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING ADJUSTMENTS
The information included in the consolidated statements of financial
position as of June 30, 1997 and December 31, 1996 and the consolidated
statements of income, stockholders' equity and cash flows of Washington Mutual,
Inc. ("Washington Mutual" or the "Company") for the quarter and six months ended
June 30, 1997 and 1996 reflect all adjustments which are, in the opinion of
management, necessary for a fair statement of the results for the period
presented.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") adopted
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share. SFAS No. 128 specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock or potential common stock such as options, warrants, convertible
securities or contingent stock agreements if those securities trade in a public
market. This standard specifies computation and presentation requirements for
both basic EPS and, for entities with complex capital structures, diluted EPS.
SFAS No. 128 is effective for reporting periods ending after December 15, 1997
and early adoption of the standard is not permitted. The Company does not
anticipate the adoption of SFAS No. 128 to have a material impact on its results
of operations on a per share basis.
3. CAPITAL STRUCTURE
In February 1997, FASB issued SFAS No. 129, Disclosure of Information about
Capital Structure. SFAS No. 129 establishes standards for disclosing information
about an entities capital structure. Effective for periods ending after December
31, 1997, the Company does not anticipate the adoption of SFAS No. 129 to have a
material impact on its financial position or results of operations.
4. COMPREHENSIVE INCOME
In June 1997, FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 is effective for periods beginning after December 15, 1997 and requires
disclosure of comprehensive income and its components. Comprehensive income
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The Company does not
anticipate the adoption of SFAS No. 130 to have a material impact on its
financial position or results of operations.
5. SEGMENT DISCLOSURES
In June 1997, FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 is effective for periods
beginning after December 15, 1997 and requires disclosure of results of
operations and other key information, such as products and services, geographic
operations and major customers, by key operating segments. The Company does not
anticipate the adoption of SFAS No. 131 to have a material impact on its
financial position or results of operations.
18
20
Washington Mutual, Inc.
List of Exhibits
Exhibit Page
- ------- ----
11.1 Statement re computation of per share earnings..........................................
27.1 Financial Data Schedule.................................................................
19