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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO :
COMMISSION FILE NUMBER 1-14667
WASHINGTON MUTUAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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WASHINGTON 91-1653725
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1201 THIRD AVENUE 98101
SEATTLE, WASHINGTON (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 461-2000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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Common Stock New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. YES X NO _ .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of March 3, 2000:
COMMON STOCK -- 12,444,200,149(1)
(1) Does not include any value attributable to 12,000,000 shares that are held
in escrow and not traded.
The number of shares outstanding of the issuer's classes of common stock as
of March 3, 2000:
COMMON STOCK -- 558,327,194(2)
(2) Includes the 12,000,000 shares held in escrow.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held April 18, 2000, are incorporated by reference into Part
III.
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WASHINGTON MUTUAL, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I...................................................... 1
ITEM 1. BUSINESS.......................................... 1
Overview............................................... 1
Key Strategic Initiatives.............................. 2
Consumer Banking....................................... 3
Mortgage Banking....................................... 4
Commercial Banking..................................... 5
Financial Services..................................... 6
Consumer Finance....................................... 7
Treasury Activities.................................... 7
Asset Quality.......................................... 9
Employees.............................................. 10
Risk Factors........................................... 10
Business Combinations.................................. 11
Taxation............................................... 12
Environmental Regulation............................... 12
Regulation and Supervision............................. 13
Competitive Environment................................ 22
Principal Officers..................................... 23
ITEM 2. PROPERTIES........................................ 24
ITEM 3. LEGAL PROCEEDINGS................................. 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................ 25
PART II..................................................... 25
ITEM 5. MARKET FOR OUR COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS......................................... 25
ITEM 6. SELECTED FINANCIAL DATA........................... 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 29
Overview............................................... 29
Results of Operations.................................. 30
Quarterly Results of Operations........................ 38
Review of Financial Condition.......................... 38
Provision and Reserve for Loan Losses.................. 43
Lines of Business...................................... 47
Asset and Liability Management Strategy................ 49
Liquidity.............................................. 54
Capital Adequacy....................................... 54
Year 2000 Project...................................... 55
Accounting Developments Not Yet Adopted................ 55
Tax Contingency........................................ 56
Goodwill Litigation.................................... 57
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................ 59
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....... 63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................... 63
PART III.................................................... 63
PART IV..................................................... 63
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.................................... 63
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PART I
ITEM 1. BUSINESS
OVERVIEW
With a history dating back to 1889, Washington Mutual, Inc. is a financial
services company committed to serving consumers and small to mid-sized
businesses. At December 31, 1999, we had deposits of $81.13 billion and
stockholders' equity of $9.05 billion. Based on our consolidated assets of
$186.51 billion at December 31, 1999, we were the largest savings institution
and the ninth largest banking company in the United States.
We conduct our business operations through our subsidiaries. Our principal
banking subsidiaries are Washington Mutual Bank, FA ("WMBFA"), Washington Mutual
Bank ("WMB") and Washington Mutual Bank fsb ("WMBfsb"). Our other principal
subsidiaries are Washington Mutual Finance Corporation, Long Beach Mortgage
Company and WM Financial Services, Inc.
Our assets have increased approximately 762% in the last four years. A
substantial portion of our growth has been through acquisitions. In December
1996, we acquired the parent of American Savings Bank (the "Keystone
Transaction"), which gave us our first depository institution in California. In
July 1997, we acquired Great Western Financial Corporation and in October 1998,
we acquired H. F. Ahmanson & Co., the parent of Home Savings of America. In
February 1998, H.F. Ahmanson had acquired Coast Savings Financial, Inc. During
1999, we completed the integration of Home Savings into our company. As part of
this integration, we consolidated 162 consumer financial centers in California
into neighboring offices.
In October 1999, we acquired Long Beach Financial Corporation, the parent
of Long Beach Mortgage. Long Beach Mortgage is a specialty mortgage finance
company that originates, purchases, sells and services specialty mortgage
finance loans. Specialty mortgage finance loans are loans to borrowers who
generally would not qualify for a loan from our banking subsidiaries due to the
borrower's credit history, high debt-to-income ratios or other factors. Long
Beach Mortgage originates its loans primarily through a nationwide network of
approximately 12,500 independent loan brokers. Long Beach Mortgage has retained
its brand name and is operating with its previous management team as a separate
subsidiary of our company.
As a result of the acquisitions described above, our company has been
transformed into a national financial services company. Although we operate
principally in California, Washington, Oregon, Florida, Texas and Utah, we have
physical operations in 40 states. Through our subsidiaries, we engage in the
following business activities:
- Consumer Banking
- Mortgage Banking
- Commercial Banking
- Financial Services
- Consumer Finance
Our principal business offices are located at 1201 Third Avenue, Seattle,
Washington 98101 and our telephone number is (206) 461-2000. When we refer to
"we" or "Washington Mutual" or the "Company" in this Form 10-K, we mean
Washington Mutual, Inc., as well as its consolidated subsidiaries. When we refer
to WMI, we mean Washington Mutual, Inc. exclusively.
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KEY STRATEGIC INITIATIVES
We have established performance goals for the period from 2000 through 2004
that are somewhat different from our goals for the prior five-year period. Our
goals for the next five years are to:
- remix the balance sheet;
- diversify revenue sources;
- reduce interest rate risk;
- operate more efficiently;
- actively manage credit risk; and
- employ capital strategies that effectively balance returns and risk.
We intend to remix our balance sheet by decreasing the percentage of
single-family residential ("SFR") mortgage loans and mortgage-backed securities
("MBS") on our balance sheet from approximately 83% to between 60-65% of assets
and to increase the percentage of commercial business and commercial real estate
loans, consumer loans and specialty mortgage finance loans. We further intend to
decrease the percentage of certificates of deposits in our deposit base and to
increase the percentage of core checking and savings deposits. We believe that
we will improve our net interest margin if we are successful with these
strategies.
Our goal is to diversify revenue sources through continued growth of
noninterest income, primarily fees derived from our consumer banking products
and our financial services businesses, and through increased mortgage banking
income and servicing fees from increased loan originations and the
securitization and sale of a substantial portion of those loans.
We intend to reduce our sensitivity to interest rate changes through a
combination of a remix of our balance sheet and growth in noninterest income.
Our asset remix is intended to reduce the percentage of fixed-rate and
medium-term SFR loans and MBS and increase the amount of commercial business
loans and shorter-term loans. We also plan to remix our liabilities by
increasing our core checking and savings deposits. Our goal of increasing the
amount of fee income and mortgage banking revenue will also reduce our reliance
on net interest income and decrease earnings volatility.
Our goal is an operating efficiency ratio of less than 45%. We intend to
achieve this goal by streamlining our processes and procedures, deploying
technology solutions to improve productivity, leveraging our infrastructure to
support revenue growth and offering accessible, low cost customer transaction
channels.
The change in the composition of our assets will increase the credit risk
to which we are exposed. We believe that our loan loss reserve will increase,
but our goal is that nonperforming assets remain below 1% of assets.
Our capital strategy will focus on return on equity and growth of earnings
per share rather than on asset growth. Our goal is a return on common equity of
at least 20% per year and growth in earnings per share of at least 13% per year.
As part of our strategy, we intend to increase the amount of higher-yielding
assets. We will continue to use share repurchases at appropriate prices to
manage our capital. We will strive to achieve a ratio of common equity to assets
of greater than 5% and a ratio of capital to risk-weighted assets (computed in
accordance with the methodology used by the Federal Reserve Board to measure the
capital of bank holding companies) of greater than 11%.
This section contains forward-looking statements, which are not historical
facts and pertain to our future operating results. These forward-looking
statements are within the meaning of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond our control. In addition, these forward-looking
statements are subject to assumptions with respect to future business strategies
and decisions that are subject to change. Actual results may differ materially
from the results discussed in these forward-looking statements for the reasons,
among others, discussed under the heading "Business-Risk Factors" included in
this Form 10-K.
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CONSUMER BANKING
Our Consumer Banking Group offers a comprehensive line of retail financial
products and services to individuals and small businesses. We provide service to
4.6 million households through multiple delivery channels that include over
1,000 traditional financial centers, both free-standing and in-store, and over
1,400 automated teller machines located in eight states. We also offer our
customers the convenience of 24-hour telephone and internet banking services.
Our Consumer Banking Group's strategy is based on acquiring and building
profitable relationships with customers through an attractive array of product
offerings, convenient service options and quality service. Since 1995, we have
actively promoted "Free Checking," which we believe is a powerful tool in
attracting new customers who may utilize fee-based services and increase the
number and balance of the accounts they maintain with us.
A primary focus of our Consumer Banking Group in 1999 was the integration
of the Home Savings financial centers. As part of this integration, the deposit
and lending systems were converted and 162 financial centers were consolidated
into other financial centers due to overlapping service areas. Equally important
was the implementation of our consumer banking strategy in former Home Savings
financial centers and the continuation of our strategy in former Great Western
and American Savings financial centers.
Our Consumer Banking Group offers the following loan products:
- second mortgage loans for purposes unrelated to the property securing the
loan and for a variety of purposes related to the property, including its
renovation or remodeling;
- manufactured housing loans;
- purchase money loans for automobiles, pleasure boats and recreational
vehicles;
- student loans;
- loans secured by deposit accounts;
- secured and unsecured loans made under our line of credit or term loan
programs; and
- small business lines of credit (up to $100,000).
In addition to being an important part of our orientation toward consumer
financial services, consumer loans provide greater net interest income due to
their generally higher yields. The size of our consumer loan portfolio has grown
in recent years as we have begun to introduce these products into California,
Florida and Texas.
Consumer loans generally are secured loans. Our decision to make a consumer
loan is based on an evaluation of the collateral and the borrower's
creditworthiness, including such factors as income, other indebtedness and
credit history. Lines of credit are subject to our periodic review. If a
borrower's financial circumstances change, then we may revise or cancel the
borrower's line of credit as we deem appropriate. Consumer lending may involve
special risks, including decreases in the value of collateral and transaction
costs associated with realization on the collateral.
Our consumer banking operations also offer various consumer deposit
products, including money market deposit accounts ("MMDAs") and checking
accounts as well as the more traditional savings accounts and time deposit
accounts. The MMDAs generally require higher minimum balances and offer higher
yields than savings accounts. We offer interest-bearing and noninterest-bearing
checking accounts. We assess monthly service charges on interest-bearing
checking accounts, unless the depositor maintains a minimum balance. We assess
no monthly fees on the vast majority of our noninterest-bearing checking
accounts.
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At December 31, 1999, the Consumer Banking Group had $79.47 billion in
deposits as follows:
TYPE OF DEPOSIT AMOUNT
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Time deposit accounts....................................... $37.01 billion
MMDAs and savings accounts.................................. 29.54 billion
Checking accounts........................................... 12.92 billion
Our Consumer Banking Group manages its excess cash from deposits by
investing in the SFR loan portfolio managed by the Mortgage Banking Group.
MORTGAGE BANKING
Our Mortgage Banking Group serves over 1.2 million households in meeting
their residential mortgage financing needs throughout the United States and is
the nation's fifth largest mortgage originator. The Mortgage Banking Group
offers a broad array of SFR mortgage products in 29 states and the District of
Columbia through multiple distribution channels, including the internet.
During 1999, we originated a total of $40.24 billion in SFR mortgages
(excluding SFR construction loans). This was about 3% lower than our 1998
origination levels, as higher interest rates slowed mortgage refinancing
activity. Slower refinance activity affected the entire mortgage market in 1999,
as total SFR originations in the United States were approximately 11% lower in
1999 than in 1998. The slower pace of refinancing activity also reduced the
volume of loans that we securitized and sold, to $8.96 billion in 1999 from
$18.24 billion in 1998. At December 31, 1999, we serviced a total of $158.88
billion in SFR loans, of which $48.64 billion were SFR loans serviced for
others.
First mortgage loan products offered through our principal banking
subsidiaries include permanent home financing as well as loans for the
construction of single-family homes. Permanent loans made available to consumers
include conventional adjustable-rate mortgage ("ARM") loans and conventional,
FHA-insured, and VA-guaranteed fixed-rate mortgage loans. All loan products are
offered with a variety of maturities and amortization schedules.
We generally securitize a majority of our originated fixed-rate SFR loans
and sell the securities to third party investors. We generally retain the
servicing rights on the loans underlying these securities. We recognize mortgage
banking income on the sale of the securities.
We generally retain originated ARM loans in our portfolio. From time to
time, we securitize these loans and retain them in our investment portfolio to
support liquidity and other corporate objectives. During 1999, we created four
series of real estate mortgage investment conduit ("REMIC") securities and
retained $9.57 billion of these securities. We also securitized $4.77 billion of
loans into agency MBS which we retained in our portfolio.
Beginning in 1995, we securitized loans with Fannie Mae and Freddie Mac
under programs in which they have recourse against us as the servicer of the
loans ("Recourse MBS"). These securitizations primarily involve ARMs. They
generally are less costly and sometimes require less documentation than
securitizations without recourse. We generally can sell these Recourse MBS in
the secondary market or use them to collateralize borrowings and to meet
regulatory liquidity requirements. We have retained the majority of Recourse MBS
in our portfolio. The remainder were sold to third parties. We establish a
recourse liability to cover the estimated loss on these obligations.
In September 1999, we entered into a strategic alliance with Fannie Mae,
under which most of the sales and securitizations of our fixed-rate conforming
mortgage loans will be to Fannie Mae. We will use our own underwriting system to
originate the loans. In addition, our agreement provides that we will work
closely with Fannie Mae in sharing credit risk management and to develop
additional products in the future.
The primary ARM products that we offer are indexed to the 12-month average
of the average annual yields on actively traded United States Treasury
securities adjusted to a constant maturity of one year ("MTA"). Under our
current programs, a borrower may choose among loans that have interim payment
caps
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or interim interest rate caps. Our loans with payment caps typically have
monthly rate adjustments with initial start rates fixed for one-, three-, six-,
or twelve-months. These loans offer our borrowers payment flexibility not
offered in other loan products, which has made this our most popular
home-financing product. The loans feature four payment options, including a
minimum payment based on the start rate, a payment that covers the full interest
due, a payment that ensures full amortization over the term of the loan, and a
payment that amortizes the loan over 15 years. These loans typically have
payments that cannot change annually by more than a contractual percentage,
usually 7.5%. In addition, we offer loans with initial start rates of one-,
three-, or five-years and annual rate adjustments thereafter. The annual rate
adjustments are usually limited to 2% and the payments are always re-amortized
to the original maturity of the loan. We often offer a "teaser" rate which means
the rate for the first two to three months of the loan is below market rates.
Our mortgage products are made available to the consumer through various
channels of distribution, which include retail home loan centers, wholesale home
loan centers, financial centers and the internet. In 1999, our 176 retail home
loan centers accounted for 43% of SFR originations, our 22 wholesale home loan
centers accounted for 48% of SFR originations and our consumer bank financial
centers accounted for 9% of SFR originations. In September 1999, we began to
originate loans directly through our web site, www.wamumortgage.com. Internet
originations are supported by our call center in Fullerton, California. In
January 2000, we announced an agreement to acquire Alta Residential Mortgage
Trust ("Alta") and the introduction of our correspondent distribution channel,
which will be responsible for the acquisition of loans on a flow basis from
other originators. In 1999, we acquired $347.4 million in correspondent product,
primarily from Alta.
All loans originated are subject to the same nondiscriminatory underwriting
standards. All loans are subject to underwriting review and approval by various
levels of our personnel, depending on the size and characteristics of the loan.
We require title insurance on all first liens on real property securing loans.
We also require our borrowers to maintain property and casualty insurance in an
amount at least equal to the total of our loan amount plus all prior liens on
the property or the replacement cost of the property, whichever is less. For
loans acquired from correspondents, we perform re-underwriting and appraisal
review of the loans purchased.
We finance two different categories of SFR construction loans. We make
custom construction loans to the intended occupant of a house to finance the
house's construction. We typically combine construction phase financing with
permanent financing of the completed home. In 1999, we originated $977.5 million
in custom construction loans.
We also make builder construction loans to borrowers who are in the
business of building homes for resale. Each builder loan is made on a
property-by-property basis and generally matures 12 to 18 months from
origination. Proper consideration is given to the higher risk inherent in these
transactions as each loan is underwritten. We made substantially all of our 1999
SFR builder construction loans in Washington, Oregon, Utah and California. Total
builder construction loan originations were $1.03 billion for 1999.
COMMERCIAL BANKING
Our Commercial Banking Group comprises two primary business lines:
commercial banking, operating under the brand names of WM Business Bank and
Western Bank; and commercial real estate lending, operating under the Washington
Mutual brand.
We offer a full range of commercial banking products and services to small
to mid-sized businesses and individuals through 74 Western Bank offices in the
Northwest and seven WM Business Bank offices in California. Commercial business
loans are typically either unsecured, or secured by business, real estate,
and/or personal assets, depending on the borrower's financial capacity and
company performance. For 1999, Western Bank and WM Business Bank average loans
grew by $405.8 million and average deposits increased by $240.9 million from
1998. At December 31, 1999, total deposits in Western Bank and WM Business Bank
were $1.47 billion, of which 39% were demand accounts. At the same date we had
$1.25 billion in commercial business loans.
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In December 1999, we entered into a strategic alliance with Franchise
Finance Corporation of America and certain of its affiliates ("FFCA") for the
sale and purchase of commercial loans. FFCA specializes in making commercial
loans to franchisees of some of the country's leading fast food restaurants,
convenience stores and automotive after-care shops. Under the terms of the
alliance, we will purchase loans originated by FFCA. We expect to retain these
loans in our portfolio. The alliance will be for a three-year term, with two
one-year renewal options. We anticipate that we will purchase $4-5 billion in
loans during the three-year period. We will perform re-underwriting and
replacement cost review of the loans purchased.
We offer commercial real estate loans to property owners and developers
through 17 Washington Mutual Commercial Real Estate offices in Washington,
Oregon, Utah, and California. Adjustable- and fixed-rate term loans for
multi-family properties represented 96% of the $2.29 billion in originations for
1999 with the balance in commercial construction and other commercial property
types. These loans typically involve large loan balances concentrated with
single borrowers or groups of related borrowers. In addition, the payment
experience on loans secured by income-producing properties usually depends on
the successful operation of the real estate project that secures the loan and
thus may be subject to adverse conditions in the real estate market or in the
economy, particularly the interest rate environment. Commercial real estate
values tend to be cyclical and, while commercial real estate values trended
upward in many areas of the country in 1999, we carefully monitor the commercial
real estate environment to determine the level of our activity in this area.
In all commercial real estate lending, location, marketability and overall
attractiveness of the project are considered. Current underwriting guidelines
for commercial real estate loans require us to perform an economic analysis of
each property with regard to the annual revenue and expenses, debt service
coverage and fair value to determine the maximum loan amount. Before we make a
commercial real estate loan, the borrower must obtain the approval of various
levels of our personnel, depending on the size and characteristics of the loan.
At December 31, 1999, commercial real estate loans totaled $18.24 billion
of which $15.26 billion were apartments and $2.98 billion were other real estate
property types. Approximately 85% of total commercial real estate loans were
secured by real property in California.
FINANCIAL SERVICES
Our Financial Services Group consists of three lines of business: (1) WM
Financial Services, Inc. ("WMFS"), a licensed broker-dealer, (2) investment
advisory and distribution services for the WM Group of Funds, and (3) Washington
Mutual Insurance Services, Inc., a full-service insurance agency. All three
business activities are key drivers of our fee income and leverage the Consumer
Banking Group's distribution system. As part of the continued focus on fee
generation as a greater percentage of the revenue mix, the Financial Services
Group will emphasize greater cross-selling efforts with the Consumer Banking
Group. In addition, WMFS will initiate marketing campaigns in new markets and
seek increased incremental revenue from existing clients.
Through WMFS we offer a wide range of investment products to our clients,
including mutual funds, variable and fixed annuities, and general securities. At
December 31, 1999, WMFS operated in seven states with approximately 500
financial consultants. In addition, our Consumer Bank Annuity Program utilizes
over 800 licensed bank employees who sell fixed annuities to consumer bank
customers.
WM Fund Advisors, Inc. ("WM Advisors"), our registered investment advisor
subsidiary, had assets under management of $7.42 billion at December 31, 1999 in
18 mutual funds, five asset management portfolios, and one variable annuity. The
WM Group of Funds are managed both by WM Advisors and by three subadvisors. The
WM Group of Funds are distributed to financial services clients through the WMFS
network in more than 1,000 consumer bank financial centers. The WM Group of
Funds are also distributed through a network of over 300 independent
broker-dealers. Sales support to these independent broker-dealers will be
significantly expanded in 2000 with a focus on asset allocation.
Washington Mutual Insurance Services is an insurance agency that supports
the mortgage lending process by offering fire, homeowners, flood, earthquake and
other property and casualty insurance products to
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borrowers. In addition, the agency offers mortgage life insurance, accidental
death and dismemberment, term, whole life, and other life insurance products to
existing mortgage and deposit customers.
CONSUMER FINANCE
Our Consumer Finance Group consists of Washington Mutual Finance
Corporation (formerly Aristar, Inc.) and Long Beach Mortgage.
Washington Mutual Finance makes consumer installment loans and real estate
secured 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. In 1999, originations had an average original
term of 71 months. In the year ended December 31, 1999, 69% of the originations
of all installment loans were unsecured or secured by luxury goods, automobiles
or other personal property and 31% were secured by real estate. We generally
acquire retail installment contracts without recourse to the originating
merchant. These contracts are typically written with original terms of three to
60 months and for 1999 had an average original term of 28 months. At December
31, 1999, Washington Mutual Finance had $3.26 billion of assets.
Washington Mutual Finance currently operates in 25 states, primarily in the
southeastern United States. In 1998 and 1999, Washington Mutual Finance
significantly increased its lending volume in Texas as a result of changes in
state law, which permitted non-purchase money home lending in Texas beginning
January 1, 1998.
Long Beach Mortgage is engaged in the business of originating, purchasing
and selling specialty mortgage finance loans secured by one-to-four family
residences. Long Beach Mortgage originates loans primarily through wholesale
channels of production. Long Beach Mortgage's nationwide network of independent
mortgage loan brokers generates loans in all 50 states. In 1999, Long Beach
Mortgage's single largest producing wholesale broker was responsible for less
than 1% of Long Beach Mortgage's wholesale originations during the year. Long
Beach Mortgage maintains a close working relationship with brokers through its
sales force of approximately 300 account executives located in 69 offices.
Long Beach Mortgage historically has followed a strategy of selling
substantially all of its loan originations in the secondary market. Long Beach
Mortgage typically sells its entire economic interest in the loan except for the
related servicing rights, which it has generally retained. Cash from loan sales
has been used by Long Beach Mortgage to repay borrowings previously made under
its warehouse financing facility.
The loans made by our consumer finance subsidiaries generally have a higher
yield than the SFR loans and consumer loans made by our banking subsidiaries
because these loans tend to have higher risk. Our typical consumer finance
borrower would generally not qualify for a loan from our banking subsidiaries
due to their credit history, high debt-to-income ratio or other factors.
Beginning in 1999, we began to acquire specialty mortgage finance loans in
order to increase the yield on our loan portfolio. The loans are managed by the
Consumer Finance Group. While we screen the portfolios of purchased specialty
mortgage finance loans for unacceptable credit risk, these loans, by their
nature, bear more credit risk than is found in standard mortgage loans that we
originate or in agency MBS. Accordingly, we expect that loan charge offs on
these portfolios will be higher than on our other portfolios.
At December 31, 1999, we had $4.45 billion of specialty mortgage finance
loans in our portfolio.
TREASURY ACTIVITIES
The primary responsibilities of our treasury department are:
- interest rate risk management;
- liquidity management;
- investing activities;
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- borrowing activities; and
- capital management.
Interest Rate Risk Management
Our interest rate risk is managed in accordance with risk measurements and
limits established by the Boards of Directors of WMI and our depository
institutions. The activities undertaken by the treasury department include
entering into interest rate swap, interest rate cap and other derivative
contracts in order to more closely match the duration of our assets and
liabilities. In 1999, we entered into $16.40 billion (notional amount) in
interest rate contracts with 19 counterparties.
Liquidity Management
Our liquidity policy is to maintain sufficient liquidity above daily
funding needs to protect against unforeseen liquidity demands. We manage our
liquidity primarily through the purchase and sale of MBS in the secondary market
and through our borrowing practices. At December 31, 1999, we had $19.82 billion
in unencumbered MBS and $3.04 billion in cash and cash equivalents. We also had
$23.72 billion in additional borrowings primarily through the use of FHLB
advances, collateralized borrowings using unpledged MBS, other wholesale
borrowing sources and deposits of public funds.
Investing Activities
In 1999, we purchased a substantial amount of agency MBS and collateralized
mortgage obligations ("CMOs") in the secondary market. We also purchased private
issue MBS and CMOs, and SFR loan pools in the secondary market. The yield on
these latter assets generally exceeds that of agency MBS because they expose us
to certain risks not inherent in agency MBS, such as credit risk and liquidity
risk.
We have 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, credit enhancement structures, borrower payment
histories and information concerning loan delinquencies and losses of the
underlying collateral, where applicable. After a purchase is made, similar
information is monitored on a periodic basis. Furthermore, we have established
internal guidelines limiting concentrations of certain risk factors.
Borrowing Activities
Deposits have generally declined in recent years. As a result, we
increasingly have relied on wholesale borrowings to fund our asset growth.
Borrowings include securities sold under agreements to repurchase ("reverse
repurchase agreements"), the purchase of federal funds, proceeds from the
issuance of mortgage-backed bonds or notes, capital notes and other types of
debt securities, and the issuance of commercial paper and funds obtained as
advances from the FHLBs of Seattle, San Francisco, and Topeka. We also have
access to the Federal Reserve Bank's discount window. Under Washington state
law, WMB may borrow up to 30% of its total assets, but reverse repurchase
agreements are not deemed borrowings under such law, and the 30% also does not
apply to borrowings from federal, state or municipal governments, agencies or
instrumentalities, including the FHLBs.
We actively engage in reverse repurchase agreements with authorized
broker-dealers and major customers, selling U.S. Government and corporate debt
securities and MBS under agreements to repurchase them or similar securities at
a future date. At December 31, 1999, we had $30.16 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 1999, WMBFA, WMB and WMBfsb had credit lines ranging
from 40% to 50% of total assets. At December 31, 1999, advances under these
credit lines totaled $57.09 billion and were secured by mortgage loans, MBS and
U.S. Government and agency securities.
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A member of an FHLB is generally required to purchase stock of the FHLB in
an amount equal to at least 5% of the aggregate outstanding advances made by the
FHLB to the member. At December 31, 1999, we held stock in FHLBs with an
aggregate value of $2.92 billion.
We offer wholesale deposits, primarily time deposit accounts, to political
subdivisions and public agencies. We consider wholesale deposits to be a
borrowing source rather than a customer relationship.
Other funding activities include the issuance of commercial paper by WMI
and Washington Mutual Finance. We have combined commercial paper facilities
backed by credit facilities from a syndicate of banks. We also issue senior
notes at WMI and Washington Mutual Finance.
Capital Management
In 1999, the Board of Directors authorized the repurchase of 56.3 million
of our shares. We repurchased 31.5 million shares during 1999. Approximately 6.3
million of these shares were used for the acquisition of Long Beach Financial
Corporation. The share repurchase program provides management with a means to
utilize excess capital. Our capital management strategy also focuses on the
risk-based capital and leverage ratios of our principal banking subsidiaries.
ASSET QUALITY
We maintain a reserve for credit losses inherent in the loan portfolio. The
reserve is based on an ongoing, quarterly assessment of the probable estimated
losses inherent in the loan portfolio. This quarterly analysis provides a
mechanism for ensuring that estimated losses reasonably approximate actual
observed losses, as any differences between estimated and actual losses will be
immediately addressed in the assessment and resulting loan loss reserve
provision.
In analyzing our existing loan portfolios, we apply specific monitoring
policies and procedures which vary according to the relative risk profile and
other characteristics of the loans within the various portfolios. Our SFR,
second mortgage and other consumer, specialty mortgage finance and commercial
real estate loans under $1 million are relatively homogeneous, and no single
loan is individually significant in terms of its size or potential risk of loss.
Therefore, we review these portfolios by analyzing their performance as a pool
of loans against which we apply a general reserve. Our determination of the
level of the reserve and, correspondingly, the provision for loan losses for
these homogenous loan pools rests upon various judgments and assumptions used to
determine the risk characteristics of the portfolios. These judgments are
supported by analyses that fall into three general categories: (i) current and
historical economic conditions; (ii) a predictive analysis of the performance
and level of loss of the current portfolio; and (iii) prior loan loss
experience. These systematic analyses provide a self-correcting mechanism to
reduce differences between estimated and actual observed losses in the
portfolios.
In contrast, our monitoring process for commercial real estate loans over
$1 million, and the commercial banking and builder construction portfolios
includes a periodic review of individual loans. Loans that are performing but
have shown some signs of weakness are evaluated under more stringent reporting
and oversight policies. We review these loans to assess the ability of the
borrower to continue to service all of its interest and principal obligations
and, as a result, may adjust the risk grade accordingly. If we believe that full
collection of principal and interest is not reasonably assured, the loan will be
appropriately downgraded and, if warranted, placed on nonaccrual status. In that
event, an allocated reserve will be established for it, even though the loan may
be current as to principal and interest payments.
Our primary depository institutions each has a Credit Policy Committee
("CPC") that continuously monitors and reviews loan quality and reports to its
respective Board of Directors. We also have internal staff regularly review the
classification of commercial loans and commercial real estate loans over $1
million and report such classification to the relevant CPC. Such reviews assist
management in establishing the level of the reserves.
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EMPLOYEES
Our number of full-time equivalent employees ("FTE") increased slightly
from 27,957 at December 31, 1998 to 28,509 at December 31, 1999, primarily as a
result of approximately 1,000 employees added in the acquisition of Long Beach
Mortgage. We believe that we have been successful in attracting quality
employees and that our employee relations are good.
RISK FACTORS
THE INTEREST RATE ENVIRONMENT HAS COMPRESSED OUR MARGINS AND ADVERSELY AFFECTED
OUR NET INTEREST INCOME
The rising interest rate environment has increased our funding costs at a
faster rate than the increase in the yield on our loans and investments. This
margin compression has negatively affected our net interest income, which is the
largest component of our earnings. In addition, our deposits have declined and
our short-term borrowings have increased at the same time that we increased the
fixed-rate portion of our MBS portfolio. If these trends continue, we expect
that net interest income will continue to be adversely affected.
The rising interest rate environment may negatively affect the volume of
loan originations. SFR mortgage originations in the United States declined from
1998 to 1999 by approximately 11% due primarily to a rising interest rate
environment. This environment has continued into 2000. If interest rates
continue to rise, we expect that SFR mortgage originations will decline during
2000. If this occurs, our loan originations may be negatively affected.
AS WE CONTINUE TO DIVERSIFY OUR ASSETS, OUR CREDIT QUALITY MAY SUFFER
Our strategic plan calls for us to reduce the percentage of SFR loans and
MBS in our portfolio and to increase the percentage of consumer loans,
commercial business loans and specialty mortgage finance loans. Although these
loans generally provide a higher yield than our SFR loans and MBS, they also
carry more risk, and consequently, there is a risk of greater loan losses in
this part of the portfolio. To the extent that we have to increase our provision
for loan loss as a result of these loans, our earnings could be adversely
affected.
WE FACE COMPETITION FROM OTHER FINANCIAL SERVICES COMPANIES IN ALL OUR MARKETS
We face significant competition both in attracting and retaining deposits
and in making loans in all of our markets. Our most direct competition for
deposits has historically come from other savings institutions, credit unions
and commercial banks doing business in our primary market areas of California,
Washington, Oregon, Florida, Texas and Utah. As with all banking organizations,
we have also experienced competition from nonbanking sources, including mutual
funds and securities brokerage companies. Recent legislation that removes many
of the restrictions on affiliations among banks, insurance companies and
securities firms is expected to increase competition in the financial services
industry. Our most direct competition for loans comes from other savings
institutions, national mortgage companies, insurance companies, commercial banks
and government-sponsored enterprises ("GSEs"), such as Fannie Mae and Freddie
Mac. Competition from such sources could increase in the future and could
adversely affect our ability to achieve our financial goals. In addition,
competitive factors such as the lower cost structure of less regulated
originators and the influence of the GSEs in establishing rates heavily
influence our lending activities.
THE CONCENTRATION OF OPERATIONS IN CALIFORNIA MAY ADVERSELY AFFECT OUR RESULTS
OF OPERATIONS IF THE CALIFORNIA ECONOMY OR REAL ESTATE MARKET DECLINES
At December 31, 1999, 54% of our loan portfolio and 72% of our deposits
were concentrated in California. As a result, our financial condition and
results of operations will be particularly subject to the conditions in the
single-family and multi-family residential markets in California. If economic
conditions generally, or in California in particular, worsen or if the market
for residential real estate declines, we may suffer decreased net income or
losses associated with higher default rates and decreased collateral values on
our existing portfolio. We might also not be able to originate the volume or
type of loans or achieve the level of deposits that we currently anticipate.
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The forward-looking statements regarding our results of operations assume
that the California economy and real estate market will remain healthy. A
worsening of current economic conditions or a significant decline in real estate
values in California could cause actual results to vary materially from the
forward-looking statements.
BUSINESS COMBINATIONS
Most of our growth since 1988 has occurred as a result of banking business
combinations. The following table summarizes our business combinations since
April 1988:
NUMBER OF
ACQUISITION NAME DATE ACQUIRED LOANS DEPOSITS ASSETS LOCATIONS
---------------- -------------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
Columbia Federal Savings Bank and
Shoreline Savings Bank............. April 29, 1988 $ 551.0 $ 555.0 $ 752.6 26
Old Stone Bank(1).................... June 1, 1990 229.5 292.6 294.0 7
Frontier Federal Savings
Association(2)..................... June 30, 1990 -- 95.6 -- 6
Williamsburg Federal Savings
Bank(2)............................ Sept. 14, 1990 -- 4.3 -- 3
Vancouver Federal Savings Bank....... July 31, 1991 200.1 253.4 260.7 7
CrossLand Savings, FSB(2)............ Nov. 8, 1991 -- 185.4 -- 15
Sound Savings and Loan Association... Jan. 1, 1992 16.8 20.5 23.5 1
World Savings and Loan
Association(2)..................... March 6, 1992 -- 37.8 -- 2
Great Northwest Bank................. April 1, 1992 603.2 586.4 710.4 17
Pioneer Savings Bank................. March 1, 1993 624.5 659.5 926.5 17
Pacific First Bank, A Federal Savings
Bank............................... April 9, 1993 3,770.7 3,831.7 5,861.3 129
Far West Federal Savings Bank(2)..... April 15, 1994 -- 42.2 -- 3
Summit Savings Bank.................. Nov. 14, 1994 127.5 169.3 188.1 4
Olympus Bank, a Federal Savings
Bank............................... April 28, 1995 237.8 278.6 391.4 11
Enterprise Bank...................... Aug. 31, 1995 92.8 138.5 153.8 1
Western Bank......................... Jan. 31, 1996 500.8 696.4 776.3 42
Utah Federal Savings Bank............ Nov. 30, 1996 88.9 106.7 122.1 5
American Savings Bank, F.A........... Dec. 20, 1996 14,562.9 12,815.4 21,893.5 224
United Western Financial Group....... Jan. 15, 1997 272.7 299.9 404.1 16
Great Western Financial
Corporation........................ July 1, 1997 32,448.3 27,785.1 43,769.8 1,138
H.F. Ahmanson & Company(3)........... Oct. 1, 1998 33,939.1 33,974.6 50,354.7 436
Industrial Bank...................... Dec. 31, 1998 11.1 26.1 27.2 1
Long Beach Financial Corporation..... Oct. 1, 1999 414.7 -- 821.4 66
Alta Residential Mortgage Trust...... Feb. 1, 2000 156.0 -- 158.1 1
- ---------------
(1) This was an acquisition of selected assets and/or liabilities.
(2) The acquisition was of branches and deposits only. The only assets acquired
were branch facilities or loans collateralized by acquired savings deposits.
(3) Includes loans, deposits and assets acquired by Ahmanson from Coast.
See "Notes to Consolidated Financial Statements -- Note 2: Business
Combinations/Restructuring" for a discussion of accounting treatment for certain
of the acquisitions.
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TAXATION
General
For federal income tax purposes, we report income and expenses using the
accrual method of tax accounting on a calendar year basis. We are subject to
federal income tax, under existing provisions of the Internal Revenue Code of
1986, as amended (the "Code"), in generally the same manner as other
corporations.
Tax Bad Debt Reserve Recapture
The Small Business Job Protection Act of 1996 (the "Job Protection Act")
requires that qualified thrift institutions, such as WMBFA, WMB and WMBfsb,
generally recapture for federal income tax purposes that portion of the balance
of their tax bad debt reserves that exceeds the December 31, 1987 balance, with
certain adjustments. Such recaptured amounts generally are to be taken into
ordinary income ratably over a six-year period beginning in 1997. Accordingly,
we have paid or will have to pay approximately an additional $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.
State Income Taxation
The states of California, Oregon, Florida, Texas, Utah and Idaho, as well
as many other states in which we do business, have corporate income taxes, which
are imposed on companies doing business in those states. Our operations in
California, Oregon and Florida result in substantial corporate income tax
expense in those states. As our operations in the remaining states increase, the
corporate income taxes will have an increasing effect on our results of
operations or financial condition.
The state of Washington does not currently have a corporate income tax.
Washington imposes on businesses a business and occupation tax based on a
percentage of gross receipts. Currently, the tax does not apply to interest
received on loans secured by first mortgages or deeds of trust on residential
properties. However, it is possible that legislation might be introduced in the
future that would repeal or limit this exemption.
Assistance Agreement
As a result of the acquisition of American Savings Bank in 1996, we are
parties to an agreement (the "Assistance Agreement") with a predecessor of the
Federal Savings & Loan Insurance Corporation Resolution Fund (the "FRF"). The
Assistance Agreement provides, in part, for the payment to the FRF over time of
75% of most of the federal tax savings and 19.5% of most of the California tax
savings (in each case computed in accordance with specific provisions contained
in the Assistance Agreement) attributable to the utilization of certain tax loss
carryforwards of New West Federal Savings and Loan Association. The provision
for such payments is reflected in the financial statements as "Income Taxes."
See "Notes to Consolidated Financial Statements -- Note 15: Income Taxes."
ENVIRONMENTAL REGULATION
Our business and properties are subject to federal and state laws and
regulations governing environmental matters, including the regulation of
hazardous substances and wastes. For example, under the federal Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and similar
state laws, owners and operators of contaminated properties may be liable for
the costs of cleaning up hazardous substances without regard to whether such
persons actually caused the contamination. Such laws may affect us both as an
owner of properties used in or held for our business, and as a secured lender of
property that is found to contain hazardous substances or wastes.
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
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beyond the protection of the secured party's interest. Recent federal and state
legislation, as well as guidance issued by the United States Environmental
Protection Agency and a number of court decisions, have provided assurance to
lenders regarding the activities they may undertake and remain within CERCLA's
secured party exemption. However, these assurances are not absolute and
generally will not protect a lender or fiduciary that participates or otherwise
involves itself in the management of its borrower, particularly in foreclosure
proceedings. As a result, CERCLA and similar state statutes may influence our
decision whether to foreclose on property that is found to be contaminated. Our
general policy is to obtain an environmental assessment prior to foreclosure of
commercial property. The existence of hazardous substances or wastes on such
property may cause us to elect not to foreclose on the property, thereby
limiting, and in some instances precluding, us from realizing on such loans.
REGULATION AND SUPERVISION
References in this section to applicable statutes and regulations are brief
and incomplete summaries only. You should consult the statutes and regulations
for a full understanding of the details of their operation.
General
As a savings and loan holding company, WMI is subject to regulation by the
Office of Thrift Supervision ("OTS"). WMBFA and WMBfsb are federal savings
associations and are subject to extensive regulation and examination by the OTS,
which is their primary federal regulator. Their deposit accounts are insured by
the Federal Deposit Insurance Corporation ("FDIC") through the Savings
Association Insurance Fund (the "SAIF") and, to a lesser extent, in the case of
WMBFA, the Bank Insurance Fund (the "BIF"). The FDIC also has some authority to
regulate WMBFA and WMBfsb. WMB is subject to regulation and supervision by the
Director of Financial Institutions of the State of Washington ("State
Director"). The FDIC insures the deposit accounts of WMB through both the BIF
and the SAIF. The FDIC examines and regulates WMB and other state-chartered
banks that are not members of the Federal Reserve System ("FDIC-regulated
banks"). Federal and state laws and regulations govern, among other things,
investment powers, deposit activities, borrowings, maintenance of guaranty funds
and retained earnings.
PRIMARY
FEDERAL STATE INSURANCE
ENTITY CHARTER REGULATOR REGULATOR FUND(S)
------ ---------- --------- ----------------- ---------
WMI................................ State (WA) OTS n.a. n.a.
WMBFA.............................. Federal OTS None SAIF, BIF
WMB................................ State (WA) FDIC WA State Director BIF, SAIF
WMBfsb............................. Federal OTS None SAIF
We also own a small industrial bank, First Community Industrial Bank
("FCIB"), in Denver, Colorado. FCIB is a state-chartered institution that is
regulated by Colorado state authorities in addition to the FDIC. State law
specifies the investments that this institution may make and the activities in
which it may engage.
State and federal laws govern our consumer finance subsidiaries. Federal
laws apply to various aspects of their lending practices. State laws establish
applicable licensing requirements, provide for periodic examinations and
establish maximum finance charges on credit extensions.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "1999 Act"). The 1999 Act significantly reforms
various aspects of the financial services business. The 1999 Act includes
provisions which:
- establish a new framework under which bank holding companies and, subject
to numerous restrictions, banks can own securities firms, insurance
companies and other financial companies;
- generally subject banks to the same securities regulation as other
providers of securities products;
- prohibit new unitary savings and loan holding companies from engaging in
nonfinancial activities or affiliating with nonfinancial entities;
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- provide consumers with new protections regarding the transfer and use of
their nonpublic personal information by financial institutions; and
- change the FHLB system in numerous ways, which are described in more
detail below.
The provisions in the 1999 Act permitting full affiliations between bank
holding companies or banks and other financial companies do not increase our
authority to affiliate. As a unitary savings and loan holding company, we were
generally permitted to have such affiliations prior to the enactment of the 1999
Act. It is expected, however, that these provisions will benefit our
competitors.
The provisions subjecting banks to securities regulation are not expected
to significantly affect us since primarily all of our securities business is
through securities subsidiaries that are already subject to such regulation.
Some new provisions restricting or regulating ownership of insurance companies
by banks apply also to savings institutions, and may hinder WMBFA, WMBfsb or WMB
from acquiring certain insurance companies.
The prohibition on the ability of new unitary savings and loan holding
companies to engage in nonfinancial activities or affiliating with nonfinancial
entities generally applies only to savings and loan holding companies that were
not, or had not submitted an application to become, savings and loan holding
companies as of May 4, 1999. Since we were treated as a unitary savings and loan
holding company prior to that date, the 1999 Act will not prohibit us from
engaging in nonfinancial activities or acquiring nonfinancial subsidiaries.
However, the 1999 Act generally restricts any nonfinancial entity from acquiring
us unless such nonfinancial entity was, or had submitted an application to
become, a savings and loan holding company as of May 4, 1999.
Management does not believe that complying with the new consumer privacy
provision will have a significant impact on our business.
Changes to the FHLB system in the 1999 Act included a change in the manner
of calculating the Resolution Funding Corporation ("REFCORP") obligations
payable by the FHLBs; a broadening in the purposes for which FHLB advances may
be used; and removal of the requirement that federal savings associations be
FHLB members. Previously, the aggregate amount of the annual REFCORP obligation
paid by all FHLBs was $300 million. The 1999 Act imposes an annual obligation
equal to 20% of the net earnings of the FHLBs. This change will result in a
greater obligation in years where FHLBs have high income levels, thereby
reducing the return on members' investments. The broadening in the purpose for
which FHLB advances can be used could result in higher borrowing costs because
of increased demand for advances.
Holding Company Regulation
WMI is a multiple savings and loan holding company, as defined by federal
law, because it owns three savings associations: WMB, WMBFA and WMBfsb. WMB is a
state-chartered savings bank that has elected to be treated as a savings
association for purposes of the federal savings and loan holding company law.
WMI is regulated as a unitary savings and loan holding company because WMBFA and
WMBfsb are deemed to have been acquired in supervisory transactions. Therefore,
certain restrictions under federal law on the activities and investments of
multiple savings and loan holding companies do not apply to WMI. These
restrictions will apply to WMI if WMB, WMBFA or WMBfsb fails to be a qualified
thrift lender ("QTL"). By this we mean generally that:
- at least 65% of a specified asset base must consist of: loans to small
businesses, credit card loans, educational loans, or certain assets
related to domestic residential real estate, including residential
mortgage loans and mortgage securities, or
- at least 60% of total assets must consist of cash, U.S. Government or
government agency debt or equity securities, fixed assets, or loans
secured by: deposits, real property used for residential, educational,
church, welfare or health purposes, or real property in certain urban
renewal areas.
WMB, WMBFA and WMBfsb are currently in compliance with QTL standards.
Failure to remain a QTL would restrict the ability of WMBFA, WMBfsb or WMB to
obtain advances from the FHLB. Failure to
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remain a QTL also would restrict the ability of WMBFA or WMBfsb to establish new
branches and pay dividends.
The OTS has proposed a regulation that could affect WMI's treatment as a
unitary savings and loan holding company. See "-- Recent and Proposed Federal
Legislation and Regulation."
Acquisitions by Savings and Loan Holding Companies. Neither WMI nor any
other person may acquire control of a savings institution or a savings and loan
holding company without the prior approval of the OTS, or, if the acquiror is an
individual, the OTS' lack of disapproval. In either case, the public must have
an opportunity to comment on the proposed acquisition, and the OTS must complete
an application review. Without prior approval from the OTS, WMI may not acquire
more than 5% of the voting stock of any savings institution that is not one of
its subsidiaries.
Annual Reporting; Examinations. Under the Home Owners' Loan Act ("HOLA")
and OTS regulations WMI, as a savings and loan holding company, must file
periodic reports with the OTS. In addition, WMI must comply with OTS
recordkeeping requirements.
WMI is subject to holding company examination by the OTS. The OTS may take
enforcement action if the activities of a savings and loan holding company
constitute a serious risk to the financial safety, soundness or stability of a
subsidiary savings association.
Commonly Controlled Depository Institutions; Affiliate
Transactions. Depository institutions are "commonly controlled" if they are
controlled by the same holding company or if one depository institution controls
another depository institution. WMI controls WMB, WMBFA, WMBfsb and FCIB. The
FDIC has authority to require FDIC-insured banks and savings associations to
reimburse the FDIC for losses it incurs in connection either with the default of
a "commonly controlled" depository institution or with the FDIC's provision of
assistance to such an institution.
WMB, WMBFA and WMBfsb, as holding company subsidiaries that are depository
institutions, are subject to both qualitative and quantitative limitations on
the transactions they conduct with WMI and its other subsidiaries.
Capital Adequacy. WMI is not subject to any regulatory capital
requirements, but each of its subsidiary depository institutions is subject to
various capital requirements. See "-- Capital Requirements."
Subsidiary Savings Institution Regulation
As federally-chartered savings associations, WMBFA and WMBfsb are subject
to regulation and supervision by the OTS. As a state-chartered savings bank, WMB
is subject to regulation and supervision by the State Director and the FDIC.
Federal Regulation and Supervision of WMBFA and WMBfsb. Federal statutes
empower federal savings institutions, such as WMBFA and WMBfsb, to conduct,
subject to various conditions and limitations, business activities that include
the following:
- accept deposits and pay interest on them;
- make loans on residential and other real estate;
- make a limited amount of consumer loans;
- make a limited amount of commercial loans;
- invest in corporate obligations, government debt securities, and other
securities;
- offer various trust and banking services to their customers; and
- own subsidiaries that invest in real estate and carry on certain other
activities.
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OTS regulations further delineate such institutions' investment and lending
powers. Federal savings institutions generally may not invest in
noninvestment-grade debt securities, nor may they generally make equity
investments, other than investments in service corporations.
State Regulation and Supervision. Washington state statutes empower savings
banks, such as WMB, to conduct, subject to various conditions and limitations,
business activities that include the following:
- accept deposits and pay interest on them;
- make loans on or invest in residential and other real estate;
- make consumer loans;
- make commercial loans;
- invest in corporate obligations, government debt securities, and other
securities;
- offer various trust and banking services to their customers; and
- own subsidiaries that engage in a wide variety of activities.
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.
Federal Prohibitions on Exercise of State Bank Powers. Federal law
prohibits 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 federal law and the FDIC.
Federal Restrictions on Transactions with Affiliates. All banks and savings
institutions are subject to affiliate and insider transaction rules applicable
to member banks of the Federal Reserve System set forth in Sections 23A, 23B,
22(g) and 22(h) of the Federal Reserve Act, as well as such additional
limitations as the institution's primary federal regulator may adopt. These
provisions prohibit or limit a savings institution from extending credit to, or
entering into certain transactions with affiliates, principal stockholders,
directors and executive officers of the savings institution and its affiliates.
For these purposes, the term "affiliate" generally includes a holding company
such as WMI and any company under common control with the savings institution.
In addition, the federal law governing unitary savings and loan holding
companies flatly prohibits WMB, WMBFA or WMBfsb from making any loan to any
affiliate whose activity is not permitted for a subsidiary of a bank holding
company. This law also prohibits WMB, WMBFA or WMBfsb from making any equity
investment in any affiliate that is not its subsidiary. We currently are in
material compliance with all these provisions.
Restrictions on Subsidiary Savings Institution Dividends. WMI's principal
sources of funds are cash dividends paid to it by its banking and other
subsidiaries, investment income and borrowings. Federal and state law limits the
ability of a depository institution, such as WMB, WMBFA or WMBfsb, to pay
dividends or make other capital distributions.
Washington state law prohibits WMB from declaring or paying a dividend
greater than its retained earnings if doing so would cause its net worth to be
reduced below (i) the amount required for the protection of preconversion
depositors or (ii) the net worth requirements, if any, imposed by the State
Director.
OTS regulations limit the ability of savings associations such as WMBFA and
WMBfsb to pay dividends and make other capital distributions. Associations (such
as WMBFA and WMBfsb) that are subsidiaries of a savings and loan holding company
must file a notice with the OTS at least 30 days before the proposed declaration
of a dividend or approval of the proposed capital distribution by its board of
directors. In addition, a savings association must obtain prior approval from
the OTS if it fails to meet certain regulatory conditions, if, after giving
effect to the proposed distribution, the association's capital distributions in
a calendar year would exceed its year-to-date net income plus retained net
income for the preceding two years or the
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association would not be at least adequately capitalized or if the distribution
would violate a statute, regulation, regulatory agreement or a regulatory
condition to which the association is subject.
FDIC Insurance
The FDIC insures the deposits of each of our banking subsidiaries to the
applicable maximum in each institution. The FDIC administers two separate
deposit insurance funds, the BIF and the SAIF. The BIF is a deposit insurance
fund for commercial banks and some state-chartered savings banks. The SAIF is a
deposit insurance fund for most savings associations. WMB and FCIB are members
of the BIF, but a portion of WMB's deposits is insured through the SAIF. WMBFA
and WMBfsb are members of the SAIF, but a portion of WMBFA's deposits is insured
through the BIF. WMB and WMBFA are subject to payment of assessments ratably to
both funds.
The FDIC has established a risk-based system for setting deposit insurance
assessments. Under the risk-based assessment system, an institution's insurance
assessments vary according to the level of capital the institution holds and the
degree to which it is the subject of supervisory concern. In addition,
regardless of the potential risk to the insurance fund, federal law requires the
FDIC to establish assessment rates that will maintain each insurance fund's
ratio of reserves to insured deposits at $1.25 per $100. Both funds currently
meet this reserve ratio. During 1999, the assessment rate for both SAIF and BIF
deposits ranged from zero to 0.27% of covered deposits. WMB, WMBFA and FCIB
qualified for the lowest rate on their BIF deposits in 1999, and WMB, WMBFA and
WMBfsb qualified for the lowest rate on their SAIF deposits in 1999.
Accordingly, none of these institutions paid any deposit insurance assessments
in 1999.
In addition to deposit insurance assessments, the FDIC is authorized to
collect assessments against insured deposits to be paid to the Finance
Corporation ("FICO") to service FICO debt incurred in the 1980s. The FICO
assessment rate is adjusted quarterly.
Before 2000, the FICO assessment rate for SAIF-insured deposits was five
times higher than the rate for BIF-insured deposits. The average annual
assessment rate in 1999 was 5.925 cents per $100 of SAIF-insured deposits and
1.185 cents per $100 of BIF-insured deposits. Beginning in 2000, SAIF- and
BIF-insured deposits will be assessed at the same rate by FICO. For the first
quarter of 2000, the annualized rate will be 2.12 cents per $100 of insured
deposits. Because we have substantially more SAIF-insured deposits than
BIF-insured deposits, this change will result in an overall reduction of the
amount of our FICO assessments.
Capital Requirements
Each of our subsidiary depository institutions is subject to various
capital requirements. WMB and FCIB are each subject to FDIC capital
requirements, while WMBFA and WMBfsb are subject to OTS capital requirements.
WMB and FCIB. FDIC regulations recognize two types or tiers of capital:
core ("Tier 1") capital and supplementary ("Tier 2") capital. Tier 1 capital
generally includes common stockholders' equity and noncumulative perpetual
preferred stock less most intangible assets. Tier 2 capital, which is limited to
100% of Tier 1 capital, includes such items as qualifying general loan loss
reserves, cumulative perpetual preferred stock, mandatory convertible debt, term
subordinated debt and limited life preferred stock; however, the amount of term
subordinated debt and intermediate term preferred stock that may be included in
Tier 2 capital is limited to 50% of Tier 1 capital.
The FDIC uses a combination of risk-based guidelines and leverage ratios to
evaluate capital adequacy. Under the risk-based capital guidelines, different
categories of assets are assigned different risk weights, based generally on the
perceived credit risk of the asset. For example, U.S. Treasury Bills and GNMA
securities are placed in the 0% risk category, 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.
These risk weights are multiplied by corresponding asset balances to determine a
risk-weighted asset base. Certain off-balance
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sheet items are added to the risk-weighted asset base by converting them to a
balance sheet equivalent and assigning them the appropriate risk weight in one
of four categories.
Under FDIC guidelines, the ratio of total capital (Tier 1 capital plus Tier
2 capital) to risk-weighted assets must be at least 8.00%, and the ratio of Tier
1 capital to risk-weighted assets must be at least 4.00%.
In addition to the risk-based capital guidelines, the FDIC uses a leverage
ratio to evaluate a bank's capital adequacy. Most banks are required to maintain
a minimum leverage ratio of Tier 1 capital to total assets of 4.00%. The FDIC
retains the right to require a particular institution to maintain a higher
capital level based on the institution's particular risk profile.
The FDIC may consider other factors that may affect a bank's financial
condition. These factors may include interest rate risk exposure, liquidity,
funding and market risks, the quality and level of earnings, concentration of
credit risk, risks arising from nontraditional activities, loan and investment
quality, the effectiveness of loan and investment policies, and management's
ability to monitor and control financial operating risks.
The following table sets forth the current regulatory requirement for
capital ratios for FDIC regulated banks as compared with our capital ratios at
December 31, 1999:
TIER 1 CAPITAL TO TIER 1 CAPITAL TO TOTAL CAPITAL TO
AVERAGE TOTAL ASSETS RISK-WEIGHTED ASSETS RISK-WEIGHTED ASSETS
-------------------- -------------------- --------------------
Regulatory Minimum........... 4.00% 4.00% 8.00%
WMB's Actual................. 5.67 10.18 10.90
FCIB's Actual................ 16.15 20.87 22.13
WMBFA and WMBfsb. The OTS requires savings associations, such as WMBFA and
WMBfsb, to meet each of three separate capital adequacy standards:
- a core capital leverage requirement;
- a tangible capital requirement; and
- a risk-based capital requirement.
For a limited time, core capital may include certain amounts of qualifying
supervisory goodwill.
OTS regulations incorporate a risk-based capital requirement that is
designed to be no less stringent than the capital standard applicable to
national banks. It is modeled in many respects on, but not identical to, the
risk-based capital requirements adopted by the FDIC. Associations whose exposure
to interest-rate risk is deemed to be above normal will be required to deduct a
portion of such exposure in calculating their risk-based capital. The OTS may
establish, on a case-by-case basis, individual minimum capital requirements for
a savings association that vary from the requirements that otherwise would apply
under the OTS capital regulations. The OTS has not established such individual
minimum capital requirements for WMBFA or WMBfsb.
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The following table sets forth the current regulatory requirement for
capital ratios for savings associations as compared with our capital ratios at
December 31, 1999:
TIER 1 CAPITAL TANGIBLE CAPITAL TIER 1 CAPITAL TO TOTAL CAPITAL TO
TO ADJUSTED TO ADJUSTED RISK-WEIGHTED RISK-WEIGHTED
TOTAL ASSETS TOTAL ASSETS ASSETS ASSETS
-------------- ---------------- ----------------- ----------------
Regulatory Minimum............. 3.00%(1) 1.50% 4.00% 8.00%
WMBFA's Actual................. 5.53 5.53 9.95 11.15
WMBfsb's Actual................ 8.58 8.58 13.94 15.21
- ---------------
(1) Most savings associations are required to maintain a minimum leverage ratio
of 4.00%.
FDICIA Requirements and Prompt Corrective Action
FDICIA created a statutory framework that increased the importance of
meeting applicable capital requirements. FDICIA established five capital
categories:
- well-capitalized;
- adequately capitalized;
- undercapitalized;
- significantly undercapitalized; and
- critically undercapitalized.
An institution's category depends upon where its capital levels are in
relation to relevant capital measures, which include a risk-based capital
measure, a leverage ratio capital measure, and certain other factors. The
federal banking agencies (including the FDIC and the OTS) have adopted
regulations that implement this statutory framework. Under these regulations, an
institution is treated as well-capitalized if its ratio of total capital to
risk-weighted assets is 10.00% or more, its ratio of core capital to
risk-weighted assets is 6.00% or more, its ratio of core capital to adjusted
total assets is 5.00% or more, and it is not subject to any federal supervisory
order or directive to meet a specific capital level. In order to be adequately
capitalized, an institution must have a total risk-based capital ratio of not
less than 8.00%, a Tier 1 risk-based capital ratio of not less than 4.00%, and a
leverage ratio of not less than 4.00%. Any institution that is neither well
capitalized nor adequately capitalized will be considered undercapitalized.
Federal law requires that the federal banking agencies risk-based capital
guidelines take into account various factors including interest rate risk,
concentration of credit risk, risks associated with nontraditional activities,
and the actual performance and expected risk of loss of multi-family mortgages.
In 1994, the federal banking agencies jointly revised their capital standards to
specify that concentration of credit and nontraditional activities are among the
factors that the agencies will consider in evaluating capital adequacy. In that
year, the OTS and 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.
Other FDIC and OTS Regulations and Examination Authority
The FDIC has adopted regulations to protect the deposit insurance funds and
depositors, including regulations governing the deposit insurance of various
forms of accounts. The FDIC also has adopted
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numerous regulations to protect the safety and soundness of FDIC-regulated
banks. These regulations cover a wide range of subjects including financial
reporting, change in bank control, affiliations with securities firms and
capital requirements. In certain instances, these regulations restrict the
exercise of powers granted by state law.
An FDIC regulation and a joint FDIC/OTS policy statement place a number of
restrictions on the activities of WMB's and WMBFA's securities affiliates and on
such affiliates' transactions with WMB, WMBFA and WMBfsb. These restrictions
include requirements that such affiliates follow practices and procedures to
distinguish them from WMB, WMBFA and WMBfsb and that such affiliates give
customers notice from time to time of their separate corporate status and of the
distinction between insured deposits and uninsured nondeposit products.
FDICIA imposes supervisory standards requiring periodic OTS or FDIC
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 law and regulations require that WMBFA and WMBfsb maintain liquid
assets in excess of a specified limit. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity."
Federal regulation of depository institutions is intended for the
protection of depositors (and the BIF and the SAIF), and not for the protection
of stockholders or other creditors. In addition, a provision in the 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 U.S.
branches (including claims of the FDIC as subrogee of the insured institution)
shall have priority over the claims of general unsecured creditors.
Federal Reserve Regulation
Under Federal Reserve Board regulations, WMB, WMBFA, WMBfsb and FCIB are
each required to maintain reserves against their transaction accounts (primarily
interest-bearing and noninterest-bearing checking accounts). Because reserves
must generally be maintained in cash or in noninterest-bearing accounts, the
effect of the reserve requirements is to increase an institution's cost of
funds. These regulations generally require that WMB, WMBFA, WMBfsb and FCIB each
maintain reserves against net transaction accounts in the amount of 3% on
amounts of $44.3 million or less, plus 10% on amounts in excess of $44.3
million. Institutions may designate and exempt $5.0 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.
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Numerous other regulations promulgated by the Federal Reserve Board affect
the business operations of our banking subsidiaries. These include regulations
relating to equal credit opportunity, electronic fund transfers, collection of
checks, truth in lending, truth in savings and availability of funds.
Community Reinvestment Act
The Community Reinvestment Act ("CRA") requires financial institutions
regulated by the federal financial supervisory agencies to ascertain and help
meet the credit needs of their delineated communities, including low- to
moderate-income neighborhoods within those communities, while maintaining safe
and sound banking practices. The regulatory agency assigns one of four possible
ratings to an institution's CRA performance and is required to make public an
institution's rating and written evaluation. The four possible ratings of
meeting community credit needs are outstanding, satisfactory, needs to improve,
and substantial noncompliance. In 1999, WMBFA and WMBfsb each received an
"outstanding" CRA rating from the OTS, and WMB and FCIB received an
"outstanding" CRA rating from the FDIC. These ratings reflect our commitment to
meeting the credit needs of the communities we serve.
Under regulations that apply to all CRA performance evaluations after July
1, 1997, many factors play a role in assessing a financial institution's CRA
performance. The institution's regulator must consider its financial capacity
and size, legal impediments, local economic conditions and demographics,
including the competitive environment in which it operates. The evaluation does
not rely on absolute standards, and the institutions are not required to perform
specific activities or to provide specific amounts or types of credit. We
maintain a CRA statement for public viewing, as well as an annual CRA highlights
document. These documents describe our credit programs and services, community
outreach activities, public comments and other efforts to meet community credit
needs.
In May 1998, we announced a ten-year, $120 billion community reinvestment
commitment to the communities in which we do business. This commitment replaces
prior commitments made by us and the companies we have acquired.
The $120 billion commitment targets single-family lending, small business
and consumer lending, multi-family lending and community investment at the
following levels:
- Single-family lending -- $81.6 billion in affordable housing loans to
minority racial and ethnic borrowers, borrowers in low- to
moderate-income census tracts and borrowers earning less than 80% of
median income. Of this amount, $30 billion will target low- to
moderate-income borrowers.
- Small business and consumer lending -- $25 billion in loans to small
businesses and consumers with low to moderate incomes, including consumer
loans and lines of credit to borrowers with low to moderate incomes and
in low- to moderate-income census tracts and to small businesses with an
emphasis on loans and lines of credit of $50,000 or less and on loans to
people of color, women and disabled persons.
- Multi-family lending -- $12.1 billion for apartment and manufactured home
park developments in low- to moderate-income census tracts or serving
families earning less than 80% of median income.
- Community investment -- $1.3 billion in investments and loans to
community development and low-income housing initiatives, tax-exempt
housing revenue bonds, minority financial institutions and community
banks and financial institutions targeting minority racial and ethnic
communities or other community needs.
We will strive to return to our neighborhoods the greater of (a) 2% of
pretax earnings or (b) 3% of after-tax earnings plus 10% of the net recovery
from the resolution of Ahmanson's goodwill litigation against the U.S.
Government. These funds will be returned through grants, sponsorships, loans at
below market rates, in-kind donations, paid employee volunteer time, and other
financial support of our efforts to develop our communities.
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Recent and Proposed Federal Legislation and Regulation
The 1999 Act, parts of which take effect in 2000, is summarized in
"Regulation and Supervision -- General."
In February 1999, the OTS proposed a regulation which could affect WMI's
treatment as a unitary savings and loan holding company. If a holding company
owns more than one savings association, it is a multiple savings and loan
holding company ("SLHC"); if it owns only one savings association, it is a
unitary SLHC. HOLA generally restricts multiple SLHC's and their non-association
subsidiaries to traditional savings association activities and services and to
activities permitted bank holding companies. These restrictions do not apply to
unitary SLHC's. In addition, these restrictions do not apply to a multiple SLHC
if all, or all but one, of its subsidiary savings associations were acquired in
transactions involving a sale or transfer from an ailing or failing institution.
Such savings associations are sometimes referred to as "supervisory"
acquisitions, and a multiple SLHC is sometimes referred to as an "exempt"
multiple SLHC if all, or all but one, of its subsidiary associations are
supervisory acquisitions. The OTS proposal states that, under certain
circumstances, an exempt multiple SLHC could lose its exempt status if it or one
of its supervisory subsidiary associations is involved in a merger.
WMI has had the status of an exempt multiple SLHC because two of its three
subsidiary associations -- WMBFA and WMBfsb -- have been deemed supervisory
acquisitions. However, both WMBFA and WMBfsb, as well as WMI, have been involved
in subsequent merger transactions. Accordingly, it is possible that, if the
proposed regulation were adopted, the OTS could assert that WMI is not an exempt
multiple SLHC. If that were to occur, WMI would have to merge its subsidiary
associations or discontinue activities, including real estate development
activities, not permitted to multiple SLHC's. In either case management would
not expect these actions to have a material adverse affect on our results of
operations or financial condition.
Regulation of Nonbanking Affiliates
As broker-dealers registered with the Securities and Exchange Commission
("SEC") and as members of the National Association of Securities Dealers, Inc.
("NASD"), WM Financial Services and our mutual fund distributor subsidiary are
subject to various regulations and restrictions imposed by those entities, as
well as by various state authorities. As our registered investment advisor, WM
Advisors is subject to various federal and state securities regulations and
restrictions.
The NASD has adopted rules concerning NASD member operations conducted in
branches of depository institutions. The NASD requirements are substantially
similar to the policy statements governing the activities of our securities
affiliates previously issued by the various banking regulators.
Our consumer finance subsidiaries are subject to various federal and state
laws and regulations, including those relating to truth-in-lending, equal credit
opportunity, fair credit reporting, real estate settlement procedures, debt
collection practices and usury. The subsidiaries are subject to various state
licensing and examination requirements.
COMPETITIVE ENVIRONMENT
We face significant competition in attracting and retaining deposits and
making loans in all of our market areas. Our most direct competition for
deposits has historically come from savings institutions, credit unions and
commercial banks doing business in our primary market areas of California,
Washington, Oregon, Florida, Texas and Utah. As with all banking organizations,
however, we have also experienced competition from nonbanking sources, including
mutual funds, corporate and governmental debt securities and other investment
alternatives. Our most direct competition for loans comes from other savings
institutions, national mortgage companies, insurance companies, commercial banks
and GSEs. Our competitors' activities may make it difficult for us to achieve
our financial goals. In addition, effective June 1, 1997, federal legislation
repealed certain restrictions on the establishment of interstate branches by
national banks and state-chartered banks. Bank holding companies are now also
generally permitted to buy banks in any state. WMBFA and
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WMBfsb already had authority to establish interstate branches under existing
federal law and regulations, so management expects that such legislation will
primarily benefit our competitors.
Although consolidation has decreased the number of institutions competing
in our markets, 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, we remain a strong market force.
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................... 50 Chairman of the Board of Directors, 1983
President and Chief Executive Officer
Fay L. Chapman....................... 53 Senior Executive Vice President and General 1997
Counsel
Craig S. Davis....................... 48 President, Mortgage Banking and Financial 1996
Services Groups
William W. Ehrlich................... 33 Executive Vice President 1993
Steven P. Freimuth................... 43 Senior Executive Vice President, Corporate 1988
Services
William A. Longbrake................. 56 Vice Chair and Chief Financial Officer 1996
Deanna W. Oppenheimer................ 41 President, Consumer Banking Group 1985
Craig E. Tall........................ 54 Vice Chair, Corporate Development, Consumer 1985
Finance and Commercial Banking
S. Liane Wilson...................... 57 Vice Chair, Corporate Technology 1985
Richard M. Levy...................... 41 Senior Vice President and Controller 1998
Norman H. Swick...................... 50 Senior Vice President and Chief Risk Officer 1980
Mr. Killinger has been Chairman, President and Chief Executive Officer of
Washington Mutual since 1991. He was named President and a director in 1988,
Chief Executive Officer in 1990 and Chairman in 1991. Mr. Killinger joined
Washington Mutual as an Executive Vice President of WMB in 1983.
Ms. Chapman became an Executive Vice President and General Counsel and
member of Washington Mutual's Executive Committee in September 1997. She became
a Senior Executive Vice President in 1999. Prior to that, Ms. Chapman had been a
partner with Foster Pepper & Shefelman PLLC, a Seattle, Washington law firm,
since 1979.
Mr. Davis became an Executive Vice President and member of the Executive
Committee in January 1997, following our merger with Keystone Holdings. He
became President, Mortgage Banking and Financial Services Groups in 1999. Mr.
Davis is responsible for lending and financial services. He was Director of
Mortgage Origination of American Savings Bank ("ASB") from 1993 through 1996 and
served as President of ASB Financial Services, Inc. from 1989 to 1993.
Mr. Ehrlich became an Assistant Vice President of Corporate Communications
in 1994, a Senior Vice President in 1998 and an Executive Vice President of
Corporate Relations and a member of the Executive Committee in 1999. Mr. Ehrlich
is responsible for overseeing the Company's corporate communications, government
relations and leadership training areas. He joined Washington Mutual as a public
relations consultant in 1990 and then rejoined Washington Mutual in 1993 as a
coordinator in the Mergers and Acquisitions Department.
Mr. Freimuth became an Executive Vice President and member of the Executive
Committee in 1997 and Senior Executive Vice President, Corporate Services in
1999. Mr. Freimuth is responsible for human resources, loan servicing and
corporate credit. He joined WMB as a Vice President in 1988 and became a Senior
Vice President in 1991.
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Mr. Longbrake rejoined Washington Mutual in October 1996 as Executive Vice
President and Chief Financial Officer and a member of the Executive Committee.
He became Vice Chair in 1999. 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.
Ms. Oppenheimer has been an Executive Vice President of Washington Mutual
since 1993 and a member of the Executive Committee since its formation in 1990.
She became President, Consumer Banking Group in 1999. Ms. Oppenheimer is
responsible for corporate marketing and consumer bank distribution. She has been
an officer of Washington Mutual since 1985.
Mr. Tall became an Executive Vice President of Washington Mutual in 1987
and has been a member of the Executive Committee since its formation in 1990. He
became Vice Chair, Corporate Development, Consumer Finance and Commercial
Banking in 1999. Mr. Tall is responsible for corporate development, commercial
banking and consumer finance.
Ms. Wilson became an Executive Vice President of Washington Mutual in 1988
and has been a member of the Executive Committee since its formation in 1990.
She became Vice Chair, Corporate Technology in 1999. Ms. Wilson is responsible
for corporate information technology.
Mr. Levy has been a Senior Vice President and Controller of WMI since
February 1998. In this capacity he is Washington Mutual's principal accounting
officer. Prior to joining the Company, Mr. Levy was Executive Vice President and
Chief Financial Officer of Community Trust Bancorp from 1995 to 1997. Prior to
that, he was the Controller of Bank of America Texas, N.A.
Mr. Swick has been a Senior Vice President of Washington Mutual since 1988.
He became Chief Risk Officer in 1998 and prior to that time was the Company's
General Auditor. In his current capacity, he is responsible for Washington
Mutual's risk management program which identifies and monitors risk throughout
the Company.
ITEM 2. PROPERTIES
As of December 31, 1999, our banking subsidiaries conducted business from
1,025 consumer financial centers, 48 Western Bank branches, 33 business banking
centers, 176 home loan centers and 22 wholesale loan centers in 40 states.
Consumer finance operations were conducted in over 600 locations in 38 states.
Washington Mutual's administrative offices are located at 1201 Third
Avenue, Seattle, Washington 98101 where, as of December 31, 1999, we leased
approximately 244,000 square feet pursuant to a lease agreement that starts to
terminate in 2007. We also lease approximately 115,000 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 10,000 square feet in Seattle in the First Interstate Building at
999 Third Avenue pursuant to a lease agreement that terminates in 2003;
approximately 122,000 feet in Seattle in the 1111 Third Avenue Building pursuant
to a lease agreement that terminates in 2004; approximately 62,000 square feet
in the Rainier Tower Building at 1301 Fifth Avenue pursuant to a lease agreement
that starts to terminate in 2003; approximately 86,000 square feet in Seattle in
the Newmark Building at 1401 Second Avenue pursuant to a lease agreement that
terminates in 2009; approximately 40,000 square feet in Seattle in the Century
Square Building at 1501 Fourth Avenue pursuant to a lease agreement that
terminates in 2002; and approximately 110,000 square feet in Bothell, Washington
pursuant to a lease agreement that terminates in 2009. We have options to renew
leases at most locations.
WMBFA administrative and subsidiary operations are conducted from owned
office space totaling 156,000 square feet in Irvine, California; approximately
47,000 square feet in Irvine pursuant to a lease agreement that starts to
terminate in 2004; approximately 327,000 square feet of owned office space in
Chatsworth, California; approximately 644,000 square feet in Chatsworth pursuant
to a lease agreement that starts to terminate in 2003; approximately 252,000
square feet of owned office space in Stockton, California; and approximately
23,000 square feet in Los Angeles pursuant to a lease agreement that starts to
terminate in 2003. We have options to renew leases at most locations.
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In 1999, approximately 1,265,000 square feet of office space on the
Irwindale-Baldwin Park, City of Industry and St. Louis campuses (the "Home
Savings Campuses") were closed and operations were consolidated with similar
operations on other administrative campuses to make more efficient use of the
office space. Approximately 24% of this vacated space was sublet to third
parties during 1999. We anticipate subletting the additional space in 2000.
During 1999, we closed 162 consumer financial centers. At December 31, 1999, 65%
of these sites have been disposed of through sale, sublease or termination of
the lease.
In February 1999, we sold a vacant WMBFA facility that totaled
approximately 385,000 square feet located in Canoga Park, California that had
housed the Coast operations and administrative offices prior to its acquisition
by Home Savings in 1998.
Washington Mutual Finance administrative operations are conducted from
owned office space totaling 71,000 square feet in Tampa, Florida.
Long Beach Mortgage administrative operations are conducted from 81,000
square feet of leased office space located in Orange, California. The facilities
are covered by several leases that, in general, expire in 2001 and 2002, and
have an option to renew for five years.
See "Notes to Consolidated Financial Statements -- Note 7: Premises and
Equipment."
ITEM 3. LEGAL PROCEEDINGS
We have 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 our results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of
1999.
PART II
ITEM 5. MARKET FOR OUR COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Our common stock trades on The New York Stock Exchange under the symbol WM.
Prior to December 9, 1998, our common stock traded on The Nasdaq Stock Market
under the symbol WAMU. As of March 3, 2000, there were 558,327,194 shares issued
and outstanding held by 36,861 shareholders of record. The closing price of our
common stock on March 3, 2000 was $23.13 per share.
Common Stock
The high and low common stock prices by quarter were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
Fourth quarter.......................... $35.94 $25.13 $41.25 $28.50
Third quarter........................... 36.63 27.94 46.06 31.13
Second quarter.......................... 41.94 34.63 50.92 40.94
First quarter........................... 45.25 38.44 49.95 36.75
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Cash dividends paid per share were as follows:
YEAR ENDED
DECEMBER 31,
----------------
1999 1998
------ ------
Fourth quarter............................................. $0.260 $0.220
Third quarter.............................................. 0.250 0.207
Second quarter............................................. 0.240 0.200
First quarter.............................................. 0.230 0.193
Dividend amounts have not been restated to reflect pooling combinations.
Preferred Stock
At December 31, 1999, we had no preferred stock outstanding.
Payment of Dividends and Policy
Payment of future dividends is subject to declaration by the 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 our subsidiaries. Our dividend policy is also dependent on
the ability of WMB, WMBFA and WMBfsb to pay dividends to their respective parent
company, which is influenced by legal, regulatory and economic restrictions. See
"Business -- Regulation and Supervision -- Restrictions on Subsidiary Savings
Institution Dividends."
Our retained earnings at December 31, 1999 included a pre-1988 thrift bad
debt reserve for tax purposes of $2.01 billion for which no federal income taxes
have been provided. In the future, if the thrift bad debt reserve is used for
any purpose other than to absorb bad debt losses, or if any of the banking
subsidiaries no longer qualifies as a bank, we 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, our 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.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA
Interest income.................. $ 12,062,198 $ 11,221,468 $ 10,202,531 $ 9,892,290 $ 9,860,408
Interest expense................. 7,610,408 6,929,743 6,287,038 6,027,177 6,306,724
------------ ------------ ------------ ------------ ------------
Net interest income.............. 4,451,790 4,291,725 3,915,493 3,865,113 3,553,684
Provision for loan losses........ 167,076 161,968 246,642 498,568 344,624
Noninterest income............... 1,508,997 1,507,200 980,535 819,361 1,224,370
Noninterest expense.............. 2,909,551 3,267,500 3,111,117 3,595,271 2,761,174
------------ ------------ ------------ ------------ ------------
Income before income taxes,
cumulative effect of accounting
changes, and minority
interest....................... 2,884,160 2,369,457 1,538,269 590,635 1,672,256
Income taxes..................... 1,067,096 882,525 653,151 201,707 654,593
Cumulative effect of change in
tax accounting method.......... -- -- -- -- 234,742
Minority interest in earnings of
consolidated subsidiaries...... -- -- -- 13,570 15,793
------------ ------------ ------------ ------------ ------------
Net income....................... $ 1,817,064 $ 1,486,932 $ 885,118 $ 375,358 $ 767,128
============ ============ ============ ============ ============
Net income attributable to common
stock.......................... $ 1,817,064 $ 1,470,990 $ 830,087 $ 291,723 $ 673,099
============ ============ ============ ============ ============
Net income per common share:
Basic.......................... $ 3.17 $ 2.61 $ 1.56 $ 0.55 $ 1.23
Diluted........................ 3.16 2.56 1.52 0.54 1.21
Average diluted common shares
used to calculate earnings per
share.......................... 574,553,031 578,562,305 556,759,023 539,058,104 585,045,390
Cash dividends paid per common
share:
Pre-business combinations(1)... $ 0.98 $ 0.82 $ 0.71 $ 0.60 $ 0.51
Post-business
combinations(2)............. 0.98 0.73 0.66 0.65 0.51
Common stock dividend payout
ratio(2)....................... 31.40% 29.32% 40.61% 94.12% 37.26%
Return on average assets......... 1.04 0.96 0.63 0.28 0.56
Return on average stockholders'
equity......................... 19.66 16.62 11.73 4.70 10.02
Return on average common
stockholders' equity........... 19.66 16.67 11.95 3.95 10.14
27
30
DECEMBER 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET DATA
Assets.................... $186,513,630 $165,493,281 $143,522,398 $137,328,541 $137,142,972
Available-for-sale
securities.............. 41,384,318 32,917,053 19,817,226 25,431,464 31,181,617
Held-to-maturity
securities.............. 19,401,465 14,129,482 17,207,854 9,605,367 10,967,204
Loans..................... 113,497,225 108,370,906 97,624,348 92,943,126 85,335,568
Deposits.................. 81,129,768 85,492,141 83,429,433 87,509,358 88,019,469
Borrowings................ 94,326,616 65,200,489 49,976,377 40,014,735 38,261,697
Stockholders' equity...... 9,052,679 9,344,400 7,601,085 7,426,137 8,421,102
Ratio of stockholders'
equity to total
assets.................. 4.85% 5.65% 5.30% 5.41% 6.14%
Diluted book value per
common share............ $ 16.18(3) $ 16.07(3) $ 13.23(3)(4) $ 12.52(3)(4) $ 13.31(4)
Number of common shares
outstanding at end of
period.................. 559,589,272(3) 581,408,525(3) 550,689,721(3)(4) 554,811,012(3)(4) 583,622,187(4)
- ---------------
(1) Amounts paid by acquired companies prior to their combination with the
Company were not included.
(2) Based on dividends paid and earnings of the Company after restatement of
financial statements for transactions accounted for as poolings of
interests.
(3) 12,000,000 shares of common stock issued to an escrow for the benefit of the
general and limited partners of Keystone Holdings and the FSLIC Resolution
Fund and their transferees were not included.
(4) Net of outstanding treasury shares and included potential conversion of
outstanding convertible preferred stock.
28
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto presented elsewhere in
this report.
This section contains forward-looking statements, which are not historical
facts and pertain to our future operating results. These forward-looking
statements are within the meaning of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements include, but are not limited to,
statements about our plans, objectives, expectations and intentions and other
statements contained in this report that are not historical facts. When used in
this report, the words "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates" and similar expressions are generally intended to identify
forward-looking statements. These forward-looking statements are inherently
subject to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond our control. In addition, these
forward-looking statements are subject to assumptions with respect to future
business strategies and decisions that are subject to change. Actual results may
differ materially from the results discussed in these forward-looking statements
for the reasons, among others, discussed under the heading "Business-Risk
Factors" included in this Form 10-K.
OVERVIEW
Our net income for 1999 was $1.82 billion, compared with $1.49 billion in
1998 and $885.1 million in 1997. We had diluted earnings per share of $3.16 in
1999, $2.56 in 1998 and $1.52 in 1997.
Several balance sheet factors affected our net interest income in 1999.
Starting in 1998 and continuing in 1999, we purchased shorter duration
investment grade MBS and whole loans in the secondary market. These investments
have acceptable, but lower returns than loans originated by us and retained in
our portfolio, thus lowering margins. The investments were made to temporarily
deploy excess capital generated by us. After reviewing first quarter 1999
results, management re-evaluated our capital deployment strategy. In April 1999,
the Board of Directors approved a share repurchase program and MBS purchases
were curtailed.
The rise in interest rates during 1999 was another factor that affected our
net interest income. Net interest income was adversely affected by the repricing
lag on our ARM portfolio. In addition, a substantial portion of our borrowings
have interest rates tied to London Interbank Offered Rate ("LIBOR"). As rates
rose, our borrowing cost increased as well. During the fourth quarter, LIBOR
increased substantially as a result of year 2000 liquidity concerns. The
increase in LIBOR during the fourth quarter reduced our net income by
approximately $22.2 million.
Another impact of rising rates was the increase in short-term ARM
originations. This allowed for organic growth in the balance sheet. ARMs
comprised 86% and 90% of our SFR originations in the third quarter and fourth
quarter of 1999, compared with 48% and 41% for the same periods a year ago. ARMs
comprised 73% of our SFR originations for the year ended December 31, 1999,
compared with 44% for 1998. Short-term ARMs generally have one- to three-month
"teaser" rates, which adversely affect returns during the "teaser" period. The
$6.13 billion growth in loans held in portfolio from year-end 1998 was primarily
due to an increase in ARM loan originations and the purchase of whole loans, but
was offset by the securitization of loans and the creation of REMICs. Loan
growth during the latter part of 1999 was enhanced by a decline in loan
prepayment and refinancing activity. Residential mortgage prepayment rates
averaged 19% and 16% during the third and fourth quarters of 1999, down from 25%
and 24% in the first and second quarters of 1999.
Our shareholders' equity was reduced in 1999 as a result of unrealized
losses on our available-for-sale portfolio. Due to an increase in interest rates
during 1999, we had an unrealized loss on available-for-sale securities during
1999 of $755.0 million, which resulted in an unrealized loss balance (net of
tax) of $667.4 million at December 31, 1999. For 1998, we had an unrealized gain
of $25.3 million, which resulted in an unrealized gain balance (net of tax) of
$87.6 million at December 31, 1998.
After reviewing first quarter 1999 results, management re-evaluated our
capital deployment strategy. In April 1999, the Board of Directors approved a
share repurchase program to acquire up to 20 million shares of common stock. In
May 1999, the Board of Directors authorized the repurchase of common shares for
use in
29
32
the acquisition of Long Beach Financial Corporation. In July 1999, the Board of
Directors authorized the repurchase of up to 30 million additional shares.
During 1999, we repurchased 31.5 million common shares at an average price of
$34.30. Approximately 6.3 million shares were used for the acquisition of Long
Beach on October 1, 1999.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income for 1999 was $4.45 billion, compared with $4.29 billion
in 1998 and $3.92 billion in 1997. The net interest margin for 1999 was 2.63%,
compared with 2.88% in 1998 and 2.91% in 1997.
The 1999 increase in net interest income was due to a 13% rise in average
interest-earning assets to $169.04 billion in 1999, compared with $149.08
billion in 1998. The net interest spread, however, declined to 2.48% in 1999
from 2.70% in 1998. The 1998 increase in net interest income was due to an 11%
rise in average interest-earning assets from $134.44 billion in 1997. The net
interest spread declined to 2.70% in 1998 from 2.74% in 1997.
The yield on loans declined 33 basis points to 7.40% for 1999 from 7.73%
for 1998. During 1998, market interest rates declined, which reduced the yield
on new originations as well as on our ARM portfolio and encouraged the
prepayment of loans with higher rates. The impact of rising rates in 1999 on the
existing portfolio was not immediately reflected in the yield on the loan
portfolio due to a lag before rates begin to adjust upward. At December 31,
1999, 1998 and 1997, 85%, 89% and 87% of total real estate loans were adjustable
rate.
The yield on MBS declined 43 basis points to 6.68% for 1999 from 7.11% for
1998. This decline was attributable to prepayments on higher yielding MBS, the
lag in repricing of adjustable-rate MBS, and purchases of $8.50 billion of MBS
to yield a weighted average rate of 6.33% during the fourth quarter of 1998 and
$14.33 billion of MBS purchases to yield a weighted average rate of 6.25% during
the twelve months ended December 31, 1999. Adjustable-rate MBS and CMOs
constituted 57% of total MBS and CMOs at December 31, 1999.
Our interest-sensitive assets have adjustable rates that change with
movements in short- to mid-term market interest rates. This is also true of the
majority of the liabilities contributing to our cost of funds. Market interest
rates declined slightly during 1997, declined further during 1998 and then
remained low within a narrow range during the first half of 1999. In the last
two quarters of 1999, market interest rates significantly increased concurrently
with increases in short-term rates by the Federal Reserve. In addition, in the
fourth quarter of 1999, the spread between LIBOR and Treasury rates widened from
its historical range due to increased short-term borrowings resulting from
concerns regarding year-end liquidity. A substantial portion of our borrowings
are tied to LIBOR and, consequently, our cost of funds during the fourth quarter
was higher than normal. The movement in our yields, rates and net interest
spread reflected these events.
30
33
Average statements of financial condition, together with the total dollar
amounts of interest income and expense and the weighted average interest rates,
were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
INTEREST INTEREST
AVERAGE INCOME OR AVERAGE INCOME OR
BALANCE(1) RATE EXPENSE BALANCE(1) RATE EXPENSE
------------ ---- ----------- ------------ ---- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash equivalents, securities
and FHLB stock.............. $ 56,176,881 6.61% $ 3,714,067 $ 43,484,260 7.02% $ 3,054,699
Loans(2)...................... 112,859,456 7.40 8,348,131 105,595,302 7.73 8,166,769
------------ ----------- ------------ -----------
Total interest-earning
assets................ 169,036,337 7.14 12,062,198 149,079,562 7.53 11,221,468
Other assets.................. 5,749,949 6,042,833
------------ ------------
Total assets............ $174,786,286 $155,122,395
============ ============
LIABILITIES
Deposits:
Checking accounts........... $ 11,839,446 0.51 60,460 $ 12,165,263 0.61 74,643
Savings accounts and
MMDAs..................... 26,498,785 3.73 987,691 25,924,391 3.65 946,975
Time deposit accounts....... 44,756,465 4.74 2,122,111 48,340,728 5.31 2,566,397
------------ ----------- ------------ -----------
Total deposits.......... 83,094,696 3.82 3,170,262 86,430,382 4.15 3,588,015
Borrowings:
Reverse repurchase
agreements................ 26,081,801 5.36 1,397,349 17,695,176 5.67 1,003,851
Advances from FHLBs......... 47,008,285 5.37 2,522,109 30,109,943 5.65 1,701,312
Federal funds purchased and
commercial paper.......... 2,420,544 5.19 125,505 4,121,666 5.61 231,085
Other....................... 4,958,523 7.97 395,183 5,226,087 7.76 405,480
------------ ----------- ------------ -----------
Total borrowings........ 80,469,153 5.52 4,440,146 57,152,872 5.85 3,341,728
------------ ----------- ------------ -----------
Total interest-bearing
liabilities........... 163,563,849 4.66 7,610,408 143,583,254 4.83 6,929,743
------------ ----------- ------------ -----------
Other liabilities............. 1,978,647 2,590,912
------------ ------------
Total liabilities........... 165,542,496 146,174,166
STOCKHOLDERS' EQUITY.......... 9,243,790 8,947,229
------------ ------------
Total liabilities and
stockholders' equity........ $174,786,286 $155,121,395
============ ============
Net interest spread and net
interest income............. 2.48 $ 4,451,790 2.70 $ 4,291,725
=========== ===========
Net interest margin........... 2.63 2.88
YEAR ENDED DECEMBER 31,
----------------------------------
1997
----------------------------------
INTEREST
AVERAGE INCOME OR
BALANCE(1) RATE EXPENSE
------------ ---- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash equivalents, securities
and FHLB stock.............. $ 37,545,693 7.14% $ 2,681,771
Loans(2)...................... 96,892,957 7.76 7,520,760
------------ -----------
Total interest-earning
assets................ 134,438,650 7.59 10,202,531
Other assets.................. 5,000,374
------------
Total assets............ $139,439,024
============
LIABILITIES
Deposits:
Checking accounts........... $ 10,698,514 0.75 80,014
Savings accounts and
MMDAs..................... 22,570,995 3.35 755,198
Time deposit accounts....... 52,065,270 5.40 2,810,330
------------ -----------
Total deposits.......... 85,334,779 4.27 3,645,542
Borrowings:
Reverse repurchase
agreements................ 14,938,348 5.69 849,383
Advances from FHLBs......... 17,643,892 5.76 1,016,925
Federal funds purchased and
commercial paper.......... 3,335,437 5.71 190,373
Other....................... 8,509,059 6.87 584,815
------------ -----------
Total borrowings........ 44,426,736 5.95 2,641,496
------------ -----------
Total interest-bearing
liabilities........... 129,761,515 4.85 6,287,038
------------ -----------
Other liabilities............. 2,134,298
------------
Total liabilities........... 131,895,813
STOCKHOLDERS' EQUITY.......... 7,543,211
------------
Total liabilities and
stockholders' equity........ $139,439,024
============
Net interest spread and net
interest income............. 2.74 $ 3,915,493
===========
Net interest margin........... 2.91
- ---------------
(1) Average balances were obtained from the best available daily, weekly or
monthly data, which management believes approximated the average balances
calculated on a daily basis.
(2) Nonaccrual loans were included in their respective loan categories. The
amortization of net deferred loan (costs) fees included in interest income
was $(49.9) million in 1999, $6.6 million in 1998 and $51.3 million in 1997.
31
34
The dollar amounts of interest income and interest expense fluctuate
depending upon changes in interest rates and upon changes in amounts (volume) of
our interest-earning assets and interest-bearing liabilities. Changes
attributable to (i) changes in volume (changes in average outstanding balances
multiplied by the prior period's rate), (ii) changes in rate (changes in average
interest rate multiplied by the prior period's volume), and (iii) changes in
rate/volume (changes in rate times the change in volume that were allocated
proportionately to the changes in volume and the changes in rate) were as
follows:
1999 VS. 1998 1998 VS. 1997
----------------------------------- -----------------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO DUE TO
---------------------- TOTAL ---------------------- TOTAL
VOLUME(1) RATE CHANGE VOLUME(1) RATE CHANGE
---------- --------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
INTEREST INCOME
Cash equivalents,
securities and FHLB
stock.................... $ 847,964 $(188,596) $ 659,368 $ 418,562 $ (45,634) $ 372,928
Loans(2)................... 546,821 (365,459) 181,362 675,086 (29,077) 646,009
---------- --------- ---------- ---------- --------- ----------
Total interest
income........... 1,394,785 (554,055) 840,730 1,093,648 (74,711) 1,018,937
INTEREST EXPENSE
Deposits:
Checking accounts........ (1,953) (12,230) (14,183) 10,410 (15,781) (5,371)
Savings accounts and
MMDAs................. 21,204 19,512 40,716 119,654 72,123 191,777
Time deposit accounts.... (181,957) (262,329) (444,286) (197,840) (46,093) (243,933)
---------- --------- ---------- ---------- --------- ----------
Total deposit
expense.......... (162,706) (255,047) (417,753) (67,776) 10,249 (57,527)
Borrowings:
Reverse repurchase
agreements............ 452,097 (58,599) 393,498 157,445 (2,977) 154,468
Advances from FHLBs...... 910,611 (89,814) 820,797 704,170 (19,783) 684,387
Federal funds purchased
and commercial
paper................. (89,308) (16,272) (105,580) 44,106 (3,394) 40,712
Other.................... (21,129) 10,832 (10,297) (247,644) 68,309 (179,335)
---------- --------- ---------- ---------- --------- ----------
Total borrowing
expense.......... 1,252,271 (153,853) 1,098,418 658,077 42,155 700,232
---------- --------- ---------- ---------- --------- ----------
Total interest
expense.......... 1,089,565 (408,900) 680,665 590,301 52,404 642,705
---------- --------- ---------- ---------- --------- ----------
Net interest income........ $ 305,220 $(145,155) $ 160,065 $ 503,347 $(127,115) $ 376,232
========== ========= ========== ========== ========= ==========
- ---------------
(1) Average balances were obtained from the best available daily, weekly or
monthly data, which management believes approximated the average balances
calculated on a daily basis.
(2) Nonaccrual loans were included in the average loan amounts outstanding. The
amortization of net deferred loan (costs) fees included in interest income
was $(49.9) million in 1999, $6.6 million in 1998 and $51.3 million in 1997.
Provision for Loan Losses
The provision for loan losses was $167.1 million for 1999, up from $162.0
million for 1998 and down from $246.6 million for 1997. The slight increase in
the provision from 1998 to 1999 was primarily due to the increased loan volume.
The average balance of loans was $112.86 billion for 1999, compared with $105.60
billion for 1998 and $96.89 billion for 1997. The provision relative to average
loans declined to 0.148% in 1999 from 0.153% in 1998 and 0.255% in 1997. In each
of the last three years, the provision for loan losses was less than total net
charge offs of $191.8 million in 1999, $175.5 million in 1998 and $251.5 million
in 1997. The overall decline in charge offs was primarily due to improvements in
credit quality and real estate values, which are reflected in the decline in
nonperforming assets to $1.03 billion at December 31, 1999, compared with $1.21
billion at December 31, 1998 and $1.37 billion at December 31, 1997.
32
35
Noninterest Income
Noninterest income consisted of the following:
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- --------
(DOLLARS IN THOUSANDS)
Depositor and other retail banking fees......... $ 763,586 $ 568,376 $478,700
Securities fees and commissions................. 271,329 192,126 186,079
Insurance fees and commissions.................. 43,085 42,254 42,700
Loan servicing income........................... 112,323 117,356 141,278
Loan related income............................. 102,784 111,155 89,758
Mortgage banking income (loss).................. 109,387 133,084 (44,368)
Gain on sale of retail deposit branch systems... -- 289,040 57,566
Gain (loss) from mortgage securities............ (12,044) (32,183) (71,892)
Other income.................................... 118,547 85,992 100,714
---------- ---------- --------
Total noninterest income................... $1,508,997 $1,507,200 $980,535
========== ========== ========
Depositor and other retail banking fees of $763.6 million for 1999
increased from $568.4 million for 1998 and $478.7 million for 1997. We collected
more debit card, ATM, overdraft protection, nonsufficient funds and other fees
related to an increased number of checking accounts. The number of checking
accounts increased during 1999 by over 400,000 or 10% to approximately
4,483,000.
The growth in depositor and other retail banking fees has been offset
somewhat by an increase in the amounts of our deposit account-related losses
shown in "depositor and other retail banking losses." These losses increase with
an increased number of checking accounts. For 1999 and 1998, depositor fees
averaged $178.31 and $148.88 per checking account, compared with losses of
$25.10 and $23.05 per checking account.
Securities fees and commissions increased from $192.1 million in 1998 to
$271.3 million in 1999. The increase was attributable to higher sales of
investment products and the growth of assets under management in the WM Group of
Funds. The successful expansion of the Consumer Bank Annuity Program in
California and Florida also contributed to the overall increase in fees and
commissions in 1999.
Loan servicing income totaled $112.3 million in 1999, compared with $117.4
million in 1998 and $141.3 million in 1997. The average servicing fee declined
5.3 basis points in 1999 due to increased prepayments of older loans that had
higher servicing fees. The decline in the average servicing fee was somewhat
offset by an increase in the amount of loans serviced. The 1998 decrease in loan
servicing income of 17% was caused by an increase in loan prepayments and the
resulting increase in the amortization of mortgage servicing rights.
Amortization increased in all three years from $60.4 million in 1997 to $85.5
million in 1998 to $85.6 million in 1999.
Loan related income consisted of late charges, prepayment fees,
reconveyance fees and miscellaneous income. The decrease in income from 1998 to
1999 was due to an increase in interest rates which caused a decline in loan
prepayments and the related prepayment fees. Late charges have also decreased as
a result of the downward trend in delinquencies. The growth in the loan
portfolio and the Coast Acquisition were the primary causes of the increase in
loan related income from 1997 to 1998.
During 1999, we had mortgage banking income of $109.4 million, compared
with $133.1 million in 1998 and a loss of $44.4 million in 1997. Sales of loans
held for sale were $8.96 billion in 1999, $18.24 billion in 1998 and $7.54
billion in 1997 primarily from our fixed-rate loan originations. In 1999, the
lack of a market for fixed-rate loans resulted in a decrease in fixed-rate loan
originations and sales volume. In October 1999, we purchased Long Beach
Mortgage, which resulted in an increase in mortgage banking income of $22.6
million in the fourth quarter. Long Beach Mortgage sells most of its loan
production in the secondary market. The loss in 1997 included a $100.0 million
write down of one tranche of a security created from loans acquired from Great
Western Bank. This tranche was held in the trading portfolio. Excluding this
transaction, we would have had mortgage banking income of $55.6 million in 1997.
33
36
Pretax gain on the sale of retail deposit branch systems was $289.0 million
during 1998 and $57.6 million during 1997. Ahmanson had a consistent strategy of
engaging in retail branch purchases and sales to consolidate its presence in key
geographic locations. In 1998, Ahmanson sold deposits of $3.24 billion and the
remainder of its branch premises in Florida. In 1997, Ahmanson sold deposits of
$251.4 million and branch premises in Arizona for a pretax gain of $16.0 million
and deposits of $916.3 million and certain branch premises in Florida for a
pretax gain of $41.6 million.
Losses from mortgage securities were $12.0 million during 1999, compared
with $32.2 million during 1998 and $71.9 million during 1997. In 1999, we
incurred losses of $6.9 million on the sale of MBS. Additionally, the provision
for loans securitized with recourse is reported in the line item -- "Gain (loss)
from mortgage securities." The provision for recourse liability was $5.1 million
for 1999, compared with $52.9 million for 1998 and $76.6 million in 1997. The
decrease in the provision for recourse liability in 1999 reflects improved
credit quality in our securitized loans. The recourse liability is deemed
adequate by management based on credit guidelines applied to the loan
portfolios.
Other income totaled $118.5 million in 1999, compared with $86.0 million in
1998 and $100.7 million in 1997. In 1999, we had gains of $21.6 million from the
sale of financial centers closed as a result of business combinations. In 1997,
we recorded a $20.8 million gain on the sale of our insurance subsidiary, WM
Life Insurance Company. Other income also includes income related to the sale of
certain other products at the financial centers, gain on sale of other assets,
and various other miscellaneous activities.
Noninterest Expense
Noninterest expense consisted of the following:
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Compensation and benefits...................... $1,186,413 $1,188,972 $1,166,052
Occupancy and equipment........................ 564,581 498,126 500,119
Telecommunications and outsourced information
services..................................... 275,963 255,644 213,372
Depositor and other retail banking losses...... 107,487 87,998 48,144
Transaction-related expense.................... 95,722 508,286 431,125
Amortization of goodwill and other intangible
assets....................................... 98,387 104,252 89,351
Foreclosed asset expense....................... 2,855 29,895 80,945
Advertising and promotion...................... 110,631 114,247 108,485
Postage........................................ 88,845 76,457 71,391
Professional fees.............................. 70,455 60,587 75,333
Regulatory assessments......................... 59,294 63,204 59,887
Office supplies................................ 34,506 42,053 35,741
Travel and training............................ 52,425 44,995 37,377
Proprietary mutual fund expense................ 29,519 30,421 38,163
Other expense.................................. 132,468 162,363 155,632
---------- ---------- ----------
Total noninterest expense................. $2,909,551 $3,267,500 $3,111,117
========== ========== ==========
Compensation and benefits expense was relatively unchanged over the past
three years. Expense for both 1999 and 1998 was $1.19 billion and for 1997,
$1.17 billion. The primary driver of compensation and benefits expense is the
number of FTE. FTE were 28,509 at December 31, 1999, compared with 27,957 at
December 31, 1998 and 27,661 at December 31, 1997. The 28,509 FTE at December
31, 1999 included 1,020 FTE associated with Long Beach Mortgage, acquired on
October 1, 1999. Over the past three years, we have been increasing staffing
levels to accommodate our growth in new markets, expansion of existing business
lines and the introduction of new products. This increase has been offset by
staff reductions associated with the Keystone Transaction as well as the Great
Western and Ahmanson mergers.
34
37
Occupancy and equipment expense was $564.6 million in 1999, up $66.5
million from 1998. Computer system upgrades caused an increase in depreciation,
equipment and maintenance expense. During 1999, we consolidated 162 consumer
financial centers in California as a result of the Ahmanson Merger. This
resulted in reductions of rent, insurance, and repair and maintenance expense
from 1998 to 1999.
Expense for telecommunications and outsourced information services was
$276.0 million in 1999, compared with $255.6 million in 1998 and $213.4 million
in 1997. The increases reflect higher use of services resulting from increased
staffing levels, new locations and account conversions, and a rate increase in
our contract with IBM Global Services.
Depositor and other retail banking losses increased from $48.1 million and
$88.0 million in 1997 and 1998 to $107.5 million in 1999 primarily due to an
increase in deposit account-related losses associated with the growth in the
number of transaction accounts.
Foreclosed asset expense was $2.9 million in 1999, compared with $29.9
million in 1998 and $80.9 million in 1997. The decrease in net expense was the
result of a reduced number of foreclosed assets and an increase in net gains on
the sale of real estate owned ("REO"). Additionally in 1998, we eliminated the
use of outsourcing in the management of REO property.
Advertising and promotion expense declined to $110.6 million in 1999 from
$114.2 million in 1998. In 1998, we incurred additional costs associated with
campaigns designed to introduce products to the California market.
Postage expense increased to $88.8 million in 1999 from $76.5 million in
1998 due to special customer mailings that occurred during 1999.
Professional fees increased to $70.5 million in 1999 from $60.6 million in
1998 due to various projects designed to streamline our processes and procedures
and to deliver new products.
Office supplies expense declined to $34.5 million in 1999 from $42.1
million in 1998 due to branch consolidations and other merger-related
efficiencies.
Expenses for travel and training increased to $52.4 million in 1999 from
$45.0 million in 1998 due to an increase in training programs and
corporate-sponsored events.
Other expense declined to $132.5 million in 1999 from $162.4 million in
1998 primarily because 1998 included $30.0 million of expense for the donation
of land for open space to support further development of property owned by
Ahmanson as a real estate investment.
Transaction-Related Expense
Transaction-related expense was $95.7 million in 1999, $508.3 million in
1998 and $431.1 million in 1997. The expenses in 1997 and 1998 related primarily
to the establishment of accruals and recognition of impairments resulting from
the mergers with Great Western and Ahmanson. The accruals were established for
employee severance and other expenses to be incurred, such as contract exit
fees. In addition, impairments were recognized on real estate and equipment to
be sold or sublet.
We had transaction-related accruals of $97.7 million at year-end 1999,
which related primarily to the impairment associated with the Irwindale campus.
This compares to $262.0 million at year-end 1998 and $196.1 million at year-end
1997. Our offices on the Irwindale campus were closed during 1999 and
approximately 727,000 square feet of office space was vacated. We are currently
in the process of subleasing this space to third party tenants.
During 1999, we consolidated 162 financial centers in California as a
result of the Ahmanson Merger. These consolidations coincided with the
conversion of the remaining branches to our systems and signage. During 1998, we
consolidated consumer financial centers with neighboring financial centers in
conjunction with the Great Western Merger.
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38
In addition to the accruals recorded on the dates of the mergers, we
incurred costs during the integration process that were not accrued at the time
of the mergers. These costs related primarily to temporary and other employee
costs associated with the integration efforts. The integrations of systems and
processes were conducted principally during 1998 for Great Western and during
1999 for Ahmanson. As the integration efforts were finalized, the on-going
transaction-related expenses declined. As of December 31, 1999, all integration
efforts had been completed.
Reconciliation of the transaction-related expenses and accrual activity
during 1997, 1998 and 1999 were as follows:
1997
AMOUNTS DECEMBER 31,
1997 1997 CHARGED 1997
PERIOD 1997 TOTAL AGAINST ACCRUED
COSTS ACCRUAL EXPENSES ACCRUAL BALANCE
-------- -------- -------- --------- ------------
(DOLLARS IN THOUSANDS)
Severance................................. $ 28,807 $ 94,126 $122,933 $ (57,960) $ 93,104
Premises.................................. -- 97,165 97,165 (69,317) 57,304
Equipment................................. -- 49,121 49,121 (59,834) --
Legal, underwriting and other
direct transaction costs................ 109,811 3,503 113,314 (5,993) 742
Contract cancellation costs............... -- 33,207 33,207 (11,808) 33,699
Other..................................... 8,640 6,745 15,385 (9,478) 11,243
-------- -------- -------- --------- --------
$147,258 $283,867 $431,125 $(214,390) $196,092
======== ======== ======== ========= ========
1998
AMOUNTS DECEMBER 31,
1998 1998 CHARGED 1998
PERIOD 1998 TOTAL AGAINST ACCRUED
COSTS ACCRUAL EXPENSES ACCRUAL BALANCE
-------- -------- -------- --------- ------------
(DOLLARS IN THOUSANDS)
Severance................................. $ -- $186,845 $186,845 $(193,935) $ 86,014
Premises.................................. 5,905 117,341 123,246 (15,713) 158,932
Equipment................................. 71,721 -- 71,721 -- --
Legal, underwriting and other
direct transaction costs................ 47,548 -- 47,548 (742) --
Contract cancellation costs............... 2,071 563 2,634 (18,584) 15,678
Other..................................... 78,778 (2,486) 76,292 (7,351) 1,406
-------- -------- -------- --------- --------
$206,023 $302,263 $508,286 $(236,325) $262,030
======== ======== ======== ========= ========
1999
AMOUNTS DECEMBER 31,
1999 1999 CHARGED 1999
PERIOD 1999 TOTAL AGAINST ACCRUED
COSTS ACCRUAL EXPENSES ACCRUAL BALANCE
-------- ------- -------- --------- ------------
(DOLLARS IN THOUSANDS)
Severance................................... $ 8,482 $ 5,612 $14,094 $ (90,809) $ 817
Premises.................................... (883) (7,164) (8,047) (55,325) 96,443
Equipment................................... 15,252 2,446 17,698 (2,446) --
Legal, underwriting and other
direct transaction costs.................. 6,175 -- 6,175 -- --
Contract cancellation costs................. 4,487 (8,155) (3,668) (7,132) 391
Other....................................... 70,227 (757) 69,470 (649) --
-------- ------- ------- --------- -------
$103,740 $(8,018) $95,722 $(156,361) $97,651
======== ======= ======= ========= =======
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Taxation
Income taxes include federal and applicable state income taxes and payments
in lieu of taxes. The provision for income taxes was $1.07 billion for 1999,
which represented an effective tax rate of 37.00%.
The provision for income taxes was $882.5 million for 1998, which
represented an effective tax rate of 37.25%. The provision was lowered due to a
one-time adjustment in the deferred tax assets attributable to the Keystone
Transaction, partially offset by nondeductible transaction costs associated with
the Ahmanson Merger.
The provision for income taxes of $653.2 million for 1997 represented an
effective tax rate of 42.46%, due in part to the nondeductibility of certain
transaction-related expenses at Washington Mutual, Ahmanson and Great Western,
and a settlement with the Internal Revenue Service (the "Service") for 1986 and
1987 for Great Western.
Keystone Holdings commenced operations in December 1988 as an indirect
holding company for ASB. ASB was formed to effect the December 1988 acquisition
(the "1988 Acquisition") of certain assets and liabilities of the failed savings
and loan association subsidiary (the "Failed Association") of Financial
Corporation of America. The 1988 Acquisition had a "good bank/bad bank"
structure, with ASB, the "good bank," acquiring substantially all of the Failed
Association's performing loans and fixed assets and assuming substantially all
of its deposit liabilities. New West, the "bad bank," was formed to acquire the
Failed Association's other assets (including nonperforming loans) and
liabilities with a view toward their liquidation. New West was transferred to
the FDIC as manager of the FRF, subsequent to the Keystone Transaction.
In connection with the 1988 Acquisition, the Service entered into a closing
agreement (the "Closing Agreement") with respect to the federal income tax
consequences of the 1988 Acquisition and certain aspects of the taxation of
Keystone Holdings and certain of its affiliates. The Closing Agreement contains
provisions that were intended to ensure that losses generated by New West would
be available to offset income of ASB for federal income tax purposes. In
connection with the 1988 Acquisition, Keystone Holdings and certain of its
affiliates entered into a number of continuing agreements with the predecessor
to the FRF, including an Assistance Agreement. These agreements were designed,
in part, to provide that over time 75% of most of the federal income tax savings
and 19.5% of most of the California tax savings (in each case computed in
accordance with specific provisions contained in the Assistance Agreement)
attributable to the utilization of certain tax loss carryforwards of New West
are paid ultimately to the FRF. The provision for such payments is reported in
the line item -- "Income taxes."
See "Notes to Consolidated Financial Statements -- Note 15: Income Taxes."
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40
QUARTERLY RESULTS OF OPERATIONS
Results of operations on a quarterly basis were as follows:
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income........................... $2,854,118 $2,959,622 $3,059,516 $3,188,942
Interest expense.......................... 1,726,923 1,810,914 1,939,850 2,132,721
---------- ---------- ---------- ----------
Net interest income....................... 1,127,195 1,148,708 1,119,666 1,056,221
Provision for loan losses................. 41,700 42,857 40,799 41,720
Noninterest income........................ 352,144 364,118 369,519 423,216
Noninterest expense....................... 729,867 748,624 699,456 731,604
---------- ---------- ---------- ----------
Income before income taxes................ 707,772 721,345 748,930 706,113
Income taxes.............................. 263,654 268,671 278,950 255,821
---------- ---------- ---------- ----------
Net income................................ $ 444,118 $ 452,674 $ 469,980 $ 450,292
========== ========== ========== ==========
Net income attributable to common stock... $ 444,118 $ 452,674 $ 469,980 $ 450,292
========== ========== ========== ==========
Net income per common share:
Basic................................... $ 0.76 $ 0.78 $ 0.83 $ 0.80
Diluted................................. 0.76 0.78 0.83 0.80
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income........................... $2,727,236 $2,842,583 $2,814,278 $2,837,371
Interest expense.......................... 1,666,934 1,752,886 1,750,909 1,759,014
---------- ---------- ---------- ----------
Net interest income....................... 1,060,302 1,089,697 1,063,369 1,078,357
Provision for loan losses................. 49,975 44,394 34,376 33,223
Noninterest income........................ 260,390 324,567 605,052 317,191
Noninterest expense....................... 670,773 722,912 724,077 1,149,738
---------- ---------- ---------- ----------
Income before income taxes................ 599,944 646,958 909,968 212,587
Income taxes.............................. 229,170 248,357 349,498 55,500
---------- ---------- ---------- ----------
Net income................................ $ 370,774 $ 398,601 $ 560,470 $ 157,087
========== ========== ========== ==========
Net income attributable to common stock... $ 362,050 $ 393,761 $ 558,092 $ 157,087
========== ========== ========== ==========
Net income per common share:
Basic................................... $ 0.66 $ 0.70 $ 0.98 $ 0.27
Diluted................................. 0.64 0.68 0.96 0.27
REVIEW OF FINANCIAL CONDITION
Assets
At December 31, 1999, our assets were $186.51 billion, an increase of
$21.02 billion or 13% from $165.49 billion at December 31, 1998. This increase
was primarily the result of the retention of loans originated by us, either as
loans or in securitized form, and the purchase of whole loans and MBS.
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41
Interest-earning assets. Our interest-earning assets consisted of the
following:
DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Cash equivalents......................... $ 233,486 $ 61,520 $ 830,978
Securities:
Trading securities..................... 34,660 39,068 23,364
Available-for-sale securities:
MBS................................. 40,972,653 32,399,591 18,624,163
Investment securities............... 411,665 517,462 1,193,063
Held-to-maturity securities:
MBS................................. 19,263,413 13,992,235 17,085,036
Investment securities............... 138,052 137,247 122,818
------------ ------------ ------------
60,820,443 47,085,603 37,048,444
Loans:
Loans held in portfolio................ 113,745,650 107,612,197 97,550,131
Loans held for sale.................... 793,504 1,826,549 1,141,367
Reserve for loan losses................ (1,041,929) (1,067,840) (1,047,845)
------------ ------------ ------------
113,497,225 108,370,906 97,643,653
Investment in FHLBs...................... 2,916,749 2,030,027 1,471,469
------------ ------------ ------------
$177,467,903 $157,548,056 $136,994,544
============ ============ ============
Securities. Our trading, available-for-sale and held-to-maturity securities
consisted of the following (at carrying value):
DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Agency MBS.................................. $39,186,804 $34,696,584 $29,199,263
Private issue MBS........................... 21,083,921 11,727,454 6,532,316
U.S. Government and agency debt............. 57,290 71,227 532,991
Corporate debt.............................. 183,044 300,504 478,823
Municipal debt.............................. 124,794 112,189 100,150
Preferred stock............................. 184,590 180,457 203,917
----------- ----------- -----------
60,820,443 47,088,415 37,047,460
Derivative instruments...................... -- (2,812) 984
----------- ----------- -----------
$60,820,443 $47,085,603 $37,048,444
=========== =========== ===========
Our securities portfolio increased by $13.73 billion at December 31, 1999,
compared with the prior year. The increase was due primarily to securitizations
of $14.62 billion and purchases of $14.48 billion, offset by paydowns of $12.41
billion and sales, unrealized losses and maturities of $2.96 billion during
1999.
Securities classified as available for sale increased by $8.47 billion in
1999 and securities classified as held to maturity increased by $5.27 billion.
The increase in the available-for-sale category was primarily due to the
purchase of agency and investment grade private issue MBS in the secondary
market and the securitization of $5.01 billion of loans, which were classified
as available for sale during 1999. The increase in the held-to-maturity category
was due to the securitization of $9.32 billion of loans, which were classified
as held to maturity during 1999. These increases were partially offset by
paydowns on existing securities.
At December 31, 1999, we held $21.08 billion of private issue MBS and CMOs
(including the REMICs). Of this total, 66% were rated the highest investment
grade (AAA), 3% were rated investment grade (AA through BBB), 12% were rated
below investment grade and 19% were unrated.
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42
At December 31, 1999, 57% of MBS were adjustable rate. Of the 57% indexed
to an adjustable rate, 60% were indexed to COFI, 33% to U.S. Treasury indices,
and 7% to other indices. The remaining 43% of MBS were fixed-rate.
Loans. Total loans (exclusive of the reserve for loan losses) at December
31, 1999 were $114.54 billion, up 5% from $109.44 billion at December 31, 1998.
The increase in the loan balances was primarily the result of originations of
new loans and the purchase of loans, offset by loan sales and securitizations
into MBS and the REMICs.
Loans (exclusive of the reserve for loan losses) consisted of the
following:
DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
SFR........................... $ 80,628,424 $ 81,101,706 $72,160,696 $69,101,085 $62,589,169
SFR construction.............. 1,242,784 1,020,082 877,449 728,121 629,280
Second mortgage and other
consumer.................... 8,527,303 7,330,891 6,712,933 5,946,083 5,250,156
Specialty mortgage finance.... 4,451,631 721,857 529,162 462,900 386,475
Commercial business........... 1,451,505 1,129,329 838,436 394,630 179,568
Commercial real estate........ 18,237,507 18,134,881 17,572,822 17,383,828 17,285,377
------------ ------------ ----------- ----------- -----------
$114,539,154 $109,438,746 $98,691,498 $94,016,647 $86,320,025
============ ============ =========== =========== ===========
Loans as a percentage of total
loans (exclusive of the
reserve for loan losses):
SFR......................... 70% 74% 73% 73% 73%
SFR construction............ 1 1 1 1 1
Second mortgage and other
consumer................. 8 7 7 6 6
Specialty mortgage
finance.................. 4 1 * 1 *
Commercial business......... 1 1 1 * *
Commercial real estate...... 16 16 18 19 20
--- --- --- --- ---
100% 100% 100% 100% 100%
--- --- --- --- ---
--- --- --- --- ---
- ---------------
* Less than 1%.
We have been diversifying our real estate loans by product type from a COFI
concentration to Treasury based by replacing our COFI runoff primarily with MTA
and hybrid ARM originations. At December 31, 1999, 85% of real estate loans were
adjustable-rate, of which 42% were indexed to COFI, 52% were indexed to U.S.
Treasury indices, and 6% to other indices. The remaining 15% of the year-end
1999 real estate loan portfolio were fixed rate. At December 31, 1998, 89% of
real estate loans were adjustable-rate, of which 55% were indexed to COFI, 27%
were indexed to U.S. Treasury indices, and 18% to other indices. The remaining
11% of the year-end 1998 real estate loan portfolio were fixed rate. Although
the COFI percentage declined from 55% to 42%, this was mitigated by the REMIC
securitizations in the fourth quarter of 1999, which comprised exclusively
non-COFI loans. Excluding the REMIC securitizations, the COFI percentage would
have declined to 33%.
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43
Loan originations were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
SFR:
Adjustable rate........................... $29,573,675 $18,342,900 $16,871,431
Fixed rate................................ 10,677,940 23,526,800 8,892,275
----------- ----------- -----------
40,251,615 41,869,700 25,763,706
SFR construction:
Custom.................................... 977,476 1,017,194 883,211
Builder................................... 1,025,934 731,103 565,305
Commercial real estate...................... 1,908,476 2,486,452 2,352,839
Second mortgage and other consumer.......... 4,857,169 4,885,759 4,615,456
Specialty mortgage finance.................. 1,382,449 428,847 272,163
Commercial business......................... 1,185,995 1,011,502 759,546
----------- ----------- -----------
11,337,499 10,560,857 9,448,520
----------- ----------- -----------
$51,589,114 $52,430,557 $35,212,226
=========== =========== ===========
Total loan originations decreased in 1999 to $51.59 billion from $52.43
billion in 1998, which had been an increase from $35.21 billion in 1997. The
decrease in originations in 1999 was primarily the result of lower SFR
originations due to higher interest rates. Total originations increased in 1998
primarily due to an increase in fixed-rate SFR loans, which was caused by the
low interest rate environment during 1998.
We purchased $6.99 billion of loans in 1999, up from $2.99 billion in 1998
and $88.2 million in 1997. Of the 1999 purchases, $3.30 billion were specialty
mortgage finance loans with a weighted average yield of 8.70%.
Liabilities
We primarily use customer deposits and wholesale borrowings to fund our
loans and investments. Due to increased market competition for customer
deposits, we have increasingly relied on wholesale borrowings to fund our asset
growth.
Deposits. Total deposits were $81.13 billion at December 31, 1999, compared
with $85.49 billion at December 31, 1998 and $83.43 billion at year-end 1997.
Deposits consisted of the following:
DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Checking accounts:
Interest bearing.......................... $ 6,214,933 $ 6,686,682 $ 6,535,662
Noninterest bearing....................... 7,274,538 6,774,049 4,650,292
----------- ----------- -----------
13,489,471 13,460,731 11,185,954
Savings accounts............................ 5,654,502 7,794,622 4,917,964
MMDAs....................................... 24,393,876 20,491,246 18,010,852
Time deposit accounts....................... 37,591,919 43,745,542 49,314,663
----------- ----------- -----------
$81,129,768 $85,492,141 $83,429,433
=========== =========== ===========
Our strategy is to increase the ratio of transaction accounts to total
deposits. As a result of this strategy, savings accounts, MMDAs and checking
accounts have increased in amount and as a percentage of total deposits to 54%
at year-end 1999, compared with 49% at year-end 1998 and 41% at year-end 1997.
These three products have the benefit of lower interest costs compared with time
deposit accounts. Even though
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44
transaction accounts are more liquid, we consider them to be the core
relationship with our customers. In the aggregate, we view these core accounts
to be a more stable source of long-term funding than time deposits.
The increase in deposits during 1998 was primarily due to the Coast
Acquisition in the first quarter of 1998 with $6.40 billion of deposits,
partially offset by the sale of 27 branches in Florida in the third quarter of
1998 with $3.24 billion of deposits. Excluding these transactions, deposits
would have decreased $1.10 billion. This decrease in deposits, as well as the
decline in 1999, was the result of less time deposits, which reflected our
strategy to remix our deposits.
While the vast majority of our deposits are retail in nature, we do engage
in certain wholesale activities -- primarily accepting time deposits from
political subdivisions and public agencies. We consider wholesale deposits to be
an alternative borrowing source rather than a customer relationship and, as
such, their levels are determined by management's decision as to the most
economic funding sources.
Borrowings. Our borrowings primarily take the form of reverse repurchase
agreements and advances from the FHLBs of Seattle, San Francisco and Topeka. The
exact mix at any given time is dependent upon the market pricing of the
individual borrowing sources.
Borrowings consisted of the following:
DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Federal funds purchased and commercial
paper..................................... $ 866,543 $ 2,482,830 $ 3,732,282
Reverse repurchase agreements............... 30,162,823 18,339,538 14,774,040
Advances from FHLBs......................... 57,094,053 39,748,613 25,114,776
Other borrowings............................ 6,203,197 4,629,508 6,355,279
----------- ----------- -----------
$94,326,616 $65,200,489 $49,976,377
=========== =========== ===========
Our wholesale borrowing portfolio increased by $29.13 billion at December
31, 1999, compared with the prior year. The increase was primarily due to our
use of wholesale borrowings as an alternative to retail deposits as a funding
source for asset growth. Due to relative pricing advantages, we generally used
advances from FHLBs and reverse repurchase agreements as our primary funding
vehicles.
In addition, during 1999, we issued senior debt securities totaling $1.60
billion and bearing a weighted average fixed rate of 7.11%.
WMBFA is a member of the FHLB of San Francisco and, as a regular part of
its business, obtains advances from this FHLB. WMB and WMBfsb are members of the
FHLB of Seattle and, as a regular part of their businesses, obtain advances from
this FHLB. FCIB is a member of the FHLB of Topeka and, as a regular part of its
business, obtains advances from this FHLB. An institution is required to own
stock in the FHLB of which it is a member.
Each institution obtaining FHLB advances is required to enter into a
written agreement with the lending FHLB under which the borrowing institution is
primarily and unconditionally obligated to repay such advances and all other
amounts owing to the lending FHLB. All advances must be fully secured by
eligible collateral. Eligible collateral includes whole first mortgage loans on
improved residential real estate, mortgage-backed and other securities issued or
guaranteed by the U.S. Government or any of its agencies, certain privately
issued MBS and other real estate-related collateral acceptable to the lending
FHLB.
FHLBs offer advances with maturities of up to ten years, and an FHLB is
permitted to offer advances with longer maturities if such advances are
consistent with the safe and sound operation of that FHLB. Each FHLB prices its
advances to members by taking into account various factors, including the
marginal cost to the FHLB of raising matching maturity funds in the market and
the administrative and operating costs associated with making such advances to
its members.
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PROVISION AND RESERVE FOR LOAN LOSSES
We analyze several important elements in determining the level of the
provision for loan losses in any given year, such as current and historical
economic conditions, nonaccrual asset trends, historical loan loss experience,
and plans for problem loan administration and resolution. During 1997 and
continuing in 1998 and 1999, the results of the analysis indicated continued
improvement in asset quality.
Nonaccrual loans continued to decline although the average loan balance
continued to increase. Nonaccrual loans decreased from $1.03 billion at December
31, 1997 to $938.0 million at December 31, 1998 to $827.0 million at December
31, 1999. Actual loss experience, as measured by net charge offs, decreased as
well. Net charge offs as a percentage of average loans declined from 0.26% for
1997 to 0.17% for 1998 and 1999. As a result of these continuing improvements in
loss experience, the provision for loan losses was less than net charge offs
during 1997, 1998 and 1999. Net charge offs exceeded the provision by $4.8
million in 1997, by $13.6 million in 1998 and by $24.7 million in 1999.
Improvements in the California economy over the last three years have
resulted in a dramatic turnaround in the housing market. The median price for
California homes had declined steadily from a high of $211,000 in 1991 to a low
point of $168,000 in February 1997. By December 1999, the median price of homes
had increased to $222,000, up $54,000 or 32% from the low point in 1997. The
result has been a decline in residential loan charge offs and a slowing in
foreclosure activity beginning toward the end of 1997. Residential loan charge
offs, net of recoveries, for 1999 totaled $33.6 million, which was less than net
charge offs of $47.7 million in 1998 and $119.6 million in 1997. As a result of
these improvements in the credit quality of our SFR portfolio, our unallocated
reserve attributable to the SFR portfolio has declined as a percentage of SFR
loans.
Charge offs of second mortgage and other consumer loans were $142.6 million
in 1999, up from $123.7 million in 1998 and $102.7 million in 1997. The ratio of
charge offs to total loans in this category has remained steady at approximately
2%, reflecting strong growth in the balances in this portfolio as well as the
continued strength of the economy. Charge offs on commercial business loans were
$5.5 million in 1999, up slightly from $5.3 million in 1998 and $3.0 million in
1997. Again, increased charge offs were primarily the result of increased
average loan balances over the same time period.
At December 31, 1999, we had specific or allocated reserves totaling $81.6
million, compared with $143.7 million at December 31, 1998 and with $128.3
million at December 31, 1997. Reserves allocated or specified for the apartment
building and commercial real estate loan portfolios have declined by 52% since
year-end 1997 and now total $59.0 million at year-end 1999. This decline was
mainly the result of three factors. First, the California economic growth and
the recovery of commercial real estate markets nationwide resulted in
significant improvement in the quality of these portfolios. At the end of 1996,
management was particularly concerned about losses in this portfolio and had
increased reserves allocated to it. Beginning in 1997 and continuing through
1998 and 1999, the apartment building and commercial real estate loan portfolios
improved steadily, reflecting the growth in jobs and population. In the majority
of markets, average occupancy levels and rental rates have increased as has the
average sales price per square foot. The result was a reduction in the level of
nonaccrual loans in these portfolios. Second, during 1999, our threshold for
reviewing apartment building and commercial real estate loans for specific or
allocated reserves increased to $1 million. Third, during the year, specific or
allocated reserves declined by $19.1 million as a result of charge offs related
to four large California borrowers.
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46
Changes in the reserve for loan losses were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Balance, beginning of year..................... $1,067,840 $1,047,845 $1,066,276 $ 979,010 $1,083,272
Provision for loan losses...................... 167,076 161,968 246,642 498,568 344,624
Transfers of reserves.......................... (1,221) 33,559 (13,594) 15,787 5,372
Loans charged off:
SFR and SFR construction..................... (37,754) (66,130) (141,540) (297,484) (299,617)
Second mortgage and other consumer........... (142,601) (123,722) (102,666) (71,930) (71,014)
Specialty mortgage finance................... (349) (196) (99) (115) (97)
Commercial business.......................... (5,492) (5,280) (3,028) (504) (813)
Commercial real estate....................... (37,113) (31,370) (57,873) (115,215) (132,158)
---------- ---------- ---------- ---------- ----------
(223,309) (226,698) (305,206) (485,248) (503,699)
Recoveries of loans previously charged off:
SFR and SFR construction..................... 4,123 18,459 21,970 26,967 17,471
Second mortgage and other consumer........... 19,146 18,147 20,248 17,386 16,965
Specialty mortgage finance................... 312 48 43 32 43
Commercial business.......................... 737 882 221 74 482
Commercial real estate....................... 7,225 13,630 11,245 13,700 14,480
---------- ---------- ---------- ---------- ----------
31,543 51,166 53,727 58,159 49,441
---------- ---------- ---------- ---------- ----------
Net charge offs.............................. (191,766) (175,532) (251,479) (427,089) (454,258)
---------- ---------- ---------- ---------- ----------
Balance, end of year........................... $1,041,929 $1,067,840 $1,047,845 $1,066,276 $ 979,010
========== ========== ========== ========== ==========
Net charge offs as a percentage of average
loans........................................ 0.17% 0.17% 0.26% 0.48% 0.51%
An analysis of the reserve for loan losses was as follows:
DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
Specific and allocated reserves:
Commercial real estate......................... $ 58,983 $ 125,700 $ 122,838 $ 174,012 $124,921
Commercial business............................ 17,612 17,157 3,277 1,285 --
Builder construction........................... 4,984 852 2,207 -- 158
---------- ---------- ---------- ---------- --------
81,579 143,709 128,322 175,297 125,079
Unallocated reserves............................. 960,350 924,131 919,523 890,979 853,931
---------- ---------- ---------- ---------- --------
$1,041,929 $1,067,840 $1,047,845 $1,066,276 $979,010
========== ========== ========== ========== ========
Total reserve for loan losses as a percentage of:
Nonaccrual loans............................... 126% 114% 101% 91% 69%
Nonperforming assets........................... 102 88 76 65 50
Total loans (exclusive of the reserve for loan
losses)...................................... 0.91 0.98 1.06 1.13 1.13
Although the aggregate reserve as a percentage of nonaccrual loans was
higher at year-end 1999 than at year-end 1998, the reserve as a percentage of
total loans was 0.91% at year-end 1999, compared with 0.98% at year-end 1998.
The amounts of nonaccrual loans and charge offs were each lower in 1999 than in
1998 despite a $5.10 billion increase in the size of the loan portfolio. No
assurance can be given that we will not, in any particular period, sustain loan
losses that are sizable in relation to the amount reserved, or that subsequent
evaluation of the loan portfolio, in light of the factors then prevailing,
including economic conditions and our ongoing examinations process and that of
our regulators, will not require significant increases in the reserve for loan
losses.
We securitize certain loans and retain these securities in our investment
portfolios. If these loans are securitized as agency securities, we typically
retain the exposure for potential losses on the loans underlying these
securities and, as a result, have established a recourse obligation. Because the
loans underlying these
44
47
securities are similar in all respects to the loans in our loan portfolio, we
estimate our recourse obligation on these securities in a manner similar to the
method we use for establishing the reserve for loan losses on our loan
portfolio. The liability for this recourse obligation is included in "Other
liabilities."
Changes in the recourse liability were as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- -------
(DOLLARS IN THOUSANDS)
Balance, beginning of year.......................... $144,257 $ 80,157 $27,940
Transfer (to) from reserve for loan losses.......... (15,000) 74,400 24,502
(Recovery of reserve) provision for recourse
losses............................................ (16,168) (10,300) 27,715
-------- -------- -------
Balance, end of year................................ $113,089 $144,257 $80,157
======== ======== =======
The total loss coverage percentage is the reserve for loan losses and the
recourse liability as a percentage of nonaccrual loans:
Total loss coverage percentage...................... 140% 129% 109%
At December 31, 1999 and 1998, we had $18.12 billion and $18.62 billion of
loans securitized and retained with recourse, and $4.65 billion and $5.83
billion of loans securitized and sold with recourse.
Nonperforming Assets
Assets considered to be nonperforming include nonaccrual loans and
foreclosed assets. When loans securitized or sold with recourse become
nonperforming, we repurchase them and include them in nonaccrual loans.
Management's classification of a loan as nonaccrual does not necessarily
indicate that the principal of the loan is uncollectible in whole or in part.
Loans are generally placed on nonaccrual status when they are four payments or
more past due. See "Notes to Consolidated Financial Statements -- Note 1:
Summary of Significant Accounting Policies."
Nonperforming assets were $1.03 billion or 0.55% of total assets at
December 31, 1999, compared with $1.21 billion or 0.73% of total assets at
December 31, 1998.
Nonperforming assets consisted of the following:
DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Nonaccrual loans:
SFR......................... $ 601,896 $ 752,261 $ 845,548 $ 998,973 $1,220,435
SFR construction............ 18,017 9,188 10,413 9,235 9,550
Second mortgage and other
consumer................. 100,838 90,411 77,734 67,461 33,062
Specialty mortgage
finance.................. 54,481 1,954 2,002 2,638 3,899
Commercial business......... 9,826 7,416 2,652 1,267 824
Commercial real estate...... 41,967 76,730 95,923 94,084 156,359
---------- ---------- ---------- ---------- ----------
827,025 937,960 1,034,272 1,173,658 1,424,129
Foreclosed assets............. 198,961 274,767 340,582 470,460 512,271
Other nonperforming assets.... -- -- -- 7,232 4,564
---------- ---------- ---------- ---------- ----------
$1,025,986 $1,212,727 $1,374,854 $1,651,350 $1,940,964
========== ========== ========== ========== ==========
Nonperforming assets as a
percentage of total
assets...................... 0.55% 0.73% 0.96% 1.20% 1.42%
The increase in nonperforming specialty mortgage finance loans from
year-end 1998 to year-end 1999 was a result of the acquisition of Long Beach
Mortgage.
45
48
Loans (exclusive of the reserve for loan losses) and nonaccrual loans by
geographic concentration at December 31, 1999 were as follows:
WASHINGTON
CALIFORNIA OREGON OTHER TOTAL
------------------------ ------------------------ ------------------------ -------------------------
PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL
----------- ---------- ----------- ---------- ----------- ---------- ------------ ----------
(DOLLARS IN THOUSANDS)
SFR.................... $42,818,783 $339,781 $12,439,161 $ 62,422 $25,370,480 $199,693 $ 80,628,424 $601,896
SFR construction....... 166,272 5,213 867,091 7,773 209,421 5,031 1,242,784 18,017
Second mortgage and
other consumer....... 2,697,652 12,903 2,854,868 22,100 2,974,783 65,835 8,527,303 100,838
Specialty mortgage
finance.............. 863,489 7,698 198,412 1,129 3,389,730 45,654 4,451,631 54,481
Commercial business.... 188,719 770 935,836 8,749 326,950 307 1,451,505 9,826
Commercial real
estate............... 15,491,495 36,502 1,996,573 1,203 749,439 4,262 18,237,507 41,967
----------- -------- ----------- -------- ----------- -------- ------------ --------
$62,226,410 $402,867 $19,291,941 $103,376 $33,020,803 $320,782 $114,539,154 $827,025
=========== ======== =========== ======== =========== ======== ============ ========
Loans and nonaccrual
loans as a percentage
of total loans and
total nonaccrual
loans................ 54% 49% 17% 12% 29% 39% 100% 100%
At December 31, 1999, nonaccrual loans in California accounted for 49% of
total nonaccrual loans, down from 63% in 1998. Due to the concentration of our
loans in California, the California real estate market requires continual
review. In general, real estate values have improved during 1998 and 1999.
However, economic performance within California may vary significantly among
property types or by region.
Impaired Loans
Commercial real estate loans over $1 million, and commercial business and
builder construction loans are individually evaluated for impairment. A loan in
one of these categories is considered impaired when it is probable that we will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. Factors involved in determining impairment include, but are not
limited to, the financial condition of the borrower, the value of the underlying
collateral, and current economic conditions.
Specialty mortgage finance loans on nonaccrual status increased from $2.0
million at December 31, 1998 to $54.5 million at December 31, 1999. This
increase was due to the acquisition of Long Beach Mortgage as well as purchases
of specialty mortgage finance loans during 1999. The balance of specialty
mortgage finance loans increased from $721.9 million at December 31, 1998 to
$4.45 billion at December 31, 1999.
At December 31, 1999, loans totaling $620.5 million were impaired, of which
$304.7 million had allocated reserves of $81.6 million. Of the $620.5 million of
impaired loans, $78.5 million were on nonaccrual status.
The amount of impaired loans and the related allocated reserve for loan
losses were as follows:
DECEMBER 31,
----------------------------------------------
1999 1998
--------------------- ---------------------
LOAN ALLOCATED LOAN ALLOCATED
AMOUNT RESERVES AMOUNT RESERVES
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Nonaccrual loans:
With allocated reserves........................ $ 41,361 $ 8,053 $ 30,251 $ 11,187
Without allocated reserves..................... 37,105 -- 16,378 --
-------- ------- -------- --------
78,466 8,053 46,629 11,187
Other impaired loans:
With allocated reserves........................ 263,298 73,526 528,379 132,522
Without allocated reserves..................... 278,695 -- 144,210 --
-------- ------- -------- --------
541,993 73,526 672,589 132,522
-------- ------- -------- --------
$620,459 $81,579 $719,218 $143,709
======== ======= ======== ========
46
49
LINES OF BUSINESS
We are managed along five major lines of business: Consumer Banking,
Mortgage Banking, Commercial Banking, Financial Services, and Consumer Finance.
Although we do not consider the Treasury group to be a line of business, it
manages investments and interest rate risk. MBS and whole loans that we purchase
(other than specialty mortgage finance loans) are allocated to treasury. Refer
to Note 25 of the Notes to the Consolidated Financial Statements for summarized
financial information for these lines of business for 1999 and 1998.
In determining net interest income for each business segment, the interest
expense of deposits is allocated to two of the segments. Deposit accounts
managed by the Western Bank and WM Business Bank division are allocated to the
commercial banking segment, and substantially all of the retail consumer
deposits are allocated to the consumer banking segment. The consumer banking
segment is allocated assets equal to the excess of its deposits over its
balances of consumer loans. The other segments are allocated an amount of
indebtedness in excess of deposits necessary to support the interest-earning
assets of the segment. The rate on such indebtedness is our weighted average
borrowing cost exclusive of the cost of deposits.
Direct expenses are those costs that are directly controlled by the
segment. Corporate support expense represents the balance of noninterest expense
and is allocated primarily in proportion to the FTE of each segment.
CONSUMER BANKING MORTGAGE BANKING
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
CONDENSED INCOME STATEMENT
Net interest income after
provision for loan losses.... $ 2,494,883 $ 2,556,637 $ 796,196 $ 832,655
Other income................... 817,333 625,665 259,334 326,614
Transaction-related expense.... 69,422 365,590 18,991 121,872
Direct expense................. 994,959 952,532 247,325 248,820
----------- ----------- ----------- -----------
Income before corporate support
expense and income taxes..... 2,247,835 1,864,180 789,214 788,577
Corporate support expense...... 792,964 781,085 285,166 286,004
Income taxes................... 534,493 400,966 185,178 186,055
----------- ----------- ----------- -----------
Net income..................... $ 920,378 $ 682,129 $ 318,870 $ 316,518
=========== =========== =========== ===========
Total assets............... $83,713,164 $88,368,887 $46,373,128 $36,105,220
=========== =========== =========== ===========
COMMERCIAL BANKING FINANCIAL SERVICES
------------------------- -------------------
1999 1998 1999 1998
----------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
CONDENSED INCOME STATEMENT
Net interest income after
provision for loan losses.... $ 376,253 $ 368,329 $ 1,210 $ 2,252
Other income................... 29,611 23,859 316,941 229,610
Transaction-related expense.... 803 6,300 3,109 6,880
Direct expense................. 83,838 81,214 199,266 162,722
----------- ----------- -------- --------
Income before corporate support
expense and income taxes..... 321,223 304,674 115,776 62,260
Corporate support expense...... 20,498 19,621 238 2,510
Income taxes................... 111,067 105,930 45,309 24,496
----------- ----------- -------- --------
Net income..................... $ 189,658 $ 179,123 $ 70,229 $ 35,254
=========== =========== ======== ========
Total assets............... $20,179,900 $19,540,284 $123,525 $114,374
=========== =========== ======== ========
CONSUMER FINANCE TREASURY/OTHER TOTAL
----------------------- ------------------------- ---------------------------
1999 1998 1999 1998 1999 1998
---------- ---------- ----------- ----------- ------------ ------------
(DOLLARS IN THOUSANDS)
CONDENSED INCOME STATEMENT
Net interest income after
provision for loan losses... $ 254,473 $ 203,431 $ 361,699 $ 166,453 $ 4,284,714 $ 4,129,757
Other income.................. 56,072 10,199 29,706 291,253 1,508,997 1,507,200
Transaction-related expense... -- -- 3,397 7,644 95,722 508,286
Direct expense................ 161,571 125,690 4,019 62,917 1,690,978 1,633,895
---------- ---------- ----------- ----------- ------------ ------------
Income before corporate
support expense and income
taxes....................... 148,974 87,940 383,989 387,145 4,007,011 3,494,776
Corporate support expense..... 2,659 1,133 21,326 34,966 1,122,851 1,125,319
Income taxes.................. 57,813 34,700 133,236 130,378 1,067,096 882,525
---------- ---------- ----------- ----------- ------------ ------------
Net income.................... $ 88,502 $ 52,107 $ 229,427 $ 221,801 $ 1,817,064 $ 1,486,932
========== ========== =========== =========== ============ ============
Total assets.............. $7,370,753 $2,764,273 $28,753,160 $18,600,243 $186,513,630 $165,493,281
========== ========== =========== =========== ============ ============
47
50
Consumer Banking
Net income for 1999 was $920.4 million, an increase of $238.2 million from
$682.1 million for 1998. This increase was primarily due to a decline of $296.2
million in transaction-related expense, partially offset by an increase of $42.4
million in direct expense and $11.9 million in corporate support expense. The
increase in direct expense reflected the increase in activity in the Consumer
Banking financial centers and back-office related to the origination and
servicing of a greater number of customer loan and deposit accounts. Of the
$42.4 million increase, $19.5 million was due to depositor and other retail
banking losses, an increase which is directly related to an increase of over
400,000 in the number of transaction accounts.
Net interest income after provision for loan losses decreased because a
decline in consumer deposits led to a decrease in assets allocated to the
Consumer Banking segment. However, while assets declined by 5.3%, the net
interest income declined by only 2.4% as deposit costs declined more sharply
than asset yields. Overall, consumer deposits declined in response to our
strategy of emphasizing transaction accounts in order to remix our deposits to
match our asset repricing characteristics more closely. For the year, time
deposit accounts decreased $6.19 billion while transaction accounts increased
$1.83 billion.
The increase in other income consisted primarily of a $195.2 million
increase in depositor and other retail banking fees. Debit card, ATM, overdraft
protection, nonsufficient funds and other fees increased due to an increased
number of checking accounts.
Mortgage Banking
Net income for 1999 was $318.9 million, an increase of $2.4 million from
$316.5 million for 1998. Net interest income after provision for loan losses
declined to $796.2 million from $832.7 million in the prior year primarily due
to the compression of the net interest spread. Other income declined due to a
decrease in loan servicing income as a result of a decline in the average
servicing fee and due to a decrease in loan related income. Increasing interest
rates caused a decline in prepayments and hence a decrease in prepayment fees.
Late charges also declined as a result of a downward trend in delinquencies. In
addition, there was a decline in mortgage banking income due to a decrease in
fixed-rate loan originations and sales. Transaction-related expense declined
$102.9 million as merger-related efforts were completed.
Commercial Banking
Net income for 1999 was $189.7 million, an increase of $10.5 million from
$179.1 million for 1998. This increase was primarily due to an increase of $7.9
million in net interest income after provision for loan losses, an increase of
$5.8 million in other income and a decrease of $5.5 million in
transaction-related expense. The increase in net interest income was largely due
to growth in average loans to $19.21 billion for 1999 from $19.02 billion for
1998.
The increase in other income was partially due to a one-time gain on the
sale of the trust operations, with the remaining increase attributable to
increased depositor fees as a result of a $199.7 million growth in average
deposit balances from year-end 1998 to year-end 1999, and increased fee income
from treasury management and international banking services.
Financial Services
Net income for 1999 was $70.2 million, an increase of $35.0 million from
$35.3 million for 1998. This increase was comprised of an increase of $87.3
million in other income and a decline of $3.8 million in transaction-related
expense, partially offset by an increase of $36.5 million in direct expense and
an increase of $20.8 million in income taxes. The increase in other income was a
result of an increase of $79.2 million in securities fees and commissions. The
increase was attributable to higher sales of investment products and the growth
of assets under management in the WM Group of Funds. The successful expansion of
the Consumer Bank Annuity Program in California and Florida also contributed to
the overall increase in fees and
48
51
commissions in 1999. With this increase, there was a corresponding increase in
commissions paid to the financial consultants and licensed bank employees that
was reflected in the increase in direct expense.
Consumer Finance
Net income for 1999 was $88.5 million, an increase of $36.4 million from
$52.1 million for 1998. The increase was comprised of an increase of $51.0
million in net interest income after provision for loan losses and an increase
of $45.9 million in other income, partially offset by a $35.9 million increase
in direct expense and an increase of $23.1 million in income taxes. The increase
in net interest income after provision for loan losses was due to an increase in
loans from $2.57 billion at December 31, 1998 to $6.59 billion at December 31,
1999. The increase in loans was attributable to the growth in loans originated
by Washington Mutual Finance, purchases of specialty mortgage finance loans and
the acquisition of Long Beach Mortgage on October 1, 1999. At December 31, 1999,
Long Beach Mortgage had a loan balance of $399.5 million. The increase in other
income was primarily due to the growth in securities fees and commissions and
$22.6 million of mortgage banking income from Long Beach Mortgage.
Treasury/Other
Net income for 1999 was $229.4 million, an increase of $7.6 million from
$221.8 million for 1998. The increase was comprised of an increase of $195.2
million in net interest income after provision for loan losses, a decline in
other income of $261.5 million, and a decrease in direct expense of $58.9
million. The increase in net interest income was a result of purchases of agency
MBS and CMOs in the first half of 1999 from the secondary market. The decline in
other income was due to $289.0 million of pretax gain on the sale of retail
deposit branch systems in 1998.
ASSET AND LIABILITY MANAGEMENT STRATEGY
Our long-run profitability depends not only on the success of the services
we offer to our customers and the credit quality of our loans and securities,
but also the extent to which our earnings are not negatively affected by changes
in interest rates. We engage in a comprehensive asset and liability management
program that attempts to reduce the risk of significant decreases in net
interest income caused by interest rate changes without unduly penalizing
current earnings. As part of this strategy, we actively manage the amounts and
maturities of our assets and liabilities.
A key component of our strategy is the origination and retention of
short-term and adjustable-rate assets whose repricing characteristics more
closely match the repricing characteristics of our liabilities. At December 31,
1999, approximately 75% of our total SFR loan and MBS portfolio had adjustable
rates.
During periods of moderate to high market interest rates, ARMs have been
preferred by our customers. ARMs are also well received whenever long-term rates
remain appreciably higher than short-term rates. During 1999, market interest
rates rose 50 to 75 basis points and the difference between the yields on a
three-month U.S. Treasury bill and a ten-year U.S. Government note averaged 88
basis points compared with 37 basis points in 1998. The effect of this interest
rate environment in 1999 was that 73% of our SFR loan originations were ARMs
while 27% were fixed rate.
Prior to the recent upward trend in interest rates, a flat yield curve and
significant repricings had resulted in lowered asset yields. Subsequently, when
interest rates rose, the higher funding costs compressed the net interest
margin. This compression is expected to continue in 2000 due to continued higher
funding costs, lagging ARM repricing and new loans that have low initial rates.
Additional Federal Reserve Board rate increases would prolong this margin
compression. Without further interest rate increases, the margin will eventually
recover. We estimate that it takes three to four quarters for asset yields to
catch up with increases in funding costs after a 25 to 50 basis point increase
in interest rates.
In order to maintain the balance between interest-sensitive liabilities and
interest-sensitive assets, we continued to sell fixed-rate conforming loans. At
the same time, we bought adjustable-rate MBS, pools of adjustable-rate loans,
and shorter duration tranches of MBS in the secondary market during the first
half of
49
52
1999. See "Business -- Treasury Activities -- Investing Activities." These
purchases were halted during the second half of 1999. We did continue to
purchase specialty mortgage finance loans, primarily through flow agreements,
during the latter half of 1999. These types of purchases are expected to
continue in 2000. It is anticipated that during 2000, in addition to selling
fixed-rate loans we may sell ARMs with three to five year initial fixed rates.
We originate and hold in portfolio adjustable-rate and short-term loans in
order to better control the interest sensitivity of our assets. We also attempt
to manage our liability durations through a variety of borrowing types and
sources. In addition, we use derivative instruments to adjust the
interest-sensitivity characteristics of certain borrowings and deposits to
better match those of the assets, which the liabilities fund.
A conventional view of interest rate sensitivity for savings institutions
is the gap report, which indicates the difference between assets maturing or
repricing within a period and total liabilities maturing or repricing within the
same period. In assigning assets to maturity and repricing categories we take
into consideration expected prepayment speeds rather than contractual
maturities. The balances reflect actual amortization of principal and do not
take into consideration reinvestment of cash. Principal prepayments are the
amounts of principal reduction over and above normal amortization. We have used
prepayment assumptions based on market estimates and past experience with our
current portfolio. Since our non-maturity deposits are not contractually subject
to repricing, they have been allocated based on expected decay rates. Non-rate
sensitive items such as the reserve for loan losses and deferred loan fees/costs
are not included in the table. The balance of fixed-rate loans held for sale is
included in the 0-3 months category.
50
53
INTEREST-RATE-SENSITIVITY GAP REPORT
DECEMBER 31, 1999
PROJECTED REPRICING
----------------------------------------------------------------------
0-3 MONTHS 4-12 MONTHS 1-5 YEARS THEREAFTER TOTAL
------------ ------------ ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
INTEREST-SENSITIVE ASSETS
Adjustable-rate loans(1)..... $ 56,559,701 $ 20,040,624 $18,219,298 $ 630,930 $ 95,450,553
Fixed-rate loans(1).......... 1,891,512 3,076,538 7,831,732 6,034,887 18,834,669
Adjustable-rate securities
(1)(2)..................... 27,408,931 3,558,531 6,851,619 126,813 37,945,894
Fixed-rate securities(1)..... 923,027 2,623,620 10,456,538 13,258,466 27,261,651
Cash and cash equivalents.... 3,040,167 -- -- -- 3,040,167
------------ ------------ ----------- ----------- ------------
$ 89,823,338 $ 29,299,313 $43,359,187 $20,051,096 $182,532,934
============ ============ =========== =========== ============
INTEREST-SENSITIVE
LIABILITIES
Noninterest-bearing checking
accounts(3)................ $ 414,224 $ 914,346 $ 2,641,363 $ 3,380,597 $ 7,350,530
Interest-bearing checking
accounts, savings accounts
and MMDAs(3)............... 4,137,137 7,574,910 14,928,357 9,546,915 36,187,319
Time deposit accounts........ 9,172,292 22,574,843 5,766,229 77,175 37,590,539
Short-term and
adjustable-rate
borrowings................. 79,002,657 3,740,735 109,953 -- 82,853,345
Fixed-rate borrowings........ 1,428,912 3,951,963 3,445,469 2,670,160 11,496,504
Derivatives matched against
liabilities................ (15,967,800) 5,402,000 11,575,800 (1,010,000) --
------------ ------------ ----------- ----------- ------------
$ 78,187,422 $ 44,158,797 $38,467,171 $14,664,847 $175,478,237
============ ============ =========== =========== ============
Repricing gap................ $ 11,635,916 $(14,859,484) $ 4,892,016 $ 5,386,249
============ ============ =========== ===========
Cumulative gap............... $ 11,635,916 $ (3,223,568) $ 1,668,448 $ 7,054,697
============ ============ =========== ===========
Cumulative gap as percentage
of assets.................. 6.24% (1.73)% 0.89% 3.78%
Total assets................. $186,513,630
============
- ---------------
(1) Based on scheduled maturity or scheduled repricing and estimated prepayments
of principal.
(2) Includes FHLB stock.
(3) Based on experience and anticipated decay rates of checking, savings, and
money market deposit accounts.
51
54
INTEREST-RATE-SENSITIVITY GAP REPORT
DECEMBER 31, 1998
PROJECTED REPRICING
----------------------------------------------------------------------
0-3 MONTHS 4-12 MONTHS 1-5 YEARS THEREAFTER TOTAL
------------ ------------ ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
INTEREST-SENSITIVE ASSETS
Adjustable-rate loans(1)..... $ 61,810,214 $ 13,803,885 $11,459,213 $ 563,466 $ 87,636,778
Fixed-rate loans(1).......... 4,104,132 4,502,547 9,657,090 3,538,199 21,801,968
Adjustable-rate
securities(1)(2)........... 29,603,536 4,203,091 245,049 190,423 34,242,099
Fixed-rate securities(1)..... 715,455 1,739,044 7,797,093 4,642,494 14,894,086
Cash and cash equivalents.... 2,751,974 5,000 -- -- 2,756,974
Derivatives matched against
assets..................... 300,000 (300,000) -- -- --
------------ ------------ ----------- ----------- ------------
$ 99,285,311 $ 23,953,567 $29,158,445 $ 8,934,582 $161,331,905
============ ============ =========== =========== ============
INTEREST-SENSITIVE
LIABILITIES
Noninterest-bearing
checking................... $ 677,405 $ 2,032,215 $ 1,366,668 $ 2,697,761 $ 6,774,049
Interest-bearing checking
accounts, savings accounts
and MMDAs(3)............... 6,298,022 13,954,671 8,523,417 6,196,440 34,972,550
Time deposit accounts........ 13,616,352 25,826,781 4,218,152 84,257 43,745,542
Short-term and
adjustable-rate
borrowings................. 50,620,150 2,000,681 15,666 5,257 52,641,754
Fixed-rate borrowings........ 4,418,849 1,250,520 5,057,371 1,847,558 12,574,298
Derivatives matched against
liabilities................ (2,812,800) 560,000 2,252,800 -- --
------------ ------------ ----------- ----------- ------------
$ 72,817,978 $ 45,624,868 $21,434,074 $10,831,273 $150,708,193
============ ============ =========== =========== ============
Repricing gap................ $ 26,467,333 $(21,671,301) $ 7,724,371 $(1,896,691)
============ ============ =========== ===========
Cumulative gap............... $ 26,467,333 $ 4,796,032 $12,520,403 $10,623,712
============ ============ =========== ===========
Cumulative gap as a
percentage of assets....... 15.99% 2.90% 7.57% 6.42%
Total assets................. $165,493,281
============
- ---------------
(1) Based on scheduled maturity or scheduled repricing and estimated prepayments
of principal.
(2) Includes FHLB stock.
(3) Based on experience and anticipated decay rates of checking, savings, and
money market deposit accounts.
Interest rate sensitive assets are expected to reprice or mature later in
the 1999 analysis, compared with the 1998 analysis due to assumed lower
prepayments, purchases of short duration fixed-rate loans, and originations of
5/1 hybrid loans. Interest rate sensitive liabilities in the 1999 analysis are
shorter duration compared with the 1998 analysis due to an increase in
short-term borrowings. Derivatives matched against borrowings have increased as
a means to lengthen some of these borrowings. A higher percentage of transaction
accounts compared with time deposits at year-end 1998 has also lengthened some
of the liabilities.
While the interest-rate-sensitivity gap helps provide some information
about a financial institution's interest sensitivity, it does not predict the
trend of future earnings. This is due, in part, to the lag risk, basis risk, and
cap risk described below. Also, the gap report does not reveal the impact of
pricing strategies and new business.
We are subject to various types of interest rate risk. Management
characterizes these risks as lag risk, repricing risk, prepayment risk, basis
risk and cap risk.
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Lag risk
Currently, lag risk is our primary interest rate risk. In times of rising
interest rates, we are negatively affected by an inherent timing difference
between the repricing of our adjustable-rate assets and our liabilities. The
effect of this timing difference, or "lag," will be favorable during a period of
declining interest rates. Although the effect of this lag generally balances out
over the life of a given loan, it can produce short-term volatility in our net
interest income during periods of interest rate movement. One example of this is
the delay in the repricing of COFI based assets, commonly referred to as "COFI
lag." This lag results from the two-month delay in reported COFI because of the
time required to gather the data needed to compute the index. The COFI used to
reprice ARMs and adjustable-rate MBS actually reflects the cost of funds for a
period two months prior to the adjustment date. As a result, COFI loans reprice
more slowly than our liabilities.
Repricing risk
Repricing risk is caused by the mismatch in the maturities or repricing
periods between interest-earning assets and interest-bearing liabilities. Our
interest-earning assets are matched with like repricing interest-bearing
liabilities. The mismatch is measured and is managed by extending our
interest-bearing liabilities with derivatives. In general, our short-term ARMs
are matched with deposits and short-term borrowings. Our fixed-rate loans are
matched with long-duration deposits, such as checking and savings accounts. Some
residual mismatches arising from borrowings are also used to fund these loans.
Our intermediate loans and investments are also funded with borrowings where a
mismatch exists. Interest rate cap and exchange agreements are generally applied
to these mismatches in order to manage the repricing risk.
Prepayment risk
In a low interest rate environment with a flat yield curve, customers'
preference for fixed-rate loans may result in the prepayment and refinancing of
existing loans, fixed-rate and ARMs, to lower coupon, fixed-rate mortgage loans.
This preference, when combined with our policy of selling most of our fixed-rate
loan production, may make it more difficult for us to increase or even maintain
the size of our loan and MBS portfolio during these periods. In addition,
premiums related to loans and MBS on our Consolidated Statement of Financial
Condition, as well as the servicing rights attributed to loans serviced for
others, must be written off at the time of repayment, and can have an adverse
impact on earnings.
Basis risk
The repricing of our assets and liabilities is also at risk from interest
rate movements because generally our assets and liabilities are tied to
different indices which may react differently to changes in interest rates.
Loans tied to the COFI index create a form of basis risk for us because the cost
of the portion of our liabilities that are borrowings rather than deposits is
higher than the general cost of funds for most of the other savings institutions
whose costs are a component of COFI. To reduce basis risk, during 1997, we
introduced the MTA loan. This loan has all the same borrower advantages as the
COFI product, such as a 7.5% annual payment cap and four payment options.
However, the MTA loan is indexed to the 12-month moving average of the one-year
Treasury bills which more closely reflects our borrowing costs. During 1999,
$28.82 billion or 97% of all SFR ARM originations were MTA loans. Management
hopes to reduce potential net interest income volatility caused by COFI basis
risk by increasing production of MTA and other non-COFI adjustable-rate products
and short-term fixed-rate products, such as consumer loans.
Borrowings are generally more rate sensitive than deposits and reprice more
quickly as market interest rates (such as treasury rates) change. To the extent
that loan indices move at a different rate or in a different direction from our
cost of funds, the general cost of funds basis risk may be realized.
Cap risk
The lifetime interest rate caps which we offer to ARM borrowers introduce
another element of interest rate risk to us. In periods of high interest rates,
it is possible for market interest rates to exceed the lifetime interest rate
caps of existing ARM loans.
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To monitor the sensitivity of earnings to interest rate changes, we conduct
financial modeling of the balance sheet and earnings under a variety of interest
rate scenarios. This modeling does require significant assumptions about loan
prepayment rates, loan origination volumes and liability funding sources. While
these assumptions may be inaccurate, these simulations are helpful for measuring
interest rate sensitivity. We monitor interest rate sensitivity and attempt to
reduce the risk of a significant decrease in net interest income caused by a
change in interest rates. We also monitor the impact of interest rate changes on
our net portfolio value.
LIQUIDITY
Liquidity management focuses on the need to meet both short-term funding
requirements and long-term growth objectives. Our long-term growth objectives
are to attract and retain stable consumer deposit relationships and to maintain
stable sources of wholesale funds. Because the low interest rate environment of
recent years has inhibited growth of consumer deposits, we have supported our
growth through business combinations with other financial institutions and by
increasing our use of wholesale borrowings. If we are not able to increase
deposits either internally or through acquisitions, our ability to grow would be
dependent upon, and to a certain extent limited by, our borrowing capacity.
We monitor our ability to meet short-term cash requirements using
guidelines established by our Board of Directors. These guidelines ensure that
short-term secured borrowing capacity is sufficient to satisfy unanticipated
cash needs.
As presented in the Consolidated Statements of Cash Flows, the sources of
liquidity vary between years. The statement of cash flows includes operating,
investing and financing categories. Cash flows from operating activities
included net income for 1999 of $1.82 billion, $318.4 million for noncash items
and $3.13 billion of other net cash inflows from operating activities. Cash
flows from investing activities consisted mainly of both sales and purchases of
securities, and loan principal payments and loan originations. In 1999, cash
flows from investing activities included sales, maturities and principal
payments on securities totaling $14.09 billion. Loans originated and purchased
for investment were in excess of payments and sales by $23.87 billion, and
$17.09 billion was used for the purchase of securities. Cash flows from
financing activities consisted primarily of the net change in our deposit
accounts and short-term borrowings, deposits sold, the proceeds and repayments
from long-term borrowings and FHLBs advances and the repurchase of our common
stock. In 1999, the above mentioned financing activities increased cash and cash
equivalents by $23.29 billion on a net basis. Cash and cash equivalents were
$3.04 billion at December 31, 1999. See "Consolidated Financial Statements --
Consolidated Statements of Cash Flows."
At December 31, 1999, we were in a position to obtain $23.72 billion in
additional borrowings primarily through the use of FHLB advances, collateralized
borrowings using unpledged MBS, other wholesale borrowing sources and deposits
of public funds.
As of December 31, 1999, we had two revolving credit facilities with a
group of lenders permitting aggregate borrowing of up to $1.20 billion. Of the
$1.20 billion available credit, $500.0 million is available to WMI. The entire
$1.20 billion is available to Washington Mutual Finance. The facilities are
available for general corporate purposes, including providing capital to our
subsidiaries. There were no outstanding borrowings under these facilities at
year-end 1999.
As of December 31, 1999, Long Beach Mortgage had two committed warehouse
credit facilities totaling $575.0 million. Total borrowings under these
warehouse facilities were $393.0 million at December 31, 1999.
CAPITAL ADEQUACY
Our capital (stockholders' equity) was $9.05 billion at December 31, 1999,
compared with $9.34 billion at December 31, 1998. During 1999, we repurchased
31.5 million common shares. These stock repurchases, the unrealized loss on
available-for-sale ("AFS") securities of $667.4 million, and the growth in
assets, were the primary factors in a decline of the ratio of stockholders'
equity to assets to 4.85% at December 31, 1999 from 5.65% at year-end 1998. The
unrealized gain on AFS securities was $87.6 million at December 31, 1998.
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Excluding the unrealized loss and gain from AFS securities, the ratio of
stockholders' equity to assets would have been 5.21% at December 31, 1999,
compared with 5.59% at year-end 1998.
The regulatory capital ratios of WMBFA, WMB and WMBfsb and minimum
regulatory requirements to be categorized as well capitalized were as follows:
DECEMBER 31, 1999
------------------------ WELL-CAPITALIZED
WMBFA WMB WMBFSB MINIMUM
----- ----- ------ ----------------
Tier 1 capital to adjusted total assets
(leverage)..................................... 5.53% 5.67% 8.58% 5.00%
Tier 1 capital to risk-weighted assets........... 9.95 10.18 13.94 6.00
Total capital to risk-weighted assets............ 11.15 10.90 15.21 10.00
In addition, FCIB met all FDIC requirements to be categorized as well
capitalized at December 31, 1999.
Our federal savings bank subsidiaries are also required by OTS regulations
to maintain tangible capital of at least 1.50% of assets. WMBFA and WMBfsb both
satisfied this requirement at December 31, 1999.
Our broker-dealer subsidiaries are also subject to capital requirements. At
December 31, 1999, both of our securities subsidiaries were in compliance with
their applicable capital requirements.
YEAR 2000 PROJECT
This section contains forward-looking statements that have been prepared on
the basis of management's best judgments and currently available information and
constitutes a Year 2000 readiness disclosure within the meaning of the Year 2000
Readiness Disclosure Act of 1998. These forward-looking statements are
inherently subject to significant business, third-party and regulatory
uncertainties and contingencies, many of which are beyond our control. In
addition, these forward-looking statements are based on current assessments and
remediation plans that are subject to representations on the part of third-party
service providers and are subject to change. Accordingly, there can be no
assurance that our results of operations will not be adversely affected by
damages resulting from the Year 2000 issue.
We implemented a company-wide program to renovate, test and document the
readiness of our electronic systems, programs and processes ("Computer Systems")
and facilities to properly recognize dates to and through the Year 2000 (the
"Year 2000 Project"). To date, neither we nor any of our service providers have
experienced any significant Computer Systems failures as a result of the Year
2000 issue. To date, we have not had any claims from customers with respect to
any damages resulting from Year 2000 issues.
We spent approximately $33.0 million on the Year 2000 Project. This amount
does not include approximately $30.3 million that we spent in 1996 and 1997 on
technology-related initiatives, which had the effect of reducing the cost of the
Year 2000 Project. We do not anticipate that any significant future expenditures
will be required relating to the Year 2000 Project.
ACCOUNTING DEVELOPMENTS NOT YET ADOPTED
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
("SFAS 133") was issued in June 1998 and establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133 requires that
all derivatives be recognized at fair value in the statement of financial
condition. If certain criteria are met, a derivative may be specifically
designated as either a fair value or cash flow hedge. Changes in the value of
derivatives designated as fair value hedges and changes in the value of the
asset, liability or firm commitment being hedged attributable to the risk being
hedged are immediately recognized in earnings. To the extent that they are
effective, changes in the value of derivatives designated as cash flow hedges
are initially reported as a component of other comprehensive income and
reclassified to earnings when the forecasted transaction affects earnings; the
ineffective portion of the change in value is immediately reported in earnings.
SFAS 133 does not change the accounting for the item that is being hedged by a
derivative designated as a cash flow hedge.
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The Financial Accounting Standards Board has issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of SFAS No. 133, which delays the implementation date of SFAS No.
133 for one year, to fiscal years beginning after June 15, 2000.
We will implement SFAS 133 on January 1, 2001. A team consisting of
management from Accounting, Treasury and Systems has been established in order
to prepare for the implementation of SFAS 133. The implementation process has
been divided into the following components: (i) identification; (ii)
documentation; (iii) systems; (iv) accounting and reporting; and (v) training.
The identification process is nearly complete. For all existing stand-alone
derivatives a determination was made as to whether each individual contract
qualified for hedge accounting under SFAS 133. This process involved identifying
the specific assets, liabilities and anticipated transactions being hedged as
well as evaluating hedge effectiveness. The portion of the identification
process that is not complete is the search for embedded derivatives. Host
contracts of all different types (e.g. borrowings, loans, leases, etc.) can
contain embedded derivatives. SFAS 133 requires certain embedded derivatives to
be accounted for separate from the host contract. A search for derivatives
embedded in our host contracts is currently in progress.
For cash flow and fair value hedges, SFAS 133 defines new formal
documentation requirements at the inception of a hedge, which include the risk
management policy and exposures, the risks to be hedged, the instruments to be
used, the expectation of effectiveness and the measurement of ongoing
effectiveness. Our policies and procedures are currently being updated to ensure
that the appropriate documentation is created in order to comply with the hedge
accounting requirements of SFAS 133.
The requirements of SFAS 133 add complexities to derivative accounting. As
such, we are evaluating application systems capable of tracking and accounting
for derivatives in compliance with SFAS 133. We expect to have a system selected
by March 31, 2000.
We are evaluating the needs for information that will be required in order
to comply with the accounting and disclosure requirements of SFAS 133. Once
needs have been identified, a process will be designed which allows for the
systematic collection and summarization of the relevant information for
preparation of accounting entries and disclosures.
While significant progress has been made towards implementing SFAS 133, the
impact of the adoption of the provisions of this statement on our results of
operations or financial condition has not yet been determined.
SFAS 133 allows us to transfer debt securities classified as held to
maturity to available for sale so that the securities will be able to be
designated in the future as hedged items relating to interest rate. We have not
yet made the determination of which debt securities, if any, will be
reclassified. Under the transition provisions of SFAS No. 137, such a transfer
does not call into question management's intent or ability to hold other debt
securities as held to maturity. At the date of the adoption of SFAS 133, any
unrealized gain or loss on any securities transferred will be reported in other
comprehensive income as required by SFAS No. 115.
TAX CONTINGENCY
From 1981 through 1985, we acquired thrift institutions in six states
through Federal Savings and Loan Insurance Corporation ("FSLIC")-assisted
transactions. Our position is that assistance received from the FSLIC included
out-of-state branching rights valued at approximately $740.0 million. Prior to
December 31, 1998, we had sold our deposit taking businesses and abandoned such
branching rights in five states, the first of which was Missouri in 1993. Our
financial statements do not contain any benefit related to our determination
that we are entitled to a deduction for the amount of our tax bases in certain
state branching rights when we sold our deposit taking businesses in those
states, thereby abandoning such branching rights. Our position is that the tax
bases result from the tax treatment of property received as assistance from the
FSLIC in conjunction with FSLIC-assisted transactions. The potential tax benefit
related to these abandonments as of December 31, 1999, could approach $238.0
million.
The Internal Revenue Service (the "Service") has completed its examination
of our federal income tax returns for the years 1990 through 1993. The return
for 1993 included our proposed adjustment related to the
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abandonment of our Missouri branching rights. The Services' National Office
issued an adverse ruling on the matter. The matter is currently before the
Appeals Branch of the Service. We believe that our position with respect to the
tax treatment of these rights is the correct interpretation. However, we
acknowledge that no judicial or administrative authority has ever directly
addressed our position. It is therefore impossible to predict the outcome if we
are required to litigate the issue. Because of these uncertainties, we cannot
presently determine if any of the above described tax benefits will ever be
realized. Therefore, in accordance with generally accepted accounting
principles, we do not believe it is appropriate at this time to reflect these
tax benefits in our financial statements.
GOODWILL LITIGATION
On August 9, 1989, the Financial Institutions Reform, Recovery and
Enforcement Act ("FIRREA") was enacted. Among other things, FIRREA raised the
minimum capital requirements for savings institutions and required a phase-out
of the amount of supervisory goodwill which could be included in satisfying
certain regulatory capital requirements. The exclusion of supervisory goodwill
from regulatory capital led many savings institutions to either replace the lost
capital by issuing new qualifying debt or equity securities or to reduce assets.
To date, the United States Court of Federal Claims (the "Court") has issued
opinions, including assessments of damages, following trials in three
supervisory goodwill cases entitled Glendale Federal Bank v. United States, No.
90-772C ("Glendale Federal"); California Federal Bank v. United States, No.
92-138C ("California Federal"); and LaSalle Talman Bank v. United States, No.
92-652C; each involving the U.S. Government's breach of one or more contracts
with savings institutions other than those acquired by the Company. In at least
two of these other cases, Glendale Federal and California Federal, both the U.S.
Government and the plaintiff savings institutions have filed appeals with the
United States Court of Appeals for the Federal Circuit.
Home Savings
In September 1992, Home Savings filed a lawsuit against the U.S. Government
in the Court for unspecified damages involving supervisory goodwill related to
its acquisitions of troubled savings institutions from 1981 to 1988.
In March 1998, the U.S. Government conceded, while reserving the right to
contest certain issues on appeal, that Home Savings had entered into certain
contracts with the U.S. Government and that the U.S. Government took actions
that were inconsistent with those contracts. These contracts relate to Home
Savings' purchase of troubled savings institutions in Florida, Missouri, Texas
and Illinois and the purchase of Century Federal Savings of New York, with
associated unamortized supervisory goodwill of $426.4 million as of August 31,
1989.
The U.S. Government has denied the existence of a contract and actions
inconsistent with such a contract in connection with Home Savings' purchase of
savings institutions in Ohio with unamortized supervisory goodwill of
approximately $33.7 million as of August 31, 1989. Home Savings had also pursued
legal remedies against the U.S. Government for the loss of supervisory goodwill
related to Home Savings' 1988 acquisition of The Bowery Savings Bank of New
York. On November 3, 1999, WMBFA (as successor to Home Savings) notified the
Court that WMBFA would not continue to pursue remedies in connection with The
Bowery Savings Bank of New York acquisition. Unamortized supervisory goodwill
from acquisitions which remain subjects of the lawsuit totaled approximately
$460.1 million as of August 31, 1989.
The U.S. Government has not conceded that Home Savings was damaged by any
breaches of contract addressed by the lawsuit, and as yet, there has been no
determination as to the amount of any damages that Home Savings may have
sustained as a result of any breach of contract. WMBFA (as successor to Home
Savings) continues to prosecute the lawsuit.
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American Savings Bank
In December 1992, ASB, Keystone Holdings and certain related parties
brought a lawsuit against the United States, alleging, among other things, that
in connection with the acquisition of ASB they entered into a contract with
agencies of the United States and that the U.S. Government breached that
contract. As a result of the Keystone Transaction, we succeeded to all of the
rights of ASB, Keystone Holdings and such related parties in such litigation and
will receive any recovery from the litigation. ASB is now WMBFA.
In connection with the Keystone Transaction, we delivered a specified
number of shares of our common stock into an escrow. There are currently 12
million shares in the escrow (the "Escrow Shares"). Upon our receipt of net cash
proceeds from a judgment in or settlement of the litigation, all or part of the
Escrow Shares will be released, 64.9% to investors in Keystone Holdings or their
assigns, and 35.1% to the FSLIC Resolution Fund or its assigns. The number of
Escrow Shares to be released will be equal to the case proceeds, reduced by
certain tax and litigation-related costs and expenses, divided by $27.7417. The
escrow will expire on December 20, 2002, subject to extensions in certain
circumstances. If not all Escrow Shares are released prior to such expiration,
any remaining Escrow Shares will be returned to us for cancellation.
The allegations made in the ASB case are similar to those asserted in other
cases where the United States Supreme Court affirmed decisions holding the U.S.
Government liable for breach of contract. However, no record has been
established in these other cases which would indicate what, if any, damages we
are entitled to receive in this case. Accordingly, the ultimate outcome of the
ASB case is uncertain, and there can be no assurance that we will benefit
financially from it. Generally, we expect to receive financial benefit only if
the case proceeds, after reduction for certain tax and litigation-related costs
and expenses, exceed $332.9 million.
Coast
Prior to the Coast Acquisition, Coast had a similar lawsuit against the
U.S. Government. In the Coast Acquisition, Ahmanson did not acquire control of,
or a significant interest in, the lawsuit. Generally, securities representing
interests in the lawsuit were issued to Coast shareholders. These securities,
called contingent payment rights certificates, are currently traded on the
NASDAQ Stock Market under the symbol CCPRZ. As successor to Ahmanson, we own a
small number of these securities.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE INFORMATION ABOUT INTEREST RATE RISK
The tables below represent in tabular form contractual balances of our
financial instruments at their expected maturity dates as well as the fair value
of those financial instruments at December 31, 1999 and 1998. The expected
maturity categories take into consideration historical prepayment speeds as well
as actual amortization of principal and do not take into consideration
reinvestment of cash. Principal prepayments are the amounts of principal
reduction over and above normal amortization. The weighted average interest
rates for the various assets and liabilities presented are actual as of December
31, 1999 and 1998. The principal/notional amounts and fair values presented in
the table do not include the reserve for loan losses or recourse liability. See
"Notes to Consolidated Financial Statements -- Note 23: Fair Value of Financial
Instruments."
PRINCIPAL/NOTIONAL AMOUNT MATURING IN:
----------------------------------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER
------------ ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Interest rate sensitive assets:
Adjustable-rate loans.............. $ 18,327,815 $15,124,942 $12,431,094 $10,129,921 $ 8,110,500 $31,579,479
Average interest rate............ 7.38% 7.19% 7.16% 7.17% 7.16% 7.11%
Fixed-rate loans................... 4,454,888 3,029,902 2,115,554 1,487,185 1,183,305 6,564,569
Average interest rate............ 12.37 11.21 10.01 8.89 8.66 7.90
Adjustable-rate securities......... 5,475,317 4,389,757 3,637,896 3,022,606 2,646,670 18,708,067
Average interest rate............ 6.52 6.46 6.43 6.42 6.43 6.24
Fixed-rate securities.............. 3,537,707 3,182,349 2,764,598 2,398,918 2,056,121 13,176,977
Average interest rate............ 6.53 6.51 6.51 6.49 6.50 6.51
Cash and cash equivalents.......... 3,040,167 -- -- -- -- --
Average interest rate............ 0.52 -- -- -- -- --
------------ ----------- ----------- ----------- ----------- -----------
$ 34,835,894 $25,726,950 $20,949,142 $17,038,630 $13,996,596 $70,029,092
============ =========== =========== =========== =========== ===========
7.19% 7.46% 7.24% 7.10% 7.06% 6.83%
============ =========== =========== =========== =========== ===========
Interest rate sensitive liabilities:
Noninterest-bearing checking
accounts......................... $ 1,328,571 $ 929,258 $ 710,973 $ 549,911 $ 451,221 $ 3,380,596
Interest-bearing checking accounts,
savings accounts and MMDAs....... 11,714,899 5,686,473 3,992,354 2,969,488 2,277,729 9,546,376
Average interest rate............ 3.90% 3.55% 3.40% 3.29% 3.21% 2.82%
Time deposit accounts.............. 31,748,271 4,459,083 807,034 229,548 270,839 77,144
Average interest rate............ 5.12 5.44 5.61 5.48 5.89 6.72
Short-term and adjustable-rate
borrowings....................... 52,055,318 26,963,582 2,700,000 10,000 1,023,000 100,000
Average interest rate............ 5.88 6.13 6.13 5.30 6.19 5.72
Fixed-rate borrowings.............. 5,705,875 1,365,160 1,014,806 456,307 706,847 2,225,721
Average interest rate............ 5.75 6.99 7.08 6.00 6.45 8.25
------------ ----------- ----------- ----------- ----------- -----------
$102,552,934 $39,403,556 $ 9,225,167 $ 4,215,254 $ 4,729,636 $15,329,837
============ =========== =========== =========== =========== ===========
5.33% 5.56% 4.54% 3.28% 4.18% 3.03%
============ =========== =========== =========== =========== ===========
Derivatives matched against
deposits:
Pay fixed swaps.................... $ 159,000 $ 234,600 $ -- $ 9,200 $ -- $ --
Average pay rate................. 5.55% 5.48% --% 5.58% --% --%
Average receive rate............. 4.67 4.67 -- 4.67 -- --
Interest rate caps................. 265,000 154,000 80,000 113,500 191,250 --
Average strike rate.............. 8.00 7.60 8.63 8.41 8.14 --
Average index rate............... 5.72 5.32 4.67 5.04 4.67 --
------------ ----------- ----------- ----------- ----------- -----------
$ 424,000 $ 388,600 $ 80,000 $ 122,700 $ 191,250 $ --
============ =========== =========== =========== =========== ===========
Derivatives matched against
borrowings:
Pay floating swaps................. $ 100,000 $ -- $ -- $ -- $ -- $ 1,010,000
Average pay rate................. 5.73% --% --% --% --% 6.09%
Average receive rate............. 9.03 -- -- -- -- 6.81
Pay fixed-rate swaps............... 5,117,000 2,521,000 769,500 300,000 182,500 --
Average pay rate................. 5.39 5.36 6.21 6.24 6.53 --
Average receive rate............. 6.14 6.14 6.11 6.12 6.25 --
Interest rate caps................. 2,375,000 7,550,000 300,000 100,000 -- --
Average strike rate.............. 5.68 5.98 7.17 7.25 -- --
Average index rate............... 6.13 6.15 6.11 6.11 -- --
------------ ----------- ----------- ----------- ----------- -----------
$ 7,592,000 $10,071,000 $ 1,069,500 $ 400,000 $ 182,500 $ 1,010,000
============ =========== =========== =========== =========== ===========
FAIR VALUE
DECEMBER 31,
TOTAL 1999
------------ ------------
(DOLLARS IN THOUSANDS)
Interest rate sensitive assets:
Adjustable-rate loans.............. $ 95,703,751 $ 94,380,396
Average interest rate............ 7.19%
Fixed-rate loans................... 18,835,403 18,507,294
Average interest rate............ 9.85
Adjustable-rate securities......... 37,880,313 37,108,976
Average interest rate............ 6.35
Fixed-rate securities.............. 27,116,670 26,264,186
Average interest rate............ 6.51
Cash and cash equivalents.......... 3,040,167 3,040,167
Average interest rate............ 0.52
------------ ------------
$182,576,304 $179,301,019
============ ============
7.08%
============
Interest rate sensitive liabilities:
Noninterest-bearing checking
accounts......................... $ 7,350,530 $ 7,350,530
Interest-bearing checking accounts,
savings accounts and MMDAs....... 36,187,319 36,187,319
Average interest rate............ 3.41%
Time deposit accounts.............. 37,591,919 37,398,130
Average interest rate............ 5.18
Short-term and adjustable-rate
borrowings....................... 82,851,900 83,149,919
Average interest rate............ 5.97
Fixed-rate borrowings.............. 11,474,716 11,080,871
Average interest rate............ 6.55
------------ ------------
$175,456,384 $175,166,769
============ ============
5.06%
============
Derivatives matched against
deposits:
Pay fixed swaps.................... $ 402,800 $ (1,937)
Average pay rate................. 5.51%
Average receive rate............. 4.67
Interest rate caps................. 803,750 321
Average strike rate.............. 8.07
Average index rate............... 5.19
------------ ------------
$ 1,206,550 $ (1,616)
============ ============
Derivatives matched against
borrowings:
Pay floating swaps................. $ 1,110,000 $ (584)
Average pay rate................. 6.06%
Average receive rate............. 7.01
Pay fixed-rate swaps............... 8,890,000 80,787
Average pay rate................. 5.50
Average receive rate............. 6.14
Interest rate caps................. 10,325,000 56,839
Average strike rate.............. 5.96
Average index rate............... 6.15
------------ ------------
$ 20,325,000 $ 137,042
============ ============
59
62
PRINCIPAL/ NOTIONAL AMOUNT MATURING IN:
---------------------------------------------------------------------------------
1999 2000 2001 2002 2003 THEREAFTER
------------ ----------- ----------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
Interest rate sensitive
assets:
Adjustable-rate loans..... $ 18,946,400 $13,441,638 $ 9,331,318 $ 6,242,742 $5,101,195 $34,573,485
Average interest rate... 8.31% 7.26% 7.05% 7.02% 7.53% 6.99%
Fixed-rate loans.......... 6,443,986 4,137,050 2,795,276 1,806,494 1,246,206 5,372,956
Average interest rate... 10.44 9.96 9.20 8.11 7.89 6.96
Adjustable-rate
securities.............. 8,256,430 5,540,521 3,916,817 2,809,154 2,103,242 11,615,935
Average interest rate... 6.92 6.60 6.37 6.30 6.27 6.02
Fixed-rate securities..... 1,901,411 2,090,336 2,071,365 1,525,697 1,106,481 6,198,796
Average interest rate... 6.56 6.56 6.59 6.58 6.57 6.46
Cash and cash
equivalents............. 2,277,305 -- -- -- -- 479,669
Average interest rate... 0.13 -- -- -- -- --
------------ ----------- ----------- ----------- ---------- -----------
$ 37,825,532 $25,209,545 $18,114,776 $12,384,087 $9,557,124 $58,240,841
============ =========== =========== =========== ========== ===========
7.79% 7.50% 7.18% 6.96% 7.19% 6.68%
==== ==== ==== ==== ==== ====
Derivatives matched against
assets:
Pay fixed swaps........... $ 500,000 $ -- $ -- $ -- $ -- $ --
Average pay rate........ 5.96% --% --% --% --% --%
Average receive rate.... 5.45 -- -- -- -- --
------------ ----------- ----------- ----------- ---------- -----------
$ 500,000 $ -- $ -- $ -- $ -- $ --
============ =========== =========== =========== ========== ===========
Interest rate sensitive
liabilities:
Noninterest-bearing
checking accounts....... $ 2,685,324 $ 738,432 $ 700,268 $ 675,462 $ 659,338 $ 1,315,225
Interest-bearing checking
accounts, savings
accounts and MMDAs...... 20,540,329 7,084,752 1,499,149 1,469,948 1,453,358 2,925,014
Average interest rate... 3.55% 3.70% 1.93% 1.90% 1.89% 1.90%
Time deposit accounts..... 39,291,090 2,687,188 884,513 571,502 221,004 90,245
Average interest rate... 5.09 5.40 5.58 5.97 5.47 6.84
Short-term and adjustable-
rate borrowings......... 35,160,914 12,750,354 4,370,292 51,439 11,488 294,602
Average interest rate... 5.71 4.45 5.04 5.01 5.04 5.13
Fixed-rate borrowings..... 6,581,341 2,589,750 912,056 744,411 232,934 1,500,909
Average interest rate... 5.70 5.94 7.17 7.76 7.97 8.09
------------ ----------- ----------- ----------- ---------- -----------
$104,258,998 $25,850,476 $ 8,366,278 $ 3,512,762 $2,578,122 $ 6,125,995
============ =========== =========== =========== ========== ===========
4.90% 4.36% 4.35% 3.48% 2.28% 3.24%
==== ==== ==== ==== ==== ====
Derivatives matched against
deposits:
Pay fixed swaps........... $ 121,600 $ 159,000 $ 234,600 $ -- $ 9,200 $ --
Average pay rate........ 5.34% 5.55% 5.48% --% 5.58% --%
Average receive rate.... 4.76 4.76 4.76 -- 4.76 --
Interest rate caps........ 855,750 265,000 154,000 80,000 113,500 191,250
Average strike rate..... 7.16 8.00 7.60 8.63 8.41 8.14
Average index rate...... 4.99 5.26 5.05 4.76 4.92 4.76
------------ ----------- ----------- ----------- ---------- -----------
$ 977,350 $ 424,000 $ 388,600 $ 80,000 $ 122,700 $ 191,250
============ =========== =========== =========== ========== ===========
Derivatives matched against
borrowings:
Pay floating swaps........ $ -- $ 100,000 $ -- $ -- $ -- $ --
Average pay rate........ --% 5.36% --% --% --% --%
Average receive rate.... -- 9.03 -- -- -- --
Pay fixed-rate swaps...... 656,000 1,950,000 -- -- -- --
Average pay rate........ 6.76 5.71 -- -- -- --
Average receive rate.... 5.35 5.30 -- -- -- --
Interest rate caps........ 150,000 1,875,000 -- -- -- --
Average strike rate..... 5.90 5.72 -- -- -- --
Average index rate...... 5.28 5.31 -- -- -- --
------------ ----------- ----------- ----------- ---------- -----------
$ 806,000 $ 3,925,000 $ -- $ -- $ -- $ --
============ =========== =========== =========== ========== ===========
FAIR VALUE
DECEMBER 31,
TOTAL 1998
------------ ------------
(DOLLARS IN THOUSANDS)
Interest rate sensitive
assets:
Adjustable-rate loans..... $ 87,636,778 $ 87,940,256
Average interest rate... 7.36%
Fixed-rate loans.......... 21,801,968 21,936,376
Average interest rate... 9.00
Adjustable-rate
securities.............. 34,242,099 34,187,443
Average interest rate... 6.41
Fixed-rate securities..... 14,894,086 14,914,137
Average interest rate... 6.53
Cash and cash
equivalents............. 2,756,974 2,756,974
Average interest rate... 0.11
------------ ------------
$161,331,905 $161,735,186
============ ============
7.18%
====
Derivatives matched against
assets:
Pay fixed swaps........... $ 500,000 $ (2,812)
Average pay rate........ 5.96%
Average receive rate.... 5.45
------------ ------------
$ 500,000 $ (2,812)
============ ============
Interest rate sensitive
liabilities:
Noninterest-bearing
checking accounts....... $ 6,774,049 $ 6,774,049
Interest-bearing checking
accounts, savings
accounts and MMDAs...... 34,972,550 34,972,550
Average interest rate... 3.23%
Time deposit accounts..... 43,745,542 43,815,219
Average interest rate... 5.14
Short-term and adjustable-
rate borrowings......... 52,639,089 52,694,708
Average interest rate... 5.34
Fixed-rate borrowings..... 12,561,401 12,781,420
Average interest rate... 6.30
------------ ------------
$150,692,631 $151,037,946
============ ============
4.63%
====
Derivatives matched against
deposits:
Pay fixed swaps........... $ 524,400 $ (10,535)
Average pay rate........ 5.47%
Average receive rate.... 4.76 544
Interest rate caps........ 1,659,500
Average strike rate..... 7.61
Average index rate...... 4.99
------------ ------------
$ 2,183,900 $ (9,991)
============ ============
Derivatives matched against
borrowings:
Pay floating swaps........ $ 100,000 $ 5,704
Average pay rate........ 5.36%
Average receive rate.... 9.03
Pay fixed-rate swaps...... 2,606,000 (23,537)
Average pay rate........ 5.98
Average receive rate.... 5.31
Interest rate caps........ 2,025,000 (5,696)
Average strike rate..... 5.73
Average index rate...... 5.31
------------ ------------
$ 4,731,000 $ (23,529)
============ ============
60
63
The differences in the maturities of assets between December 31, 1998 and
December 31, 1999 relate primarily to the $21.24 billion increase in
interest-rate sensitive assets due to purchases of MBS and loan pools in the
secondary market and the origination and retention of adjustable-rate loans. Due
to the slowdown in estimated prepayment speeds, asset maturities have extended.
The differences in the maturities of liabilities were the result of two
factors. Due to our emphasis on checking and money market accounts, 1999 had a
higher percentage of transaction accounts compared with time deposits in 1998,
which caused an overall increase in subsequent years. In addition, we
substantially increased our wholesale funding in 1999, which was shorter in
duration and thus caused an increase in maturities less than one year.
Derivatives matched against borrowings have increased to lengthen some of these
borrowings.
Loan indices
As discussed previously, the majority of our loans and MBS have adjustable
rates that are tied to a market index. Our cost of funds compared to various
indices was as follows:
WASHINGTON
MUTUAL'S COST OF
FUNDS LESS THAN
(GREATER THAN)
WASHINGTON MUTUAL'S -----------------
FOR THE QUARTER ENDED COST OF FUNDS COFI MTA COFI MTA
--------------------- ------------------- ---- ---- ------ -----
December 31, 1999........................................ 4.89% 4.76% 4.98% (0.13)% 0.09%
September 30, 1999....................................... 4.61 4.56 4.74 (0.05) 0.13
June 30, 1999............................................ 4.49 4.49 4.79 -- 0.30
March 31, 1999........................................... 4.60 4.56 4.94 (0.04) 0.34
Management of Interest Rate Risk and Derivative Activities
To further manage interest rate risk, we use derivative instruments, such
as interest rate exchange agreements and interest rate cap agreements, to
mitigate interest rate risk. At December 31, 1999, we had entered into interest
rate exchange agreements and interest rate cap agreements with notional values
of $21.53 billion. Derivative instruments, if not used appropriately, can
subject a company to unintended financial exposure. These instruments involve,
to varying degrees, elements of credit risk in excess of the amounts recognized
in the Consolidated Statements of Financial Condition. The contract or notional
amount of these instruments reflects the extent of involvement we have in
particular classes of financial instruments.
Management, in conjunction with the Board of Directors, has established
strict policies and guidelines for the use of derivative instruments. Moreover,
we have used these instruments for many years to mitigate interest rate risk.
These instruments are not intended to be used as techniques to generate earnings
by speculating on the movements of interest rates, nor do we act as a dealer of
these instruments. See "Notes to Consolidated Financial Statements -- Note 22:
Interest Rate Risk Management."
Our current strategy is to use derivative instruments to hedge interest
rate risk associated with deposits and borrowings. For example, we have entered
into interest rate cap agreements to provide an additional layer of interest
rate protection should interest rates on deposits and borrowings rise. Through
the use of these agreements, management attempts to offset increases in interest
expense related to these deposits and borrowings and effectively lengthen the
repricing period. Thus, we have a degree of interest rate protection when
interest rates increase because the interest rate cap agreements provide a
mechanism for repricing the deposits and borrowings generally on pace with
current market rates. In a similar way, interest rate exchange agreements are
utilized to provide protection in an increasing rate environment, and also
result in sensitivity in a downward market. There can be no assurance that
interest rate exchange agreements and interest rate cap agreements will provide
us with protection in all scenarios.
61
64
The effect that interest rate exchange agreements and interest rate cap
agreements would have had on the repricing period of deposits and borrowings in
an increasing interest rate environment (up 200 basis points) for the period the
derivatives were outstanding was as follows:
DECEMBER 31, 1999
-----------------------------------------------------------------------
AFTER THREE
DUE WITHIN MONTHS BUT AFTER ONE BUT
THREE WITHIN ONE WITHIN TWO AFTER TWO
MONTHS YEAR YEARS YEARS TOTAL
------------ ----------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
Amount of deposits and
borrowings.................. $ 94,155,221 $38,756,799 $12,541,120 $30,025,097 $175,478,237
Effect of derivative
instruments................. (17,022,800) 5,977,000 10,361,100 684,700 --
------------ ----------- ----------- ----------- ------------
Amount of deposits and
borrowings after effect of
derivative instruments...... $ 77,132,421 $44,733,799 $22,902,220 $30,709,797 $175,478,237
============ =========== =========== =========== ============
The effect that interest rate exchange agreements and interest rate cap
agreements would have had on the repricing period of deposits and borrowings in
a decreasing interest rate environment (down 200 basis points) for the period
the derivatives were outstanding was as follows:
DECEMBER 31, 1999
----------------------------------------------------------------------
AFTER THREE
DUE WITHIN MONTHS BUT AFTER ONE BUT
THREE WITHIN ONE WITHIN TWO AFTER TWO
MONTHS YEAR YEARS YEARS TOTAL
----------- ----------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
Amount of deposits and
borrowings................... $94,155,221 $38,756,799 $12,541,120 $30,025,097 $175,478,237
Effect of derivative
instruments.................. (8,450,800) 5,424,000 2,755,600 271,200 --
----------- ----------- ----------- ----------- ------------
Amount of deposits and
borrowing after effect of
derivative instruments....... $85,704,421 $44,180,799 $15,296,720 $30,296,297 $175,478,237
=========== =========== =========== =========== ============
We also hedge the risks associated with the mortgage pipeline. The mortgage
pipeline consists of fixed-rate SFR loans which will be sold in the secondary
market. The risk with the mortgage pipeline is that interest rates will rise
between the time the customer locks in the interest rate on the loan and the
time the loan is sold. This period is usually 30 to 60 days. To hedge this risk,
we execute forward sales agreements. A forward sales agreement protects us in a
rising interest rate environment because the sales price and delivery date have
already been established. A forward sales agreement, however, is different than
an option contract in that we are obligated to deliver the loan to the third
party on the agreed upon future date. As a result, if the loans do not fund, we
may not have the necessary assets to meet our commitment. Therefore, we would be
required to purchase other assets, at current market prices, to satisfy the
forward sales agreement. To mitigate this risk, we use fallout factors, which
represent the percentage of loans which are not expected to close, when
calculating the amount of forward sales agreements to execute.
Counterparty risk
Our borrowing activities (including reverse repurchase agreements) and
derivative instruments generally involve an exchange of obligations with another
financial institution, referred to in such transactions as a "counterparty." If
a counterparty were to default, we could be exposed to a financial loss. A loss
would result to the extent that the value of the collateral or funds held by the
counterparty exceeded the value of the collateral or funds held by us. In order
to minimize the risk, all counterparties are evaluated for financial strength on
at least an annual basis. Exposure limits are then established for each
counterparty. Our primary focus is to deal with well-established reputable and
financially strong firms. The majority of the counterparties are U.S.-based
companies.
62
65
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For financial statements, see Index to Consolidated Financial Statements on
page 65.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Part III is incorporated by reference from our definitive proxy statement
issued in conjunction with our Annual Meeting of Shareholders to be held April
18, 2000. Certain information regarding our principal officers is set forth in
"Business -- Principal Officers."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
See Index to Consolidated Financial Statements on page 65.
(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because they are not
applicable or not required, or because the required information is included in
the Consolidated Financial Statements or the Notes thereto.
(b) REPORTS ON FORM 8-K:
Washington Mutual filed the following reports on Form 8-K during the fourth
quarter of 1999:
1. Report filed October 4, 1999. Items included: Item 5. Other Events,
and Item 7. Financial Statements and Exhibits. The report included a press
release announcing the completion of the acquisition of Long Beach
Financial Corporation.
2. Report filed October 21, 1999. Items included: Item 5. Other
Events, and Item 7. Financial Statements and Exhibits. The report included
a press release announcing the Company's third quarter financial results.
3. Report filed November 8, 1999. Items included: Item 5. Other
Events, and Item 7. Financial Statements and Exhibits. The report included
a press release regarding announcements made at an investors conference.
4. Report filed November 15, 1999. Items included: Item 7. Financial
Statements and Exhibits. Slides shown at an investors conference were
included as exhibits.
5. Report filed December 7, 1999. Items included: Item 7. Financial
Statements and Exhibits. The report included exhibits relating to the
issuance of $250,000,000 of Senior Notes due 2006.
(c) EXHIBITS:
See Index of Exhibits on page 126.
63
66
SIGNATURES
Pursuant to the requirements of the Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on March 14, 2000.
WASHINGTON MUTUAL, INC.
/s/ KERRY K. KILLINGER
--------------------------------------
Kerry K. Killinger
President, Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on February 15, 2000.
/s/ KERRY K. KILLINGER /s/ WILLIAM A. LONGBRAKE
- ----------------------------------------------------- -----------------------------------------------------
Kerry K. Killinger William A. Longbrake
Chairman, President and Chief Executive Officer; Executive Vice President and Chief Financial
Director (Principal Executive Officer) Officer (Principal Financial Officer)
/s/ RICHARD M. LEVY
-----------------------------------------------------
Richard M. Levy
Senior Vice President and Controller
(Principal Accounting Officer)
/s/ DOUGLAS P. BEIGHLE /s/ PHILLIP D. MATTHEWS
- ----------------------------------------------------- -----------------------------------------------------
Douglas P. Beighle Phillip D. Matthews
Director Director
/s/ DAVID BONDERMAN /s/ MICHAEL K. MURPHY
- ----------------------------------------------------- -----------------------------------------------------
David Bonderman Michael K. Murphy
Director Director
/s/ MARY E. PUGH
- ----------------------------------------------------- -----------------------------------------------------
J. Taylor Crandall Mary E. Pugh
Director Director
/s/ ROGER H. EIGSTI /s/ WILLIAM G. REED, JR.
- ----------------------------------------------------- -----------------------------------------------------
Roger H. Eigsti William G. Reed, Jr.
Director Director
/s/ JOHN W. ELLIS /s/ ELIZABETH A. SANDERS
- ----------------------------------------------------- -----------------------------------------------------
John W. Ellis Elizabeth A. Sanders
Director Director
/s/ ANNE V. FARRELL /s/ WILLIAM D. SCHULTE
- ----------------------------------------------------- -----------------------------------------------------
Anne V. Farrell William D. Schulte
Director Director
/s/ STEPHEN E. FRANK /s/ JAMES H. STEVER
- ----------------------------------------------------- -----------------------------------------------------
Stephen E. Frank James H. Stever
Director Director
/s/ WILLIAM P. GERBERDING /s/ WILLIS B. WOOD, JR.
- ----------------------------------------------------- -----------------------------------------------------
William P. Gerberding Willis B. Wood, Jr.
Director Director
/s/ ENRIQUE HERNANDEZ, JR.
- -----------------------------------------------------
Enrique Hernandez, Jr.
Director
64
67
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ 66
Independent Auditors' Report................................ 67
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.......................... 68
Consolidated Statements of Comprehensive Income for the
years ended December 31, 1999,
1998 and 1997............................................. 69
Consolidated Statements of Financial Condition at December
31, 1999 and 1998......................................... 70
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999,
1998 and 1997............................................. 71
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... 72
Notes to Consolidated Financial Statements.................. 74
65
68
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Washington Mutual, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Washington Mutual, Inc. and subsidiaries ("the Company") as of
December 31, 1999 and 1998, and the related consolidated statements of income,
comprehensive income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated financial statements give
retroactive effect to the merger, on October 1, 1998, of Washington Mutual, Inc.
and subsidiaries and H. F. Ahmanson & Company and subsidiaries which was
accounted for as pooling of interests as described in Note 2 to the consolidated
financial statements. We did not audit the consolidated statements of
operations, stockholders' equity, and cash flows of H. F. Ahmanson & Company and
subsidiaries for the year ended December 31, 1997, which statements reflect
total net income constituting 46% of consolidated net income for the year then
ended. Those statements were audited by other auditors whose report, dated,
January 15, 1998 (except as to Note 2 of Notes to Consolidated Financial
Statements, which is as of February 13, 1998 and Note 19 of Notes to
Consolidated Financial Statements, which is as of March 16, 1998) has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for H. F. Ahmanson & Company and subsidiaries for 1997, is based solely on the
report of such other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
such consolidated financial statements referred to above present fairly, in all
material respects, the financial condition of Washington Mutual, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
February 25, 2000
Seattle, Washington
66
69
INDEPENDENT AUDITORS' REPORT
The Board of Directors
H. F. Ahmanson & Company:
We have audited the consolidated statements of operations, stockholders'
equity and cash flows of H. F. Ahmanson & Company and subsidiaries for the year
ended December 31, 1997, which are not presented separately herein. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, and the results of operations and cash
flows of H. F. Ahmanson & Company and subsidiaries for the year ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Los Angeles, California
January 15, 1998, except as to
Note 2 of Notes to Consolidated
Financial Statements, which is as of
February 13, 1998 and Note 19 of
Notes to Consolidated Financial
Statements, which is as of
March 16, 1998
67
70
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
INTEREST INCOME
Loans.................................................. $8,348,131 $8,166,769 $7,520,760
Available-for-sale ("AFS") securities.................. 2,481,464 1,707,874 1,674,375
Held-to-maturity ("HTM") securities.................... 1,050,023 1,175,334 791,242
Other interest and dividend income..................... 182,580 171,491 216,154
---------- ---------- ----------
Total interest income................................ 12,062,198 11,221,468 10,202,531
INTEREST EXPENSE
Deposits............................................... 3,170,262 3,588,015 3,645,542
Borrowings............................................. 4,440,146 3,341,728 2,641,496
---------- ---------- ----------
Total interest expense............................... 7,610,408 6,929,743 6,287,038
---------- ---------- ----------
Net interest income.................................. 4,451,790 4,291,725 3,915,493
Provision for loan losses.............................. 167,076 161,968 246,642
---------- ---------- ----------
Net interest income after provision for loan
losses............................................ 4,284,714 4,129,757 3,668,851
NONINTEREST INCOME
Depositor and other retail banking fees................ 763,586 568,376 478,700
Securities fees and commissions........................ 271,329 192,126 186,079
Insurance fees and commissions......................... 43,085 42,254 42,700
Loan servicing income.................................. 112,323 117,356 141,278
Loan related income.................................... 102,784 111,155 89,758
Mortgage banking income (loss)......................... 109,387 133,084 (44,368)
Gain on sale of retail deposit branch systems.......... -- 289,040 57,566
Gain (loss) from mortgage securities................... (12,044) (32,183) (71,892)
Other income........................................... 118,547 85,992 100,714
---------- ---------- ----------
Total noninterest income............................. 1,508,997 1,507,200 980,535
NONINTEREST EXPENSE
Compensation and benefits.............................. 1,186,413 1,188,972 1,166,052
Occupancy and equipment................................ 564,581 498,126 500,119
Telecommunications and outsourced information
services............................................. 275,963 255,644 213,372
Depositor and other retail banking losses.............. 107,487 87,998 48,144
Transaction-related expense............................ 95,722 508,286 431,125
Amortization of goodwill and other intangible assets... 98,387 104,252 89,351
Foreclosed asset expense............................... 2,855 29,895 80,945
Other expense.......................................... 578,143 594,327 582,009
---------- ---------- ----------
Total noninterest expense............................ 2,909,551 3,267,500 3,111,117
---------- ---------- ----------
Income before income taxes........................... 2,884,160 2,369,457 1,538,269
Income taxes........................................... 1,067,096 882,525 653,151
---------- ---------- ----------
Net income............................................. $1,817,064 $1,486,932 $ 885,118
========== ========== ==========
Net income attributable to common stock................ $1,817,064 $1,470,990 $ 830,087
========== ========== ==========
Net income per common share:
Basic................................................ $3.17 $2.61 $1.56
Diluted.............................................. 3.16 2.56 1.52
See Notes to Consolidated Financial Statements.
68
71
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- --------
(DOLLARS IN THOUSANDS)
Net income.................................................. $1,817,064 $1,486,932 $885,118
Other comprehensive (loss) income, net of income taxes:
Unrealized (loss) gain on securities:
Unrealized holding (loss) gain during the period, net of
deferred income tax (benefit) of $(492,678), $31,818
and $15,622........................................... (750,025) 52,866 24,310
Loss (gain) included in net income, net of income tax
(benefit) of $(3,635), $6,700 and $2,894.............. 5,531 (11,407) (4,532)
Amortization of market adjustment for mortgage-backed
securities ("MBS") transferred in 1997 from available
for sale to held to maturity, net of deferred income
tax of $7,254, $10,255 and $1,267..................... (10,525) (16,151) (1,982)
---------- ---------- --------
(755,019) 25,308 17,796
Minimum pension liability adjustment...................... 6,294 (13,324) --
---------- ---------- --------
Other comprehensive (loss) income........................... (748,725) 11,984 17,796
---------- ---------- --------
Comprehensive income........................................ $1,068,339 $1,498,916 $902,914
========== ========== ========
See Notes to Consolidated Financial Statements.
69
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents................................... $ 3,040,167 $ 2,756,974
Trading securities.......................................... 34,660 39,068
AFS securities, amortized cost of $42,564,180 and
$32,861,818:
MBS....................................................... 40,972,653 32,399,591
Investment securities..................................... 411,665 517,462
HTM securities, fair value of $19,037,435 and $14,112,620:
MBS....................................................... 19,263,413 13,992,235
Investment securities..................................... 138,052 137,247
Loans:
Loans held in portfolio................................... 113,745,650 107,612,197
Loans held for sale....................................... 793,504 1,826,549
Reserve for loan losses................................... (1,041,929) (1,067,840)
------------ ------------
Total loans............................................. 113,497,225 108,370,906
Mortgage servicing rights................................... 643,185 461,295
Foreclosed assets........................................... 198,961 274,767
Premises and equipment...................................... 1,558,649 1,421,162
Investment in Federal Home Loan Banks ("FHLBs")............. 2,916,749 2,030,027
Goodwill and other intangible assets........................ 1,199,854 1,009,666
Other assets................................................ 2,638,397 2,082,881
------------ ------------
Total assets............................................ $186,513,630 $165,493,281
============ ============
LIABILITIES
Deposits:
Checking accounts......................................... $ 13,489,471 $ 13,460,731
Savings accounts and money market deposit accounts
("MMDAs")............................................... 30,048,378 28,285,868
Time deposit accounts..................................... 37,591,919 43,745,542
------------ ------------
Total deposits.......................................... 81,129,768 85,492,141
Federal funds purchased and commercial paper................ 866,543 2,482,830
Securities sold under agreements to repurchase ("reverse
repurchase agreements")................................... 30,162,823 18,339,538
Advances from FHLBs......................................... 57,094,053 39,748,613
Other borrowings............................................ 6,203,197 4,629,508
Other liabilities........................................... 2,004,567 5,456,251
------------ ------------
Total liabilities....................................... 177,460,951 156,148,881
STOCKHOLDERS' EQUITY
Common stock, no par value: 1,600,000,000 shares authorized,
571,589,272 and 593,408,525 shares issued................. -- --
Capital surplus -- common stock............................. 2,205,201 2,994,653
Accumulated other comprehensive income:
Unrealized (loss) gain on securities...................... (667,414) 87,605
Minimum pension liability adjustment...................... (7,030) (13,324)
Retained earnings........................................... 7,521,922 6,275,466
------------ ------------
Total stockholders' equity.............................. 9,052,679 9,344,400
------------ ------------
Total liabilities and stockholders' equity.............. $186,513,630 $165,493,281
============ ============
See Notes to Consolidated Financial Statements.
70
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CAPITAL ACCUMULATED COMMON
SURPLUS- OTHER STOCK
PREFERRED COMMON COMPREHENSIVE RETAINED IN
TOTAL STOCK STOCK INCOME EARNINGS TREASURY
----------- --------- ----------- ------------- ---------- ---------
(DOLLARS IN THOUSANDS)
Balance, December 31, 1996............ $ 7,426,137 $ 765,563 $ 2,293,098 $ 44,501 $4,773,897 $(450,922)
Net income............................ 885,118 -- -- -- 885,118 --
Cash dividends declared on preferred
stock............................... (55,018) -- -- -- (55,018) --
Cash dividends declared on common
stock............................... (359,488) -- -- -- (359,488) --
Repurchase of common stock, net....... (502,953) -- (21,574) -- -- (481,379)
Redemption or conversion of preferred
stock............................... (165,000) (168,301) 3,300 -- -- 1
Common stock issued through employee
stock plans, including tax
benefit............................. 354,493 -- 354,553 -- -- (60)
Other comprehensive income, net of
related income taxes................ 17,796 -- -- 17,796 -- --
----------- --------- ----------- --------- ---------- ---------
Balance, December 31, 1997............ 7,601,085 597,262 2,629,377 62,297 5,244,509 (932,360)
Net income............................ 1,486,932 -- -- -- 1,486,932 --
Cash dividends declared on preferred
stock............................... (19,974) -- -- -- (19,974) --
Cash dividends declared on common
stock............................... (436,001) -- -- -- (436,001) --
Repurchase of common stock, net....... (24,082) -- -- -- -- (24,082)
Redemption or conversion of preferred
stock............................... (313,063) (597,262) (112,085) -- -- 396,284
Common stock issued to acquire Coast
Savings Financial, Inc. ("Coast")... 925,143 -- 373,078 -- -- 552,065
Common stock issued through employee
stock plans, including tax
benefit............................. 112,376 -- 115,179 -- -- (2,803)
Treasury shares retired............... -- -- (10,896) -- -- 10,896
Other comprehensive income, net of
related income taxes................ 11,984 -- -- 11,984 -- --
----------- --------- ----------- --------- ---------- ---------
Balance, December 31, 1998............ 9,344,400 -- 2,994,653 74,281 6,275,466 --
Net income............................ 1,817,064 -- -- -- 1,817,064 --
Cash dividends declared on common
stock............................... (570,608) -- -- -- (570,608) --
Common stock repurchased and
retired............................. (1,081,639) -- (1,081,639) -- -- --
Common stock issued to acquire Long
Beach Financial Corp.
("Long Beach")...................... 207,191 -- 207,191 -- -- --
Common stock issued through employee
stock plans, including tax
benefit............................. 84,996 -- 84,996 -- -- --
Other comprehensive income, net of
related income taxes................ (748,725) -- -- (748,725) -- --
----------- --------- ----------- --------- ---------- ---------
Balance, December 31, 1999............ $ 9,052,679 $ -- $ 2,205,201 $(674,444) $7,521,922 $ --
=========== ========= =========== ========= ========== =========
See Notes to Consolidated Financial Statements.
71
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................... $ 1,817,064 $ 1,486,932 $ 885,118
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses................... 167,076 161,968 246,642
Mortgage banking (income) loss.............. (109,387) (133,084) 44,368
Loss from mortgage securities............... 12,044 32,183 71,892
Depreciation and amortization............... 400,016 313,499 308,078
Stock dividends from FHLBs.................. (139,263) (111,925) (89,174)
Transaction-related expense................. -- 81,651 198,628
Decrease in trading securities.............. 10,515 96,637 1,647
Origination of loans held for sale.......... (4,995,551) (13,501,513) (6,324,786)
Sales of loans held for sale................ 8,959,636 18,238,151 7,538,968
(Increase) decrease in other assets......... (516,564) 157,453 (431,364)
(Decrease) increase in other liabilities.... (336,019) 93,065 (60,145)
------------ ------------ ------------
Net cash provided by operating
activities............................. 5,269,567 6,915,017 2,389,872
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of AFS securities...................... (17,029,111) (17,372,010) (3,243,633)
Purchases of HTM securities...................... (62,331) (17,033) (31,251)
Sales of AFS securities.......................... 1,467,311 2,158,037 2,362,772
Maturities of AFS securities..................... 206,332 420,345 253,352
Maturities of HTM securities..................... 6,904 7,118 20,763
Principal payments on securities................. 12,410,919 10,009,719 4,294,364
Purchases of FHLB stock.......................... (787,650) (343,501) (187,407)
Redemption of FHLB stock......................... -- -- 69,092
Purchases of loans............................... (7,161,755) (3,020,097) (88,216)
Sales of loans................................... 55,213 49,137 41,088
Origination of loans, net of principal
payments....................................... (16,766,345) (7,781,385) (12,968,472)
Sales of foreclosed assets....................... 354,292 608,562 784,668
Cash (used for) provided by acquisitions......... (144,089) 399,590 --
Purchases of premises and equipment, net......... (318,798) (320,175) (130,189)
Cash proceeds from sale of WMLife................ -- -- 105,000
------------ ------------ ------------
Net cash used by investing activities,
carried forward........................ (27,769,108) (15,201,693) (8,718,069)
See Notes to Consolidated Financial Statements.
72
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Net cash used by investing activities,
brought forward........................... (27,769,108) (15,201,693) (8,718,069)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in deposits............................. (4,289,159) (1,102,464) (2,912,233)
Deposits sold.................................... (73,214) (3,235,644) (1,167,693)
Increase (decrease) in short-term borrowings..... 5,413,040 2,335,477 (2,004,313)
Proceeds from long-term borrowings............... 15,881,088 1,382,981 12,651,516
Repayments of long-term borrowings............... (9,910,368) (3,650,294) (10,466,879)
Proceeds from FHLBs advances..................... 87,174,232 67,188,545 58,265,565
Repayments of FHLBs advances..................... (69,827,998) (53,882,390) (47,603,586)
Cash dividends paid on preferred and common
stock.......................................... (570,608) (455,975) (414,506)
Redemption of preferred stock.................... -- (313,063) (165,000)
Repurchase of common stock, net.................. (1,081,639) (24,082) (502,953)
Other capital transactions....................... 67,360 80,562 259,061
------------ ------------ ------------
Net cash provided by financing activities... 22,782,734 8,323,653 5,938,979
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents............................... 283,193 36,977 (389,218)
Cash and cash equivalents, beginning of
year...................................... 2,756,974 2,719,997 3,109,215
------------ ------------ ------------
Cash and cash equivalents, end of year...... $ 3,040,167 $ 2,756,974 $ 2,719,997
============ ============ ============
NONCASH ACTIVITIES
Loans exchanged for MBS and real estate mortgage
investment conduits ("REMICs")................. $ 14,761,845 $ 647,020 $ 6,408,056
Loans exchanged for trading securities........... 2,246 107,544 --
Transfer to HTM securities from AFS securities... -- -- 4,359,814
Real estate acquired through foreclosure......... 337,878 511,763 738,440
Loans originated to facilitate the sale of
foreclosed assets.............................. 65,172 55,161 123,762
Loans held for sale originated to refinance
existing loans................................. 2,511,862 5,288,736 969,192
Loans held in portfolio originated to refinance
existing loans................................. 4,346,823 2,556,023 1,249,087
Trade date purchases not yet settled............. -- 2,609,937 77,684
Transfers of reserves............................ 1,221 74,409 24,502
Transaction-related write down on premises and
equipment...................................... 6,226 76,486 129,151
CASH PAID DURING THE YEAR FOR
Interest on deposits............................. 3,151,433 3,609,804 3,655,105
Interest on borrowings........................... 4,251,282 3,194,464 3,069,683
Income taxes..................................... 826,762 814,337 494,062
See Notes to Consolidated Financial Statements.
73
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Washington Mutual, Inc. ("WMI" and together with its subsidiaries,
"Washington Mutual" or the "Company") is a financial services company committed
to serving consumers and small to mid-sized businesses. Through its
subsidiaries, Washington Mutual engages in the following lines of business:
consumer banking, mortgage banking, commercial banking, financial services and
consumer finance. The Company's principal banking subsidiaries are Washington
Mutual Bank, FA ("WMBFA"), Washington Mutual Bank ("WMB") and Washington Mutual
Bank fsb ("WMBfsb"). The banking subsidiaries accept deposits from the general
public, make residential loans, consumer loans, and limited types of commercial
real estate loans (primarily loans secured by multi-family properties), and
engage in certain commercial banking activities. The Company provides consumer
installment loans and purchases retail installment contracts through its
consumer finance subsidiary, Aristar, Inc. and its subsidiaries under the name
Washington Mutual Finance. Washington Mutual markets annuities and other
insurance products, offers full-service securities brokerage, and acts as the
investment advisor to and the distributor of mutual funds.
The Company has a concentration of operations in California. At December
31, 1999, 54% of the Company's loan portfolio and 72% of the Company's deposits
were concentrated in California.
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 presentation. All significant intercompany
transactions and balances have been eliminated.
All information, including that of prior periods, has been restated to
reflect the Company's 3-for-2 stock split in June 1998.
On October 1, 1998, H.F. Ahmanson & Company ("Ahmanson") merged with and
into WMI and all of the subsidiaries of Ahmanson, including Home Savings of
America, FSB ("Home Savings"), became subsidiaries of the Company (the "Ahmanson
Merger").
On February 13, 1998, Ahmanson acquired Coast Savings Financial, Inc.
("Coast"), which was accounted for as a purchase (the "Coast Acquisition").
On July 1, 1997, Great Western Financial Corporation ("Great Western")
merged with and into a subsidiary of WMI and all of the subsidiaries of Great
Western, including Great Western Bank, a Federal Savings Bank ("GWB") and
Washington Mutual Finance, became subsidiaries of the Company (the "Great
Western Merger").
On December 20, 1996, Keystone Holdings, Inc. ("Keystone Holdings") merged
with and into WMI, and all of the subsidiaries of Keystone Holdings, including
American Savings Bank, F.A. ("ASB"), became subsidiaries of the Company (the
"Keystone Transaction").
The Ahmanson Merger, the Great Western Merger and the Keystone Transaction
were all accounted for as poolings of interests. When Washington Mutual acquires
a company through a pooling of interests, current and prior period financial
statements are restated to include the accounts of merged companies. As a
result, the accompanying financial statements and notes thereto are presented as
if the companies were merged as of the beginning of the earliest period shown.
Previously reported balances of the merged companies have been reclassified to
conform to the Company's presentation and restated to give effect to the
combinations.
On October 1, 1999, Washington Mutual acquired Long Beach, parent of Long
Beach Mortgage Company ("Long Beach Mortgage"). The acquisition was accounted
for as a purchase. The results of operations of Long Beach have been included in
the Company's results of operations from the date of acquisition. Long Beach
Mortgage will retain its name and operate as a wholly-owned subsidiary of
Washington Mutual.
74
77
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For the purpose of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, U.S. Treasury bills, overnight
investments, commercial paper and repurchase agreements with an initial maturity
of three months or less.
Federal Reserve Board regulations require depository institutions to
maintain certain minimum reserve balances. Included in cash were balances
maintained at the Federal Reserve Bank of San Francisco of $90.4 million and
$146.5 million at December 31, 1999 and 1998.
Derivative Instruments
The Company uses derivative instruments, such as interest rate exchange
agreements, interest rate cap agreements, and forward sales contracts of
financial instruments to reduce its exposure to interest rate risk. All of the
Company's derivative instruments are used for purposes other than trading.
Interest rate exchange agreements and interest rate cap agreements are used only
if they have the effect of changing the interest rate characteristics of the
assets or liabilities to which they are designated. Such effect is measured
through ongoing correlation or effectiveness tests.
Interest rate exchange agreements and interest rate cap agreements are
designated against interest-earning assets, deposits and borrowings. Agreements
designated against AFS securities are included at fair value in the AFS
portfolio and any mark-to-market adjustments are reported with the change in
value of the AFS portfolio. Interest rate exchange agreements and interest rate
cap agreements designated against loans, deposits and borrowings are reported at
historical cost.
The interest differential paid or received on interest rate exchange
agreements and interest rate cap agreements is recorded as an adjustment to
interest income or interest expense. The purchase premium of interest rate cap
agreements is capitalized and amortized as a component of interest income or
interest expense over the original term of the interest rate cap agreement. No
purchase premiums are paid at the time of entering into interest rate exchange
agreements.
From time to time, the Company terminates interest rate exchange agreements
and interest rate cap agreements prior to maturity. Such circumstances arise if,
in the judgment of management, such instruments no longer effectively meet
policy objectives. Usually such instruments are within one year of maturity.
Gains and losses from terminated interest rate exchange agreements and interest
rate cap agreements are recognized, consistent with the gain or loss on the
asset or liability associated with the agreement. When the asset or liability is
not sold or paid off, the gains or losses are deferred and amortized as
additional interest income or interest expense over the original terms of the
agreements or the remaining life of the designated asset or liability, whichever
is less.
From time to time, the Company redesignates interest rate exchange
agreements and interest rate cap agreements between earning assets and deposits
and borrowings. Such redesignations are recorded at fair value at the time of
transfer.
75
78
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company may write covered call options on its AFS portfolio. If the
option is exercised, the option fee is recorded as an adjustment to the gain or
loss on the sale of the security. If the option is not exercised, the option fee
is recognized as fee income.
Trading Securities
Securities classified as trading are accounted for at fair value with
changes in unrealized gains and losses included in current period earnings.
Gains and losses realized on the sale of these securities are based on the
specific identification method.
Held-to-Maturity Securities
Investments classified as held to maturity are accounted for at amortized
cost, but the Company must have both the positive intent and the ability to hold
those securities to maturity. Other than temporary declines in fair value are
recognized as a reduction to current earnings.
Available-for-Sale Securities
Securities not classified as either trading or held to maturity are
considered to be available for sale. Gains and losses realized on the sale of
these securities are based on the specific identification method. Unrealized
gains and losses from AFS securities are excluded from earnings and reported
(net of tax) in accumulated other comprehensive income until realized. Other
than temporary declines in fair value are recognized as a reduction to current
earnings.
Loans
Loans held in portfolio are stated at the principal amount outstanding, net
of deferred loan costs or fees and any discounts or premiums on purchased loans.
Deferred costs or fees, discounts and premiums are amortized using the interest
method over the estimated life of the loan. The Company sells most of its
conforming fixed-rate single-family residential mortgage ("SFR") loans in the
secondary market. SFR loans are defined as first lien mortgages on
owner-occupied one-to-four family residences. At the date of origination, the
loans so designated are identified as loans held for sale and carried at the
lower of net cost or fair value on an aggregate basis, net of their related
forward sales hedge gains and losses.
Management generally ceases to accrue interest income on all loans that
become four payments delinquent and reverses all interest accrued up to that
time. Thereafter, interest income is accrued only if and when, in management's
opinion, projected cash proceeds are deemed sufficient to repay both principal
and interest. All loans for which interest is not being accrued are referred to
as loans on nonaccrual status.
Commercial real estate loans over $1 million, and commercial business and
builder construction loans are individually evaluated for impairment. A loan in
one of these categories is considered impaired when it is probable that we will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. Factors involved in determining impairment include, but are not
limited to, the financial condition of the borrower, the value of the underlying
collateral, as determined by either a discounted cash flow analysis or direct
capitalization methodology, and current economic conditions. All other loans are
reviewed on a collective basis.
Reserve for Loan Losses
The reserve for loan losses is maintained at a level sufficient to provide
for estimated loan losses based on evaluating known and inherent risks in the
loan portfolio. The reserve is based on management's continuing analysis of the
pertinent factors and trends underlying the quality of the loan portfolio. These
factors include changes in the size and composition of the loan portfolio;
historical loan loss experience; current and historical
76
79
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
economic conditions; nonaccrual trends; predictive analytical tools; plans for
problem loan administration and resolution; and detailed analyses of individual
loans and credits for which full collectibility may not be assured. The detailed
analysis includes techniques to estimate the fair value of loan collateral and
the existence of potential alternative sources of repayment.
When available information confirms that specific loans or portions thereof
are uncollectible, these amounts are charged off against the reserve for loan
losses. The existence of some or all of the following criteria will generally
confirm that a loss has been incurred: the loan is significantly delinquent and
the borrower has not evidenced the ability or intent to bring the loan current;
the Company has no recourse to the borrower, or if it does, the borrower has
insufficient assets to pay the debt; or the fair value of the loan collateral is
significantly below the current loan balance and there is little or no near-term
prospect for improvement.
Consumer finance loans secured by collateral other than real estate are
charged off based on the number of days contractually delinquent (180 days for
substantially all loans).
The ultimate recovery of all loans is susceptible to future market factors
beyond the Company's control. These factors may result in losses or recoveries
differing significantly from those provided for in the Consolidated Financial
Statements.
Recourse Liability
The Company records a recourse liability to cover inherent losses on loans
securitized and retained in its MBS portfolio for which the Company retains the
credit risk. The recourse liability is also intended to cover potential losses
on loans and MBS sold to third parties for which a recourse liability exists. A
regular review is performed to determine the adequacy of the recourse liability.
Because the portfolio of loans and securities for which a recourse obligation
exists is similar to the Company's SFR loan portfolio, the review for adequacy
of the recourse liability is substantially similar to the review of the adequacy
of the reserve for SFR loan losses. Adjustments to the recourse liability are
recorded in gain (loss) from mortgage securities. In 1998, in connection with
the Ahmanson Merger, an additional amount was transferred from the reserve for
loan losses to the recourse liability to conform with Washington Mutual's
policy.
Gain (loss) from mortgage securities includes the provision for credit
losses on recourse mortgage securities, impairment on private issue securities,
gains and losses on sales of mortgage securities, and changes in unrealized
gains and losses on trading mortgage securities.
Foreclosed Assets
Foreclosed assets include properties acquired through foreclosure that are
transferred at fair value, less estimated selling costs, which represents the
new recorded basis of the property. Subsequently, properties are evaluated and
any additional declines in value are recorded in current period earnings. The
amount the Company ultimately recovers from foreclosed assets may differ
substantially from the net carrying value of these assets because of future
market factors beyond the Company's control or because of changes in the
Company's strategy for sale or development of the property.
Transfers and Servicing of Financial Assets
The Company records the securitization or transfer of assets in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 125. In connection
with such transfers, assets created and liabilities assumed, including servicing
rights, are recorded at their allocated carrying value based on the relative
fair values. Fair value is determined by computing the present value of the
estimated cash flows retained, using the dates that such cash flows are expected
to be released to the Company, at a discount rate considered to be commensurate
with the risks associated with the cash flows. The amounts and timing of the
cash flows are
77
80
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated after considering various economic factors including prepayment,
delinquency, default and loss assumptions. The valuation also considers
loan-related factors as applicable. Gains or losses resulting from the
securitization or transfer of assets are recorded in noninterest income.
Servicing rights are capitalized and amortized in proportion to, and over
the period of, estimated future net servicing income. Short servicing is
recorded in other liabilities in instances where the cost of servicing exceeds
the servicing fees received and is amortized in proportion to, and over the
period of, estimated net servicing loss.
The Company assesses impairment of the capitalized servicing rights based
on the fair value of those rights on a stratum-by-stratum basis, with any
impairment recognized through a valuation allowance for each impaired stratum.
For purposes of measuring impairment, the servicing rights are stratified based
on the following predominant risk characteristics of the underlying loans:
fixed-rate mortgage loans by coupon rate (less than 6%, 50 basis point
increments between 6% and 12%, and greater than 12%) and adjustable-rate
mortgage loans ("ARMs") by index, such as the FHLB 11th District Cost of Funds
Index ("COFI"), U.S. Treasury, or the London Interbank Offered Rate ("LIBOR").
In order to determine the fair value of the servicing rights, the Company
primarily uses a valuation model that calculates the present value of expected
future cash flows. Assumptions used in the valuation model include market
discount rates and anticipated prepayment speeds. The prepayment speeds are
determined from market sources for fixed-rate mortgages with similar coupons and
prepayment reports for comparable ARMs. In addition, the Company uses market
comparables for estimates of the cost of servicing per loan, inflation rates,
ancillary income per loan and default rates.
Premises and Equipment
Land, buildings, leasehold improvements and equipment are carried at
amortized cost. Buildings and equipment are depreciated over their estimated
useful lives using the straight-line method. Leasehold improvements are
amortized over the shorter of their useful lives or lease terms. The Company
reviews buildings, leasehold improvements, and equipment for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Impairment exists when the estimated undiscounted cash
flows for the property is less than its carrying value. If identified, an
impairment loss is recognized through a charge to earnings based on the fair
value of the property.
Goodwill and Other Intangible Assets
Goodwill, representing the excess of purchase price over the fair value of
net assets acquired, results from acquisitions made by the Company.
Substantially all of the Company's goodwill is being amortized using the
straight-line method over 10 to 25 years. Other intangible assets are amortized
over their estimated useful lives. The Company periodically reviews its goodwill
and other intangible assets for other-than-temporary impairment. If
circumstances indicate that impairment may exist, recoverability of the asset is
assessed based on expected undiscounted net cash flows.
Company-Owned Life Insurance
The Company purchased life insurance policies as a funding source for
certain employees' and directors' benefit plans and is the sole owner and
beneficiary of these company-owned life insurance policies. Premiums paid, net
of changes in the estimated cash surrender value of the related policies, are
included in compensation and benefits.
78
81
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reverse Repurchase Agreements
The Company enters into agreements under which we sell securities subject
to an obligation to repurchase the same or similar securities. Under these
arrangements, the Company transfers legal control over the assets but still
retains effective control through an agreement that both entitles and obligates
the Company to repurchase the assets. As a result, reverse repurchase agreements
are accounted for as financing arrangements and not as a sale and subsequent
repurchase of securities. The obligation to repurchase the securities is
reflected as a liability in the Consolidated Statements of Financial Condition
while the dollar amount of securities underlying the agreements remains in the
respective asset accounts.
Transaction-Related Expense
The Company records transaction-related expense in conjunction with its
major business combinations. Transaction-related expense is comprised of three
major categories: employee severance costs, the write down of duplicate or
excess premises and equipment, and other expenses related to effecting a
business combination.
A liability for the cost of employee termination benefits that management
intends to provide to involuntarily terminated employees is recognized in the
period in which management approves the specific plan of termination, if all of
the following conditions exist: (i) management has the appropriate level of
authority to involuntarily terminate employees, (ii) management approves and
commits the enterprise to the plan of termination, (iii) management establishes
the benefits that current employees will receive upon termination, (iv) the
benefit arrangement has been communicated to employees, (v) the communication of
the benefit arrangement includes sufficient detail to enable employees to
determine the type and amount of benefits they will receive if they are
terminated, (vi) the plan of termination specifically identifies the number of
employees to be terminated, their job classifications or functions, and their
locations, and (vii) the period of time to complete the plan of termination
indicates that significant changes to the plan of termination are not likely.
Upon consummation of a business combination, the Company specifically
identifies duplicate or excess facilities in the combined operations. Duplicate
or excess facilities fall into two categories: facilities owned by the Company
and facilities leased by the Company. Duplicate or excess facilities owned by
the Company are recorded at the lower of cost or fair value. Fair value of
duplicate or excess facilities is estimated based on the present value of the
expected future cash flows using a discount rate commensurate with the risks
involved. The loss estimated and recorded on leased duplicate or excess
facilities represents either costs to be incurred by the Company under
contractual obligations or represents penalties that will be incurred to cancel
the contractual obligations. Lease payments made on these facilities while they
remain in service are included in occupancy and equipment expense and are not
included in transaction-related expenses.
Other expenses related to effecting a business combination consist of both
period costs and accrued contract exit fees for duplicate services provided. The
period costs include actual fees of professional services firms (legal,
investment banking, etc.) that were incurred in conjunction with the
combinations, and one-time, nonrecurring costs associated with combining the
entities which are being expensed as incurred. The liability for contract exit
fees for duplicate services is recognized when management makes the decision to
terminate such contracts.
Gains in excess of the previously established reserves resulting from the
sale of financial centers closed as a result of business combinations are
included in other income.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under
this method, a deferred tax asset or liability is determined based on the
enacted tax rates which will be in effect when the differences between the
financial statement carrying amounts and tax bases of existing assets and
liabilities are expected
79
82
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to be reported in the Company's income tax returns. The comprehensive deferred
tax provision for the year is equal to the change in the deferred tax asset from
the beginning to the end of the year. The effect on deferred taxes of a change
in tax rates is recognized in income in the period that includes the enactment
date of the change.
The Company reports income and expenses using the accrual method of
accounting and files a consolidated tax return on that basis as well. The
Company's tax filings generally include all subsidiaries.
Keystone Holdings, Great Western, Ahmanson, and Long Beach filed separate
consolidated tax returns prior to the mergers with the Company. For periods
subsequent to the mergers with Washington Mutual, the Company's consolidated tax
return included the merged companies.
Year 2000 Project
The Company expensed all costs related to making its information systems
and facilities ready for the Year 2000 date change.
Average Balances
Average balances are obtained from the best available daily, weekly or
monthly data, which management believes approximate the average balances
calculated on a daily basis.
Earnings Per Share
Earnings per share ("EPS") are presented under two formats: earnings per
share and diluted earnings per share. Earnings per share are computed by
dividing net income (after deducting dividends on preferred stock) by the
weighted average number of common shares outstanding during the year. Diluted
earnings per share are computed by dividing net income (after deducting
dividends on preferred stock) by the weighted average number of common shares
outstanding during the year, plus the impact of those potential common shares,
such as stock options, that are dilutive.
Recently Issued Accounting Standards Not Yet Adopted
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998 and establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Financial
Accounting Standards Board has issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS No.
133," which delays the implementation date of SFAS No. 133 for one year, to
fiscal years beginning after June 15, 2000. The Company will implement this
statement on January 1, 2001. While significant progress has been made towards
implementing SFAS No. 133, the impact of the adoption of the provisions of this
statement on the Company's results of operations or financial condition has not
yet been determined.
NOTE 2: BUSINESS COMBINATIONS/RESTRUCTURING
On December 20, 1996, the Company completed the Keystone Transaction. At
November 30, 1996, Keystone Holdings had assets of $21.89 billion, deposits of
$12.82 billion and stockholders' equity of $808.6 million. The Company issued
71,825,000 shares of common stock to complete the Keystone Transaction.
On July 1, 1997, Washington Mutual completed the Great Western Merger. On
that date, Great Western had assets of $43.77 billion, deposits of $27.79
billion and stockholders' equity of $2.69 billion. The Company issued
188,474,327 shares of common stock to complete the merger.
80
83
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prior to the acquisition by Washington Mutual, Great Western had
implemented a restructuring plan in 1996 to improve its competitive position,
accelerate expense reduction and enhance future revenue growth by streamlining
operations, making efficient use of premises and modernizing its systems
platform. As a result, restructuring charges in the amount of $68.3 million were
recorded in 1996. The components of the restructuring charges were severance and
related payments, and facilities and equipment impairment. At the time of the
acquisition of Great Western by Washington Mutual, the 1996 restructuring plan
was discontinued.
On October 1, 1998, Washington Mutual completed its merger with Ahmanson.
On that date, Ahmanson had assets of $50.35 billion, deposits of $33.97 billion
and stockholders' equity of $3.61 billion. The Company issued 205,582,840 shares
of common stock to complete the merger. In 1997, Ahmanson recognized a $10.4
million after-tax gain on the sale of its Washington Mutual, Inc. shares
received as part of Washington Mutual's acquisition of Great Western. Since
Washington Mutual subsequently acquired Ahmanson, the gain has been reclassified
from operations to equity.
Prior to merging with Washington Mutual, Ahmanson completed the acquisition
of Coast on February 13, 1998. At the date of acquisition, Coast had total
assets of $8.90 billion and deposits of $6.40 billion. Ahmanson reissued
16,263,796 shares of its common stock held in treasury to complete the
acquisition. The value of Ahmanson common stock issued to complete the
acquisition was $925.1 million as of the purchase date. Ahmanson recorded $431.5
million in goodwill, which included $79.0 million of transaction-related
expenses, which were capitalized. In addition, Ahmanson recognized core deposit
intangibles of $85.0 million.
For the Keystone Transaction, as well as the Great Western and Ahmanson
mergers, the Company recorded transaction-related expenses associated with
employee severance, real estate and equipment to be sold or sublet and other
expenses to be incurred, such as contract exit fees. At the time of the Keystone
Transaction, the Company recorded $226.4 million in transaction-related
expenses. In determining the amount of the transaction-related expense, the
Company created a plan that outlined how the new California operations would be
integrated. The acquisition of Great Western in July 1997 impacted this plan,
resulting in modifications. Based on the revised plan, $431.1 million was
recorded in transaction-related expenses. In addition, certain accruals made as
a result of the Keystone Transaction were reversed. When the Company acquired
Ahmanson in 1998, an evaluation of the current integration plan was again
performed and the necessary changes were made to reflect the impact of Ahmanson.
As a result, $508.3 million in transaction-related expenses were recorded. The
Company also reversed certain accruals recorded in conjunction with the Great
Western Merger.
The Company's integration plan assumed staff reductions of approximately
2,850 related to the Keystone Transaction and the Great Western Merger as well
as 3,400 related to the Ahmanson Merger. Staff reductions were completed within
one year of the respective merger dates. As of December 31, 1999, all planned
staff reductions were completed and were not significantly different from the
original planned reductions.
Offices used by the Company on the Irwindale, California campus were closed
in the fourth quarter of 1999 after the Ahmanson Merger. The 727,000 square feet
of office space at the Irwindale campus is currently in the process of being
leased or subleased to third party tenants. The Company completed 162 branch
consolidations in California resulting from the Ahmanson Merger.
The carrying amount of assets acquired through the Keystone Transaction and
the Great Western and Ahmanson mergers and held for disposal at December 31,
1999 was $33.2 million.
81
84
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliations of the transaction-related expenses and accrual activity
were as follows:
1997
AMOUNTS DECEMBER 31,
1997 1997 CHARGED 1997
PERIOD 1997 TOTAL AGAINST ACCRUED
COSTS ACCRUAL EXPENSES ACCRUAL BALANCE
-------- -------- -------- --------- ------------
(DOLLARS IN THOUSANDS)
Severance........................ $ 28,807 $ 94,126 $122,933 $ (57,960) $ 93,104
Premises......................... -- 97,165 97,165 (69,317) 57,304
Equipment........................ -- 49,121 49,121 (59,834) --
Legal, underwriting and other
direct transaction costs....... 109,811 3,503 113,314 (5,993) 742
Contract cancellation costs...... -- 33,207 33,207 (11,808) 33,699
Other............................ 8,640 6,745 15,385 (9,478) 11,243
-------- -------- -------- --------- --------
$147,258 $283,867 $431,125 $(214,390) $196,092
======== ======== ======== ========= ========
1998
AMOUNTS DECEMBER 31,
1998 1998 CHARGED 1998
PERIOD 1998 TOTAL AGAINST ACCRUED
COSTS ACCRUAL EXPENSES ACCRUAL BALANCE
-------- -------- -------- --------- ------------
(DOLLARS IN THOUSANDS)
Severance........................ $ -- $186,845 $186,845 $(193,935) $ 86,014
Premises......................... 5,905 117,341 123,246 (15,713) 158,932
Equipment........................ 71,721 -- 71,721 -- --
Legal, underwriting and other
direct transaction costs....... 47,548 -- 47,548 (742) --
Contract cancellation costs...... 2,071 563 2,634 (18,584) 15,678
Other............................ 78,778 (2,486) 76,292 (7,351) 1,406
-------- -------- -------- --------- --------
$206,023 $302,263 $508,286 $(236,325) $262,030
======== ======== ======== ========= ========
1999
AMOUNTS DECEMBER 31,
1999 1999 CHARGED 1999
PERIOD 1999 TOTAL AGAINST ACCRUED
COSTS ACCRUAL EXPENSES ACCRUAL BALANCE
-------- ------- -------- --------- ------------
(DOLLARS IN THOUSANDS)
Severance.......................... $ 8,482 $ 5,612 $14,094 $ (90,809) $ 817
Premises........................... (883) (7,164) (8,047) (55,325) 96,443
Equipment.......................... 15,252 2,446 17,698 (2,446) --
Legal, underwriting and other
direct transaction costs......... 6,175 -- 6,175 -- --
Contract cancellation costs........ 4,487 (8,155) (3,668) (7,132) 391
Other.............................. 70,227 (757) 69,470 (649) --
-------- ------- ------- --------- -------
$103,740 $(8,018) $95,722 $(156,361) $97,651
======== ======= ======= ========= =======
On October 1, 1999, Washington Mutual acquired Long Beach, parent of Long
Beach Mortgage, for $168.3 million in cash and $207.2 million in stock for a
total of $375.5 million. The acquisition was accounted for as a purchase. Under
purchase accounting, the assets and liabilities of Long Beach were recorded on
the books of Washington Mutual at their respective fair values at the time of
acquisition. Goodwill of approximately $296.2 million was recorded, which is
being amortized over 20 years. At October 1, 1999, Long Beach had $821.4 million
in assets inclusive of the goodwill created. The results of operations have been
included in the financial statements since the acquisition date.
82
85
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3: SECURITIES
The amortized cost, unrealized gains, unrealized losses, and fair values of
securities (exclusive of trading securities) were as follows:
DECEMBER 31, 1999
-------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE YIELD(1)
----------- ---------- ----------- ----------- --------
(DOLLARS IN THOUSANDS)
Available-for-sale securities
Investment securities:
U.S. Government and
agency................... $ 60,201 $ -- $ (2,911) $ 57,290 5.18%
Corporate debt.............. 162,676 99 -- 162,775 6.19
Municipal................... 7,010 -- -- 7,010 5.59
Equity securities:
Preferred stock.......... 189,566 1,974 (8,170) 183,370 6.13
Other securities......... 7,044 6 (5,830) 1,220 *
----------- ------- ----------- -----------
426,497 2,079 (16,911) 411,665 6.27
MBS:
U.S. Government and
agency................... 27,882,804 16,478 (702,717) 27,196,565 6.33
Private issue............... 14,254,879 5,609 (484,400) 13,776,088 6.61
----------- ------- ----------- -----------
42,137,683 22,087 (1,187,117) 40,972,653 6.43
----------- ------- ----------- -----------
$42,564,180 $24,166 $(1,204,028) $41,384,318 6.42
=========== ======= =========== ===========
Held-to-maturity securities
Investment securities:
Corporate debt.............. $ 20,268 $ -- $ (1,342) $ 18,926 7.97%
Municipal................... 117,784 1,745 (2,689) 116,840 5.52
----------- ------- ----------- -----------
138,052 1,745 (4,031) 135,766 5.88
MBS:
U.S. Government and
agency................... 11,990,036 52,812 (283,386) 11,759,462 6.41
Private issue............... 7,273,377 -- (131,170) 7,142,207 6.52
----------- ------- ----------- -----------
19,263,413 52,812 (414,556) 18,901,669 6.45
----------- ------- ----------- -----------
$19,401,465 $54,557 $ (418,587) $19,037,435 6.45
=========== ======= =========== ===========
- ---------------
* Less than 1%.
(1) Weighted average yield at end of year.
83
86
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE YIELD(1)
----------- ---------- ---------- ----------- --------
(DOLLARS IN THOUSANDS)
Available-for-sale securities
- ---------------------------------
Investment securities:
U.S. Government and agency..... $ 64,149 $ 172 $ -- $ 64,321 6.36%
Corporate debt................. 283,441 194 (3,304) 280,331 6.23
Municipal...................... 2,020 1 -- 2,021 5.10
Equity securities:
Preferred stock............. 157,854 11,265 -- 169,119 3.97
Other securities............ 1,657 13 -- 1,670 3.29
----------- -------- -------- -----------
509,121 11,645 (3,304) 517,462 5.53
MBS:
U.S. Government and agency..... 24,254,100 122,023 (27,547) 24,348,576 6.71
Private issue.................. 8,098,597 1,707 (46,477) 8,053,827 6.43
----------- -------- -------- -----------
32,352,697 123,730 (74,024) 32,402,403 6.64
Derivative instruments:
Interest rate exchange
agreements.................. -- -- (2,812) (2,812) --
----------- -------- -------- -----------
32,352,697 123,730 (76,836) 32,399,591 6.64
----------- -------- -------- -----------
$32,861,818 $135,375 $(80,140) $32,917,053 6.62
=========== ======== ======== ===========
Held-to-maturity securities
- ---------------------------------
Investment securities:
U.S. Government and agency..... $ 6,906 $ 17 $ -- $ 6,923 5.24%
Corporate debt................. 20,173 2,060 -- 22,233 7.97
Municipal...................... 110,168 6,750 (5) 116,913 5.85
----------- -------- -------- -----------
137,247 8,827 (5) 146,069 6.13
MBS:
U.S. Government and agency..... 10,347,739 15,378 -- 10,363,117 6.46
Private issue.................. 3,644,496 41,089 (82,151) 3,603,434 7.13
----------- -------- -------- -----------
13,992,235 56,467 (82,151) 13,966,551 6.64
----------- -------- -------- -----------
$14,129,482 $ 65,294 $(82,156) $14,112,620 6.63
=========== ======== ======== ===========
- ---------------
(1) Weighted average yield at end of year.
84
87
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Securities (exclusive of trading securities) by contractual maturity were
as follows:
DECEMBER 31, 1999
---------------------------------------------------------------------------------
DUE AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN
FAIR VALUE YIELD(1) ONE YEAR YIELD(1) FIVE YEARS YIELD(1) TEN YEARS
----------- -------- -------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Available-for-sale securities
- ------------------------------
Investment securities:
U.S. Government and
agency.................... $ 57,290 5.18% $ -- --% $ 57,094 5.17% $ --
Corporate debt.............. 162,775 6.19 -- -- -- -- --
Municipal................... 7,010 5.59 -- -- -- -- --
Equity securities:
Preferred stock............. 183,370 6.13 -- -- -- -- --
Other securities............ 1,220 * -- -- -- -- --
MBS:
U.S. Government and
agency.................... 27,196,565 6.33 173,312 6.70 582,965 6.66 243,774
Private issue............... 13,776,088 6.61 -- -- -- -- 4,689
----------- -------- -------- --------
$41,384,318 6.42 $173,312 6.70 $640,059 6.53 $248,463
=========== ======== ======== ========
Held-to-maturity securities
- ------------------------------
Investment securities:
Corporate debt.............. $ 18,926 7.97% $ 44 5.50% $ 48 5.50% $ --
Municipal................... 116,840 5.52 273 5.20 13,028 5.38 21,231
MBS:
U.S. Government and
agency.................... 11,759,462 6.41 194 9.75 11,364 6.91 48,756
Private issue............... 7,142,207 6.52 50,728 6.23 -- -- --
----------- -------- -------- --------
$19,037,435 6.45 $ 51,239 6.24 $ 24,440 6.10 $ 69,987
=========== ======== ======== ========
DECEMBER 31, 1999
---------------------------------
AFTER
YIELD(1) TEN YEARS YIELD(1)
-------- ----------- --------
(DOLLARS IN THOUSANDS)
Available-for-sale securities
- ------------------------------
Investment securities:
U.S. Government and
agency.................... --% $ 196 6.73%
Corporate debt.............. -- 162,775 6.19
Municipal................... -- 7,010 5.59
Equity securities:
Preferred stock............. -- 183,370 6.13
Other securities............ -- 1,220 *
MBS:
U.S. Government and
agency.................... 5.99 26,196,514 6.33
Private issue............... 6.65 13,771,399 6.61
-----------
6.00 $40,322,484 6.42
===========
Held-to-maturity securities
- ------------------------------
Investment securities:
Corporate debt.............. --% $ 18,834 7.97%
Municipal................... 5.99 82,308 5.44
MBS:
U.S. Government and
agency.................... 7.37 11,699,148 6.40
Private issue............... -- 7,091,479 6.54
-----------
6.97 $18,891,769 6.45
===========
DECEMBER 31, 1999
---------------------------------------------------------------------------------
DUE AFTER ONE AFTER FIVE
AMORTIZED WITHIN BUT WITHIN BUT WITHIN
COST YIELD(1) ONE YEAR YIELD(1) FIVE YEARS YIELD(1) TEN YEARS
----------- -------- -------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Available-for-sale securities
- ------------------------------
Investment securities:
U.S. Government and
agency.................... $ 60,201 5.18% $ -- --% $ 60,005 5.17% $ --
Corporate debt.............. 162,676 6.19 -- -- -- -- --
Municipal................... 7,010 5.59 -- -- -- -- --
Equity securities:
Preferred stock............. 189,566 6.13 -- -- -- -- --
Other securities............ 7,044 * -- -- -- -- --
MBS:
U.S. Government and
agency.................... 27,882,804 6.33 173,752 6.70 585,544 6.66 252,020
Private issue............... 14,254,879 6.61 -- -- -- -- 5,062
----------- -------- -------- --------
$42,564,180 6.42 $173,752 6.70 $645,549 6.53 $257,082
=========== ======== ======== ========
DECEMBER 31, 1999
---------------------------------
AFTER
YIELD(1) TEN YEARS YIELD(1)
-------- ----------- --------
(DOLLARS IN THOUSANDS)
Available-for-sale securities
- ------------------------------
Investment securities:
U.S. Government and
agency.................... --% $ 196 6.73%
Corporate debt.............. -- 162,676 6.19
Municipal................... -- 7,010 5.59
Equity securities:
Preferred stock............. -- 189,566 6.13
Other securities............ -- 7,044 *
MBS:
U.S. Government and
agency.................... 5.99 26,871,488 6.33
Private issue............... 6.65 14,249,817 6.61
-----------
6.00 $41,487,797 6.42
===========
- ---------------
* Less than 1%.
(1) Weighted average yield at end of year.
85
88
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
---------------------------------------------------------------------------------
DUE AFTER ONE AFTER FIVE
AMORTIZED WITHIN BUT WITHIN BUT WITHIN
COST YIELD(1) ONE YEAR YIELD(1) FIVE YEARS YIELD(1) TEN YEARS
----------- -------- -------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Held-to-maturity securities
Investment securities:
Corporate debt.............. $ 20,268 7.97% $ 49 5.50% $ 48 5.50% $ --
Municipal................... 117,784 5.52 270 5.20 12,778 5.38 20,499
MBS:
U.S. Government and
agency.................... 11,990,036 6.41 193 9.75 11,569 6.91 49,642
Private issue............... 7,273,377 6.52 50,728 6.23 -- -- --
----------- -------- -------- --------
$19,401,465 6.45 $ 51,240 6.24 $ 24,395 6.10 $ 70,141
=========== ======== ======== ========
DECEMBER 31, 1999
---------------------------------
AFTER
YIELD(1) TEN YEARS YIELD(1)
-------- ----------- --------
(DOLLARS IN THOUSANDS)
Held-to-maturity securities
Investment securities:
Corporate debt.............. --% $ 20,171 7.97%
Municipal................... 5.99 84,237 5.44
MBS:
U.S. Government and
agency.................... 7.37 11,928,632 6.40
Private issue............... -- 7,222,649 6.54
-----------
6.97 $19,255,689 6.45
===========
- ---------------
(1) Weighted average yield at end of year.
In addition to agency securities, the securities portfolio contained
investment grade private issue MBS of $14.40 billion and $11.73 billion at
December 31, 1999 and 1998. At December 31, 1999, the Company had private issue
MBS from the following issuers, each of which exceeded 10% of the Company's
equity: General Electric Capital Mortgage Services with an amortized cost of
$1.26 billion and a fair value of $1.21 billion; Norwest Asset Securities Corp.
with an amortized cost of $1.17 billion and a fair value of $1.12 billion;
Residential Funding Mortgage Services Inc. with an amortized cost of $1.37
billion and a fair value of $1.32 billion; and Washington Mutual Bank, FA, with
an amortized cost of $12.93 billion and a fair value of $12.65 billion.
Proceeds from sales of securities in the AFS portfolio during 1999, 1998
and 1997 were $1.44 billion, $2.16 billion and $2.36 billion. The Company
realized $3.5 million in gains and $12.6 million in losses on these sales during
1999. The Company realized $19.1 million in gains and $1.0 million in losses on
sales during 1998. Similarly, the Company realized $8.3 million in gains and
$897,000 in losses during 1997.
MBS with an amortized cost of $41.08 billion and a fair value of $40.19
billion at December 31, 1999 were pledged to secure public deposits, reverse
repurchase agreements, other borrowings, FHLB advances, and access to the
Federal Reserve discount window. In connection with the Great Western Merger,
the Company reclassified certain MBS from available for sale to held to
maturity. The unrealized pretax gain at the time of the reclassification of
$102.7 million was retained in equity and is being amortized over the life of
the related securities. At December 31, 1999 and 1998, the unamortized pretax
gain, included as a component of accumulated other comprehensive income, was
$55.3 million and $73.0 million.
86
89
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4: LOANS
Loans consisted of the following:
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
SFR..................................................... $ 80,628,424 $ 81,101,706
SFR construction........................................ 1,242,784 1,020,082
Second mortgage and other consumer...................... 8,527,303 7,330,891
Specialty mortgage finance.............................. 4,451,631 721,857
Commercial business..................................... 1,451,505 1,129,329
Commercial real estate(1)............................... 18,237,507 18,134,881
Reserve for loan losses................................. (1,041,929) (1,067,840)
------------ ------------
$113,497,225 $108,370,906
============ ============
- ---------------
(1) Included $236.7 million and $221.7 million of commercial real estate
construction lending at December 31, 1999 and 1998.
Real estate construction (including SFR construction and commercial real
estate construction) and commercial business loans by maturity date were as
follows:
DECEMBER 31, 1999
----------------------------------------------------------------
REAL ESTATE
CONSTRUCTION COMMERCIAL BUSINESS
---------------------- ------------------------
ARMS FIXED-RATE ARMS FIXED-RATE TOTAL
-------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Due within one year...... $468,501 $ 24,649 $ 638,005 $115,129 $1,246,284
After one but within five
years.................. 160,784 28,246 199,972 144,470 533,472
After five years......... 239,360 557,920 241,871 112,058 1,151,209
-------- -------- ---------- -------- ----------
$868,645 $610,815 $1,079,848 $371,657 $2,930,965
======== ======== ========== ======== ==========
Nonaccrual loans totaled $827.0 million and $938.0 million at December 31,
1999 and 1998. If interest on nonaccrual loans had been recognized, such income
would have been $67.4 million in 1999, $66.4 million in 1998 and $66.2 million
in 1997.
The amount of impaired loans and the related allocated reserve for loan
losses were as follows:
DECEMBER 31,
----------------------------------------------
1999 1998
--------------------- ---------------------
LOAN ALLOCATED LOAN ALLOCATED
AMOUNT RESERVES AMOUNT RESERVES
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Nonaccrual loans:
With allocated reserves........................ $ 41,361 $ 8,053 $ 30,251 $ 11,187
Without allocated reserves..................... 37,105 -- 16,378 --
-------- ------- -------- --------
78,466 8,053 46,629 11,187
Other impaired loans:
With allocated reserves........................ 263,298 73,526 528,379 132,522
Without allocated reserves..................... 278,695 -- 144,210 --
-------- ------- -------- --------
541,993 73,526 672,589 132,522
-------- ------- -------- --------
$620,459 $81,579 $719,218 $143,709
======== ======= ======== ========
87
90
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The average balance of impaired loans and the related interest income
recognized were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
Average balance of impaired loans.......................... $669,839 $833,550 $939,346
Interest income recognized................................. 45,796 58,831 71,822
Loans totaling $69.34 billion and $47.70 billion at December 31, 1999 and
1998 were pledged to secure advances from FHLBs. At December 31, 1999, the
Company had $571.6 million in fixed-rate SFR loan commitments, $2.98 billion in
ARM commitments, $966.2 million in SFR construction loan commitments, $127.4
million in second mortgage and other consumer loan commitments, $391.1 million
in specialty mortgage finance commitments, $1.24 billion in commercial business
loan commitments, $388.1 million in commercial real estate loan commitments, and
$3.91 billion in undisbursed lines of credit.
The Company had net unamortized deferred loan costs of $185.5 million at
the end of 1999. At December 31, 1998, the Company had net unamortized deferred
loan costs of $68.2 million. The amortization of net deferred loan (costs) fees
included in interest income totaled $(49.9) million in 1999, $6.6 million in
1998 and $51.3 million in 1997.
NOTE 5: RESERVE FOR LOAN LOSSES AND RECOURSE LIABILITY
Changes in the reserve for loan losses were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Balance, beginning of year..................... $1,067,840 $1,047,845 $1,066,276
Provision for loan losses...................... 167,076 161,968 246,642
Transfers of reserves.......................... (1,221) 33,559 (13,594)
Loans charged off:
SFR and SFR construction..................... (37,754) (66,130) (141,540)
Second mortgage and other consumer........... (142,601) (123,722) (102,666)
Specialty mortgage finance................... (349) (196) (99)
Commercial business.......................... (5,492) (5,280) (3,028)
Commercial real estate....................... (37,113) (31,370) (57,873)
---------- ---------- ----------
(223,309) (226,698) (305,206)
Recoveries of loans previously charged off:
SFR and SFR construction..................... 4,123 18,459 21,970
Second mortgage and other consumer........... 19,146 18,147 20,248
Specialty mortgage finance................... 312 48 43
Commercial business.......................... 737 882 221
Commercial real estate....................... 7,225 13,630 11,245
---------- ---------- ----------
31,543 51,166 53,727
---------- ---------- ----------
Net charge offs................................ (191,766) (175,532) (251,479)
---------- ---------- ----------
Balance, end of year........................... $1,041,929 $1,067,840 $1,047,845
========== ========== ==========
88
91
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As part of the ongoing process to ensure the adequacy of the reserve for
loan losses, the Company reviews the components of its loan portfolio for
specific risk of principal loss. Components of the reserve for loan losses were
as follows:
DECEMBER 31,
------------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
Specific and allocated reserves:
Commercial real estate.................................... $ 58,983 $ 125,700
Commercial business....................................... 17,612 17,157
Builder construction...................................... 4,984 852
---------- ----------
81,579 143,709
Unallocated reserves........................................ 960,350 924,131
---------- ----------
$1,041,929 $1,067,840
========== ==========
Changes in the recourse liability were as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- -------
(DOLLARS IN THOUSANDS)
Balance, beginning of year.......................... $144,257 $ 80,157 $27,940
Transfer (to) from reserve for loan losses.......... (15,000) 74,400 24,502
(Recovery of reserve) provision for recourse
losses............................................ (16,168) (10,300) 27,715
-------- -------- -------
Balance, end of year................................ $113,089 $144,257 $80,157
======== ======== =======
NOTE 6: LOAN SERVICING
Loans serviced consisted of the following:
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
Loans held in portfolio and held for sale (exclusive of
loans serviced by others)................................. $106,598,033 $106,366,964
Loans securitized and retained (with and without
recourse)................................................. 33,196,495 24,713,174
Loans serviced for others................................... 54,605,941 51,737,736
------------ ------------
$194,400,469 $182,817,874
============ ============
As of December 31, 1999, the Company serviced 339 Government National
Mortgage Association ("GNMA") loan pools with an outstanding security balance of
$210.7 million. The Company did not issue any additional GNMA loan pools during
1999.
Changes in the balance of mortgage servicing rights were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
Balance, beginning of year......................... $461,295 $311,480 $274,057
Additions.......................................... 266,103 239,570 104,898
Amortization of mortgage servicing rights.......... (88,511) (89,260) (64,211)
Impairment adjustment.............................. 4,298 (495) (3,264)
-------- -------- --------
Balance, end of year............................... $643,185 $461,295 $311,480
======== ======== ========
89
92
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the balance of short servicing were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
Balance, beginning of year............................ $14,241 $17,984 $20,714
Amortization.......................................... (2,941) (3,743) (3,858)
Impairment adjustment................................. -- -- 1,128
------- ------- -------
Balance, end of year.................................. $11,300 $14,241 $17,984
======= ======= =======
Changes in the valuation for impairment of mortgage servicing rights were
as follows:
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------ ------
(DOLLARS IN THOUSANDS)
Balance, beginning of year.............................. $ 7,934 $7,439 $4,175
Net change.............................................. (4,298) 495 3,264
------- ------ ------
Balance, end of year.................................... $ 3,636 $7,934 $7,439
======= ====== ======
NOTE 7: PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
DECEMBER 31,
-------------------------
1999 1998
---------- -----------
(DOLLARS IN THOUSANDS)
Furniture and equipment.................................... $1,046,162 $ 846,597
Buildings.................................................. 775,242 714,412
Leasehold improvements..................................... 403,716 350,951
Work in progress........................................... 28,857 274,835
---------- -----------
2,253,977 2,186,795
Accumulated depreciation................................... (915,512) (1,013,536)
Land....................................................... 220,184 247,903
---------- -----------
$1,558,649 $ 1,421,162
========== ===========
Depreciation expense for 1999, 1998 and 1997 was $206.9 million, $145.9
million and $174.5 million.
The Company leases various branch offices, office facilities and equipment
under capital and noncancelable operating leases which expire at various dates
through 2072. Some leases contain escalation provisions for adjustments in the
consumer price index and provide for renewal options for five- to ten-year
periods. Rental expense, including amounts paid under month-to-month cancelable
leases, amounted to $191.2 million, $182.8 million and $186.1 million in 1999,
1998 and 1997.
90
93
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum net rental commitments, including maintenance and other
associated costs, for all noncancelable leases were as follows:
OPERATING LEASE CAPITAL LEASE
--------------------------- --------------------------
LAND AND FURNITURE AND LAND AND FURNITURE AND
BUILDINGS EQUIPMENT BUILDINGS EQUIPMENT
---------- ------------- --------- -------------
(DOLLARS IN THOUSANDS)
Year ending December 31,
2000............................. $ 159,353 $15,600 $ 7,551 $1,713
2001............................. 145,900 13,314 7,700 1,713
2002............................. 130,413 8,377 7,700 338
2003............................. 115,596 2,335 7,579 --
2004............................. 100,751 34 7,514 --
Thereafter......................... 430,383 -- 54,225 --
---------- ------- ------- ------
$1,082,396 $39,660 $92,269 $3,764
========== ======= ======= ======
NOTE 8: INVESTMENT IN FHLBS
The investment in the FHLBs of San Francisco, Seattle and Topeka consisted
of capital stock, at cost, totaling $2.92 billion at December 31, 1999 and $2.03
billion at December 31, 1998. The Company earned yields of 5.72% in 1999, 6.37%
in 1998 and 6.51% in 1997 from its investment in FHLBs. The investment in FHLB
stock is required to permit the Company to borrow from the FHLBs.
NOTE 9: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following:
DECEMBER 31,
------------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
Branch acquisitions, net of accumulated amortization of
$575,557 and $519,610..................................... $ 426,207 $ 475,257
Business combinations, net of accumulated amortization of
$125,883 and $149,726..................................... 773,647 534,409
---------- ----------
$1,199,854 $1,009,666
========== ==========
The average remaining amortization period at December 31, 1999 was
approximately 16 years.
91
94
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10: DEPOSITS
Deposits consisted of the following:
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS)
Checking accounts:
Interest bearing........................................ $ 6,214,933 $ 6,686,682
Noninterest bearing..................................... 7,274,538 6,774,049
----------- -----------
13,489,471 13,460,731
Savings accounts.......................................... 5,654,502 7,794,622
MMDAs..................................................... 24,393,876 20,491,246
Time deposit accounts:
Due within one year..................................... 32,201,744 39,491,294
After one but within two years.......................... 4,100,180 2,565,666
After two but within three years........................ 763,939 868,983
After three but within four years....................... 209,823 543,117
After four but within five years........................ 263,606 193,312
After five years........................................ 52,627 83,170
----------- -----------
37,591,919 43,745,542
----------- -----------
$81,129,768 $85,492,141
=========== ===========
Time deposit accounts in amounts of $100,000 or more totaled $8.84 billion
and $6.42 billion at December 31, 1999 and 1998. At December 31, 1999, $2.55
billion of these deposits mature within three months or less, $2.26 billion
mature in over three to six months, $2.70 billion mature in over six months to
one year, and $1.33 billion mature after one year.
Interest expense on deposits was as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Interest-bearing checking accounts..................... $ 60,460 $ 74,643 $ 80,014
Savings accounts and MMDAs............................. 987,691 946,975 755,198
Time deposit accounts.................................. 2,122,111 2,566,397 2,810,330
---------- ---------- ----------
$3,170,262 $3,588,015 $3,645,542
========== ========== ==========
Financial data pertaining to the weighted average cost of deposits were as
follows:
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
----- ----- -----
Weighted average interest rate during the year.............. 3.82% 4.15% 4.27%
The weighted average interest rate is based upon stated interest rates
without giving consideration to daily compounding of interest or forfeiture of
interest because of premature withdrawals. Accrued but unpaid interest on
deposits included in other liabilities totaled $68.0 million and $49.2 million
at December 31, 1999 and 1998.
92
95
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11: FEDERAL FUNDS PURCHASED AND COMMERCIAL PAPER
Federal funds purchased and commercial paper consisted of the following:
DECEMBER 31,
----------------------
1999 1998
-------- ----------
(DOLLARS IN THOUSANDS)
Federal funds purchased..................................... $525,000 $1,967,007
Commercial paper............................................ 341,543 515,823
-------- ----------
$866,543 $2,482,830
======== ==========
Federal funds purchased have remaining average maturities of 17 days at
December 31, 1999. Commercial paper has remaining average maturities of 35 days
at December 31, 1999.
Financial data pertaining to federal funds purchased and commercial paper
were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Federal funds purchased
Weighted average interest rate, end of year.... 5.74% 5.25% 5.89%
Weighted average interest rate during the
year......................................... 5.11 5.60 5.65
Average balance of federal funds purchased..... $2,000,759 $3,757,701 $2,895,380
Maximum amount of federal funds purchased at
any month end................................ 2,835,500 6,070,029 4,845,600
Interest expense............................... 102,251 210,538 163,694
Commercial paper
Weighted average interest rate, end of year.... 6.20% 5.63% 5.99%
Weighted average interest rate during the
year......................................... 5.54 5.65 6.06
Average balance of commercial paper............ $ 419,785 $ 363,965 $ 440,057
Maximum amount of commercial paper issued at
any month end................................ 651,297 515,823 694,006
Interest expense............................... 23,254 20,547 26,679
NOTE 12: REVERSE REPURCHASE AGREEMENTS
The Company sold, under agreements to repurchase, specific securities of
the U.S. Government and its agencies and other approved investments to
broker-dealers and customers. Securities underlying the agreements with
broker-dealers were delivered to the dealer who arranged the transaction or were
held by a safekeeping agent for the Company's account. Securities delivered to
broker-dealers may be loaned out in the ordinary course of operations.
93
96
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of reverse repurchase agreements were as follows:
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS)
Due within 30 days........................................ $ 4,450,108 $ 2,579,348
After 30 but within 90 days............................... 10,543,377 6,928,226
After 90 but within 180 days.............................. 4,539,062 2,447,428
After 180 days but within one year........................ 1,655,708 1,259,309
After one year............................................ 8,974,568 5,125,227
----------- -----------
$30,162,823 $18,339,538
=========== ===========
Financial data pertaining to reverse repurchase agreements were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Weighted average interest rate, end of
year...................................... 5.81% 5.38% 5.74%
Weighted average interest rate during the
year...................................... 5.36 5.67 5.69
Average balance of reverse repurchase
agreements................................ $26,081,801 $17,695,176 $14,938,348
Maximum amount of reverse repurchase
agreements at any month end............... 30,162,823 18,339,538 14,977,811
Interest expense............................ 1,397,349 1,003,851 849,383
NOTE 13: ADVANCES FROM FHLBS
As members of the FHLBs of San Francisco, Seattle and Topeka, WMBFA, WMB,
WMBfsb and First Community Industrial Bank maintain credit lines that are
percentages of their total regulatory assets, subject to collateralization
requirements. Advances are collateralized in the aggregate by all stock owned of
the FHLBs, by deposits with the FHLBs, and by certain mortgages or deeds of
trust and securities of the U.S. Government and its agencies. The maximum amount
of credit which the FHLBs will extend for purposes other than meeting
withdrawals varies from time to time in accordance with their policies. The
interest rates charged by the FHLBs for advances vary depending upon maturity,
the cost of funds in the individual FHLB and the purpose of the borrowing.
Scheduled maturities of advances from FHLBs were as follows:
DECEMBER 31,
----------------------------------------------------------
1999 1998
--------------------------- ---------------------------
RANGES OF RANGES OF
INTEREST INTEREST
AMOUNT RATES AMOUNT RATES
----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
Due within one year........ $34,106,722 4.50% - 9.34% $20,959,305 4.97% - 8.88%
After one but within two
years.................... 18,443,900 5.21 - 6.40 14,730,417 4.50 - 9.34
After two but within three
years.................... 2,960,357 3.50 - 6.55 3,560,125 4.91 - 8.22
After three but within four
years.................... 200,185 5.76 - 6.03 101,245 3.50 - 8.22
After four but within five
years.................... 1,225,310 6.05 - 8.65 211,185 5.30 - 8.22
After five years........... 157,579 2.80 - 8.57 186,336 2.80 - 8.65
----------- -----------
$57,094,053 $39,748,613
=========== ===========
94
97
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial data pertaining to advances from FHLBs were as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Weighted average interest rate, end of year..... 5.92% 5.35% 5.78%
Weighted average interest rate during the
year.......................................... 5.37 5.65 5.76
Average balance of advances from FHLBs.......... $47,008,285 $30,109,943 $17,643,892
Maximum amount of advances from FHLBs at any
month end..................................... 57,094,053 39,748,613 25,114,776
Interest expense................................ 2,522,109 1,701,312 1,016,925
NOTE 14: OTHER BORROWINGS
Other borrowings consisted of the following:
DECEMBER 31,
------------------------------------------------------------
1999 1998
---------------------------- ----------------------------
RANGES OF RANGES OF
AMOUNT INTEREST RATES AMOUNT INTEREST RATES
---------- -------------- ---------- --------------
(DOLLARS IN THOUSANDS)
Senior notes:
Due in 1999.............. $ -- --% $ 199,993 5.52% - 7.88%
Due in 2000.............. 552,424 6.13 - 7.65 549,260 5.63 - 7.65
Due in 2001.............. 649,513 5.88 - 7.75 649,170 5.88 - 7.75
Due in 2002.............. 763,191 6.00 - 8.60 612,897 6.30 - 8.60
Due in 2003.............. 149,526 6.50 149,415 6.50
Due in 2004.............. 199,754 5.85 -- --
Due in 2005.............. 148,590 7.25 148,370 7.25
Due in 2006.............. 1,236,282 7.25 - 7.50 -- --
Subordinated notes:
Due in 1999.............. -- -- 412,975 7.50 - 9.88
Due in 2000.............. 325,162 5.23 - 6.15 349,322 5.23 - 10.50
Due in 2001.............. 149,741 9.88 149,825 9.88
Due in 2004.............. 547,628 6.50 - 7.88 248,433 6.50 - 7.88
Due in 2006.............. 99,025 6.63 -- --
Trust preferred
securities(1):
Due in 2025.............. 98,879 8.25 97,960 8.25
Due in 2026.............. 148,887 8.36 148,636 8.36
Due in 2027.............. 692,780 8.21 - 8.38 691,810 8.21 - 8.38
Other:
Notes payable, due in
2006.................. -- -- 98,885 6.63
Warehouse credit
facilities, due in
2000.................. 392,999 7.46 - 7.84 -- --
Other.................... 48,816 4.20 - 15.20 122,557 5.18 - 17.47
---------- ----------
$6,203,197 $4,629,508
========== ==========
- ---------------
(1) Inclusive of capitalized issuance costs.
95
98
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is the guarantor of four separate issues of trust preferred
securities, as discussed below:
On May 31, 1997, Washington Mutual Capital I ("WMC I"), a wholly-owned
subsidiary of Washington Mutual, issued $400.0 million of 8.375% Subordinated
Capital Income Securities. In connection with WMC I's issuance of these
securities, Washington Mutual issued to WMC I $412.4 million principal amount of
its 8.375% Junior Subordinated Debentures, due 2027 (the "subordinated
debentures"). The sole assets of WMC I are and will be the subordinated
debentures.
On January 27, 1997, Great Western Financial Trust II ("GWFT II"), a
wholly-owned subsidiary of Great Western, issued $300.0 million of 8.206% Trust
Originated Preferred Securities. In connection with GWFT II's issuance of these
securities, Great Western issued to GWFT II $309.3 million principal amount of
its 8.206% subordinated deferrable interest notes, due 2027 (the "subordinated
notes due 2027"). The sole assets of GWFT II are and will be the subordinated
notes due 2027.
In December 1996, Ahmanson Trust I (the "capital trust"), a wholly-owned
subsidiary of Ahmanson, issued $150.0 million of 8.36% Company-obligated
mandatorily redeemable capital securities, Series A, of subsidiary trust holding
solely Junior Subordinated Deferrable Interest Debentures of Ahmanson. In
connection with the capital trust's issuance of these securities, Ahmanson
issued to the capital trust $154.6 million principal amount of its 8.36%
subordinated notes, due December 2026 (the "subordinated notes due 2026"). The
sole assets of the capital trust are and will be the subordinated notes due
2026.
In December 1995, Great Western Financial Trust I ("GWFT I"), a
wholly-owned subsidiary of Great Western, issued $100.0 million of 8.25% Trust
Originated Preferred Securities. In connection with GWFT I's issuance of these
securities, Great Western issued to GWFT I $103.1 million principal amount of
its 8.25% subordinated deferrable interest notes, due 2025 (the "subordinated
notes due 2025"). The sole assets of GWFT I are and will be the subordinated
notes due 2025.
Obligations of Great Western and Ahmanson under the above described
arrangements were assumed by the Company. Washington Mutual's obligations under
these and related agreements, taken together, constitute a full and
unconditional guarantee by the Company of the obligations specified above.
The Company has a right to defer payment of interest on the debentures at
any time or from time to time for a period not exceeding the extension period
described in the table below with respect to each deferral period, provided that
no extension period may extend beyond the stated maturity of the respective
debentures. Distributions paid on the securities are recorded as interest
expense in the Consolidated Statements of Income.
96
99
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial data pertaining to trust preferred securities were as follows:
DECEMBER 31, 1999 AND 1998
-------------------------------------------------------------------------------------------
AGGREGATE
LIQUIDATION AGGREGATE AGGREGATE PER
AMOUNT OF LIQUIDATION PRINCIPAL STATED ANNUM
TRUST AMOUNT OF AMOUNT MATURITY INTEREST
PREFERRED COMMON OF OF RATE OF EXTENSION REDEMPTION
NAME OF TRUST SECURITIES SECURITIES NOTES NOTES NOTES PERIOD OPTION
------------- ----------- ----------- --------- -------- -------- --------------- ------------
(DOLLARS IN THOUSANDS)
Great Western Financial $100,000 $ 3,093 $103,093 2025 8.250% 20 consecutive On or after
Trust I................... quarters December 31,
2000
Great Western Financial 300,000 9,279 309,279 2027 8.206 Ten consecutive On or after
Trust II.................. semi-annual February 1,
periods 2007
Washington Mutual Capital 400,000 12,371 412,371 2027 8.375 Ten consecutive On or after
I......................... semi-annual June 1, 2007
periods
Ahmanson Trust I............ 150,000 4,640 154,640 2026 8.360 Ten consecutive On or after
semi-annual December 1,
periods 2026
-------- ------- --------
$950,000 $29,383 $979,383 8.306
======== ======= ========
At December 31, 1999 and 1998, the Company had outstanding and unused lines
of credit totaling $793.5 million and $150.0 million with the Federal Reserve
Bank to cover overdrafts.
In August 1999, the Company and Washington Mutual Finance entered into two
revolving credit facilities with The Chase Manhattan Bank as administrative
agent: a $600.0 million 364-day facility and a $600.0 million four-year
facility, each to be used for general corporate purposes, including back-up for
the Company's and Washington Mutual Finance's commercial paper programs. The
Company may borrow a total of $500.0 million under these facilities, and
Washington Mutual Finance may borrow a total of $1.20 billion under these
facilities. As of December 31, 1999 and 1998, there were no outstanding
borrowings under these facilities.
As of December 31, 1999, Long Beach Mortgage had two committed warehouse
credit facilities totaling $575.0 million. Total borrowings under these
warehouse facilities was $393.0 million at December 31, 1999.
As of December 31, 1999, the Company had entered into eleven letters of
credit with the FHLB of San Francisco for a total of $427.3 million. As of
December 31, 1998, the Company had entered into nine letters of credit with the
FHLB of San Francisco for a total of $428.0 million. These letters of credit
provide credit enhancement on housing revenue bonds and certain of the Company's
private issue MBS.
97
100
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15: INCOME TAXES
Income taxes (benefits) from continuing operations consisted of the
following:
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- --------
(DOLLARS IN THOUSANDS)
Current:
Federal....................................... $ 443,328 $ 865,875 $585,503
State and local............................... 34,334 182,935 125,978
Payments in lieu.............................. 33,470 34,960 17,018
---------- ---------- --------
511,132 1,083,770 728,499
Deferred:
Federal....................................... 396,576 (324,623) (70,358)
State and local............................... 156,545 (43,206) (5,204)
Payments in lieu.............................. 2,843 166,584 214
---------- ---------- --------
555,964 (201,245) (75,348)
---------- ---------- --------
$1,067,096 $ 882,525 $653,151
========== ========== ========
Provisions of the Small Business Job Protection Act of 1996 (the "Job
Protection Act") significantly altered the Company's tax bad debt deduction
method and the circumstances that would require a tax bad debt reserve
recapture. Prior to enactment of the Job Protection Act, savings institutions
were permitted to compute their tax bad debt deduction through use of either the
reserve method or the percentage of taxable income method. The Job Protection
Act repealed both of these methods for large savings institutions and allows bad
debt deductions based only on actual current losses. While repealing the reserve
method for computing tax bad debt deductions, the Job Protection Act allows
thrifts to retain their existing base year bad debt reserves but requires that
reserves in excess of the balance at December 31, 1987, be recaptured into
taxable income. The tax liability for this recapture is included in the
accompanying Consolidated Financial Statements.
The base year reserve is recaptured into taxable income only in limited
situations, such as in the event of certain excess distributions or complete
liquidation. None of the limited circumstances requiring recapture are
contemplated by the Company. The amount of the Company's tax bad debt reserves
subject to recapture in these circumstances approximates $2.01 billion at
December 31, 1999. Due to the remote nature of events which may trigger the
recapture provisions, no tax liability has been established in the accompanying
Consolidated Financial Statements.
During 1998, the Company completed a settlement with the Internal Revenue
Service (the "Service") for Great Western for 1987 and 1986, and Washington
Mutual for 1993 and 1992. During 1999, the Service completed its examination of
Great Western for 1988 through 1992. The case has been referred to the Appeals
Branch for review.
The Service is currently examining H. F. Ahmanson for 1994 through
September 1998 and Washington Mutual for 1994 through 1997. The Company has been
informed by the Service that it will be examining Great Western for 1993 through
1997. The Service has completed its examination of Ahmanson for 1990 through
1993. All issues have been resolved except for one which is under review by the
Appeals Branch. The Service's National Office has issued an adverse ruling on
this issue. The Company has not recorded any benefit with respect to this issue.
As of December 31, 1999, the Company's accrual for income taxes payable is
sufficient to cover any expected liabilities arising from these examinations.
98
101
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of the Company's net deferred tax asset
(liability) were as follows:
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards........................ $ 450,005 $ 579,330
Provision for losses on loans and foreclosed assets..... 371,332 401,204
Unrealized losses on securities......................... 437,607 --
Merger costs............................................ 171,771 339,490
Compensation differences................................ 67,888 105,868
State and local taxes................................... 69,662 54,082
Other................................................... 55,671 130,673
----------- -----------
1,623,936 1,610,647
Payments in lieu.......................................... (233,329) (230,485)
Valuation allowance....................................... (90,851) (188,690)
----------- -----------
Deferred tax asset, net of payments in lieu and
valuation
allowance............................................ 1,299,756 1,191,472
Deferred tax liabilities:
Loan fees............................................... (459,626) (445,752)
Stock dividends from FHLBs.............................. (435,938) (384,460)
Basis difference on premises and equipment.............. (147,172) (103,030)
Gain on loan sales...................................... (81,428) (88,726)
Unrealized gains on securities.......................... -- (62,051)
Other................................................... (156,893) (67,033)
----------- -----------
(1,281,057) (1,151,052)
----------- -----------
Net deferred tax asset.................................... $ 18,699 $ 40,420
=========== ===========
The Company establishes a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
deferred tax asset will not be realized. The valuation allowance of $90.9
million at December 31, 1999 and $188.7 million at December 31, 1998 relate
primarily to net operating losses that are limited by Internal Revenue Code
Section 382 as a result of the Keystone Transaction.
As a result of the Keystone Transaction, the Company and certain of its
affiliates are parties to an agreement (the "Assistance Agreement") with a
predecessor of the Federal Savings and Loan Insurance Corporation ("FSLIC")
Resolution Fund (the "FRF"), which generally provides that 75% of most of the
federal tax savings and approximately 19.5% of most of the California tax
savings (as computed in accordance with the Assistance Agreement), attributable
to ASB's utilization of certain tax loss carryovers of New West Federal Savings
and Loan Association, are to be paid by the Company to the FRF. The Assistance
Agreement sets forth certain special adjustments to federal taxable income to
arrive at "FSLIC taxable income," which is then offset by utilizable net
operating losses to compute the benefit due to the FRF.
99
102
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Federal and state income tax net operating loss carryforwards due to expire
under current law during the years indicated were as follows:
DECEMBER 31, 1999
----------------------
FEDERAL STATE
-------- ----------
(DOLLARS IN THOUSANDS)
Expiring in:
2001...................................................... $ -- $ 448,763
2002...................................................... -- 557,975
2003...................................................... 421,498 --
2004...................................................... 254,000 --
2005...................................................... 254,000 --
2008...................................................... 16,203 --
2009...................................................... 6,543 --
2010...................................................... 24,251 --
2011...................................................... 1,011 --
2012...................................................... 327 --
-------- ----------
$977,833 $1,006,738
======== ==========
Reconciliations between income taxes computed at statutory rates and income
taxes included in the Consolidated Statements of Income were as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997
----------------------- ---------------------- ---------------------
AS A AS A AS A
PERCENTAGE PERCENTAGE PERCENTAGE
OF PRETAX OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
---------- ---------- --------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Income taxes computed at statutory
rates............................ $1,009,456 35.00% $ 829,310 35.00% $538,394 35.00%
Tax effect of:
State income tax, net of federal
tax benefit.................... 122,204 4.24 95,470 4.03 76,096 4.95
Payments in lieu................. 33,936 1.18 201,544 8.51 17,232 1.12
Valuation allowance change from
prior year..................... (45,248) (1.57) (258,176) (10.90) (24,860) (1.62)
Other............................ (53,252) (1.85) 14,377 0.61 46,289 3.01
---------- --------- --------
Income taxes included in the
Consolidated Statements of
Income.................... $1,067,096 37.00 $ 882,525 37.25 $653,151 42.46
========== ========= ========
NOTE 16: CONTINGENCIES
The Company has certain litigation and negotiations in progress resulting
from activities arising from normal operations. In the opinion of management,
none of these matters is likely to have a materially adverse effect on the
Company's results of operations or financial condition.
As part of the administration and oversight of the Assistance Agreement and
other agreements among ASB, certain of its affiliates and the Federal Deposit
Insurance Corporation ("FDIC"), the FDIC has a variety of review and audit
rights, including the right to review and audit computations of payments in lieu
of taxes.
In order to meet the needs of its customers, Washington Mutual issues
direct-pay, standby and other letters of credit. The credit risk in issuing
letters of credit is essentially the same as that involved in extending
100
103
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loan facilities to customers. Washington Mutual holds collateral to support
letters of credit when deemed necessary. At December 31, 1999, outstanding
letters of credit issued by Washington Mutual totaled $291.7 million.
The Company is a party to goodwill litigation that may result in a gain.
The ultimate outcome is uncertain and there can be no assurance that the Company
will benefit financially from it.
NOTE 17: STOCKHOLDERS' EQUITY
Common Stock
Changes in common stock outstanding were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(NUMBER OF SHARES IN THOUSANDS)
Shares issued, beginning of year...................... 593,409 589,790 576,179
Common stock issued through employee stock plans...... 3,386 4,158 14,973
Common stock issued to acquire Long Beach............. 6,338 -- --
Common stock repurchased and retired.................. (31,544) (539) (1,362)
------- ------- -------
Shares issued, end of year............................ 571,589 593,409 589,790
Treasury shares, end of year(1)....................... -- -- (46,948)
------- ------- -------
Shares outstanding, end of year....................... 571,589 593,409 542,842
======= ======= =======
- ---------------
(1) Beginning in October 1995, Ahmanson commenced a program to repurchase its
own common stock and had purchased a total of 27,986,575 shares (or
47,017,446 equivalent common shares of WMI, based on a conversion rate of
1.68 shares of WMI common stock for each share of Ahmanson common stock)
before the program was discontinued in February 1998. The shares were
recorded as common stock in treasury. Prior to its merger with Washington
Mutual, Ahmanson reissued substantially all the shares for purposes of the
conversion of Ahmanson's 6.00% Cumulative Convertible Preferred Stock,
Series D, the Coast Acquisition, and employee stock option exercises. The
residual amount of treasury shares was retired upon the merger with
Washington Mutual, and no treasury shares remained at December 31, 1999 and
1998.
Cash dividends paid per share were as follows(1):
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
Fourth quarter........................................... $0.260 $0.220 $0.187
Third quarter............................................ 0.250 0.207 0.180
Second quarter........................................... 0.240 0.200 0.173
First quarter............................................ 0.230 0.193 0.167
- ---------------
(1) These dividends have not been restated to reflect pooling combinations.
Prior to their business combination with Washington Mutual, acquired
companies paid total common cash dividends of $69.6 million and $154.6 million
in 1998 and 1997. No common cash dividends were paid by acquired companies in
1999.
In addition to being influenced by legal, regulatory and economic
restrictions, WMI's ability to pay dividends is also predicated on the ability
of its subsidiaries to declare and pay dividends to WMI. These subsidiaries are
subject to legal, regulatory and debt covenant restrictions on their ability to
pay dividends.
During 1999, the Board of Directors authorized a stock repurchase program
which permits the repurchase in the open market of up to 56.3 million shares of
the Company's common stock. During the year, the Company repurchased a total of
31.5 million shares of its common stock.
101
104
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1990, the Company's Board of Directors adopted a Shareholder Rights Plan
and declared a dividend of one right for each outstanding share of common stock
to shareholders of record on October 31, 1990. The rights have certain
anti-takeover effects. They are intended to discourage coercive or unfair
takeover tactics and to encourage any potential acquirer to negotiate a price
fair to all shareholders. The rights may cause substantial dilution to an
acquiring party that attempts to acquire the Company on terms not approved by
the Board of Directors, but they will not interfere with any friendly merger or
other business combination. The plan was not adopted in response to any specific
effort to acquire control of the Company.
See -- "Note 18: Earnings Per Share" for discussion of the 12 million
shares of common stock held in escrow.
Preferred Stock
There was no preferred stock (10,000,000 shares authorized without regard
to merged companies) issued or outstanding at December 31, 1999 and 1998.
In 1993, the Company issued 2,000,000 shares of 7.60% Noncumulative
Perpetual Preferred Stock, Series E ("Series E Preferred Stock"), at $25.00 per
share for net proceeds of $48.2 million. The Series E Preferred Stock had a
liquidation preference of $25.00 per share plus dividends accrued and unpaid for
the then current dividend period. Dividends, if and when declared by Washington
Mutual's Board of Directors, were at an annual rate of $1.90 per share.
Dividends were declared and paid in all quarters from issuance to redemption. In
November 1995, the Company purchased and retired 30,000 shares of the Series E
Preferred Stock. The Company redeemed the remaining Series E Preferred Stock on
September 16, 1998, at the redemption price of $25.00 per share plus unpaid
dividends, for the then current dividend period up to the date fixed for
redemption.
In 1993, Ahmanson issued 575,000 shares of 6.00% Cumulative Convertible
Preferred Stock, Series D ("Series D Convertible Preferred Stock") and received
net proceeds of $280.7 million. The Series D Convertible Preferred Stock was
convertible into 11,814,238 shares of Ahmanson's common stock at a rate of
$24.335 per share of common stock. Dividends, if and when declared by Ahmanson's
Board of Directors, were at an annual rate of $30.00 per share. Dividends were
declared and paid in all quarters from issuance to redemption or conversion. On
or before August 24, 1998, substantially all of these shares were converted to
Ahmanson common stock.
In 1993, Ahmanson issued 780,000 shares of 8.40% Preferred Stock, Series C
("Series C Preferred Stock-Ahmanson") and received net proceeds of $188.4
million. The Series C Preferred Stock-Ahmanson had a liquidation preference of
$195.0 million plus dividends accrued and unpaid for the then current dividend
period. Dividends, if and when declared by Ahmanson's Board of Directors, were
at an annual rate of $21.00 per share. Dividends were declared and paid in all
quarters from issuance to redemption. On March 2, 1998, Ahmanson redeemed at par
the entire $195.0 million of Series C Preferred Stock-Ahmanson.
In 1992, the Company issued 2,800,000 shares of 9.12% Noncumulative
Perpetual Preferred Stock, Series C ("Series C Preferred Stock"), at $25.00 per
share for net proceeds of $67.4 million. The Series C Preferred Stock had a
liquidation preference of $25.00 per share plus dividends accrued and unpaid for
the then current dividend period. Dividends were at an annual rate of $2.28 per
share. Dividends were declared and paid in all quarters from issuance to
redemption. In November 1995, the Company purchased and retired 47,500 shares of
the Series C Preferred Stock. The Company redeemed the remaining Series C
Preferred Stock on January 1, 1998, at the redemption price of $25.00 per share
plus unpaid dividends, for the then current dividend period up to the date fixed
for redemption.
In 1992, Great Western issued 6,600,000 depository shares, each
representing a one-tenth interest in a share of 8.30% Cumulative Preferred Stock
("Cumulative Preferred Stock"). The Cumulative Preferred Stock had a liquidation
value of $250.00 per share. Each share of Cumulative Preferred Stock was
redeemable
102
105
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
at the option of the Company on or after November 1, 1997, at $250.00 per share,
plus accrued and unpaid dividends. Dividends were cumulative from the date of
issue and were payable quarterly. Dividends were declared and paid in all
quarters from issuance to redemption. On July 1, 1997, in connection with the
Great Western Merger, each outstanding share of Cumulative Preferred Stock was
converted into one share of WMI 8.30% Cumulative Preferred Stock, Series F
("Series F Preferred Stock"). The terms, preferences, limitations, privileges
and rights of the Series F Preferred Stock were substantially identical to those
of the Cumulative Preferred Stock. As in the case of the Cumulative Preferred
Stock, each share of Series F Preferred Stock was represented by depository
shares (the "New Washington Mutual Depository Shares"), each representing a
one-tenth interest in a share of the Series F Preferred Stock. The Company
redeemed the Series F Preferred Stock on November 1, 1997.
NOTE 18: EARNINGS PER SHARE
Information used to calculate EPS was as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income
- -----------------------------------------
Net income............................... $ 1,817,064 $ 1,486,932 $ 885,118
Accumulated dividends on preferred
stock.................................. -- (15,942) (55,031)
------------ ------------ ------------
Net income attributable to common
stock.................................. 1,817,064 1,470,990 830,087
Accumulated dividends on convertible
preferred stock........................ -- 9,269 17,219
------------ ------------ ------------
Diluted net income attributable to common
stock.................................. $ 1,817,064 $ 1,480,259 $ 847,306
============ ============ ============
Weighted average shares
- -----------------------------------------
Basic weighted average number of common
shares outstanding..................... 572,652,277 564,420,541 532,412,178
Dilutive effect of potential common
shares................................. 1,900,754 14,141,764 24,346,845
------------ ------------ ------------
Diluted weighted average number of common
shares outstanding..................... 574,553,031 578,562,305 556,759,023
============ ============ ============
Net income per common share
- -----------------------------------------
Basic.................................... $3.17 $2.61 $1.56
Diluted.................................. 3.16 2.56 1.52
Options to purchase an average of 4,520,073 shares of common stock at an
average exercise price of $39.76 per share were outstanding during the year, but
were not included in the computation of diluted EPS because the exercise price
of the options was greater than the average market price of the common stock
during the year.
Additionally, as part of the business combination with Keystone Holdings,
12 million shares of common stock, with an assigned value of $27.74 per share,
were issued to an escrow for the benefit of the general and limited partners of
Keystone Holdings and the FRF and their transferees. The conditions upon which
these shares are contingently issuable are based on the outcome of certain
litigation and not based on earnings or market price. At December 31, 1999, the
contingencies were not met, and therefore, the contingently issuable shares were
not included in the above computations.
103
106
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19: REGULATORY CAPITAL REQUIREMENTS
WMI is not subject to any regulatory capital requirements. However, each of
its subsidiary depository institutions is subject to various capital
requirements. WMB is subject to FDIC capital requirements while WMBFA and WMBfsb
are subject to Office of Thrift Supervision ("OTS") capital requirements. The
Company also owns a small industrial bank that is subject to FDIC capital
requirements.
The capital adequacy requirements are quantitative measures established by
regulation that require WMBFA, WMB and WMBfsb to maintain minimum amounts and
ratios of capital. The FDIC requires WMB to maintain minimum ratios of Tier 1
and total capital to risk-weighted assets as well as Tier 1 capital to average
total assets. The OTS requires WMBFA and WMBfsb to maintain minimum ratios of
Tier 1 and total capital to risk-weighted assets, as well as Tier 1 capital to
adjusted total assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") created a statutory framework that increased the importance of
meeting applicable capital requirements. FDICIA established five capital
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. An institution's
category depends upon where its capital levels are in relation to relevant
capital measures, which include a risk-based capital measure, a leverage ratio
capital measure, and certain other factors. The federal banking agencies
(including the FDIC and the OTS) have adopted regulations that implement this
statutory framework. Under these regulations, an institution is treated as well
capitalized if its ratio of total capital to risk-weighted assets is 10.00% or
more, its ratio of Tier 1 capital to risk-weighted assets is 6.00% or more, its
ratio of Tier 1 capital to adjusted total assets is 5.00% or more and it is not
subject to any federal supervisory order or directive to meet a specific capital
level.
In order to be adequately capitalized, an institution must have a total
risk-based capital ratio of not less than 8.00%, a Tier 1 risk-based capital
ratio of not less than 4.00%, and a Tier 1 capital ratio of not less than 4.00%.
Undercapitalized institutions are subject to certain prompt corrective
action requirements, regulatory controls and restrictions, which become more
extensive as an institution becomes more severely undercapitalized. Failure by
any of the Company's depository institutions to comply with applicable capital
requirements would, if unremedied, result in restrictions on its activities and
lead to regulatory enforcement actions against such institution including, but
not limited to, the issuance of a capital directive to ensure the maintenance of
required capital levels. FDICIA requires the federal banking regulators to take
prompt corrective action with respect to depository institutions that do not
meet minimum capital requirements. Additionally, FDIC or OTS approval of any
regulatory application filed for their review may be dependent on compliance
with capital requirements.
104
107
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The actual regulatory capital ratios calculated for WMBFA, WMB and WMBfsb,
along with the minimum capital amounts and ratios for the regulatory minimum
requirement and the minimum amounts and ratios required to be categorized as
well capitalized under the regulatory framework for prompt corrective action
were as follows:
DECEMBER 31, 1999
--------------------------------------------------------------
MINIMUM TO BE
CATEGORIZED AS WELL
REGULATORY CAPITALIZED UNDER
MINIMUM PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
------------------ ------------------ --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- ----- ----------- ------
(DOLLARS IN THOUSANDS)
WMBFA
Total capital to risk-weighted assets... $9,065,199 11.15% $6,503,120 8.00% $8,128,900 10.00%
Tier 1 capital to risk-weighted
assets................................ 8,090,758 9.95 3,251,560 4.00 4,877,340 6.00
Tier 1 capital to adjusted total assets
(leverage)............................ 8,090,758 5.53 5,856,077 4.00 7,320,097 5.00
Tangible capital to tangible assets..... 8,088,870 5.53 2,196,029 1.50 n.a. n.a.
WMB
Total capital to risk-weighted assets... 2,102,858 10.90 1,543,128 8.00 1,928,909 10.00
Tier 1 capital to risk-weighted
assets................................ 1,962,779 10.18 771,564 4.00 1,157,346 6.00
Tier 1 capital to average assets
(leverage)............................ 1,962,779 5.67 1,385,199 4.00 1,731,499 5.00
WMBfsb
Total capital to risk-weighted assets... 76,826 15.21 40,413 8.00 50,517 10.00
Tier 1 capital to risk-weighted
assets................................ 70,422 13.94 20,207 4.00 30,310 6.00
Tier 1 capital to adjusted total assets
(leverage)............................ 70,422 8.58 32,847 4.00 41,058 5.00
Tangible capital to tangible assets..... 70,422 8.58 12,318 1.50 n.a. n.a.
105
108
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
---------------------------------------------------------------
MINIMUM TO BE
CATEGORIZED AS WELL
REGULATORY CAPITALIZED UNDER
MINIMUM PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
------------------- ------------------ --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------ ---------- ----- ----------- ------
(DOLLARS IN THOUSANDS)
WMBFA(1)
Total capital to risk-weighted
assets.............................. $8,771,315 12.11% $5,793,557 8.00% $7,241,946 10.00%
Tier 1 capital to risk-weighted
assets.............................. 7,404,210 10.22 2,896,779 4.00 4,345,168 6.00
Tier 1 capital to adjusted total
assets (leverage)................... 7,404,210 5.76 5,144,260 4.00 6,430,325 5.00
Tangible capital to tangible assets... 7,401,708 5.76 1,929,060 1.50 n.a. n.a.
WMB
Total capital to risk-weighted
assets.............................. 1,939,187 11.47 1,352,948 8.00 1,691,185 10.00
Tier 1 capital to risk-weighted
assets.............................. 1,790,565 10.59 676,474 4.00 1,014,711 6.00
Tier 1 capital to average assets
(leverage).......................... 1,790,565 5.90 1,212,989 4.00 1,516,236 5.00
WMBfsb
Total capital to risk-weighted
assets.............................. 87,356 13.35 52,367 8.00 65,459 10.00
Tier 1 capital to risk-weighted
assets.............................. 79,124 12.09 26,183 4.00 39,275 6.00
Tier 1 capital to adjusted total
assets (leverage)................... 79,124 7.37 42,963 4.00 53,703 5.00
Tangible capital to tangible assets... 79,124 7.37 16,111 1.50 n.a. n.a.
- ---------------
(1) On October 3, 1998, Home Savings merged with and into WMBFA. The regulatory
capital information for WMBFA reflected this merger.
Management believes that WMBFA, WMB and WMBfsb individually met all capital
adequacy requirements, as of December 31, 1999, to which they were subject.
Additionally, as of the most recent notifications from the FDIC (for WMB) and
the OTS (for WMBFA and WMBfsb), the FDIC and OTS individually categorized WMBFA,
WMB and WMBfsb as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, a bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 or leverage capital
ratios as set forth in the table above. There are no conditions or events since
those notifications that management believes have changed the well capitalized
status of WMBFA, WMB and WMBfsb.
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
would not cause WMBFA or WMBfsb to cease to be well capitalized. In June 1996,
the FDIC and certain other federal banking agencies (not including the OTS)
issued a joint policy statement providing guidance on prudent interest rate risk
management principles. The agencies stated that they would determine banks'
interest rate risk on a case-by-case basis, and would not adopt a standardized
measure or establish an explicit minimum capital charge for interest rate risk.
106
109
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 20: STOCK OPTION PLANS, EMPLOYEE STOCK PURCHASE PLAN, AND RESTRICTED STOCK
PLANS
On March 8, 1984, the Company's stockholders approved the adoption of the
1983 incentive stock option plan, providing for the award of incentive stock
options or nonqualified stock options to certain officers of the Company at the
discretion of the Board of Directors. On April 19, 1994, the Company's
stockholders approved the adoption of the 1994 stock option plan (the "1994
Plan") in which the right to purchase common stock of WMI may be granted to
officers, directors, consultants and advisers of the Company. The 1994 Plan is
generally similar to the 1983 plan, which terminated according to its terms in
1993. The 1994 Plan does not affect any options granted under the 1983 plan.
Under the 1994 Plan, on the date of the grant, the exercise price of the
option must at least equal the market value per share of WMI's common stock. The
1994 Plan provides for the granting of options for a maximum of 18,000,000
common shares.
On September 16, 1997, the Company's Board of Directors approved the
adoption of a broad-based stock option plan called "WAMU Shares" as part of the
Company's effort to build a unified team and to appropriately compensate its
employees. This plan provides for an award of nonqualified stock options to all
eligible employees who were employed by the Company on September 1, 1997.
Generally, full-time employees have an option to purchase 150 shares of WMI
common stock, while part-time employees have an option to purchase 75 shares.
Employees who were designated to receive options under the 1994 Plan were
excluded. All grants were made using the fair market value of WMI's common stock
on September 1, 1997, and all options vested on September 1, 1999. The WAMU
Shares plan provides for the granting of options for a maximum of 3,300,000
common shares.
On December 15, 1998, the Company's Board of Directors approved the
adoption of a broad-based stock option plan ("WAMU Shares II") to provide a
performance incentive and encourage stock ownership by employees of the Company.
This plan provides for an award of nonqualified stock options to all eligible
employees who were employed by the Company on January 4, 1999. Full-time
employees received an option to purchase 100 shares of WMI common stock, while
part-time employees received an option to purchase 50 shares. Employees who were
designated to receive options under the 1994 Plan were excluded. These employee
stock options were in addition to the Company's previous broad-based stock
option plan described above. Options under the WAMU Shares II plan were granted
at the fair market value of WMI's common stock on December 14, 1998, and all
options vest on January 4, 2001. The WAMU Shares II plan provides for the
granting of options up to a maximum of 3,300,000 common shares.
Stock options under all stock plans were generally exercisable on a
phased-in schedule over two to five years, depending upon the terms of the
grant, and expire three to ten years from the grant date. Options to purchase
9,128,792 and 7,728,919 shares of common stock were fully exercisable at
December 31, 1999 and 1998.
107
110
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock options granted, exercised, or forfeited were as follows:
WEIGHTED
WEIGHTED AVERAGE FAIR
AVERAGE VALUE PER SHARE
NUMBER OF EXERCISE PRICE OF OPTIONS AT
OPTION SHARES OF OPTION SHARES DATE OF GRANT
------------- ---------------- ---------------
Balance, December 31, 1996....................... 21,641,809 $14.87
Granted in 1997.................................. 6,456,190 37.06 $10.25
Exercised in 1997................................ (14,262,878) 14.89
Forfeited in 1997................................ (343,758) 15.52
-----------
Balance, December 31, 1997....................... 13,491,363 25.46
Granted in 1998.................................. 3,486,639 32.94 7.83
Exercised in 1998................................ (3,359,459) 13.93
Forfeited in 1998................................ (339,316) 34.52
-----------
Balance, December 31, 1998....................... 13,279,227 30.11
Granted in 1999.................................. 6,306,833 28.68 9.51
Exercised in 1999................................ (2,032,693) 14.58
Forfeited in 1999................................ (2,131,452) 37.12
Grants in connection with Long Beach............. 1,592,783 13.42
-----------
Balance, December 31, 1999....................... 17,014,698 28.94
===========
Financial data pertaining to outstanding stock options were as follows:
DECEMBER 31, 1999
- ---------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED AVERAGE
NUMBER OF AVERAGE AVERAGE NUMBER OF EXERCISE PRICE
RANGES OF OPTION REMAINING EXERCISE PRICE EXERCISABLE OF EXERCISABLE
EXERCISE PRICES SHARES YEARS OF OPTION SHARES OPTION SHARES OPTION SHARES
- --------------- ---------- --------- ---------------- ------------- ----------------
$ 5.02 - $10.97 810,628 3.2 $ 8.76 810,628 $ 8.76
11.52 - 20.66 2,345,156 5.9 14.98 2,345,156 14.98
21.00 - 30.49 5,309,251 9.1 25.52 1,649,001 25.46
31.56 - 35.58 4,911,996 7.1 33.07 1,354,282 33.58
36.07 - 40.56 1,995,783 4.1 39.26 1,892,373 39.23
41.13 - 49.69 1,641,884 8.0 45.03 1,077,352 45.01
---------- ---------
17,014,698 28.94 9,128,792 27.65
========== =========
Under the terms of the Company's Employee Stock Purchase Plan ("ESPP"), an
employee may purchase WMI common stock at a 15% discount without paying
brokerage fees or commissions on purchases. The Company pays for the program's
administrative expenses. The plan is open to all employees who are at least 18
years old, have completed at least one year of service, and work at least 20
hours per week. Participation can be by either payroll deduction or lump sum
payments with a maximum annual contribution of 10% of each employee's previous
year's eligible cash compensation. Under the ESPP, dividends are automatically
reinvested.
The Company adopted the disclosure requirements of SFAS No. 123, and will
continue to measure its employee stock-based compensation arrangements under the
provisions of the AICPA Accounting Principles Board Opinion 25. Accordingly, no
compensation cost has been recognized for its stock option plans and its ESPP.
Had compensation cost for the Company's compensation plans been determined
consistent with SFAS
108
111
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No. 123, the Company's net income attributable to common stock and net income
per common share would have been reduced to the pro forma amounts indicated
below:
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income attributable to common
stock
Basic:
As reported........................ $1,817,064 $1,470,990 $830,087
Pro forma.......................... 1,802,981 1,446,139 792,311
Diluted:
As reported........................ 1,817,064 1,480,259 847,306
Pro forma.......................... 1,802,981 1,455,408 809,530
Net income per common share
Basic:
As reported........................ $ 3.17 $ 2.61 $ 1.56
Pro forma.......................... 3.15 2.56 1.49
Diluted:
As reported........................ 3.16 2.56 1.52
Pro forma.......................... 3.14 2.52 1.45
The fair value of options granted under the Company's stock option plans
was estimated on the date of grant using the Binomial option-pricing model with
the following weighted average assumptions: annual dividend yield ranging from
2.24% to 2.45% for 1999, 2.68% for 1998 and 2.67% for 1997; expected volatility
ranging from 27.51% to 31.61% for 1999, 27.71% for 1998 and 27.37% for 1997;
risk free interest rate ranging from 4.54% to 6.29% for 1999, 5.44% for 1998 and
6.01% for 1997; and expected life of between four and five years for 1999, and
five years for 1998 and 1997.
The Company maintains a restricted stock plan for the benefit of directors,
key officers, loan officers and investment representatives. Under the plan, the
Company granted 474,893, 203,904, and 331,936 shares of restricted stock in
1999, 1998, and 1997. Upon grant, shares are issued to a trustee and are
released to recipients when the restrictions lapse. The restrictions are based
upon either a continuous service or performance requirement. At the date of
grant, unearned compensation is recorded as an offset to stockholders' equity
and is amortized as compensation expense over the restricted period. The balance
of unearned compensation related to these restricted shares as of December 31,
1999 was $20.2 million.
The total compensation expense recognized for the restricted shares was
$8.7 million, $9.4 million, and $3.3 million in 1999, 1998, and 1997. Restricted
shares accrue dividends. All canceled or forfeited shares become available for
future grants.
NOTE 21: EMPLOYEE BENEFITS PROGRAMS
Pension Plans
Washington Mutual maintains a noncontributory cash balance defined benefit
pension plan (the "Pension Plan") for substantially all eligible employees.
Benefits earned for each year of service are based primarily on the level of
compensation in that year plus a stipulated rate of return on the benefit
balance. It is the Company's policy to fund the Pension Plan on a current basis
to the extent deductible under federal income tax regulations. Prior to their
merger with the Company, Ahmanson, Coast and Great Western maintained defined
benefit pension plans. The Ahmanson and Coast Plans were merged into the Pension
Plan on October 1, 1999 and the Great Western Plan was merged into the Pension
Plan on July 1, 1998. The Pension Plan's assets consist primarily of mutual
funds and equity securities.
109
112
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the projected benefit obligation were as follows:
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
Benefit obligation, beginning of year....................... $681,266 $559,354
Actuarial (gain) loss....................................... (61,114) 51,634
Business combinations....................................... -- 47,055
Interest cost............................................... 45,198 42,588
Service cost................................................ 30,706 32,654
Benefits paid............................................... (64,102) (50,326)
Expenses.................................................... -- (1,693)
Amendments.................................................. (27,630) --
-------- --------
Benefit obligation, end of year............................. $604,324 $681,266
======== ========
Changes in Pension Plans' assets were as follows:
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
Fair value of assets, beginning of year..................... $756,385 $672,665
Actual return on assets..................................... 80,089 78,429
Business combinations....................................... -- 57,310
Benefits paid............................................... (64,102) (50,326)
Expenses.................................................... -- (1,693)
-------- --------
Fair value of assets, end of year........................... $772,372 $756,385
======== ========
Reconciliations of funded status were as follows:
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
Funded status............................................... $168,048 $ 75,119
Unrecognized net loss (gain)................................ (45,129) 60,200
Unamortized prior service cost.............................. (24,375) (29,189)
Remaining unamortized, unrecognized net asset............... (1,772) (2,154)
-------- --------
Prepaid benefit cost........................................ $ 96,772 $103,976
======== ========
Net periodic expense for the Pension Plans was as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
Interest cost...................................... $ 45,198 $ 42,588 $ 36,274
Service cost....................................... 30,706 32,654 24,439
Expected return on assets.......................... (61,641) (62,382) (52,506)
Amortization of prior service credit............... (4,820) (4,776) (4,203)
Amortization of unrecognized transition asset...... (382) (382) (958)
Recognized net actuarial loss...................... 714 -- --
Curtailment gain................................... (2,571) -- --
-------- -------- --------
Net periodic expense............................... $ 7,204 $ 7,702 $ 3,046
======== ======== ========
110
113
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Weighted average assumptions used in accounting for the Pension Plans were
as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
----- ----- -----
Assumed discount rate....................................... 7.75% 6.75% 7.25%
Assumed rate of compensation increase....................... 5.15 4.83 4.87
Expected return on assets................................... 8.56 9.00 9.00
Nonqualified Defined Benefit Plans and Other Postretirement Benefit Plans
The Company, as successor to Ahmanson, Coast, and Great Western, has
assumed responsibility for nonqualified, noncontributory unfunded postretirement
benefit plans, including retirement restoration plans for certain employees, a
number of supplemental retirement plans for certain officers, and multiple
outside directors' retirement plans. Benefits under the retirement restoration
plans are generally determined by the Company. Benefits under the supplemental
retirement plans are generally based on years of service. Benefits under the
outside directors' retirement plans generally are payable for a period equal to
the participants' service on the Board of Directors, with a lifetime benefit
payable to participants with 15 or more years of service.
The Company, as successor to Ahmanson and Great Western, maintains unfunded
defined benefit postretirement plans that make medical and life insurance
coverage available to eligible retired employees and dependents. The expected
cost of providing these benefits to retirees, their beneficiaries and covered
dependents was accrued during the years each employee provided services.
Changes in the benefit obligation were as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
NONQUALIFIED OTHER NONQUALIFIED OTHER
DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT
PLANS BENEFITS PLANS BENEFITS
--------------- -------------- --------------- --------------
(DOLLARS IN THOUSANDS)
Benefit obligation, beginning of
year.............................. $103,795 $38,639 $ 94,766 $47,975
Special termination benefits........ -- -- 10,386 --
Interest cost....................... 7,053 2,107 7,022 2,447
Actuarial (gain) loss............... (2,100) (8,377) 6,697 (250)
Business combinations............... -- -- 6,495 --
Service cost........................ -- 584 692 546
Settlements......................... -- -- (7,713) --
Benefits paid....................... (9,679) (2,000) (9,520) (2,779)
Curtailment gain.................... -- (1,333) (5,032) --
Amendments.......................... -- 480 -- (9,300)
-------- ------- -------- -------
Benefit obligation, end of year..... $ 99,069 $30,100 $103,793 $38,639
======== ======= ======== =======
111
114
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the fair value of plan assets were as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
NONQUALIFIED OTHER NONQUALIFIED OTHER
DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT
PLANS BENEFITS PLANS BENEFITS
--------------- -------------- --------------- --------------
(DOLLARS IN THOUSANDS)
Fair value of plan assets, beginning
of year........................... $ -- $ -- $ -- $ --
Employer contributions.............. 9,679 2,000 17,234 2,779
Benefits paid....................... (9,679) (2,000) (9,520) (2,779)
Settlements......................... -- -- (7,714) --
------- ------- ------- -------
Fair value of plan assets, end of
year.............................. $ -- $ -- $ -- $ --
======= ======= ======= =======
Reconciliations of funded status were as follows:
DECEMBER 31,
-------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
NONQUALIFIED OTHER NONQUALIFIED OTHER
DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT
PLANS BENEFITS PLANS BENEFITS
--------------- -------------- --------------- --------------
(DOLLARS IN THOUSANDS)
Funded status............................. $(99,069) $(30,100) $(103,793) $(38,639)
Unrecognized net loss (gain).............. 3,647 (10,537) 10,161 (2,507)
Unamortized prior service cost (credit)... 406 (7,526) 477 (8,636)
Remaining unamortized, unrecognized net
obligation.............................. -- 8,879 -- 10,253
-------- -------- --------- --------
Net amount recognized..................... $(95,016) $(39,284) $ (93,155) $(39,529)
======== ======== ========= ========
Amounts recognized in the Consolidated Statements of Financial Condition
were as follows:
DECEMBER 31,
-------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
NONQUALIFIED OTHER NONQUALIFIED OTHER
DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT
PLANS BENEFITS PLANS BENEFITS
--------------- -------------- --------------- --------------
(DOLLARS IN THOUSANDS)
Accumulated other comprehensive income.... $ 5,214 $ -- $ 10,271 $ --
Intangible asset.......................... (676) -- 477 --
Accrued benefit liability................. (4,538) -- (10,748) --
Accrued benefit cost...................... (95,016) (39,284) (93,155) (39,529)
-------- -------- -------- --------
Net amount recognized..................... $(95,016) $(39,284) $(93,155) $(39,529)
======== ======== ======== ========
112
115
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic expense for the benefit plans was as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- -------------------------------- --------------------------------
NONQUALIFIED OTHER NONQUALIFIED OTHER NONQUALIFIED OTHER
DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT
PLANS BENEFITS PLANS BENEFITS PLANS BENEFITS
--------------- -------------- --------------- -------------- --------------- --------------
(DOLLARS IN THOUSANDS)
Special termination
benefits........... $ -- $ -- $10,386 $ -- $ -- $ --
Curtailment loss
(gain)............. -- (600) 9,829 -- -- --
Interest cost........ 7,053 2,107 7,022 2,447 6,302 4,427
Service cost......... -- 584 692 546 925 1,533
Amortization of prior
service cost
(credit)........... 71 (630) 410 (664) 992 --
Recognized net
actuarial loss
(gain)............. 4,415 (347) 366 (279) 2,356 (220)
Settlement loss...... -- -- 333 -- -- --
Amortization of
unrecognized
transition
obligation......... -- 641 222 693 608 693
------- ------ ------- ------ ------- ------
Net periodic
expense............ $11,539 $1,755 $29,260 $2,743 $11,183 $6,433
======= ====== ======= ====== ======= ======
Weighted average assumptions used in accounting for the benefit plans were
as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- -------------------------------- --------------------------------
NONQUALIFIED OTHER NONQUALIFIED OTHER NONQUALIFIED OTHER
DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT DEFINED BENEFIT POSTRETIREMENT
PLANS BENEFITS PLANS BENEFITS PLANS BENEFITS
--------------- -------------- --------------- -------------- --------------- --------------
Assumed discount
rate............... 7.75% 7.75% 6.75% 6.75% 7.29% 7.14%
Assumed rate of
compensation
increase........... 5.00 -- 5.00 -- 5.18 --
The assumed rate of compensation increase is not applicable to all
nonqualified defined benefit plans.
For measurement of the net periodic cost of other postretirement benefit
plans, a 6.75% annual increase in the medical care trend rate was assumed for
1999, thereafter decreasing to 5.75%.
Account Balance Plans
Savings Plans. The Company sponsors a retirement savings and investment
plan (the "RSIP") for all eligible employees that allows participants to make
contributions by salary deduction equal to 15% or less of their salary pursuant
to Section 401(k) of the Internal Revenue Code. Employee contributions vest
immediately. The Company's matching contributions and any profit sharing
contributions made to employees vest based on years of service.
The Company, as successor to Ahmanson and Coast, maintains a savings plan
for employees formerly of Ahmanson and Coast, which allows participants to make
contributions equal to 15% or less of their salary pursuant to Section 401(k) of
the Internal Revenue Code. Employees vest immediately in their own contributions
and they vest in the Company's contributions based on years of service. The
Coast savings plan was merged into the Ahmanson savings plan at the close of
business on June 30, 1998. Contributions to the Ahmanson 401(k) plan were frozen
at June 30, 1999 and all participants became eligible to participate in the
RSIP. The Ahmanson plan was merged into the RSIP on October 1, 1999.
113
116
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company contributions to savings plans were $39.3 million, $35.6 million
and $27.4 million in 1999, 1998 and 1997.
Other Account Balance Plans. The Company sponsors supplemental employee and
executive retirement plans for the benefit of certain officers. The plans are
designed to supplement the benefits that are accrued under the Pension Plans.
The Company provides an optional deferred compensation plan for certain
employees and directors. Eligible participants can defer a portion of their
compensation, and the Company agrees to pay interest on the balance of funds
deferred. The Company also maintains similar optional deferred compensation
plans for directors and certain employees formerly with Ahmanson, Coast, Great
Western and ASB. No additional compensation may be deferred under the Coast,
Great Western and ASB plans. Compensation may be deferred for another one year
under the Ahmanson Plan. Expense related to deferred compensation plans was $8.2
million, $8.1 million and $8.5 million in 1999, 1998 and 1997.
The Company has purchased life insurance, primarily with two carriers, on
the lives of the participants in certain nonqualified defined benefit plans and
the deferred compensation plans (described above). The net cash surrender value
of this life insurance, included in other assets, was $405.2 million at December
31, 1999 and $401.0 million at December 31, 1998 and net premium income related
to insurance purchased was $15.0 million in 1999, $7.5 million in 1998 and $13.7
million in 1997.
NOTE 22: INTEREST RATE RISK MANAGEMENT
From time to time, the following strategies may be used by the Company to
reduce its exposure to interest rate risk: the origination and purchase of ARMs
and the purchase of adjustable-rate MBS; the sale of fixed-rate SFR loan
production or fixed-rate MBS; and the use of derivative instruments, such as
interest rate exchange agreements, interest rate cap agreements, and forward
sales contracts.
The Company uses forward sales contracts to hedge its exposure to
increasing interest rates with respect to fixed-rate loans and loan commitments
which the Company intends to sell in the secondary market. Forward sales
contracts are used to sell fixed-rate loans at a future date for a specified
price. Gains or losses are recognized at the time the contracts mature and are
recorded as a component of mortgage banking income. As of December 31, 1999 and
1998, the Company had $635.0 million and $2.50 billion in forward sales
contracts to hedge loan commitments, which were expected to close, and SFR
loans, which were held for sale.
Interest rate exchange agreements, interest rate cap agreements, and
forward sales contracts expose the Company to credit risk in the event of
nonperformance by counterparties to such agreements. This risk consists
primarily of the termination value of agreements where the Company is in a
favorable position. The Company controls the credit risk associated with its
various derivative agreements through counterparty credit review, counterparty
exposure limits and monitoring procedures.
The Company's use of derivative instruments reduces the effect that
changing interest rates may have on net interest income. The Company uses such
instruments to reduce the volatility of net interest income over an interest
rate cycle. The Company does not invest in leveraged derivative instruments.
During 1999 and 1998, the Company did not terminate any interest rate exchange
agreements or interest rate cap agreements.
114
117
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of interest rate exchange agreements were as follows:
DECEMBER 31, 1999
-----------------------------------------------------------------
NOTIONAL SHORT-TERM LONG-TERM CARRYING FAIR
AMOUNT RECEIPT RATE(1) PAYMENT RATE VALUE VALUE
----------- --------------- ------------ -------- -------
(DOLLARS IN THOUSANDS)
Designated against deposits and
borrowings:
Due within one year................. $ 5,376,000 6.15% 5.40% $-- $32,786
After one but within two years...... 2,755,600 6.01 5.37 -- 31,518
After two but within three years.... 769,500 6.11 6.21 -- 8,863
After three years................... 1,501,700 6.59 6.17 -- 5,099
----------- -- -------
$10,402,800 6.17 5.56 $-- $78,266
=========== == =======
DECEMBER 31, 1998
-----------------------------------------------------------------
NOTIONAL SHORT-TERM LONG-TERM CARRYING FAIR
AMOUNT RECEIPT RATE(1) PAYMENT RATE VALUE VALUE
---------- --------------- ------------ -------- --------
(DOLLARS IN THOUSANDS)
Designated against AFS securities:
Due within one year................. $ 500,000 5.45% 5.96% $(2,812) $ (2,812)
Designated against deposits and
borrowings:
Due within one year................. 777,600 5.26 6.54 -- (5,936)
After one but within two years...... 2,209,000 5.43 5.68 -- (15,131)
After two but within three years.... 234,600 4.76 5.48 -- (6,786)
After three years................... 9,200 4.76 5.58 -- (516)
---------- ------- --------
$3,730,400 5.35 5.89 $(2,812) $(31,181)
========== ======= ========
- ---------------
(1) The terms of each agreement had specific LIBOR or COFI reset and index
requirements, which resulted in different short-term receipt rates for each
agreement. The receipt rate represented the weighted average rate as of the
last reset date for each agreement.
Scheduled maturities of interest rate cap agreements were as follows:
DECEMBER 31, 1999
------------------------------------------------------
SHORT-TERM
NOTIONAL STRIKE RECEIPT CARRYING FAIR
AMOUNT RATE RATE(1) VALUE VALUE
----------- ------ ---------- -------- -------
(DOLLARS IN THOUSANDS)
Designated against deposits and borrowings:
Due within one year(2)...................... $ 2,640,000 5.88% 6.08% $ 1,107 $ 5,806
After one but within two years(3)........... 7,704,000 6.01 6.14 32,470 47,477
After two but within three years(4)......... 380,000 7.47 5.81 2,442 2,346
After three years(5)........................ 404,750 7.99 5.13 3,701 1,531
----------- ------- -------
$11,128,750 6.10 6.08 $39,720 $57,160
=========== ======= =======
- ---------------
(1) The terms of each agreement had specific LIBOR or COFI reset and index
requirements, which resulted in different short-term receipt rates for each
agreement. The receipt rate represented the weighted average rate as of the
last reset date for each agreement.
(2) Included collars of $1.88 billion notional amount with a weighted average
floor of 5.01% and corridors of $612.0 million notional amount with a
weighted average ceiling of 6.52%.
(3) Included corridors of $348.5 million notional amount with a weighted average
ceiling of 6.88%.
(4) Included corridors of $80.0 million notional amount with a weighted average
ceiling of 9.50%.
(5) Included corridors of $281.3 million notional amount with a weighted average
ceiling of 9.49%.
115
118
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
-----------------------------------------------------
SHORT-TERM
NOTIONAL STRIKE RECEIPT CARRYING FAIR
AMOUNT RATE RATE(1) VALUE VALUE
---------- ------ ---------- -------- -------
(DOLLARS IN THOUSANDS)
Designated against deposits and borrowings:
Due within one year(2)........................ $1,005,750 6.98% 5.03% $1,341 $ (314)
After one but within two years(3)............. 2,140,000 6.00 5.30 2,716 (5,273)
After two but within three years(4)........... 154,000 7.60 5.05 1,403 167
After three years(5).......................... 384,750 8.32 4.81 3,321 269
---------- ------ -------
$3,684,500 6.57 5.17 $8,781 $(5,151)
========== ====== =======
- ---------------
(1) The terms of each agreement had specific LIBOR or COFI reset and index
requirements, which resulted in different short-term receipt rates for each
agreement. The receipt rate represented the weighted average rate as of the
last reset date for each agreement.
(2) Included corridors of $839.8 million notional amount with a weighted average
ceiling of 8.77% and collars of $150.0 million notional amount with a
weighted average floor of 5.17%.
(3) Included collars of $1.88 billion notional amount with a weighted average
floor of 5.01% and corridors of $112.0 million notional amount with a
weighted average ceiling of 9.50%.
(4) Included corridors of $98.5 million notional amount with a weighted average
ceiling of 9.48%.
(5) Included corridors of $361.3 million notional amount with a weighted average
ceiling of 9.49%.
Financial data pertaining to interest rate exchange agreements were as
follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ---------- ----------
(DOLLARS IN THOUSANDS)
Weighted average net effective (benefit) cost, end of
year................................................ (0.61)% 0.54% 0.45%
Weighted average net effective cost during the year... 0.15 0.37 0.67
Monthly average notional amount of interest rate
exchange agreements................................. $ 7,801,092 $3,042,438 $2,322,355
Maximum notional amount of interest rate exchange
agreements at any month end......................... 10,402,800 3,824,400 2,926,833
Net cost included in interest income on AFS
securities.......................................... 1,964 1,894 2,637
Net cost included in interest income on loans......... -- -- 2,835
Net cost included in interest expense on deposits..... 3,775 2,575 3,951
Net cost included in interest expense on borrowings... 5,665 6,210 5,958
Financial data pertaining to interest rate cap agreements were as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ---------- ----------
(DOLLARS IN THOUSANDS)
Monthly average notional amount of interest rate cap
agreements.......................................... $ 7,656,615 $3,260,115 $3,897,769
Maximum notional amount of interest rate cap
agreements at any month end......................... 11,411,250 3,874,500 3,965,000
Net cost included in interest income on AFS
securities.......................................... -- 1,033 3,612
Net cost included in interest expense on deposits..... 3,169 4,593 5,773
Net cost included in interest expense on borrowings... 13,840 945 --
116
119
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in interest rate exchange agreements and interest rate cap
agreements were as follows:
YEAR ENDED DECEMBER 31, 1999
------------------------------
INTEREST RATE INTEREST RATE
EXCHANGE CAP
AGREEMENTS AGREEMENTS
------------- -------------
(DOLLARS IN THOUSANDS)
Notional balance, beginning of year......................... $ 3,730,400 $ 3,684,500
Additions................................................... 7,950,000 8,450,000
Maturities.................................................. (1,277,600) (1,005,750)
----------- -----------
Notional balance, end of year............................... $10,402,800 $11,128,750
=========== ===========
NOTE 23: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because an active secondary market does not
exist for a portion of the Company's financial instruments, fair value estimates
were based on management's judgment concerning future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. In addition, considerable judgment was required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Fair value estimates were determined for existing balance sheet and
off-balance sheet financial instruments, including derivative instruments,
without attempting to estimate the value of anticipated future business and the
value of certain assets and liabilities that were not considered financial
instruments. Significant assets that were not considered financial instruments
include premises and equipment, net tax assets, REI, foreclosed assets and
intangible assets. In addition, the value of the servicing rights for loans sold
in which the mortgage servicing rights has not been capitalized was excluded
from the valuation. Finally, the tax ramifications related to the realization of
the unrealized gains and losses could have a significant effect on fair value
estimates and have not been considered in any of the valuations.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument as of December 31, 1999 and 1998:
Cash and cash equivalents -- The carrying amount represented fair value.
Trading securities -- Fair values were based on quoted market prices. If a
quoted market price was not available, fair value was estimated using market
prices for similar securities, as well as internal analysis.
Available-for-sale securities -- Fair values were based on quoted market
prices. If a quoted market price was not available, fair value was estimated
using market prices for similar securities, as well as internal analysis.
Held-to-maturity securities -- Fair values were based on quoted market
prices. If a quoted market price was not available, fair value was estimated
using market prices for similar securities, as well as internal analysis.
Loans -- Loans were priced using an option adjusted cash flow valuation
methodology. Fair values were derived from quoted market prices, internal
estimates and the pricing of similar instruments.
117
120
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment in FHLBs -- The carrying amount represented fair value. FHLB
stock does not have a readily determinable fair value and is required to be sold
back only at its par value.
Mortgage servicing rights -- The fair value of mortgage servicing rights
was estimated using projected cash flows, adjusted for the effects of
anticipated prepayments, using a market discount rate. The value estimates
exclude the value of the servicing rights for loans sold in which the mortgage
servicing rights has not been capitalized.
Deposits -- The fair value of checking accounts, savings accounts and MMDAs
was the amount payable on demand at the reporting date. For time deposit
accounts, the fair value was determined using an option adjusted cash flow
methodology. The discount rate was derived from the rate currently offered on
alternate funding sources with similar maturities. Core deposit intangibles were
not included in the valuation.
Federal funds purchased and commercial paper -- The value was determined
using an option adjusted cash flow methodology. The discount rate was derived
from the rate currently offered on similar borrowings.
Reverse repurchase agreements -- These were valued using an option adjusted
cash flow methodology. The discount rate was derived from the rate currently
offered on similar borrowings.
Advances from FHLBs -- These were valued using an option adjusted cash flow
methodology. The discount rate was derived from the rate currently offered on
similar borrowings.
Trust preferred securities -- Fair values were based on quoted market
prices. If a quoted market price was not available, fair value was estimated
using market prices for similar securities.
Other borrowings -- These were valued using an option adjusted cash flow
methodology. The discount rate was derived from the rate currently offered on
similar borrowings.
Derivative financial instruments -- The fair value for interest rate
exchange agreements and interest rate cap agreements was determined using dealer
quotations, when available. If a quoted market price was not available, fair
value was estimated using an internal analysis based on the market prices of
similar instruments. The market prices for similar instruments were used to
value interest rate cap agreements.
Forward sales contracts designated against loans -- The fair value of
forward sales contracts purchased as a hedge of fixed-rate commitments and
commitments to fund real estate loans was estimated using current market prices
adjusted for various risk factors and market volatility.
Off-balance sheet loan commitments -- The fair value of loan commitments
was estimated based on current levels of interest rates versus the committed
interest rates. The balance shown represents the differential between committed
value and fair value.
118
121
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair value of the Company's financial instruments was as
follows:
DECEMBER 31,
---------------------------------------------------------
1999 1998
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Financial assets:
Cash and cash equivalents.......... $ 3,040,167 $ 3,040,167 $ 2,756,974 $ 2,756,974
Trading securities................. 34,660 34,660 39,068 39,068
AFS securities..................... 41,384,318 41,384,318 32,919,865 32,919,865
HTM securities..................... 19,401,465 19,037,436 14,129,482 14,112,620
Loans.............................. 113,497,225 112,887,690 108,370,906 109,876,632
Investment in FHLBs................ 2,916,749 2,916,749 2,030,027 2,030,027
Mortgage servicing rights.......... 643,185 825,254 461,295 481,608
Financial liabilities:
Deposits........................... 81,129,768 80,935,978 85,492,141 85,561,818
Federal funds purchased and
commercial paper................ 866,543 866,415 2,482,830 2,482,742
Reverse repurchase agreements...... 30,162,823 30,157,452 18,339,538 18,364,164
Advances from FHLBs................ 57,094,053 57,065,418 39,748,613 39,808,157
Trust preferred securities......... 940,547 897,542 938,406 1,039,885
Other borrowings................... 5,262,650 5,243,964 3,691,102 3,781,180
Derivative financial instruments(1):
Interest rate exchange agreements:
Designated against AFS
securities.................... -- -- (2,812) (2,812)
Designated against deposits and
borrowings.................... -- 78,266 -- (28,369)
Interest rate cap agreements:
Designated against deposits and
borrowings.................... 39,720 57,160 8,781 (5,151)
Other off-balance sheet instruments:
Forward sales contracts designated
against loans................... -- 7,790 -- 3,186
Off-balance sheet loan
commitments..................... -- (2,505) -- 14,032
- ---------------
(1) See Note 22: Interest Rate Risk Management.
119
122
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 24: FINANCIAL INFORMATION -- WMI
The following WMI (parent company only) financial information should be
read in conjunction with the other Notes to Consolidated Financial Statements.
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
---------- ---------- ---------
(DOLLARS IN THOUSANDS)
INTEREST INCOME
Loans.................................................. $ 13,060 $ 223 $ 3,895
Notes receivable from subsidiaries..................... 12,393 36,091 39,032
AFS securities......................................... 283 304 1,769
Trading securities..................................... 240 -- --
Cash equivalents....................................... -- 1,831 4,439
---------- ---------- ---------
Total interest income................................ 25,976 38,449 49,135
INTEREST EXPENSE
Borrowings from subsidiaries........................... 49,011 55,352 44,336
Other borrowings....................................... 105,855 85,056 90,271
---------- ---------- ---------
Total interest expense............................... 154,866 140,408 134,607
---------- ---------- ---------
Net interest expense................................. (128,890) (101,959) (85,472)
NONINTEREST INCOME
Gain (loss) on sale of other assets.................... (323) (1,009) 20,845
Other operating income................................. 10,170 1,680 388
---------- ---------- ---------
Total noninterest income............................. 9,847 671 21,233
NONINTEREST EXPENSE
Compensation and benefits.............................. 15,987 26,593 10,938
Transaction-related expense............................ 12,405 57,550 32,308
Other operating expense................................ 18,868 12,443 30,267
---------- ---------- ---------
Total noninterest expense............................ 47,260 96,586 73,513
---------- ---------- ---------
Net loss before income tax benefit and equity in net
income of subsidiaries............................ (166,303) (197,874) (137,752)
Income tax benefit..................................... 65,541 85,571 73,357
Equity in net income of subsidiaries................... 1,917,826 1,599,235 949,513
---------- ---------- ---------
Net income............................................. $1,817,064 $1,486,932 $ 885,118
========== ========== =========
120
123
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents................................... $ 283,582 $ 317,730
Trading securities.......................................... -- 9,669
AFS securities.............................................. 5,344 9,263
Loans....................................................... 333,171 45,597
Accounts and notes receivable from subsidiaries............. 131,542 213,792
Investment in subsidiaries.................................. 10,613,999 10,172,632
Other assets................................................ 198,504 385,951
----------- -----------
Total assets.............................................. $11,566,142 $11,154,634
=========== ===========
LIABILITIES
Notes payable to subsidiaries............................... $ 566,461 $ 669,982
Other borrowings............................................ 1,804,423 963,415
Other liabilities........................................... 142,579 176,837
----------- -----------
Total liabilities......................................... 2,513,463 1,810,234
STOCKHOLDERS' EQUITY........................................ 9,052,679 9,344,400
----------- -----------
Total liabilities and stockholders' equity................ $11,566,142 $11,154,634
=========== ===========
121
124
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................. $1,817,064 $1,486,932 $ 885,118
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
(Gain) loss on sale of assets..................... 323 1,009 (20,845)
Decrease (increase) in trading securities......... 9,346 (10,678) --
Increase (decrease) in interest payable........... 5,864 (204) 2,624
Increase (decrease) in income taxes payable....... 79,802 14,706 (88,809)
Equity in undistributed earnings of
subsidiaries.................................... (1,917,826) (1,591,298) (949,513)
(Increase) decrease in other assets............... 107,645 (74,662) 6,373
Increase in other liabilities..................... 459,531 30,900 8,377
---------- ---------- ----------
Net cash provided (used) by operating
activities................................... 561,749 (143,295) (156,675)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of AFS securities............................ -- -- (1,000)
Sales of AFS securities................................ -- -- 75,866
Principal payments of AFS securities................... 3,919 654 4,191
Origination of loans, net of principal payments........ (287,574) (32,341) 80,528
Decrease (increase) in notes receivable from
subsidiaries......................................... 82,250 (44,605) 111,034
Investment in subsidiary............................... (911,919) (42,529) (572,412)
Dividends received from subsidiaries................... 1,140,000 848,594 1,002,736
Proceeds from sale of subsidiary....................... -- -- 102,775
Other, net............................................. -- -- 882
---------- ---------- ----------
Net cash provided by investing activities....... 26,676 729,773 804,600
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) in reverse repurchase agreements............ -- -- (68,326)
Repayments of notes payable to subsidiaries............ (108,298) (3,425) --
Proceeds from (repayments of) other borrowings......... 845,785 (189,020) 538,514
Issuance of common stock through employee stock
plans................................................ 82,794 80,562 146,266
Issuance of common stock to acquire Long Beach......... 207,191 -- --
Redemption of preferred stock.......................... -- (313,063) (165,000)
Repurchase of common stock, net........................ (1,079,437) (24,082) (481,379)
Cash dividends paid.................................... (570,608) (455,975) (338,780)
Other, net............................................. -- -- 28,343
---------- ---------- ----------
Net cash (used) by financing activities......... (622,573) (905,003) (340,362)
---------- ---------- ----------
(Decrease) increase in cash and cash
equivalents.................................. (34,148) (318,525) 307,563
Cash and cash equivalents, beginning of year.... 317,730 636,255 328,692
---------- ---------- ----------
Cash and cash equivalents, end of year.......... $ 283,582 $ 317,730 $ 636,255
========== ========== ==========
122
125
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 25: LINES OF BUSINESS
Washington Mutual is managed along five major lines of business: consumer
banking, mortgage banking, commercial banking, financial services, and consumer
finance. The treasury group, although not considered a line of business, is
responsible for the management of investments and interest rate risk.
Each line of business is managed by a member of the Executive Committee
under the direction of the Chief Executive Officer. The Executive Committee,
which is the senior decision making group of the Company, is comprised of nine
members including the Chairman, President and Chief Executive Officer. Other
Executive Committee members are responsible for managing the centralized support
functions.
The financial performance of the business lines is measured by the
Company's profitability reporting process, which utilizes various management
accounting techniques to ensure that each business line's financial results
reflect the underlying performance of that business. To better assess the
profitability of its business lines, the Company generates segment results that
include balances directly attributable to business line activities as well as
balances that are allocated from traditionally undistributed units. In this way,
management can better assess the fully burdened performance of a particular
business line. Washington Mutual is constantly analyzing its line of business
performance and developing better ways to measure profitability.
Prior to the Ahmanson Merger and during the fourth quarter of 1998,
Ahmanson was managed as a distinct business segment of Washington Mutual. In the
first quarter of 1999 we incorporated Ahmanson into our existing business lines.
We have restated 1998 information to reflect this new basis of performance
measurement and the incorporation of Ahmanson.
The principal activities conducted by mortgage banking are the origination
of SFR and residential construction loans, and the associated loan servicing
activities. Consumer banking includes deposit products (with their related fee
income) and all consumer loan products originated through our financial centers.
These consumer loan products include second equity mortgage loans, lines of
credit, manufactured housing loans, automobile, boat and recreational vehicle
loans, and education loans. Commercial banking offers a full range of commercial
banking products and services, including commercial business loans, multi-family
residential loans and loans secured by nonresidential real estate. Financial
Services offers a wide range of investment products to the Company's customers,
including mutual funds, variable and fixed annuities and general securities.
Consumer Finance offers direct consumer installment loans and retail sales
financing, and manages the Company's portfolio of purchased specialty mortgage
finance loans.
The accounting policies of the segments are the same as those described in
"Note 1: Summary of Significant Accounting Policies." Whenever feasible,
revenues and expenses are directly assigned to business lines in evaluating
their performance. Some of the loans originated by the Company's mortgage
banking line of business are transferred to the consumer banking line of
business at a transfer price that reflects the risk-adjusted value of such
loans. Additionally, corporate overhead, centralized support costs, and other
costs are allocated to each business line based on appropriate allocation
methodologies.
The organizational structure of the Company and the allocation
methodologies it employs result in business line financial results that are not
necessarily comparable across companies. As such, Washington Mutual's business
line performance may not be directly comparable with similar information from
other financial institutions.
123
126
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial highlights by line of business were as follows:
YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------------------------------------------
CONSUMER MORTGAGE COMMERCIAL FINANCIAL CONSUMER TREASURY/
BANKING BANKING BANKING SERVICES FINANCE OTHER TOTAL
----------- ----------- ----------- --------- ---------- ----------- ------------
(DOLLARS IN THOUSANDS)
Condensed income statement
Net interest income after
provision for loan losses...... $ 2,494,883 $ 796,196 $ 376,253 $ 1,210 $ 254,473 $ 361,699 $ 4,284,714
Other income..................... 817,333 259,334 29,611 316,941 56,072 29,706 1,508,997
Transaction-related expense...... 69,422 18,991 803 3,109 -- 3,397 95,722
Direct expense................... 994,959 247,325 83,838 199,266 161,571 4,019 1,690,978
----------- ----------- ----------- -------- ---------- ----------- ------------
Income before corporate support
expense and income taxes....... 2,247,835 789,214 321,223 115,776 148,974 383,989 4,007,011
Corporate support expense........ 792,964 285,166 20,498 238 2,659 21,326 1,122,851
Income taxes..................... 534,493 185,178 111,067 45,309 57,813 133,236 1,067,096
----------- ----------- ----------- -------- ---------- ----------- ------------
Net income....................... $ 920,378 $ 318,870 $ 189,658 $ 70,229 $ 88,502 $ 229,427 $ 1,817,064
=========== =========== =========== ======== ========== =========== ============
DECEMBER 31, 1999
---------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Total assets..................... $83,713,164 $46,373,128 $20,179,900 $123,525 $7,370,753 $28,753,160 $186,513,630
=========== =========== =========== ======== ========== =========== ============
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------------------------------
CONSUMER MORTGAGE COMMERCIAL FINANCIAL CONSUMER TREASURY/
BANKING BANKING BANKING SERVICES FINANCE OTHER TOTAL
----------- ----------- ----------- --------- ---------- ----------- ------------
(DOLLARS IN THOUSANDS)
Condensed income statement
Net interest income after
provision for loan losses...... $ 2,556,637 $ 832,655 $ 368,329 $ 2,252 $ 203,431 $ 166,453 $ 4,129,757
Other income..................... 625,665 326,614 23,859 229,610 10,199 291,253 1,507,200
Transaction-related expense...... 365,590 121,872 6,300 6,880 -- 7,644 508,286
Direct expense................... 952,532 248,820 81,214 162,722 125,690 62,917 1,633,895
----------- ----------- ----------- -------- ---------- ----------- ------------
Income before corporate support
expense and income taxes....... 1,864,180 788,577 304,674 62,260 87,940 387,145 3,494,776
Corporate support expense........ 781,085 286,004 19,621 2,510 1,133 34,966 1,125,319
Income taxes..................... 400,966 186,055 105,930 24,496 34,700 130,378 882,525
----------- ----------- ----------- -------- ---------- ----------- ------------
Net income....................... $ 682,129 $ 316,518 $ 179,123 $ 35,254 $ 52,107 $ 221,801 $ 1,486,932
=========== =========== =========== ======== ========== =========== ============
DECEMBER 31, 1998
---------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Total assets..................... $88,368,887 $36,105,220 $19,540,284 $114,374 $2,764,273 $18,600,243 $165,493,281
=========== =========== =========== ======== ========== =========== ============
Prior to 1998, the Company was managed by legal entity, not along our five
major lines of business. We are unable to restate financial information for 1997
to reflect our current basis of segmentation. In the statements below, we
present legal entity information for the current and prior periods reflecting
our old basis of segmentation. During 1999 the operations of Ahmanson were
merged with those of the Company and Ahmanson no longer exists as a separate
legal entity. In 1999 a majority of Ahmanson's financial results of operations
and assets are reflected in WMBFA.
124
127
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial highlights by legal entity were as follows:
YEAR ENDED DECEMBER 31, 1999
------------------------------------------------------------------------------
WASHINGTON
MUTUAL
WMBFA WMB WMBFSB FINANCE OTHER TOTAL
------------ ----------- -------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
Condensed income statement
Net interest income (expense) after provision
for loan losses............................. $ 3,306,716 $ 916,995 $ 23,806 $ 224,805 $ (187,608) $ 4,284,714
Other income.................................. 1,082,686 267,454 28,302 29,501 101,054 1,508,997
Transaction-related expense................... 80,854 14 -- -- 14,854 95,722
Other expense................................. 1,901,043 631,517 33,840 135,594 111,835 2,813,829
------------ ----------- -------- ---------- ---------- ------------
Income (loss) before income taxes............. 2,407,505 552,918 18,268 118,712 (213,243) 2,884,160
Income taxes (benefit)........................ 908,270 195,541 7,098 45,720 (89,533) 1,067,096
Minority interest............................. 2,265 -- -- -- (2,265) --
------------ ----------- -------- ---------- ---------- ------------
Net income (loss)............................. $ 1,496,970 $ 357,377 $ 11,170 $ 72,992 $ (121,445) $ 1,817,064
============ =========== ======== ========== ========== ============
DECEMBER 31, 1999
------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Total assets.................................. $146,254,487 $34,864,671 $829,322 $3,257,222 $1,307,928 $186,513,630
============ =========== ======== ========== ========== ============
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------------------
WASHINGTON
MUTUAL
WMBFA WMB WMBFSB FINANCE AHMANSON OTHER TOTAL
----------- ----------- ---------- ---------- ----------- --------- ------------
(DOLLARS IN THOUSANDS)
Condensed income statement
Net interest income (expense)
after provision for loan
losses......................... $ 1,770,456 $ 833,216 $ 25,142 $ 203,432 $ 1,400,340 $(102,829) $ 4,129,757
Other income..................... 535,207 256,587 27,585 10,199 586,448 91,174 1,507,200
Transaction-related expense...... 70,216 2,486 -- -- 411,041 24,543 508,286
Other expense.................... 1,042,973 547,581 28,614 126,044 916,161 97,841 2,759,214
----------- ----------- ---------- ---------- ----------- --------- ------------
Income (loss) before income
taxes.......................... 1,192,474 539,736 24,113 87,587 659,586 (134,039) 2,369,457
Income taxes (benefit)........... 407,030 196,649 9,115 34,700 258,997 (23,966) 882,525
----------- ----------- ---------- ---------- ----------- --------- ------------
Net income (loss)................ $ 785,444 $ 343,087 $ 14,998 $ 52,887 $ 400,589 $(110,073) $ 1,486,932
=========== =========== ========== ========== =========== ========= ============
DECEMBER 31, 1998
--------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Total assets..................... $80,979,357 $32,445,591 $1,070,478 $2,768,725 $48,330,419 $(101,289) $165,493,281
=========== =========== ========== ========== =========== ========= ============
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------------------------------------
WASHINGTON
MUTUAL
WMBFA WMB WMBFSB FINANCE AHMANSON OTHER TOTAL
----------- ----------- ---------- ---------- ----------- --------- ------------
(DOLLARS IN THOUSANDS)
Condensed income statement
Net interest income (expense)
after provision for loan
losses......................... $ 1,570,468 $ 738,741 $ 29,125 $ 180,605 $ 1,219,517 $ (69,605) $ 3,668,851
Other income..................... 325,429 199,121 14,666 10,928 282,762 147,629 980,535
Transaction-related expense...... 262,456 233 -- -- -- 168,436 431,125
Other expense.................... 1,044,458 465,260 24,946 115,502 865,136 164,690 2,679,992
----------- ----------- ---------- ---------- ----------- --------- ------------
Income (loss) before income
taxes.......................... 588,983 472,369 18,845 76,031 637,143 (255,102) 1,538,269
Income taxes (benefit)........... 274,189 183,473 7,275 29,744 233,803 (75,333) 653,151
----------- ----------- ---------- ---------- ----------- --------- ------------
Net income (loss)................ $ 314,794 $ 288,896 $ 11,570 $ 46,287 $ 403,340 $(179,769) $ 885,118
=========== =========== ========== ========== =========== ========= ============
DECEMBER 31, 1997
--------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Total assets..................... $67,185,330 $26,017,981 $1,056,795 $2,542,444 $46,503,624 $ 216,224 $143,522,398
=========== =========== ========== ========== =========== ========= ============
125
128
WASHINGTON MUTUAL, INC.
INDEX OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Restated Articles of Incorporation of the Company, as
amended (the "Articles") (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999. File No. 0-25188).
3.2 Bylaws of the Company, as amended (filed as an exhibit to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999. File No. 0-25188).
4.1* Rights Agreement, dated October 16, 1990.
4.2* Amendment No. 1 to Rights Agreement, dated October 31, 1994.
4.3* Supplement to Rights Agreement, dated November 29, 1994.
4.4 The Company agrees to furnish the Securities and Exchange
Commission, upon request, with copies of all instruments
defining rights of holders of long-term debt of Washington
Mutual and its consolidated subsidiaries.
10.1 Tax Sharing Agreement between Washington Mutual, Inc.,
Washington Mutual Bank, FA, Washington Mutual Bank fsb and
Washington Mutual Bank, dated March 30, 1998, as amended
August 31, 1999 (filed herewith).
10.2* Lease Agreement between Third and University Limited
Partnership and Washington Mutual Savings Bank, dated
September 1, 1988.
10.3 Escrow Agreement, dated December 20, 1996, by and among
Washington Mutual, Inc., Keystone Holdings Partners, L.P.,
the Federal Deposit Insurance Corporation as manager of the
FSLIC Resolution Fund, and The Bank of New York (filed as an
exhibit to the Company's Current Report on Form 8-K dated
January 3, 1997. File No. 0-25188).
10.4 Registration Rights Agreement, dated July 21, 1996, by and
among Washington Mutual, Inc., Keystone Holdings Partners,
L.P., and the Federal Deposit Insurance Corporation as
manager of the FSLIC Resolution Fund (filed as an exhibit to
the Company's Current Report on Form 8-K dated January 3,
1997. File No. 0-25188).
10.5 Agreement and Plan of Merger between Washington Mutual, Inc.
and H.F. Ahmanson & Company ("Ahmanson") dated as of March
16, 1998 (filed as an appendix to the Company's Registration
Statement on Form S-4, dated July 27, 1998. Registration No.
333-52785).
10.6 Agreement and Plan of Merger between Washington Mutual, Inc.
and Long Beach Financial Corporation, dated March 18, 1999
(filed as an appendix to the Company's Registration
Statement on Form S-4 dated June 21, 1999).
10.7 364-Day Credit Agreement by and among the Company,
Washington Mutual Finance Corporation (formerly known as
Aristar, Inc.), The Chase Manhattan Bank as Administrative
Agent and certain lenders (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999. File No. 0-25188).
10.8 Four-Year Credit Agreement by and among the Company,
Washington Mutual Finance Corporation (formerly known as
Aristar, Inc.), The Chase Manhattan Bank as Administrative
Agent and certain lenders (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999. File No. 0-25188).
Management Contracts and Compensatory Plans and Arrangements (Exhibits
10.9-10.73)
10.9 Amended and Restated Washington Mutual 1994 Stock Option
Plan (filed as an appendix to the Company's Definitive Proxy
Statement on Schedule 14A filed on March 18, 1998. File No.
0-25188).
10.10* Amended and Restated Incentive Stock Option Plan.
126
129
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.11 Washington Mutual Restricted Stock Plan (as amended and
restated as of February 18, 1997) (filed as an appendix to
the Company's Definitive Proxy Statement on Schedule 14A
filed on March 12, 1997. File No. 0-25188).
10.12* Washington Mutual Employees' Stock Purchase Program.
10.13 Fourth Amendment to the Washington Mutual Employees' Stock
Purchase Program (filed as an exhibit to the Company's
Current Report on Form 8-K dated December 22, 1998. File No.
0-25188).
10.14 Washington Mutual Retirement Savings and Investment Plan (as
amended and restated) (filed as an exhibit to the Company's
Current Report on Form 8-K dated December 22, 1998. File No.
0-25188).
10.15* Washington Mutual Employee Service Award Plan.
10.16*** Supplemental Employee's Retirement Plan for Salaried
Employees of Washington Mutual.
10.17*** Washington Mutual Supplemental Executive Retirement
Accumulation Plan.
10.18*** Deferred Compensation Plan for Directors and Certain Highly
Compensated Employees.
10.19*** Deferred Compensation Plan for Certain Highly Compensated
Employees.
10.20** Employment Contract of Kerry K. Killinger.
10.21** Employment Contract for Executive Officers.
10.22 Form of Employment Contract for Senior Vice Presidents
(filed as an exhibit to the Washington Mutual, Inc. Annual
Report on Form 10-K for the year ended December 31, 1998.
File No. 0-25188).
10.23 The 1988 Stock Option and Incentive Plan (as amended
effective July 26, 1994) (filed as an exhibit to the
Quarterly Report of Great Western Financial Corporation
("Great Western"), on Form 10-Q for the quarter ended
September 30, 1994. File No. 001-04075).
10.24 Amendment No. 1996-1 to the Great Western Financial
Corporation 1988 Stock Option and Incentive Plan, effective
December 10, 1996 (filed as an exhibit to Great Western's
Annual Report on Form 10-K for the year ended December 31,
1996. File No. 001-04075).
10.25 Form of Director Stock Option Agreement (filed as an exhibit
to Great Western's Registration Statement on Form S-8
Registration No. 33-21469 pertaining to Great Western's 1988
Stock Option and Incentive Plan).
10.26 Form of Director Stock Option Agreement effective January 3,
1994, (filed as an exhibit to Great Western's Annual Report
on Form 10-K for the year ended December 31, 1993. File No.
001-04075).
10.27 Great Western Financial Corporation Directors' Deferred
Compensation Plan (1992 Restatement) (filed as an exhibit to
Great Western's Annual Report on Form 10-K for the year
ended December 31, 1991. File No. 001-04075).
10.28 Amendment to Great Western Financial Corporation Directors',
Senior Officers' and basic Deferred Compensation Plans (1992
Restatement) (filed as an exhibit to Great Western's Annual
on Form 10-K for the year ended December 31, 1994. File No.
001-04075).
10.29 Amendment No. 2 to Directors' Deferred Compensation Plan
1992 Restatement (filed as an exhibit to Great Western's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1996. File No. 001-04075).
10.30 Amendment No. 1996-2 to Directors' Deferred Compensation
Plan, dated December 10, 1996 (filed as an exhibit to Great
Western's Annual Report on Form 10-K for the year ended
December 31, 1996. File No. 001-04075).
127
130
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.31 Great Western Financial Corporation Umbrella Trust for
Directors (filed as an exhibit to Great Western's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1989.
File No. 001-04075).
10.32 Amendment No. 1996-1 to Umbrella Trust for Directors, dated
December 16, 1996 (filed as an exhibit to Great Western's
Annual Report on Form 10-K for the year ended December 31,
1996. File No. 001-04075).
10.33 Omnibus Amendment 1995-1 to the Umbrella Trusts replacing
the Finance Committee of the Board of Directors with the
Compensation Committee of the Board of Directors as
administrator of the plans (filed as an exhibit to Great
Western's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995. File No. 001-04075).
10.34 Restated Retirement Plan for Directors (filed as an exhibit
to Great Western's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993. File No. 001-04075).
10.35 Employee Home Loan Program (filed as an exhibit to Great
Western's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1993. File No. 001-04075).
10.36 Amendment No. 1996-1 to Employee Home Loan Program,
effective December 10, 1996 (filed as an exhibit to Great
Western's Annual Report on Form 10-K for the year ended
December 31, 1996. File No. 001-04075).
10.37 Omnibus Amendment 1997-1 amending the definition of change
in control in the Great Western Financial Corporation 1988
Stock Option and Incentive Plan, as amended December 10,
1996, the Great Western Financial Corporation Directors'
Deferred Compensation Plan (1992 Restatement), as amended
December 10, 1996, the Umbrella Trust for Directors as
amended December 10, 1996, and the Employee Home Loan
Program (revised and restated as of April 27, 1993), as
amended December 10, 1996 (filed as an exhibit to Great
Western's Annual Report on Form 10-K for the year ended
December 31, 1996. File No. 001-04075).
10.38 Washington Mutual, Inc. WAMU Share Program (filed as an
exhibit to the Company's Registration Statement on Form S-8,
File No. 333-69503).
10.39 January 1999 WAMU Share Program (filed as an exhibit to the
Company's Registration Statement on Form S-8, File No.
333-69503).
10.40 H.F. Ahmanson & Company 1984 Stock Incentive Plan (filed as
an exhibit to Ahmanson's Annual Report on Form 10-K for the
year ended December 31, 1984. File No. 1-08930).
10.41 Amendment to H.F. Ahmanson & Company 1984 Stock Incentive
Plan (filed as an exhibit to Ahmanson's Annual Report on
Form 10-K for the year ended December 31, 1989. File No.
1-08930).
10.42 H.F. Ahmanson & Company 1993 Stock Incentive Plan as amended
(filed as an exhibit to Ahmanson's Annual Report on Form
10-K for the year ended December 31, 1996. File No.
1-08930).
10.43 H.F. Ahmanson & Company 1988 Directors' Stock Incentive
Plan, as amended (filed as an exhibit to Ahmanson's Annual
Report on Form 10-K for the year ended December 31, 1989.
File No. 1-08930).
10.44 H.F. Ahmanson & Company 1996 Nonemployee Directors' Stock
Incentive Plan (filed as an exhibit to Ahmanson's Annual
Report on Form 10-K for the year ended December 31, 1995.
File No. 1-08930).
10.45 1989 Contingent Deferred Compensation Plan of H.F. Ahmanson
& Company (filed as an exhibit to Ahmanson's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1991.
File No. 1-08930).
128
131
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.46 First Amendment to 1989 Contingent Deferred Compensation
Plan of H.F. Ahmanson & Company (filed as an exhibit to
Ahmanson's Annual Report on Form 10-K for the year ended
December 31, 1995. File No. 1-08930).
10.47 Second Amendment to 1989 Contingent Deferred Compensation
Plan of H.F. Ahmanson & Company (filed as an exhibit to
Ahmanson's Annual Report on Form 10-K for the year ended
December 31, 1996. File No. 1-08930).
10.48 Elective Deferred Compensation Plan of H.F. Ahmanson &
Company (filed as an exhibit to Ahmanson's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1991. File No.
1-08930).
10.49 First Amendment to Elective Deferred Compensation Plan of
H.F. Ahmanson & Company (filed as an exhibit to Ahmanson's
Annual Report on Form 10-K for the year ended December 31,
1995. File No. 1-08930).
10.50 Second Amendment to Elective Deferred Compensation Plan of
H.F. Ahmanson & Company (filed as an exhibit to Ahmanson's
Annual Report on Form 10-K for the year ended December 31,
1996. File No. 1-08930).
10.51 Capital Accumulation Plan of H.F. Ahmanson & Company (filed
as an exhibit to Ahmanson's Annual Report on Form 10-K for
the year ended December 31, 1996. File No. 1-08930).
10.52 First Amendment to Capital Accumulation Plan of H.F.
Ahmanson & Company (filed as an exhibit to Ahmanson's Annual
Report on Form 10-K for the year ended December 31, 1996.
File No. 1-08930).
10.53 Supplemental Executive Retirement Plan of H.F. Ahmanson &
Company, as amended and restated (filed as an exhibit to
Ahmanson's Annual Report on Form 10-K for the year ended
December 31, 1995. File No. 1-08930).
10.54 First Amendment to Supplemental Executive Retirement Plan of
H.F. Ahmanson & Company (filed as an exhibit to Ahmanson's
Annual Report on Form 10-K for the year ended December 31,
1996. File No. 1-08930).
10.55 Senior Supplemental Executive Retirement Plan of H.F.
Ahmanson and Company, as amended and restated (filed as an
exhibit to Ahmanson's Annual Report on Form 10-K for the
year ended December 31, 1995. File No. 1-08930).
10.56 Executive Life Insurance Plan of H.F. Ahmanson & Company
(filed as an exhibit to Ahmanson's Annual Report on Form
10-K for the year ended December 31, 1989. File No.
1-08930).
10.57 First Amendment to Executive Life Insurance Plan of H.F.
Ahmanson & Company (filed as an exhibit to Ahmanson's Annual
Report on Form 10-K for the year ended December 31, 1995.
File No. 1-08930).
10.58 Second Amendment to Executive Life Insurance Plan of H.F.
Ahmanson & Company (filed as an exhibit to Ahmanson's Annual
Report on Form 10-K for the year ended December 31, 1996.
File No. 1-08930).
10.59 Senior Executive Life Insurance Plan of H.F. Ahmanson &
Company, as amended and restated (filed as an exhibit to
Ahmanson's Annual Report on Form 10-K for the year ended
December 31, 1995. File No. 1-08930).
10.60 H.F. Ahmanson & Company Supplemental Long Term Disability
Plan (filed as an exhibit to Ahmanson's Annual Report on
Form 10-K for the year ended December 31, 1989. File No.
1-08930).
10.61 Outside Directors' Elective Deferred Compensation Plan of
H.F. Ahmanson & Company (filed as an exhibit to Ahmanson's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1991. File No. 1-08930).
129
132
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.62 First Amendment to Outside Directors' Elective Deferred
Compensation Plan of H.F. Ahmanson & Company (filed as an
exhibit to Ahmanson's Annual Report on Form 10-K for the
year ended December 31, 1995. File No. 1-08930).
10.63 Second Amendment to Outside Directors' Elective Deferred
Compensation Plan of H.F. Ahmanson & Company (filed as an
exhibit to Ahmanson's Annual Report on Form 10-K for the
year ended December 31, 1996. File No. 1-08930).
10.64 Outside Directors' Capital Accumulation Plan of H.F.
Ahmanson & Company (filed as an exhibit to Ahmanson's Annual
Report on Form 10-K for the year ended December 31, 1996.
File No. 1-08930).
10.65 First Amendment to Outside Directors' Capital Accumulation
Plan of H.F. Ahmanson & Company (filed as an exhibit to
Ahmanson's Annual Report on Form 10-K for the year ended
December 31, 1996. File No. 1-08930).
10.66 Outside Director Retirement Plan of H.F. Ahmanson & Company,
as amended and restated (filed as an exhibit to Ahmanson's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1991. File No. 1-08930).
10.67 First Amendment to Outside Director Retirement Plan of H.F.
Ahmanson & Company (filed as an exhibit to Ahmanson's Annual
Report on Form 10-K for the year ended December 31, 1995.
File No. 1-08930).
10.68 Amended Form of Indemnity Agreement between H.F. Ahmanson &
Company and directors and executive officers (filed as an
exhibit to Ahmanson's Annual Report on Form 10-K for the
year ended December 31, 1989. File No. 1-08930).
10.69 Board of Directors Retirement Plan of Coast (filed as an
exhibit to the Current Report of Coast Savings Financial
Inc. ("Coast") on Form 8-K dated September 1, 1989. File No.
1-10264).
10.70 Pension Plan of Coast (filed as an exhibit to Coast's
Current Report on Form 8-K dated September 1, 1989. File No.
1-10264).
10.71 First Amendment to Pension Plan of Coast (filed as an
exhibit to Coast's Current Report on Form 8-K dated
September 1, 1989. File No. 1-10264).
10.72 Form of Post-Retirement Compensation Arrangement of Coast
(filed as an exhibit to Coast's Annual Report on Form 10-K
for the year ended December 31, 1989. File No. 1-10264).
10.73 Amended and Restated Executive Supplemental Retirement Plan
of Coast, dated February 28, 1996 (filed as an exhibit to
Coast's Annual Report on Form 10-K for the year ended
December 31, 1995. File No. 1-10264).
21 List of Subsidiaries of the Registrant (filed herewith).
23 Consent of Deloitte & Touche LLP (filed herewith).
23.1 Consent of KPMG LLP (filed herewith).
27.1 Financial Data Schedule for the year ended December 31,
1999, and restated Financial Data Schedule for the years
ended December 31, 1998 and 1997 (filed herewith).
- ---------------
* Filed as an exhibit to the Company's Current Report on Form 8-K dated
November 29, 1994. File No. 0-25188.
** Filed as an exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997. File No. 0-25188.
*** Filed as an exhibit to the Washington Mutual, Inc. Annual Report on Form
10-K for the year ended December 31, 1996. File No. 0-25188.
Exhibits followed by a parenthetical reference are incorporated by reference
herein from the documents described therein. Documents relating to Ahmanson
filed prior to May 1985 were filed by H.F. Ahmanson & Company, a California
corporation, Commission File No. 1-7108.
130