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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20529
FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO :
COMMISSION FILE NUMBER 0-25188
WASHINGTON MUTUAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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WASHINGTON 91-1653725
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1201 THIRD AVENUE 98101
SEATTLE, WASHINGTON (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 461-2000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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Common Stock The Nasdaq Stock Market
7.60% Noncumulative Perpetual Preferred Stock, Series E The Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. YES X NO __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of January 31, 1998:
COMMON STOCK -- $15,530,272,661(1)
(1) Does not include any value attributable to 8,000,000 shares that are held in
escrow and not traded.
The number of shares outstanding of the issuer's classes of common stock as
of January 31, 1998:
COMMON STOCK -- 257,781,511(2)
(2) Includes the 8,000,000 shares held in escrow.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held April 21, 1998, are incorporated by reference into Part
III.
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WASHINGTON MUTUAL, INC.
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I...................................................... 1
ITEM 1. BUSINESS.......................................... 1
Overview............................................... 1
Corporate Developments................................. 2
Integration of Operations.............................. 2
Lending Activities..................................... 5
Asset Quality.......................................... 8
Investing Activities................................... 10
Sources of Funds....................................... 10
Business Combinations.................................. 12
Employees.............................................. 12
Taxation of the Company................................ 12
Environmental Regulation............................... 13
Regulation and Supervision............................. 14
Competitive Environment................................ 20
Principal Officers..................................... 21
ITEM 2. PROPERTIES........................................ 22
ITEM 3. LEGAL PROCEEDINGS................................. 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................ 23
PART II..................................................... 23
ITEM 5. MARKET FOR WASHINGTON MUTUAL'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS........................ 23
Common Stock........................................... 23
Preferred Stock........................................ 23
Payment of Dividends and Policy........................ 24
ITEM 6. SELECTED FINANCIAL DATA........................... 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS..................... 27
General................................................ 27
Results of Operations.................................. 28
Review of Financial Position........................... 37
Asset Quality.......................................... 43
Market Risk and Asset/Liability Management............. 50
Liquidity.............................................. 56
Capital Adequacy....................................... 57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....... 57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................... 57
PART III.................................................... 57
PART IV..................................................... 57
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.................................... 57
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PART I
ITEM 1. BUSINESS
OVERVIEW
With a history dating back to 1889, Washington Mutual Inc. ("Washington
Mutual" or the "Company") is a financial services company committed to serving
consumers and small to mid-sized businesses. The Company operates principally in
California, Washington, Oregon, Florida and Utah, but has operations in a total
of 36 states. At December 31, 1997, the Company had consolidated assets of
$96.98 billion, deposits of $50.99 billion and stockholders' equity of $5.31
billion. Through its subsidiaries, the Company engages in the following
activities:
Mortgage Lending and Consumer Banking Activities
The Company's primary line of business is mortgage lending and consumer
banking, which it conducts through its principal banking subsidiaries,
Washington Mutual Bank, FA ("WMBFA"), Washington Mutual Bank ("WMB"), and
Washington Mutual Bank fsb ("WMBfsb"). At December 31, 1997, the Company
operated approximately 1,100 consumer financial centers and home loan centers
offering a full complement of mortgage lending and consumer banking products and
services. In the first 10 months of 1997, the Company's banking subsidiaries
were the leading originators of one-to-four family residential mortgage ("SFR")
loans in California, Washington and Oregon.
Washington Mutual Bank, FA. WMBFA's principal areas of operation are
California and Florida, where at December 31, 1997, it operated 568 consumer
financial centers. WMBFA also operates home loan centers in California, Florida
and 21 additional states. At December 31, 1997, WMBFA had assets of $67.21
billion and deposits of $39.14 billion. Its deposits are insured by the Federal
Deposit Insurance Corporation (the "FDIC") primarily through the Savings
Association Insurance Fund ("SAIF").
Washington Mutual Bank. At December 31, 1997, WMB had assets of $26.02
billion and deposits of $11.47 billion. WMB operates in Washington, Oregon, Utah
and Idaho, and at December 31, 1997, operated 250 consumer financial centers and
28 home loan centers. Its deposits are insured by the FDIC through the Bank
Insurance Fund ("BIF") and the SAIF.
Washington Mutual Bank fsb. At December 31, 1997, WMBfsb had assets of
$1.06 billion and deposits of $454.5 million. WMBfsb operates in Utah, Idaho and
Montana and, at December 31, 1997, operated 32 consumer financial centers and 4
home loan centers. WMBfsb's deposits are insured by the FDIC through the SAIF.
Consumer Finance Activities
Through Aristar, Inc. and its subsidiaries ("Aristar"), the Company makes
direct consumer installment loans and purchases retail installment contracts
from local retail establishments through a network of approximately 500 branch
offices located in 22 states, primarily in the southeastern United States. It
also accepts deposits through its industrial banks in Colorado and Utah.
Aristar's business is generally conducted under the names Blazer, City Finance
and First Community. At December 31, 1997, Aristar had assets of $2.54 billion
and deposits of $163.2 million.
Commercial Banking Activities
At December 31, 1997, through Western Bank, the commercial banking division
of WMB, the Company operated 47 Western financial centers and 23 business
banking centers offering a range of commercial banking products and services to
small to mid-sized businesses. WMB commenced its commercial banking activities
through the acquisitions of Enterprise Bank ("Enterprise") in 1995 and Western
Bank ("Western") in 1996.
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Securities Activities
Broker-Dealer Activities. Through WM Financial Services, Inc. ("WM
Financial"), Great Western Financial Securities Corporation ("GWFSC"), Composite
Funds Distributor, Inc. ("CFDI") and Sierra Investment Services Corporation
("SISC"), the Company offers a broad range of securities brokerage services,
including distribution of mutual funds. WM Financial and GWFSC make their
registered representatives available for consultation regularly or by
appointment in many of the Company's financial centers.
Investment Advisor Activities. Composite Research & Management Co.
("Composite Research"), Sierra Investment Advisors Corporation ("SIAC") and SISC
are registered investment advisors. At December 31, 1997, Composite Research was
the investment advisor to eight mutual funds, and SIAC and SISC between them
were the investment advisor to 36 mutual funds. At December 31, 1997, Composite
Research had a total of $1.72 billion in funds under management in the eight
mutual funds and SIAC and SISC had a total of $3.01 billion in funds under
management in their mutual funds.
CORPORATE DEVELOPMENTS
On December 20, 1996, Washington Mutual consummated the merger of Keystone
Holdings, Inc. ("Keystone Holdings") with and into the Company and certain other
transactions (the "Keystone Transaction") and thereby acquired American Savings
Bank, F.A. ("ASB"). Washington Mutual issued 47,883,333 shares of common stock
to complete the Keystone Transaction.
On July 1, 1997, Washington Mutual consummated the merger of Great Western
Financial Corporation ("GWFC") with and into a subsidiary of the Company (the
"Great Western Merger"). All of GWFC's subsidiaries, including Great Western
Bank, a Federal Savings Bank ("GWB") and Aristar, became subsidiaries of the
Company. The Company issued 125,649,551 shares of common stock in the Great
Western Merger.
On October 1, 1997, GWB was merged with and into ASB. Simultaneously, the
name of ASB was changed to Washington Mutual Bank, FA. The Company has announced
that it intends to operate all of its former Great Western Bank and American
Savings Bank consumer financial and home loan centers under the Washington
Mutual name commencing in 1998.
The above mentioned transactions were accounted for as poolings of
interests. See "Consolidated Financial Statements -- Note 2: Business
Combinations/Restructuring."
On December 31, 1997, the Company and SAFECO Corporation ("SAFECO")
completed the formation of a strategic alliance to distribute SAFECO and other
annuities through the Company's consumer financial center network. As part of
this alliance, SAFECO acquired the Company's insurance subsidiary, WM Life
Insurance Co. ("WM Life").
INTEGRATION OF OPERATIONS
This section contains forward-looking statements that have been prepared on
the basis of the Company's best judgments and currently available information.
These forward-looking statements are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which are
beyond the control of the Company. In addition, these forward-looking statements
are subject to assumptions with respect to future business strategies and
decisions that are subject to change. Accordingly, there can be no assurance
that the cost savings and revenue enhancements described herein will be achieved
in the amounts or within the time periods currently estimated. See "Cautionary
Statements" below for a discussion of factors that may cause such
forward-looking statements to differ from actual results.
The integration of ASB and its subsidiaries with the Company is
substantially complete. All major back office functions and data processing
systems were consolidated and the deposit and loan processing systems were
converted to the Company's systems by the end of the third quarter of 1997. At
the beginning of 1997, the Company introduced its "Free Checking" product into
the ASB system, which resulted in approximately
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83,000 net new checking accounts in 1997. The Company also introduced its full
line of SFR loan products and standardized loan pricing throughout the ASB
lending system.
The integration of GWFC and its subsidiaries with the Company is proceeding
on schedule. Administration of payroll, employee benefit plans, incentive
compensation systems, and accounts payable were consolidated effective January
1, 1998. The conversion of the deposit and loan processing systems is scheduled
for the second quarter of 1998.
During the fourth quarter of 1997, the Company's "Free Checking" product
was introduced at GWB consumer financial centers in California and Florida. This
introduction resulted in approximately 79,000 net new accounts during that
quarter, after having net account losses of approximately 134,000 during the
first nine months of the year. The Company also introduced its full line of SFR
loan products and standardized loan pricing throughout the GWB lending system.
Prior to the Great Western Merger, the Company estimated that 100 ASB and
GWB consumer financial centers would be consolidated as a result of the Great
Western Merger. Also prior to the Great Western Merger, GWFC identified five
consumer financial centers for closure. In November 1997, the Company identified
an additional 85 consumer financial centers for closure. A total of 90 consumer
financial center closures are expected to be completed in the third quarter of
1998.
The Company estimated $334 million in revenue enhancements as a result of
the Great Western Merger to be realized fully in 1999 with an approximately $173
million increase during 1998. For 1999, total fee increases of $88 million were
projected with the remaining $246 million resulting from an incremental increase
in net interest income. Based upon the success of the introduction of the "Free
Checking" product in the GWB system, and the additional experience gained from
operating the combined Company for six months, management believes the estimated
fee enhancements are reasonable and will be realized as anticipated.
The increase in net interest income was projected to result from the
leveraging of the additional capital generated by the Great Western Merger. The
rate of growth during the second half of 1997 was consistent with the
projections presented at the time of the Great Western Merger. However, during
the fourth quarter of 1997, the yield on a 10-year U.S. government note declined
approximately 36 basis points while the yield on a three-month U.S. treasury
bill increased 25 basis points. This change in the interest rate environment is
expected to result in an increase in loan refinancing and prepayment of existing
loans as well as in fixed-rate loans being more attractive to borrowers than
adjustable-rate mortgage ("ARM") loans. Because it is the Company's practice to
sell most conforming fixed-rate SFR loans, the persistence of lower interest
rates and a narrow spread between short and long-term interest rates for an
extended period of time will result in higher fixed-rate originations, making
full realization of the net interest income revenue enhancements difficult. The
Company expects that this will be partially mitigated by gains from the sale of
an increased amount of conforming fixed-rate SFR loans.
Annual cost savings before taxes of $340 million were projected as part of
the benefits of the Great Western Merger. Approximately $208 million savings
were originally anticipated for 1998, with the full benefit being realized in
1999. Realization of cost savings during 1998 may be negatively affected by an
estimated $60 to $80 million in one-time incremental transaction costs to merge
systems and provide customer support during the conversion period. These
expenses are in addition to the transaction-related expenses accrued in the
third quarter of 1997 and the transaction-related period costs incurred during
1997. The Company does not currently expect there to be significant transaction
costs related to the Great Western Merger in 1999. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Other Expense."
Cautionary Statements
Increased Origination of Loans May Not Be Achieved. Washington Mutual's
business plan assumes that it will be able to increase net interest income by
originating and retaining a greater volume of loans than either Washington
Mutual or GWB would have on a stand-alone basis. To the extent that the Company
is not able to generate a sufficient volume of new loans or retain such loans in
its portfolio at the levels or of the types
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assumed in the business plan and forward-looking statements, the estimates of
future net income contained therein may differ materially from actual results.
Cost Savings May Not Be Realized. No assurance can be given that the cost
savings which are anticipated through the consolidation of consumer financial
centers and home loan centers of WMBFA and of administrative functions of the
Company will be achieved or will occur in the time periods anticipated. In
addition, when consumer financial centers are consolidated or closed, financial
institutions often lose customers and deposits as a result. To the extent that
the Company loses customers or deposits significantly in excess of the amount
anticipated, the operations of the Company could be materially adversely
affected, particularly in the short term. The forward-looking statements assume,
based on Washington Mutual's historical experience following acquisitions, that
the deposit base of the Company will remain substantially intact during the
period presented in the forward-looking statements. To the extent that the
change in ownership of GWB, the consolidation of branches of WMBFA or other
factors result in a significant temporary or long-term loss of deposits, actual
results of operations may vary materially from the forward-looking information
presented.
Consumer Banking Expansion Risks. The forward-looking statements assume an
increase in fee income from the Company's consumer banking operations. The
sources of these fee increases include introduction of a debit card, a new
pricing policy for checking account services in California and Florida revised
policies for checking account services in accordance with Washington Mutual's
programs, implementation of the Company's checking programs throughout the WMBFA
system and improved revenues in financial services subsidiaries. Washington
Mutual has relatively limited experience with the introduction of these business
initiatives in California and Florida, where the greatest expansion of consumer
banking activities is expected to occur. Accordingly, there can be no assurance
that the Company's emphasis on consumer banking activities will be successful in
the California or Florida markets or that any increase in fee income anticipated
by the forward-looking statements will be achieved.
Concentration of Operations in California. At December 31, 1997, 52% of
Washington Mutual's loan portfolio was concentrated in California. In addition,
at December 31, 1997, approximately three quarters of the Company's deposits
were on deposit at consumer financial centers in California. As a result, the
financial condition and results of operations of the Company will be subject to
general economic conditions, and particularly the conditions in the
single-family and multi-family residential markets, in California. If economic
conditions generally, or in California in particular, worsen or if the market
for residential real estate declines, the Company may suffer decreased net
income or losses associated with higher default rates and decreased collateral
values on its existing portfolio, and may not be able to originate the volume or
type of loans or achieve the level of deposits and mutual fund assets currently
anticipated.
The forward-looking statements regarding the Company's results of
operations assume that the California economy and real estate market will remain
healthy. A worsening of current economic conditions or a significant decline in
real estate values in California could cause actual results to vary materially
from the forward-looking statements.
Interest Rate Risk. Washington Mutual realizes its income principally from
the differential between the interest earned on loans, investments and other
assets and the interest paid on interest-bearing liabilities. Net interest
spreads are affected by the difference between the repricing characteristics of
interest-earning assets and deposits and other borrowings. Market interest rates
have an impact on the volume and rates on loans, investments, deposits and
borrowings. Significant fluctuations in interest rates and spreads may adversely
affect net income. In addition, at the end of 1997, long-term interest rates
declined dramatically and the yield curve became much flatter. In this type of
interest rate environment, the Company's customers tend to prefer fixed-rate
loans to ARMs, and thus, the Company's ability to grow its asset size by
retaining ARMs in its portfolio could be adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Market Risk and Asset/Liability Management."
Competition. Washington Mutual faces significant competition both in
attracting and retaining deposits and in making loans in all of its markets. The
most direct competition has historically come from other savings institutions,
credit unions, mortgage companies, insurance companies, commercial banks, and
other institu-
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tional lenders doing business in the Company's market areas of California,
Washington, Oregon, Florida and Utah. Competition from commercial banks has been
particularly strong due to their extensive distribution systems. As with all
banking organizations, however, the Company has experienced increasing
competition from nonbanking sources, including mutual funds, securities
brokerage companies and government-sponsored enterprises ("GSEs") such as the
Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC"), and the Government National Mortgage Association
("GNMA"). Some of these competitors have significantly greater financial
resources, larger market share and greater name recognition than the Company.
There can be no assurance that competition from such sources will not increase
in the future and adversely affect the Company's ability to achieve its
financial goals. In addition, the Company's lending activities are heavily
influenced by competitive factors such as the lower cost structure of less
regulated originators and the influence of GSEs in establishing rates.
LENDING ACTIVITIES
General
The Company's principal lending activities are carried on through its
banking subsidiaries, WMBFA, WMB and WMBfsb, and through Aristar. At December
31, 1997, the Company's total loan portfolio of $67.81 billion (exclusive of
reserve for loan losses) included $53.43 billion of SFR loans; $877.4 million of
SFR construction loans; $6.61 billion of mortgage loans secured by commercial
real estate such as apartment buildings, office buildings, warehouses and
shopping centers; $1.08 billion of loans secured by manufactured housing; $2.73
billion of consumer loans; $2.31 billion of consumer finance loans; and $772.5
million of commercial business loans. For a discussion of the fair value of the
loan portfolio, see "Consolidated Financial Statements -- Note 28: Fair Value of
Financial Instruments."
Washington state law gives state-chartered savings banks such as WMB broad
lending powers, subject to certain statutory restrictions on total investment in
different types of loans. WMB may make loans secured by residential and
commercial real estate, secured and unsecured consumer loans, and secured and
unsecured commercial loans. WMBFA and WMBfsb, as federally chartered
institutions, have somewhat narrower lending authority but can make loans
secured by residential and commercial real estate, certain secured and unsecured
consumer loans, and a limited amount of secured and unsecured commercial loans.
SFR and SFR Construction Loans
General. The bulk of the Company's residential loan portfolio is in
California, Washington, Oregon, Florida and Utah. All of the Company's
residential mortgage lending is subject to nondiscriminatory underwriting
standards. All loans are subject to underwriting review and approval by various
levels of Company personnel, depending on the size and characteristics of the
loan.
The Company requires title insurance on all first liens on real property
securing loans and also requires that fire and casualty insurance be maintained
on properties in an amount at least equal to the total of the Company's loan
amount plus all prior liens on the property or the replacement cost of the
property, whichever is less.
Under federal regulations, a real estate loan made by a depository
institution may not exceed 100% of the appraised value of the property at the
time of origination. In addition, depository institutions are required by
regulation to adopt written policies that establish appropriate limits and
standards for real estate loans and to consider certain regulatory guidelines in
establishing these policies. These guidelines specify that depository
institutions should not originate any commercial, multi-family or
nonowner-occupied SFR loan (including builder construction loans) with an
initial loan-to-value ratio in excess of 85%. The guidelines further provide
that depository institutions should not originate any owner-occupied SFR loan
with a loan-to-value ratio of 90% or above at origination, unless such loan is
protected by an appropriate credit enhancement in the form of either mortgage
insurance or readily marketable collateral. These real estate lending guidelines
recognize that it may be appropriate for a depository institution to originate
mortgage loans with loan-to-value ratios exceeding these specified levels,
provided that the aggregate amount of all loans in excess of these limits does
not exceed a specified level of such depository institution's total capital and
such loans are identified in the
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depository institution's records and reported at least quarterly to its board of
directors. At December 31, 1997, 3% of the Company's SFR loan portfolio had
loan-to-value ratios of 90% or above at origination and were without mortgage
insurance.
SFR Lending. In the first 10 months of 1997, the Company's banking
subsidiaries were the leading originators of SFR loans in California, Washington
and Oregon. The Company makes available to borrowers a full range of SFR loans,
including FHA-insured and VA-guaranteed loans, conventional fixed-rate loans
with a variety of maturities and amortization schedules, and ARMs. ARMs are
advantageous to the Company because adjustable-rate loans better match the
Company's natural liability base. In recent years, and particularly in the
California market, the Company has emphasized the origination of ARMs. The
primary ARM products presently being offered are either indexed to the Cost of
Funds Index of the Eleventh District Federal Home Loan Bank (San Francisco)
("COFI") or to the one-year Moving Treasury Average ("MTA"). During 1997, 69% of
loan originations were ARMs and 31% had a fixed rate. Under the Company's
current ARM programs, the borrower may choose among loans that have the initial
interest rate fixed for one, three or five years before the adjustments begin.
Currently, such ARMs have annual payment adjustments caps of 7.5% per year.
Under most options, the borrower may elect, between the sixth and the sixtieth
months, to convert to a fixed-rate loan payable over the remainder of the
original term. There is no conversion fee, and the fixed interest rate is
indexed to the then-current required net yield for loans sold to FNMA.
The Company originates loans through its consumer financial centers in
Washington, Oregon, Utah, Idaho and Montana, and through home loan centers
throughout its franchise. The Company intends to introduce loan originations
through its consumer financial centers in California and Florida in 1998. The
Company also originates nearly half of its loans through loan brokers. To
monitor credit quality, the Company conducts extensive due diligence and reviews
the stability and credit experience of each broker prior to accepting any loan
packages. Loan production from the wholesale channel is subjected to the same
underwriting standards as loan production from the home loan centers.
The Company originates loans for its portfolio that meet secondary market
standards established by GSEs ("conforming" loans) as well as those that meet
the Company's underwriting standards but do not conform to the requirements of
the GSEs for sale in the secondary market ("nonconforming" loans). Nonconforming
loans comprised approximately half of 1997's total residential originations.
These loans may be nonconforming because they exceed the maximum amount allowed
by the secondary market ("jumbo loans"), because the loan documentation lacks
some information relating to the borrower's credit or employment history
unrelated to the value of the collateral, or because the borrower's credit
history does not meet secondary market standards. All nonconforming loans are
fully supported by appraisals and title insurance. In addition, the
loan-to-value requirements are generally lower for nonconforming loans than for
conforming loans and decrease as the amount of the loan increases. The
delinquency experience on the Company's nonconforming loan portfolio as a whole
has not been significantly higher than on conforming loans.
SFR Construction Loans. The Company provides financing for two different
categories of SFR construction loans. A custom construction loan is made to the
intended occupant of a house to finance its construction and typically is
combined with the permanent financing of the constructed home. Builder
construction loans are made to borrowers who are in the business of building
homes for resale. Builder construction loans are made either on a house-by-house
basis or, in certain circumstances, through a collateralized, limited line of
credit. Builder construction lending involves somewhat more risk than custom
construction loans and involves different underwriting considerations. All SFR
construction loans require approval by various levels of Company personnel,
depending on the size and characteristics of the loan. SFR construction loans
for nonconforming residential properties (properties other than single-family
detached houses) are subject to more stringent approval requirements than loans
for conforming properties.
SFR construction loans are an integral part of the Company's overall
lending program. Builder construction loans are of short duration, generally 12
to 18 months and are generally priced at a higher rate than are permanent
residential loans. In addition, SFR construction loans provide a source of SFR
loans.
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Custom Construction loans may be of short duration, generally 9 to 12 months, or
maybe 15 to 30 years if combined with permanent financing.
At December 31, 1997, 61% of the SFR construction portfolio was custom
construction loans and 39% was builder construction loans. Originations of SFR
construction loans for 1997 totaled $1.45 billion, an increase of 12% from $1.29
billion in 1996. Substantially all of the 1997 SFR construction loan
originations were made in Washington, Oregon and Utah.
Commercial Real Estate Loans
Commercial real estate lending generally entails greater risks than
residential mortgage lending. Commercial real estate loans typically involve
large loan balances concentrated with single borrowers or groups of related
borrowers. In addition, the payment experience on loans secured by
income-producing properties usually depends on the successful operation of the
related real estate project and thus may be subject, to a greater extent, to
adverse conditions in the real estate market or in the economy, particularly the
interest rate environment. Commercial real estate values tend to be cyclical
and, while commercial real estate values have trended upward in many areas of
the country in 1997, management carefully monitors the commercial real estate
environment to determine the level of the Company's activity in this area.
In all commercial real estate lending, the Company considers the location,
marketability and overall attractiveness of the project. Washington Mutual's
current underwriting guidelines for commercial real estate loans require an
economic analysis of each property with regard to the annual revenue and
expenses, debt service coverage and fair value to determine the maximum loan
amount. Commercial real estate loans require approval at various levels of
Company personnel, depending on the size and characteristics of the loan.
Historically, the Company focused its commercial real estate lending on
small to mid-sized apartment lending (loans of $2.5 million or less). During
1996 and 1997, the Company began to broaden its lending scope by originating
$295.4 million and $495.0 million of nonresidential real estate loans, compared
to $549.0 million and $691.6 million of apartment loans. This change in emphasis
was occasioned in part by the acquisitions of Enterprise and Western and the
development of the Company's commercial banking operations. Both the Enterprise
and Western commercial real estate portfolios are predominantly nonresidential
commercial real estate. As the amount of commercial real estate lending
increases, the risk characteristics of the Company's commercial loan portfolio
will generally increase.
Loan Securitization
The Company from time to time, depending on its asset and liability
management strategy, converts a portion of its SFR loans into either FHLMC
participation certificates, GNMA mortgage-backed securities or FNMA
mortgage-backed securities (collectively, "MBS"). This securitization of its
loans provides the Company with increased liquidity both because the MBS are
more readily marketable than the underlying loans and because they can be used
as collateral for borrowing.
The Company generally securitizes a substantial portion of its fixed-rate
SFR loan production in order to sell the MBS in the secondary market. These
fixed-rate loans are generally securitized and sold without recourse and become
obligations of the applicable GSE. Generally, the servicing of the loans is
retained by the Company with the servicing fee income fixed by the relevant GSE.
In 1995, 1996 and 1997, the Company securitized loans with FHLMC and FNMA
under programs in which the GSE has recourse against the originator of the loans
("Recourse MBS"). These securitizations primarily involve ARMs and are generally
less costly and may require less documentation than securitizations without
recourse. These Recourse MBS are generally saleable in the secondary market and
can be used as collateral for borrowings and to meet regulatory liquidity
requirements. The Company has retained the majority of Recourse MBS. The Company
has also sold Recourse MBS and has established a contingent liability to cover
the estimated recourse obligation. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asset Quality."
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When MBS composed of loans originated by the Company's banking subsidiaries
are owned by such banking subsidiaries, they are serviced in the same manner as
any other loan in the loan portfolio. In addition, when loans sold with recourse
become nonperforming, the loans are included in the Company's total nonaccrual
assets.
Manufactured Housing, Second Mortgage and Other Consumer Loans
WMB and WMBfsb offer consumer loans programs in Washington, Oregon, Utah,
Idaho and Montana that include (i) manufactured housing loans, (ii) second
mortgage loans for a variety of purposes, including purchase, renovation, or
remodeling of property, and for uses unrelated to the security, (iii) loans for
the purchase of automobiles, pleasure boats and recreational vehicles, (iv)
student loans, and (v) loans for general purposes, including secured and
unsecured loans made under Washington Mutual's line of credit programs. Consumer
loans, in addition to being an important part of the Company's orientation
toward consumer financial services, provide greater net interest income due to
their generally higher yields. The size of the consumer loan portfolio has grown
in recent years. Management has begun to introduce these products into WMBFA's
service area. Lending in this area may involve special risks, including
decreases in the value of collateral and transaction costs associated with
foreclosure and repossession.
Consumer loans generally are secured loans and are made based on an
evaluation of the collateral and the borrower's creditworthiness, including such
factors as income, other indebtedness and credit history. Lines of credit are
subject to periodic review, revision and, when deemed appropriate by the
Company, cancellation as a result of changes in the borrower's financial
circumstances.
Consumer Finance Loans
Aristar makes direct consumer installment loans and purchases retail
installment contracts from local retail establishments. These consumer credit
transactions are primarily for personal, family or household purposes.
Installment loans typically have original terms ranging from 12 to 360 months,
and for 1997 originations had an average original term of 72 months. In the year
ended December 31, 1997, 61% of the originations of all installment loans were
unsecured or secured by luxury goods, automobiles or other personal property,
with the remaining 39% secured by real estate. Retail installment contracts are
generally acquired without recourse to the originating merchant. These contracts
are typically written with original terms of from three to 60 months and for
1997 had an average original term of 27 months.
Aristar's operations are currently located in 22 states, primarily in the
southeastern United States. The Company anticipates that Aristar will
significantly increase its lending volume in Texas as a result of changes in
Texas law which permit non-purchase money home equity lending for the first
time, commencing January 1, 1998. These changes allow borrowers to obtain loans
for a variety of purposes, such as renovation and remodeling of property, as
well as, for the first time, for uses unrelated to the security.
Commercial Business Loans
The Company, primarily through the Western Bank division of WMB, offers a
full range of commercial banking products and services. The Company's commercial
business loans are mainly loans to individuals and to small to mid-sized
businesses, and they are secured by a variety of business and personal assets
or, in some cases, are unsecured. In 1997, the Company originated $669.6 million
of commercial business loans, and the commercial business loan portfolio totaled
$772.5 million at December 31, 1997.
ASSET QUALITY
General
Washington Mutual's comprehensive process for identifying impaired assets,
classifying assets and asset review is performed on a quarterly basis. The
objective of the review process is to identify any trends and determine the
levels of loss exposure to evaluate the need for an adjustment to the reserve
accounts. Reserves
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are maintained for assets classified as substandard or doubtful. Any portion of
an asset classified as loss is immediately written off or specifically reserved.
The principal measures of asset problems are the levels of nonaccrual loans
and foreclosed assets, the levels of impaired loans, the amount of the provision
for loan losses, the amount of loan charge offs, and writedowns in the value of
foreclosed assets. In 1997, the Company changed its accounting policy with
respect to reserving for losses on loans securitized and retained. See
"Management's Discussion and Analysis of Financial Position and Results of
Operations -- Asset Quality."
Management ceases to accrue interest income on any loan that is four
payments or more delinquent (generally beyond 90 days) and reserves all interest
accrued up to that time. In addition, when circumstances indicate concern as to
the future collectibility of the principal of a commercial real estate or
commercial business loan, management stops accruing interest on the loan,
whether or not it has reached the four payment delinquency point. Thereafter,
interest income is accrued only if and when, in management's opinion, projected
cash proceeds are deemed sufficient to repay both principal and interest. All
loans on which interest is not being accrued are referred to as loans on
nonaccrual status.
Foreclosed Assets
Real estate or personal property that served as security for a defaulted
loan and becomes a foreclosed asset is recorded on the Company's books at the
lower of the outstanding loan balance (net of any reserves charged off) or fair
value, the determination of which takes into account the effect of sales and
financing concessions that may be required to market the property. If
management's estimate of fair value at the time a property is foreclosed is less
than the loan balance, the loan is written down at that time by a charge to the
reserve for loan losses. See "Management's Discussion and Analysis of Financial
Position and Results of Operations -- Asset Quality."
Provision for Loan Losses and Reserve for Loan Losses
Loan loss reserves are based upon management's continuing analysis of
pertinent factors underlying the quality of the loan portfolio. These factors
include changes in the size and composition of the loan portfolio, historical
loan loss experience, industry-wide loss experience, current and anticipated
economic conditions and detailed analysis of individual loans and credits for
which full collectibility may not be assured, as well as management's policies,
practices and intentions with respect to credit administration and asset
management.
As part of the process of determining the adequacy of the reserve for loan
losses, management reviews the Company's loan portfolio for specific weaknesses.
Commercial real estate, commercial business and builder construction loans are
evaluated individually for impairment. This detailed analysis includes
estimating the fair value of loan collateral and assessing the potential
existence of alternative sources of repayment. When available information
confirms that specific loans or portions thereof are uncollectible, those
amounts are charged off against the reserve for loan losses. The existence of
some or all of the following criteria will generally confirm that a loss or
impairment has incurred: the loan is significantly delinquent and the borrower
has not evidenced the ability or intent to bring the loan current; the Company
has no recourse to the borrower, or if it does, the borrower has insufficient
assets to pay the debt; or the fair value of the loan collateral is
significantly below the current loan balance, and there is little or no
near-term prospect for improvement.
Unallocated reserves are established for loss exposure that may exist in
the remainder of the loan portfolio that has not yet been identified. In
determining the adequacy of unallocated reserves, management considers changes
in the size and composition of the loan portfolio, actual historical loan loss
experience, current and anticipated economic conditions, and the Company's
credit administration and asset management philosophies and procedures.
It is possible that the provision for loan losses may, in the future,
change as a percentage of total loans. The reserve for loan losses is maintained
at a level sufficient to provide for estimated loan losses based on evaluating
known and inherent risks in the loan portfolio. See "Management's Discussion and
Analysis of
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Financial Position and Results of Operations -- Asset Quality -- Provision for
Loan Losses and Reserve for Loan Losses."
INVESTING ACTIVITIES
Washington Mutual has authority under Washington state law to make any
investment, but Washington Mutual's banking subsidiaries are subject to
investment restrictions imposed by state and federal law. Under Washington state
law, WMB has authority, subject to a numerical limit, to make any investment
deemed prudent by its board of directors, and may invest in commercial paper,
corporate bonds, mutual fund shares, debt and equity securities issued by
creditworthy entities and interests in real estate located inside or outside of
Washington state. The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), however, prohibits a state bank (such as WMB) from making or
retaining equity investments that are not permissible for a national bank,
subject to certain exceptions.
WMBFA and WMBfsb have authority to make investments specified by the Home
Owners' Loan Act ("HOLA") and applicable regulations, including the purchase of
governmental obligations, investment-grade commercial paper, and
investment-grade corporate debt securities. Despite these broad investment
powers, at December 31, 1997, MBS accounted for $22.87 billion or 95% of the
Company's total investment portfolio. Of MBS, at December 31, 1997, 91% were GSE
MBS. The remainder, $2.09 billion, were private-issue MBS and collateralized
mortgage obligations ("CMOs"). See "Consolidated Financial Statements -- Note 4:
Securities."
Historically, the yield on private-issue MBS, CMOs, and purchased loan
pools has exceeded the yield on GSE MBS because they expose the Company to
certain risks that are not inherent in GSE MBS, such as credit risk and
liquidity risk. These assets are not guaranteed by the U.S. government or one of
its agencies because the loan size, underwriting or underlying collateral of
these assets often does not meet set industry standards. Consequently, there is
a higher potential of loss of the principal investment. Additionally, the
Company may not be able to sell such assets in certain market conditions as the
number of interested buyers may be limited at that time. Furthermore, the
complex structure of certain CMOs in the Company's portfolio increases the
difficulty in assessing the portfolio's risk and its fair value. Examples of
some of the more complex structures include certain CMOs where the Company holds
subordinated tranches, certain CMOs that have been resecuritized and certain
securities that contain a significant number of loans with principal balances in
amounts larger than can be sold as GSE MBS.
The Company has instituted a policy of performing credit reviews on each
individual security or loan pool prior to purchase. Such a review includes
consideration of the collateral characteristics, borrower payment histories and
information concerning loan delinquencies and losses of the underlying
collateral. After a security is purchased, similar information is monitored on a
periodic basis. Furthermore, the Company has established internal guidelines
limiting the geographic concentration of the underlying collateral.
SOURCES OF FUNDS
Deposits
The Company offers money market deposit accounts ("MMDAs") and checking
accounts as well as the more traditional savings accounts and time deposit
accounts. The MMDAs generally require higher minimum balances and offer higher
yields than savings accounts. The Company offers checking accounts that both
bear interest and are noninterest bearing. The interest-bearing checking
accounts are subject to monthly service charges, unless a minimum balance is
maintained. The vast majority of the noninterest-bearing checking accounts have
no monthly fees.
At December 31, 1997, the Company had $50.99 billion in deposits, of which
$28.13 billion were time deposit accounts, $14.94 billion were MMDAs and savings
accounts; and $7.91 billion were checking accounts. Although 55% of deposits at
the end of 1997 were time deposit accounts, $23.41 billion or 83% of total time
deposit accounts had remaining maturities of one year or less.
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At December 31, 1997, $3.53 billion of the Company's total deposits did not
bear interest. Since 1995, WMB and WMBfsb have been actively promoting a "Free
Checking" account, and the Company introduced this product into its California
and Florida operations during 1997. This account has helped to reduce the
overall cost of funds by increasing the percentage of deposits that are
noninterest bearing. The Company expects to continue to actively promote its
"Free Checking" account throughout its markets.
The Company has also actively promoted MMDAs because, while a somewhat
volatile source of deposits, they have the advantage of being variable-rate
liabilities. At December 31, 1997, the Company had an aggregate of $11.67
billion in MMDAs and only $3.27 billion in regular savings accounts.
Wholesale deposits, primarily time deposit accounts, are offered to
political subdivisions and public agencies. The Company considers wholesale
deposits to be a borrowing source rather than a customer relationship.
Borrowings
Because deposits have declined in recent years, the Company has
increasingly relied on wholesale borrowings to fund its asset growth. Borrowings
include securities sold under agreements to repurchase ("reverse repurchase
agreements"), the purchase of federal funds, the issuance of mortgage-backed
bonds or notes, capital notes and other types of debt securities, the issuance
of commercial paper and funds obtained as advances from the Federal Home Loan
Bank ("FHLB") of Seattle and the FHLB of San Francisco. The Company also has
access to the Federal Reserve Bank's discount window. Under Washington state
law, WMB may borrow up to 30% of total assets, but reverse repurchase agreements
are not deemed borrowings under such law, and borrowings from federal, state or
municipal governments, agencies or instrumentalities, including the FHLBs, also
are not subject to the 30% limit.
The Company actively engages in reverse repurchase agreements with
authorized broker-dealers and major customers, selling U.S. government and
corporate debt securities and MBS under agreements to repurchase them or similar
securities at a future date. At December 31, 1997, the Company had $12.28
billion of such borrowings.
WMB and WMBfsb are members of the FHLB of Seattle and WMBFA is a member of
the FHLB of San Francisco. As members, each company maintains a credit line that
is a percentage of its total regulatory assets, subject to collateralization
requirements. At year-end 1997, WMBFA, WMB and WMBfsb had credit lines ranging
from 40% to 45% of total assets. At December 31, 1997, advances under these
credit lines totaled $20.30 billion and were secured by mortgage loans and deeds
of trust and securities of the U.S. government and agencies thereof.
Federal law requires that a member of an FHLB pay in to the FHLB, in
exchange for stock of the FHLB, an amount equal to at least 5% of the aggregate
outstanding advances made by the FHLB to the member. At December 31, 1997, the
Company held stock in FHLBs with an aggregate value of $1.06 billion.
In addition to the borrowings discussed above, at December 31, 1997, the
Company was in a position to obtain approximately $21 billion in additional
borrowings, primarily through the use of collateralized borrowings and deposits
of public funds using unpledged mortgage-backed securities and other wholesale
borrowing sources. See "Management's Discussion and Analysis of Financial
Position and Results of Operation -- Liquidity."
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BUSINESS COMBINATIONS
Most of the Company's growth since 1988 has occurred as a result of banking
business combinations. The following table summarizes Washington Mutual's
business combinations since April 1988:
NUMBER OF
ACQUISITION NAME DATE ACQUIRED LOANS DEPOSITS ASSETS LOCATIONS
---------------- -------------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
Columbia Federal Savings Bank and
Shoreline Savings Bank............. April 29, 1988 $ 551.0 $ 555.0 $ 752.6 26
Old Stone Bank(1).................... June 1, 1990 229.5 292.6 294.0 7
Frontier Federal Savings
Association(2)..................... June 30, 1990 -- 95.6 -- 6
Williamsburg Federal Savings
Bank(2)............................ Sept. 14, 1990 -- 44.3 -- 3
Vancouver Federal Savings Bank....... July 31, 1991 200.1 253.4 260.7 7
CrossLand Savings, FSB(2)............ Nov. 8, 1991 -- 185.4 -- 15
Sound Savings and Loan Association... Jan. 1, 1992 16.8 20.5 23.51
World Savings and Loan
Association(2)..................... March 6, 1992 -- 37.8 -- 2
Great Northwest Bank................. April 1, 1992 603.2 586.4 710.4 17
Pioneer Savings Bank................. March 1, 1993 624.5 659.5 926.5 17
Pacific First Bank, A Federal Savings
Bank............................... April 9, 1993 3,770.7 3,831.7 5,861.3 129
Far West Federal Savings Bank(2)..... April 15, 1994 -- 42.2 -- 3
Summit Savings Bank.................. Nov. 14, 1994 127.5 169.3 188.1 4
Olympus Bank, a Federal Savings
Bank............................... April 28, 1995 237.8 278.6 391.4 11
Enterprise Bank...................... Aug. 31, 1995 92.8 138.5 153.8 1
Western Bank......................... Jan. 31, 1996 500.8 696.4 776.3 42
Utah Federal Savings Bank............ Nov. 30, 1996 88.9 106.7 122.1 5
American Savings Bank, F.A........... Dec. 20, 1996 14,562.9 12,815.4 21,893.5 224
United Western Financial Group....... Jan. 15, 1997 272.7 299.9 404.1 16
Great Western Financial
Corporation........................ July 1, 1997 32,448.3 27,785.1 43,769.8 1,138
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(1) This was an acquisition of selected assets and liabilities.
(2) The acquisition was of branches and deposits only. The only assets acquired
were branch facilities or loans collateralized by acquired savings deposits.
See "Consolidated Financial Statements -- Note 2: Business
Combinations/Restructuring" for a discussion of accounting treatment for certain
of the acquisitions.
EMPLOYEES
The number of full-time equivalent employees at the Company decreased from
19,906 at December 31, 1996 to 19,880 at December 31, 1997. The Company believes
that it has been successful in attracting quality employees and believes its
employee relations are good.
TAXATION OF THE COMPANY
General
For federal income tax purposes, the Company reports its income and
expenses using the accrual method of tax accounting and uses the calendar year
as its tax year. Except for the interest expense rules pertaining to certain tax
exempt income applicable to banks and the recently repealed bad debt reserve
deduction, the Company is subject to federal income tax, under existing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), in
generally the same manner as other corporations.
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Tax Bad Debt Reserve Recapture
The Small Business Job Protection Act of 1996 (the "Job Protection Act")
requires that qualified thrift institutions, such as WMBFA, WMB and WMBfsb,
generally recapture for federal income tax purposes that portion of the balance
of their tax bad debt reserves that exceeds the December 31, 1987 balance, with
certain adjustments. Such recaptured amounts are to be generally taken into
ordinary income ratably over a six-year period beginning in 1997. Accordingly,
Washington Mutual will have to pay an additional approximately $4.2 million
(based upon current federal income tax rates) in federal income taxes each year
of the six-year period due to the Job Protection Act.
The Job Protection Act also repeals the reserve method of accounting for
tax bad debt deductions and, thus, requires thrifts to calculate the tax bad
debt deduction based on actual current loan losses.
State Income Taxation
The state of Washington does not currently have a corporate income tax.
Washington imposes on businesses a business and occupation tax based on a
percentage of gross receipts. Currently, interest received on loans secured by
first mortgages or deeds of trust on residential properties is not subject to
such tax. However, it is possible that legislation will be introduced that would
repeal or limit this exemption.
The states of California, Oregon, Florida, Utah, Idaho and Montana, as well
as many of the other states in which the Company does business, have corporate
income taxes, which are imposed on companies doing business in those states. The
Company's operations in California, Oregon and Florida result in substantial
corporate income tax expenses in such states. As the Company's operations in the
remaining states increase, the corporate income taxes will have an increasing
effect on the Company's results of operations or financial condition.
Assistance Agreement
As a result of the Keystone Transaction, the Company and certain of its
affiliates are parties to an agreement (the "Assistance Agreement") with a
predecessor of the Federal Savings & Loan Insurance Corporation ("FSLIC")
Resolution Fund (the "FRF"), which is designed, in part, to provide that over
time 75% of most of the federal tax savings and 19.5% of most of the California
tax savings (in each case computed in accordance with specific provisions
contained in the Assistance Agreement) attributable to the utilization of
certain tax loss carryforwards of New West Federal Savings and Loan Association
("New West") are paid ultimately to the FRF. The provision for such payments is
reflected in the financial statements as "Provision for payments in lieu of
taxes." See "Management's Discussion and Analysis of Financial Position and
Results of Operations -- General -- The Keystone Transaction" and "Consolidated
Financial Statements -- Note 19: Payments in Lieu of Taxes."
ENVIRONMENTAL REGULATION
The Company's business and properties are subject to federal and state laws
and regulations governing environmental matters, including the regulation of
hazardous substances and wastes. For example, under the federal Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and similar
state laws, owners and operators of contaminated properties may be liable for
the costs of cleaning up hazardous substances without regard to whether such
persons actually caused the contamination. Such laws may affect the Company both
as an owner of properties used in or held for its business, and as a secured
lender of property that is found to contain hazardous substances or wastes.
Further, although CERCLA exempts holders of security interests, the
exemption may not be available if a secured party engages in the management of
its borrower or the collateral property in a manner deemed beyond the protection
of the secured party's interest. Recent federal and state legislation, as well
as guidance issued by the United States Environmental Protection Agency and a
number of court decisions, have provided assurance to lenders regarding the
activities they may undertake and remain within CERCLA's secured party
exemption. However, these assurances are not absolute and generally will not
protect a lender or fiduciary that
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participates or otherwise involves itself in the management of its borrower,
particularly in foreclosure proceedings. As a result, CERCLA and similar state
statutes may affect the Company's decision whether to foreclose on property that
is found to be contaminated. It is the Company's general policy to obtain an
environmental assessment prior to foreclosure of commercial property. The
existence of hazardous substances or wastes on such property may cause the
Company to elect not to foreclose on the property, thereby limiting, and in some
instances precluding, the Company from realizing on such loans.
REGULATION AND SUPERVISION
General. Washington Mutual, in its capacity as a savings and loan holding
company, is subject to regulation by the Office of Thrift Supervision ("OTS").
WMB is subject to regulation and supervision by the Director of the Department
of Financial Institutions of the State of Washington ("State Director"). Its
deposit accounts are insured by the FDIC through both the BIF and SAIF. The FDIC
undertakes examination and regulation of WMB and other state-chartered banks
that are not members of the Federal Reserve system ("FDIC-regulated banks").
Federal and state laws and regulations govern, among other things, investment
powers, deposit activities, borrowings, maintenance of guaranty funds and
retained earnings. WMBFA and WMBfsb are subject to extensive regulation and
examination by the OTS, which is their primary federal regulator. Their deposit
accounts are insured through the SAIF by the FDIC, which also has some authority
to regulate WMBFA and WMBfsb.
The Company owns two industrial banks, First Community Industrial Bank
("FCIB") in Denver, Colorado and Great Western Thrift & Loan ("GWTL") in Salt
Lake City, Utah. FCIB and GWTL (collectively, the "Industrial Banks") are state
chartered institutions which are regulated by state authorities in addition to
being regulated by the FDIC. State laws specify the investments which these
institutions may make and the activities in which they may engage.
The Company's consumer finance subsidiaries are governed by state and
federal laws. Federal laws relate primarily to fair credit practice matters.
State laws establish applicable licensing requirements, provide for periodic
examinations and establish maximum finance charges on credit extensions.
The description of statutory provisions and regulations applicable to
depository institutions, insurance companies, securities companies and their
holding companies set forth in this annual report does not purport to be a
complete description of the statutes and regulations mentioned herein, nor of
all such statutes and regulations.
Holding Company Regulation. The Company is a multiple savings and loan
holding company, as defined by federal law, because it owns three savings
associations -- WMB, WMBFA and WMBfsb. WMB has elected to be treated as a
savings association for purposes of the federal savings and loan holding company
law. WMI is treated as a unitary savings and loan holding company and is not
subject to certain federal statutory restrictions on activities and investments
(the "MHC Restrictions") as are some multiple savings and loan holding
companies, because WMBFA and WMBfsb are deemed to have been acquired in
supervisory transactions. The Company will become subject to the MHC
Restrictions, however, if any one of WMB, WMBFA or WMBfsb fails to be a
qualified thrift lender ("QTL"), meaning generally that either (i) at least 65%
of a specified asset base must consist of loans to small businesses, including
credit card loans, educational loans or certain assets related to domestic
residential real estate, including residential mortgage loans and mortgage
securities; or (ii) at least 60% of total assets must consist of cash, United
States government or government agency debt or equity securities, fixed assets,
or loans secured by deposits, by real property used for residential,
educational, church, welfare or health purposes, or by real property in certain
urban renewal areas. Failure to remain a QTL also would impose conditions on
WMB's ability to obtain advances from the FHLB, and would restrict the ability
of WMBFA and WMBfsb, among other things, to branch, to pay dividends and to
obtain such advances. Each of WMB, WMBFA and WMBfsb are currently in compliance
with QTL standards.
HOLA and OTS regulations require the Company, as a savings and loan holding
company, to file periodic reports with the OTS. In addition, it must observe
such recordkeeping requirements as the OTS may prescribe and is subject to
holding company examination by the OTS. The OTS may take enforcement action
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if the activities of a savings and loan holding company constitute a serious
risk to the financial safety, soundness or stability of a subsidiary savings
association. WMB, WMBFA and WMBfsb, as holding company subsidiaries that are
depository institutions, are subject to both qualitative and quantitative
limitations on the transactions they conduct with the Company and its other
subsidiaries.
The FDIC has authority to require FDIC-insured banks and savings
associations to reimburse the FDIC for losses incurred by the FDIC in connection
with the default of a commonly controlled depository institution or with the
FDIC's provision of assistance to such an institution. Institutions are commonly
controlled if they are controlled by the same holding company or if one
depository institution controls another depository institution (as the Company
controls WMB, WMBFA, WMBfsb and the Industrial Banks).
State Regulation and Supervision. Savings banks in Washington, such as WMB,
are empowered by state statute to take deposits and pay interest thereon and,
subject to various conditions and limitations, to make loans on or invest in
residential and other real estate, to make consumer loans, to make commercial
loans, to invest in corporate obligations, government debt securities, and other
securities, and to offer various trust and banking services to their customers.
Under state law, savings banks in Washington also generally have all of the
powers that federal mutual savings banks have under federal laws and
regulations.
FDIC Insurance. Deposits in the Company's banking subsidiaries are
separately insured by the FDIC to the applicable maximum limits in each
institution. The FDIC administers two separate deposit insurance funds. The BIF
is a deposit insurance fund for commercial banks and some state-chartered
savings banks, including WMB and the Industrial Banks. A portion of WMB's
deposits are also insured through SAIF. The SAIF is a deposit insurance fund for
most savings associations, such as WMBFA and WMBfsb. A small portion of WMBFA's
deposits are insured through the BIF. At December 31, 1997, approximately 90% of
the combined deposits of the Company were insured through SAIF.
The FDIC has developed a deposit insurance system under which the
assessment rate for an insured depository institution varies according to the
level of risk it poses to the BIF or SAIF. This system bases an institution's
risk category partly upon whether the institution is well capitalized,
adequately capitalized, or less than adequately capitalized. See "Regulation and
Supervision -- Capital Requirements." Each insured depository institution is
also assigned to one of three supervisory subgroups based on reviews by the
institution's primary federal or state regulator, statistical analyses of
financial statements, and other information relevant to gauging the risk posed
by the institution. Based on its capital and supervisory subgroups, each
institution is assigned an annual FDIC assessment rate. WMB and the Industrial
Banks qualify for the lowest rate on its BIF deposits, and WMB, WMBFA and WMBfsb
qualify for the lowest rate on their SAIF deposits. Regardless of the potential
risk to the insurance fund, Federal law requires the FDIC to establish
assessment rates that will maintain each insurance fund's ratio of reserves to
insured deposits at $1.25 per $100.
The BIF reached the $1.25 per $100 of insured deposits reserve ratio and,
effective January 1996, BIF premiums declined. On September 30, 1996, President
Clinton signed legislation intended, among other things, to recapitalize the
SAIF and to reduce SAIF premiums. The legislation provided for a special
one-time assessment on SAIF-insured deposits that were held as of March 31,
1995, including certain deposits acquired after that date. This assessment
brought the SAIF's reserve ratio to the legally required $1.25 per $100 of
insured deposits level. Washington Mutual's special assessment resulted in a
charge of $312.6 million. Even though the one-time charge reduced the Company's
1996 earnings by $200.0 million, management believes the legislation is in the
best interests of the Company due to the reduction in SAIF assessment rates.
WMB, WMBFA, WMBfsb and the Industrial Banks currently pay no assessment for
deposit insurance. However, under the legislation recapitalizing the SAIF, the
FDIC is authorized to collect assessments against insured deposits to be paid to
the Finance Corporation ("FICO") to service FICO debt incurred in the 1980s. The
current FICO assessment rate for BIF-insured deposits is 1.256 cents per $100 of
deposits per year and 6.28 cents per $100 of deposits per year for SAIF-insured
deposits.
Capital Requirements. The Company is not subject to any regulatory capital
requirements. However, each of its subsidiary depository and insurance
institutions is subject to various capital requirements. WMB and the Industrial
Banks are each subject to FDIC capital requirements, while WMBFA and WMBfsb are
subject to OTS capital requirements.
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WMB and the Industrial Banks. FDIC regulations recognize two types or tiers
of capital: core ("Tier 1") capital and supplementary ("Tier 2") capital. Tier 1
capital generally includes common stockholders' equity and noncumulative
perpetual preferred stock items less most intangible assets. Tier 2 capital,
which is limited to 100% of Tier 1 capital, includes such items as qualifying
general loan loss reserves, cumulative perpetual preferred stock, mandatory
convertible debt, term subordinated debt and limited life preferred stock;
however, the amount of term subordinated debt and intermediate term preferred
stock (original maturity of at least five years but less than 20 years) that may
be included in Tier 2 capital is limited to 50% of Tier 1 capital.
The FDIC currently measures an institution's capital using a leverage limit
together with certain risk-based ratios. The FDIC's minimum leverage capital
requirement specifies a minimum ratio of Tier 1 capital to total assets. Most
banks are required to maintain a minimum leverage ratio of at least 4.00% to
5.00%. The FDIC retains the right to require a particular institution to
maintain a higher capital level based on an institution's particular risk
profile. WMB has calculated its leverage ratio to be 5.86% as of December 31,
1997. FCIB and GWTL have calculated their respective leverage ratios to be
22.35% and 11.84% as of December 31, 1997.
FDIC regulations also establish a measure of capital adequacy based on
ratios of qualifying capital to risk-weighted assets. Assets are placed in one
of four categories and given a percentage weight -- 0%, 20%, 50% or
100% -- based on the relative risk of that category. For example, U.S. Treasury
Bills and GNMA securities are placed in the 0% risk category, FNMA and FHLMC
securities are placed in the 20% risk category, loans secured by SFR properties
and certain private-issue MBS are generally placed in the 50% risk category, and
commercial real estate and consumer loans are generally placed in the 100% risk
category. In addition, certain off-balance sheet items are converted to balance
sheet credit equivalent amounts, and each amount is then assigned to one of the
four categories. Under the guidelines, the ratio of total capital (Tier 1
capital plus Tier 2 capital) to risk-weighted assets must be at least 8.00%, and
the ratio of Tier I capital to risk-weighted assets must be at least 4.00%. WMB
has calculated its total risk-based ratio to be 10.93% and its Tier 1 risk-based
capital ratio to be 10.13% as of December 31, 1997. FCIB and GWTL have
calculated their total risk-based ratios to be 29.53% and 16.03%, and their Tier
1 risk-based capital ratios to be 28.26% and 14.77% as of December 31, 1997. In
evaluating the adequacy of a bank's capital, the FDIC may also consider other
factors that may affect a bank's financial condition. Such factors may include
interest rate risk exposure, liquidity, funding and market risks, the quality
and level of earnings, concentration of credit risk, risks arising from
nontraditional activities, loan and investment quality, the effectiveness of
loan and investment policies, and management's ability to monitor and control
financial operating risks.
WMBFA and WMBfsb. The OTS requires savings associations, such as WMBFA and
WMBfsb, to meet each of three separate capital adequacy standards: a core
capital leverage requirement, a tangible capital requirement and a risk-based
capital requirement. OTS regulations require savings associations to maintain
core capital (which may include, for a limited time, certain amounts of
qualifying supervisory goodwill) of at least 3.00% of assets and tangible
capital (excluding all goodwill) of at least 1.50% of assets. As of December 31,
1997, WMBFA's core capital and tangible capital ratios were 5.78% each, and
WMBfsb's core capital and tangible capital ratios were 6.66% each. Most savings
institutions are required to maintain a minimum leverage ratio of at least
4.00%. OTS regulations incorporate a risk-based capital requirement that is
designed to be no less stringent than the capital standard applicable to
national banks and is modeled in many respects on, but not identical to, the
risk-based capital requirements adopted by the FDIC. These regulations require a
core risk-based capital ratio of at least 4.00% and a total risk-based capital
ratio of at least 8.00%. As of December 31, 1997, WMBFA had core risk-based and
total risk-based capital ratios of 9.54% and 11.11%, while WMBfsb had ratios of
10.84% and 11.95%.
FDICIA Requirements. FDICIA created a statutory framework that increased
the importance of meeting applicable capital requirements. FDICIA establishes
five capital categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. An institution's category depends upon where its capital
levels are in relation to relevant capital measures, which include a risk-based
capital measure, a leverage ratio capital measure, and certain other factors.
The federal banking agencies (including the FDIC and the OTS) have adopted
regulations that implement this statutory
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framework. Under these regulations, an institution is treated as well
capitalized if its ratio of total capital to risk-weighted assets is 10.00% or
more, its ratio of core capital to risk-weighted assets is 6.00% or more, its
ratio of core capital to adjusted total assets is 5.00% or more, and it is not
subject to any federal supervisory order or directive to meet a specific capital
level. In order to be adequately capitalized, an institution must have a total
risk-based capital ratio of not less than 8.00%, a Tier 1 risk-based capital
ratio of not less than 4.00%, and a leverage ratio of not less than 4.00%. Any
institution which is neither well capitalized nor adequately capitalized will be
considered undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective
action requirements, regulatory control and restrictions which become more
extensive as an institution becomes more severely undercapitalized. Failure by
WMB, WMBFA, WMBfsb or the Industrial Banks to comply with applicable capital
requirements would, if unremedied, result in restrictions on their activities
and lead to enforcement actions against WMB or the Industrial Banks by the FDIC
or against WMBFA or WMBfsb by the OTS, including, but not limited to, the
issuance of a capital directive to ensure the maintenance of required capital
levels. FDICIA requires the federal banking regulators to take prompt corrective
action with respect to depository institutions that do not meet minimum capital
requirements. Additionally, FDIC or OTS approval of any regulatory application
filed for their review may be dependent on compliance with capital requirements.
Federal law requires that the federal banking agencies risk-based capital
guidelines take into account various factors including interest rate risk,
concentration of credit risk, risks associated with nontraditional activities,
and the actual performance and expected risk of loss of multi-family mortgages.
In 1994, the federal banking agencies jointly revised their capital standards to
specify that concentration of credit and nontraditional activities are among the
factors that the agencies will consider in evaluating capital adequacy. In that
year, the OTS and FDIC amended their risk-based capital standards with respect
to the risk weighting of loans made to finance the purchase or construction of
multi-family residences. The OTS adopted final regulations adding an interest
rate risk component to the risk-based capital requirements for savings
associations (such as WMBFA and WMBfsb), although implementation of the
regulation has been delayed. Management believes that the effect of including
such an interest rate risk component in the calculation of risk-adjusted capital
will not cause WMBFA or WMBfsb to cease to be well capitalized. In June 1996,
the FDIC and certain other federal banking agencies (not including the OTS)
issued a joint policy statement providing guidance on prudent interest rate risk
management principles. The agencies stated that they would evaluate the banks'
interest rate risk on a case-by-case basis, and would not adopt a standardized
measure or establish an explicit minimum capital charge for interest rate risk.
Legal Restrictions on Dividends of Depository Institutions. A depository
institution such as WMB, WMBFA or WMBfsb may not make a capital distribution if,
following such distribution, the institution will be undercapitalized under the
FDICIA provisions described above. In addition, Washington state law prohibits
WMB from declaring or paying a dividend greater than its retained earnings or if
doing so would cause its net worth to be reduced below (i) the amount required
for the protection of preconversion depositors or (ii) the net worth
requirements, if any, imposed by the State Director.
OTS regulations limit the ability of savings associations such as WMBFA and
WMBfsb to pay dividends and make other capital distributions according to the
institution's level of capital and income, with the greatest flexibility
afforded to institutions that meet or exceed their OTS capital requirements.
Under current OTS regulations, a savings association that exceeds its OTS
regulatory capital requirements both before and after a proposed dividend (or
other distribution of capital) and has not been advised by the OTS that it is in
need of more than normal supervision may, after prior notice to but without the
approval of the OTS, make capital distributions during a calendar year up to the
higher of (i) 100% of its income during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the institution's excess
capital over its capital requirements) at the beginning of the calendar year or
(ii) 75% of its net income over the most recent four-quarter period. In
addition, such an institution may make capital distributions in excess of the
foregoing limits if the OTS does not object within a 30-day period following
notice by the institution.
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A savings association that would not meet OTS capital requirements
following payment of a dividend is subject to additional restrictions. It is not
anticipated that WMBFA or WMBfsb will pay any dividend that would cause either
of them to fail to meet OTS capital requirements.
FDIC and OTS Regulation and Examination. The FDIC has adopted regulations
to protect the deposit insurance funds and depositors, including regulations
governing the deposit insurance of various forms of accounts. The FDIC has also
adopted numerous regulations to protect the safety and soundness of FDIC-
regulated banks. These regulations cover a wide range of subjects including
financial reporting, change in bank control, affiliations with securities firms
and capital requirements. In certain instances, these regulations restrict the
exercise of powers granted by state law.
An FDIC regulation and a joint FDIC/OTS policy statement place a number of
restrictions on the activities of WMB's and WMBFA's securities and insurance
affiliates and on such affiliates' transactions with WMB, WMBFA and WMBfsb.
These restrictions include requirements that such affiliates follow practices
and procedures to distinguish them from WMB, WMBFA and WMBfsb and that such
affiliates give customers notice from time to time of their separate corporate
status and of the distinction between insured deposits and uninsured nondeposit
products.
FDICIA also prohibited banks, such as WMB, and their subsidiaries from
exercising certain powers that were granted by state law to make investments or
carry on activities as principal (i.e., for their own account) unless either (i)
national banks have power under federal law to make such investments or carry on
such activities, or (ii) the bank and such investments or activities meet
certain requirements established by FDICIA and the FDIC.
FDICIA imposed new supervisory standards requiring annual examinations,
independent audits, uniform accounting and management standards, and prompt
corrective action for problem institutions. As a result of FDICIA, depository
institutions and their affiliates are subject to federal standards governing
asset growth, interest rate exposure, executive compensation, and many other
areas of depository institution operations. FDICIA contains numerous other
provisions, including reporting requirements and revised regulatory standards
for, among other things, real estate lending.
The FDIC may sanction any FDIC-regulated bank that does not operate in
accordance with FDIC regulations, policies and directives. Proceedings may be
instituted against any FDIC-regulated bank, or any institution-affiliated party,
such as a trustee, director, officer, employee, agent, or controlling person of
the bank, who engages in unsafe and unsound practices, including violations of
applicable laws and regulations. The FDIC may revalue assets of an institution,
based upon appraisals, and may require the establishment of specific reserves in
amounts equal to the difference between such revaluation and the book value of
the assets. The State Director has similar authority under Washington state law,
and the OTS has similar authority under HOLA. The FDIC has additional authority
to terminate insurance of accounts, after notice and hearing, upon a finding
that the insured institution is or has engaged in any unsafe or unsound practice
that has not been corrected, is operating in an unsafe or unsound condition, or
has violated any applicable law, regulation, rule, or order of or condition
imposed by the FDIC.
Federal savings institutions, such as WMBFA and WMBfsb, are subject to
regulatory oversight and examination by the OTS and the FDIC. HOLA and OTS
regulations delineate such institutions' investment and lending powers. Federal
savings institutions may not invest in noninvestment-grade debt securities, nor
may they generally make equity investments, other than investments in service
corporations.
Federal law and regulations require that WMBFA and WMBfsb maintain liquid
assets in excess of a specified limit. See "Management's Discussion and Analysis
of Financial Position and Results of Operations -- Liquidity."
Federal regulation of depository institutions is intended for the
protection of depositors (and the BIF and SAIF), and not for the protection of
stockholders or other creditors. In addition, a provision in the Omnibus Budget
Reconciliation Act of 1993 ("Budget Act") requires that in any liquidation or
other resolution of any FDIC-insured depository institution, claims for
administrative expenses of the receiver and for deposits in
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U.S. branches (including claims of the FDIC as subrogee of the insured
institution) shall have priority over the claims of general unsecured creditors.
Federal Reserve Regulation. Under Federal Reserve Board regulations, WMB,
WMBFA, WMBfsb and the Industrial Banks are each required to maintain reserves
against their transaction accounts (primarily checking and NOW accounts).
Because reserves must generally be maintained in cash or in noninterest-bearing
accounts, the effect of the reserve requirements is to increase an institution's
cost of funds. These regulations generally require that WMB, WMBFA and WMBfsb
each maintain reserves against net transaction accounts in the amount of 3% on
amounts of $47.8 million or less, plus 10% on amounts in excess of $47.8
million. Institutions may designate and exempt $4.7 million of certain
reservable liabilities from these reserve requirements. These amounts and
percentages are subject to adjustment by the Federal Reserve Board. A savings
bank, like other depository institutions maintaining reservable accounts, may
borrow from the Federal Reserve Bank discount window, but the Federal Reserve
Board's regulations require the savings bank to exhaust other reasonable
alternative sources before borrowing from the Federal Reserve Bank.
Numerous other regulations promulgated by the Federal Reserve Board affect
the business operations of the Company's banking subsidiaries. These include
regulations relating to equal credit opportunity, electronic fund transfers,
collection of checks, truth in lending, truth in savings and availability of
funds.
Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires
financial institutions regulated by the federal financial supervisory agencies
to ascertain and help meet the credit needs of their delineated communities,
including low-income and moderate-income neighborhoods within those communities,
while maintaining safe and sound banking practices. The regulatory agency
assigns one of four possible ratings to an institution's CRA performance and is
required to make public an institution's rating and written evaluation. The four
possible ratings of meeting community credit needs are outstanding,
satisfactory, needs to improve, and substantial noncompliance.
Under new regulations that apply to all CRA performance evaluations after
July 1, 1997, many factors play a role in assessing a financial institution's
CRA performance. The institution's regulator must consider its financial
capacity and size, legal impediments, local economic conditions and
demographics, including the competitive environment in which it operates. The
evaluation does not rely on absolute standards, and the institutions are not
required to perform specific activities or to provide specific amounts or types
of credit.
Under the regulations applicable before July 1, 1997, WMBFA and WMBfsb each
received an "outstanding" CRA rating from the OTS, and WMB and the Industrial
Banks received an "outstanding" CRA rating from the FDIC. These ratings reflect
Washington Mutual's commitment to meeting the credit needs of the communities it
serves. No assurance can be given, however, that the CRA performance of these
institutions will result in "outstanding" ratings under the new regulations in
the future. The Company maintains a CRA statement for public viewing, as well as
an annual CRA highlights document. These documents describe Washington Mutual's
credit programs and services, community outreach activities, public comments and
other efforts to meet community credit needs.
In April 1997, the Company made a public commitment to make $75.00 billion
in loans and investments over a 10-year period to families and small businesses
in the communities it serves. The primary components of the commitment include
$50.00 billion in affordable housing loans to minorities and borrowers in low-
to moderate-income census tracts; $8.00 billion in consumer loans to low- to
moderate-income borrowers; $7.00 billion in multi-family loans for properties
serving low- to moderate-income tenants; $1.00 billion of investments in, and
loans to, various community development projects; and $9.00 billion in small
business loans of $50,000 or less.
Recent and Proposed Federal Legislation and Regulation. Effective June 1,
1997, federal legislation repealed certain restrictions on the establishment of
interstate branches by national banks and state-chartered banks. In addition,
bank holding companies are now generally permitted to buy banks in any state.
WMBFA and WMBfsb already have authority to establish interstate branches under
current federal law and regulations, so management expects that such legislation
will primarily benefit competitors of the Company.
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Various legislative proposals relating to financial services companies have
been or are expected to be introduced in the current session of Congress. These
include proposals to restrict or further regulate the sales of mutual funds and
annuities by depository institutions or their affiliates, to restrict
affiliations between the Company and nonbanking corporations including life
insurance companies, and to require federal savings institutions such as WMBFA
and WMBfsb to convert to commercial banks. The outcome of these legislative
proposals cannot be forecast reliably.
The OTS on January 7, 1998, published a proposal that would allow a federal
savings institution such as WMBFA or WMBfsb to pay dividends and make capital
distributions in an aggregate amount not exceeding the sum of the institution's
net income for the year to date, plus previously undistributed net income for
the preceding two years, without application to the OTS. This proposal would
make OTS regulations on capital distributions more similar to the rules of other
federal banking agencies. As subsidiaries of a savings and loan holding company,
however, WMBFA and WMBfsb would still be required to notify the OTS 30 days
before declaration of a dividend.
Regulation of Nonbanking Affiliates. As broker-dealers registered with the
Securities and Exchange Commission and as members of the National Association of
Securities Dealers ("NASD"), WM Financial, CFDI, GWFSC and SISC are subject to
various regulations and restrictions imposed by those entities, as well as by
various state authorities. As registered investment advisors, Composite
Research, SIAC and SISC are subject to various federal and state securities
regulations and restrictions.
The NASD has adopted and forwarded to the SEC for approval rules concerning
NASD member operations conducted in branches of depository institutions.
Although many of the NASD's proposed requirements are substantially similar to
the joint FDIC/OTS policy statement governing the activities of the Company's
securities affiliates, the NASD proposal, if approved by the SEC, could impose
additional restrictions on these affiliates.
COMPETITIVE ENVIRONMENT
Washington Mutual faces significant competition in attracting and retaining
deposits and making loans in all of its market areas. Its most direct
competition for deposits has historically come from savings institutions, credit
unions and commercial banks doing business in its primary market areas of
California, Washington, Oregon, Florida and Utah. As with all banking
organizations, however, Washington Mutual has also experienced competition from
nonbanking sources, including mutual funds, corporate and governmental debt
securities and other investment alternatives. Washington Mutual's competition
for loans comes principally from savings institutions, commercial banks,
mortgage companies, credit unions, insurance companies and other institutional
lenders. Many of these competitors have more significant financial resources,
larger market shares and greater name recognition than the Company. The
activities of such competitors may make it difficult for Washington Mutual to
achieve its financial goals. In addition to the normal competitive factors
described above, Washington Mutual management at the holding company level has
limited operating experience in California and Florida, each of which has a much
larger population with more large financial institution competitors than the
states in which WMB has historically operated. Accordingly, there can be no
assurance that the Company's consumer banking strategy will prove successful in
the California and Florida markets.
Although consolidation has decreased the number of institutions competing
in the Company's market, both savings and commercial banks have reemphasized
their focus on the consumer, making competition for retail deposits and loans
extremely fierce. While the increased competitive pressures make the banking
environment more difficult, the Company remains a strong market force. For 1997
(through October), WMB's originations of SFR loans ranked first in both
Washington and Oregon and WMBFA's originations of residential mortgages ranked
first in California.
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PRINCIPAL OFFICERS
The following table sets forth certain information regarding the principal
officers of Washington Mutual:
EMPLOYEE OF
PRINCIPAL OFFICERS AGE CAPACITY IN WHICH SERVED COMPANY SINCE
------------------ --- ------------------------ -------------
Kerry K. Killinger................ 48 Chairman of the Board of Directors, 1983
President and Chief Executive Officer
Fay L. Chapman.................... 51 Executive Vice President and General Counsel 1997
Craig S. Davis.................... 46 Executive Vice President 1996
Steven P. Freimuth................ 41 Executive Vice President 1988
Lee D. Lannoye.................... 60 Executive Vice President 1988
William A. Longbrake.............. 54 Executive Vice President and 1996
Chief Financial Officer
Deanna W. Oppenheimer............. 39 Executive Vice President 1985
Craig E. Tall..................... 52 Executive Vice President 1985
S. Liane Wilson................... 55 Executive Vice President 1985
Richard M. Levy................... 39 Senior Vice President and Controller 1998
Norman H. Swick................... 48 Senior Vice President and General Auditor 1980
Douglas G. Wisdorf................ 43 Senior Vice President and 1976
Deputy Chief Financial Officer
Mr. Killinger has been Chairman, President and Chief Executive Officer of
Washington Mutual since its organization. He has been Chairman of the Board of
Directors of WMB since 1991 and Chief Executive Officer since 1990. Mr.
Killinger became an Executive Vice President of WMB in 1983, a Senior Executive
Vice President of WMB in 1986 and the President and a director of WMB in 1988.
Ms. Chapman became an Executive Vice President and General Counsel and
member of the Executive Committee of Washington Mutual in September 1997. Prior
to that appointment, Ms. Chapman had been a partner with Foster Pepper &
Shefelman, a Seattle, Washington law firm, since 1979.
Mr. Davis became an Executive Vice President and member of the Executive
Committee in January 1997, following the Company's merger with Keystone
Holdings. In his capacity as Executive Vice President, Mr. Davis is responsible
for lending and financial services. He was Director of Mortgage Origination of
ASB from 1993 through 1996 and served as President of ASB Financial Services,
Inc. from 1989 to 1993.
Mr. Freimuth became an Executive Vice President and member of the Executive
Committee of the Company in 1997. In this capacity, he is responsible for
corporate lending administration. He joined WMB as a Vice President in 1988 and
became a Senior Vice President in 1991.
Mr. Lannoye has been an Executive Vice President of the Company since its
organization. He has been an Executive Vice President of WMB since 1988 and a
member of the Executive Committee since its formation in 1990. In his capacity
as Executive Vice President, Mr. Lannoye is responsible for corporate
administration and credit.
Mr. Longbrake rejoined Washington Mutual in October 1996 as Executive Vice
President and Chief Financial Officer and a member of the Company's Executive
Committee. In his capacity as Executive Vice President, Mr. Longbrake is
responsible for corporate finance. From March of 1995 through September of 1996,
he served as Deputy to the Chairman for Finance and Chief Financial Officer of
the FDIC. Mr. Longbrake was Senior Executive Vice President and Chief Financial
Officer of the Company from its organization through February 1995. He was Chief
Financial Officer of WMB from 1988 to 1995 and a member of the Company's
Executive Committee from its formation in 1990 until 1995 and again since 1996.
Mr. Longbrake became an Executive Vice President and Treasurer of WMB in 1982
and a Senior Executive Vice President of WMB in 1986.
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Ms. Oppenheimer has been an Executive Vice President of Washington Mutual
since its organization. She has been an Executive Vice President of WMB since
1993 and a member of the Company's Executive Committee since its formation in
1990. In this capacity, Ms. Oppenheimer is responsible for corporate marketing
and consumer bank distribution. She has been an officer of WMB since 1985. She
became an Assistant Vice President of WMB in 1986, a Vice President in 1987 and
a Senior Vice President in 1989.
Mr. Tall has been an Executive Vice President of Washington Mutual since
its organization. He had been an Executive Vice President of WMB since 1987 and
a member of the Company's Executive Committee since its formation in 1990. In
his capacity as Executive Vice President, Mr. Tall is responsible for corporate
development, commercial banking and consumer finance.
Ms. Wilson has been an Executive Vice President of Washington Mutual since
its organization. She has been an Executive Vice President of WMB since 1988 and
a member of the Company's Executive Committee since its formation in 1990. In
her capacity as Executive Vice President, Ms. Wilson is responsible for
corporate operations.
Mr. Levy has been a Senior Vice President and Controller since February
1998. In this capacity he is the principal accounting officer of the Company.
Prior to joining the Company, Mr. Levy was Executive Vice President and Chief
Financial Officer of Community Trust Bancorp from 1995 to 1997. Prior to that,
he was the Controller of Bank of America Texas, N.A.
Mr. Swick has been Senior Vice President and General Auditor of Washington
Mutual since its organization. He has been an officer of WMB since 1980. Mr.
Swick became a Vice President in 1984, Senior Vice President in 1988, and
General Auditor of WMB in 1989. In this capacity, he monitors the Company's
internal controls and compliance with all laws and regulations.
Mr. Wisdorf has been Deputy Chief Financial Officer since 1996 and Senior
Vice President of Washington Mutual since its organization. Mr. Wisdorf was
Controller of the Company from 1994 to February 1998. He became Vice President
and Controller of WMB in 1986 and has been an officer since 1978.
ITEM 2. PROPERTIES
As of December 31, 1997, the Company's banking subsidiaries conducted
business from 850 consumer financial centers, 47 Western financial centers, 23
business banking centers and over 200 home loan centers in 26 states. Consumer
finance operations were conducted in approximately 500 locations in 22 states.
Washington Mutual's administrative offices are located at 1201 Third
Avenue, Seattle, Washington, 98101 where, as of December 31, 1997, the Company
leased approximately 178,000 square feet pursuant to a lease agreement that
starts to terminate in 2007 with multiple options to renew at the Company's
discretion. The Company also leases approximately 158,000 square feet of space
in Seattle in the Second and Seneca Building pursuant to a lease agreement that
starts to terminate in 2001; approximately 75,000 square feet in the adjoining
building pursuant to a lease agreement that starts to terminate in 2006;
approximately 97,000 square feet in Seattle in the 1st Interstate Building at
999 Third Avenue pursuant to a lease agreement that starts to terminate in 1999;
and approximately 61,000 square feet in Seattle in the 1111 3rd Avenue Building
pursuant to a lease agreement that starts to terminate in 2004. The Company has
multiple options to renew leases at all locations.
WMBFA administrative and subsidiary operations are conducted from owned
office space totaling 280,000 square feet in Irvine, California, 237,000 square
feet in Stockton, California and 305,000 square feet in Chatsworth, California.
WMBFA administrative and subsidiary operations are also conducted from leased
office space totaling 795,000 square feet in Chatsworth pursuant to a lease
agreement that starts to terminate in 2005 with options to renew at the
Company's discretion.
Aristar administrative operations are conducted from owned office space
totaling 71,000 square feet in Tampa, Florida.
See "Consolidated Financial Statements -- Note 10: Premises and Equipment."
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ITEM 3. LEGAL PROCEEDINGS
Washington Mutual has certain litigation and negotiations in progress
resulting from activities arising from normal operations. In the opinion of
management, none of these matters is likely to have a materially adverse effect
on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR WASHINGTON MUTUAL'S, COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
COMMON STOCK
Washington Mutual's common stock trades on The Nasdaq Stock Market under
the symbol WAMU. As of January 31, 1998, there were 257,781,511 shares issued
and outstanding held by 22,931 shareholders of record. The last reported sales
price of common stock on February 20, 1998 was $67.75 per share.
The high and low common stock prices by quarter were as follows:
YEAR ENDED
DECEMBER 31, 1997
------------------
HIGH LOW
------- -------
Fourth quarter............................................. $72.38 $60.31
Third quarter.............................................. 70.25 58.88
Second quarter............................................. 62.69 45.38
First quarter.............................................. 58.88 42.75
YEAR ENDED
DECEMBER 31, 1996
------------------
HIGH LOW
------- -------
Fourth quarter............................................. $45.88 $36.50
Third quarter.............................................. 39.25 28.50
Second quarter............................................. 30.38 26.13
First quarter.............................................. 32.25 27.63
The cash dividends paid by quarter were as follows:
YEAR ENDED
DECEMBER 31,
----------------
1997 1996
------ ------
Fourth quarter............................................. $ 0.28 $ 0.24
Third quarter.............................................. 0.27 0.23
Second quarter............................................. 0.26 0.22
First quarter.............................................. 0.25 0.21
These dividends do not include amounts paid by acquired companies prior to
their combination with the Company.
PREFERRED STOCK
7.60% Noncumulative Perpetual Preferred Stock, Series E. Washington
Mutual's Series E Preferred Stock trades on The Nasdaq Stock Market under the
symbol WAMUM. The Series E Preferred Stock has a liquidation preference of $25
per share plus dividends accrued and unpaid for the then-current dividend
period. Dividends, if and when declared by Washington Mutual's Board of
Directors, are at an annual rate of $1.90 per share. Dividends of $0.475 per
share have been declared for each quarter for the two years ended December 31,
1997. At December 31, 1996, there were 1,970,000 shares issued and outstanding
held by
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344 shareholders of record. The last reported sales price of the Series E
Preferred Stock on February 20, 1998 was $25.38 per share.
The high and low stock prices by quarter were as follows:
YEAR ENDED
DECEMBER 31,
----------------
1997
----------------
HIGH LOW
------ ------
Fourth quarter............................................. $26.00 $25.38
Third quarter.............................................. 26.00 25.50
Second quarter............................................. 25.88 25.25
First quarter.............................................. 25.75 25.00
YEAR ENDED
DECEMBER 31,
----------------
1996
----------------
HIGH LOW
------ ------
Fourth quarter............................................. $25.75 $24.25
Third quarter.............................................. 24.75 24.00
Second quarter............................................. 25.00 23.63
First quarter.............................................. 25.63 24.50
PAYMENT OF DIVIDENDS AND POLICY
Payment of future dividends is subject to declaration by Washington
Mutual's Board of Directors. Factors considered in determining the size of
dividends are the amount and stability of profits, adequacy of capitalization,
and expected asset and deposit growth of its subsidiaries. The dividend policy
of Washington Mutual is also dependent on the ability of WMB, WMBFA and WMBfsb
to pay dividends to their respective parent company, which is influenced by
legal, regulatory and economic restrictions. See "Business -- Regulation and
Supervision -- Legal Restrictions on Dividends of Depository Institutions."
Retained earnings of the Company at December 31, 1997 included a pre-1988
thrift bad debt reserve for tax purposes of $1.22 billion for which no federal
income taxes have been provided. In the future, if the thrift bad debt reserve
is used for any purpose other than to absorb bad debt losses, or if any of the
banking subsidiaries no longer qualifies as a bank, the Company will incur a
federal income tax liability at the then prevailing corporate tax rate, to the
extent of such subsidiaries' pre-1988 thrift bad debt reserve. As a result, the
Company's ability to pay dividends in excess of current earnings may be limited.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data for
Washington Mutual and is derived from and should be read in conjunction with the
consolidated financial statements of Washington Mutual and the notes thereto,
which are included in this Annual Report on Form 10-K. The Great Western Merger
in 1997 and the Keystone Transaction in 1996 were accounted for as poolings of
interests. The assets, liabilities, stockholders' equity, and results of
operations have been recorded on the books of Washington Mutual at their values
as carried on the books of the respective companies, and no goodwill was
created. Washington Mutual's financial information contained herein has been
restated as if the respective companies had been combined for all periods
presented. As such, the information presented herein is not comparable with that
reflected in the Company's annual report on Form 10-K/A for the year ended
December 31, 1996.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA
Interest income..................... $ 6,810,964 $ 6,387,090 $ 6,158,371 $ 4,928,851 $ 4,883,407
Interest expense.................... 4,154,491 3,814,143 3,860,018 2,642,806 2,509,827
------------ ------------ ------------ ------------ ------------
Net interest income................. 2,656,473 2,572,947 2,298,353 2,286,045 2,373,580
Provision for loan losses........... 207,139 392,435 251,424 327,068 620,808
Other income........................ 713,400 658,164 603,567 694,228 648,925
Other expense....................... 2,261,608 2,428,599 1,802,886 1,883,348 1,922,639
------------ ------------ ------------ ------------ ------------
Income before income taxes,
extraordinary items, cumulative
effect of accounting changes, and
minority interest................. 901,126 410,077 847,610 769,857 479,058
Income taxes........................ 402,116 141,220 273,006 265,180 126,034
Provision for payments in lieu of
taxes............................. 17,232 25,187 7,887 (824) 14,075
Extraordinary items, net of federal
income tax effect(1).............. -- -- -- -- (8,953)
Cumulative effect of change in tax
accounting method................. -- -- -- -- 13,365
Minority interest in earnings of
consolidated subsidiaries......... -- 13,570 15,793 13,992 13,991
------------ ------------ ------------ ------------ ------------
Net income.......................... $ 481,778 $ 230,100 $ 550,924 $ 491,509 $ 320,546
============ ============ ============ ============ ============
Net income attributable to common
stock............................. $ 460,346 $ 191,386 $ 507,325 $ 447,910 $ 253,764
============ ============ ============ ============ ============
Net income per common share:
Basic............................. $1.87 $0.81 $2.19 $1.98 $1.30
Diluted........................... 1.86 0.81 2.16 1.96 1.30
Average diluted common shares used
to calculate earnings per share... 247,045,339 237,683,414 244,555,332 232,633,542 224,329,524
SELECTED FINANCIAL DATA
Cash dividends paid per common
share:
Pre-business combinations(2)...... $1.06 $0.90 $0.77 $0.70 $0.50
Post-business combinations(3)..... 1.11 1.09 0.75 0.82 0.75
Common stock dividend payout
ratio(3).......................... 56.83% 112.13% 33.16% 38.73% 62.81%
Return on average assets............ 0.52 0.27 0.66 0.67 0.36
Return on average stockholders'
equity............................ 9.21 4.40 11.58 11.36 6.14
Return on average common
stockholders' equity.............. 9.25 3.86 11.33 11.07 5.54
25
28
SELECTED FINANCIAL DATA
DECEMBER 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Assets...................... $ 96,981,099 $ 87,426,497 $ 86,613,386 $ 79,699,553 $ 71,961,681
Available-for-sale
securities................ 11,373,922 16,095,343 20,749,500 7,780,460 4,917,290
Held-to-maturity
securities................