Back to GetFilings.com
1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
------------------------
(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, 2000
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)
------------------------
WASHINGTON 91-1653725
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NUMBER)
1201 THIRD AVENUE, SEATTLE, WASHINGTON 98101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 461-2000
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock New York Stock Exchange
8% Corporate Premium Income Equity Securities 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 past 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 2, 2001:
COMMON STOCK -- $28,799,686,768(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 2, 2001:
COMMON STOCK -- 583,802,776(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 17, 2001, are incorporated by reference into Part
III.
================================================================================
2
WASHINGTON MUTUAL, INC.
2000 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I...................................................... 1
ITEM 1. BUSINESS.......................................... 1
Overview............................................... 1
Banking and Financial Services Group................... 1
Home Loans and Insurance Services Group................ 3
Specialty Finance Group................................ 6
Treasury Division...................................... 7
Employees.............................................. 8
Competitive Environment................................ 8
Factors That May Affect Future Results................. 9
Business Combinations.................................. 11
Taxation............................................... 11
Environmental Regulation............................... 12
Regulation and Supervision............................. 13
Principal Officers..................................... 24
ITEM 2. PROPERTIES........................................ 25
ITEM 3. LEGAL PROCEEDINGS................................. 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................ 26
PART II..................................................... 26
ITEM 5. MARKET FOR OUR COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS......................................... 26
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
Review of Financial Condition.......................... 35
Provision and Allowance for Loan and Lease Losses...... 38
Operating Segments..................................... 42
Asset and Liability Management Strategy................ 43
Liquidity.............................................. 45
Capital Adequacy....................................... 46
Recently Issued Accounting Standards Adopted in These
Financial Statements.................................. 46
Recently Issued Accounting Standards Not Yet Adopted... 47
Tax Contingency........................................ 47
Goodwill Litigation.................................... 48
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................ 49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....... 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................... 51
PART III.................................................... 51
PART IV..................................................... 51
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.................................... 51
i
3
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. Based on our consolidated assets at December 31, 2000, we were the
largest savings institution and the seventh largest banking company in the
United States.
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., and its consolidated subsidiaries. When we refer to
WMI, we mean Washington Mutual, Inc. exclusively.
Our business operations are conducted by 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 ("Washington Mutual
Finance"), Long Beach Mortgage Company ("Long Beach Mortgage") and WM Financial
Services, Inc. ("WMFS").
Our assets have grown over the last five years primarily through
acquisitions. In 1996, we acquired Keystone Holdings, Inc., the parent of
American Savings Bank, F.A. ("ASB"). This acquisition, referred to as the
"Keystone Transaction," gave us our first depository institution in California.
In 1997, we acquired Great Western Financial Corporation ("Great Western") and
in October 1998, we acquired H.F. Ahmanson & Co. ("Ahmanson"). In February 1998,
Ahmanson had acquired Coast Savings Financial, Inc. (the "Coast Acquisition").
On January 31, 2001, we acquired the mortgage operations of The PNC
Financial Services Group, Inc. The principal subsidiaries acquired in that
transaction were renamed Washington Mutual Home Loans, Inc. ("WMHLI") and
Washington Mutual Mortgage Securities Corp. ("WMMSC").
On February 9, 2001, we acquired Texas-based Bank United Corp., which was
merged into Washington Mutual, Inc. As a result, all of the subsidiaries of Bank
United Corp., including Bank United, a federally chartered savings bank, became
our subsidiaries. Bank United was subsequently merged into WMBFA.
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 42 states.
Effective January 1, 2001, we realigned our business segments. The
following discussion of our business portrays our business as it is now being
managed. Separately, we are in the process of enhancing our segment reporting
process methodologies and allocations and will be reporting segment results
under the new methodologies and as realigned beginning with the first quarter of
2001.
These business segments are:
- Banking and Financial Services Group
- Home Loans and Insurance Services Group
- Specialty Finance Group
- Treasury Division
BANKING AND FINANCIAL SERVICES GROUP
Our Banking and Financial Services Group ("Banking & FS") offers a
comprehensive line of consumer and business financial products and services to
individuals and small and middle market businesses. We provide service to
approximately five million households through multiple delivery channels: over
1,100 finan-
1
4
cial centers (both free-standing and in-store), including 35 business banking
centers, and over 1,600 automated teller machines located in eight states. We
also offer our customers the convenience of 24-hour telephone and internet
banking and investment services.
Our strategy is to expand our base of consumer and business relationships
by combining national convenience with local customer service and a broad-based
product line. In addition to traditional banking products, we offer investment
management, securities brokerage services and annuity products through our
subsidiaries and affiliates. In May 2000, we launched our own web complex, made
up of our banking site, wamu.com; Invest1to1.com and wmfinancial.com, which
provide on-line financial planning and stock trading; and wmgroupoffunds.com,
featuring WM Group of Funds information and interaction with investors and
financial advisors. In partnership with our Home Loans & Insurance Services
Group, mortgage loans and insurance products are made available through our
financial centers.
Banking & FS offers various consumer and business deposit products, as well
as a variety of value-added, fee-based banking services. Deposit products
offered include checking accounts, savings accounts, money market deposit
accounts ("MMDAs") and time deposit accounts. Fee-based services include, but
are not limited to:
- payment choices, including debit card, pay-by-phone, on-line banking,
money orders, bank checks, and traveler's checks,
- a membership program featuring free checks, a variety of product
discounts, shopping and travel services, and credit card protection
service, and
- safety deposit box rentals.
A primary focus of the Banking & FS Group in 2000 was the opening of
financial centers in Las Vegas with project Occasio(TM) (Latin for "favorable
opportunity"), which features a completely new retail approach to banking.
Occasio(TM) provides Banking & FS an additional vehicle for expanding into new
market areas where acquisition opportunities may be limited. Based on the
favorable customer acceptance and strong results in Las Vegas, we will expand
into Phoenix beginning in 2001 and will open a total of approximately 40
financial centers in Phoenix throughout 2001 and 2002. Occasio(TM) financial
centers welcome customers in an open, free-flowing retail environment where they
can either interact with roaming customer service representatives or become
engaged by high-tech, self-help, touch screens. Occasio(TM) focuses on the
customer and how the customer chooses to be served. Customers can also log onto
Washington Mutual's home page, which provides links to all of our internet
products and services.
One of Banking & FS's primary business objectives is to expand consumer and
business lending activities, as they generally offer higher yields than prime
mortgage lending activities. The size of our consumer and commercial business
loan portfolio has grown in recent years, partly due to the introduction of the
consumer lending product line in California, Florida and Texas and the expansion
of WM Business Bank in California. The following consumer loan products are
available through our financial centers:
- second mortgage loans, both 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, marine and recreational vehicles,
- student loans,
- loans secured by deposit accounts, and
- secured and unsecured loans made under our line of credit or term loan
programs.
We offer a full line of business loan products and banking services through
our Western Bank offices in the northwest and WM Business Bank offices in
California. We concentrate on developing and maintaining
2
5
strong client relationships with small and mid-sized companies. Our core
business customers are companies with $5 million to $100 million in sales. We
provide the following loan products to our business customers:
- business lines of credit,
- working capital loans,
- equipment loans,
- loans secured by real estate, and
- Small Business Administration ("SBA") loans.
We also offer an array of banking services to our business customers
including:
- international trade finance,
- deposit, cash, and treasury management services, and
- merchant bankcard services.
Commercial business loans are made on a secured or unsecured basis.
Collateral for secured commercial loans may be business assets, real estate,
personal assets, or some combination thereof. Our decision to make a consumer or
commercial loan is based on an evaluation of the borrower's financial capacity,
including such factors as income, other indebtedness and credit history; company
performance, in the case of commercial loans; and collateral.
The merger with Bank United Corp. enhances our presence in the State of
Texas. Prior to the merger, our operations served more than 125,000 households
through 48 financial centers in and around Dallas and Houston. The merger with
Bank United Corp. adds over 300,000 households and approximately 160 financial
centers to our Texas presence and expands our market coverage into the Austin
and San Antonio markets. The merger with Bank United Corp. strengthens our
market position for business lending in Texas, as well as nationally through SBA
lending offices located in some of the nation's most attractive geographic
markets.
Our investment services are offered through: (1) WMFS, a licensed
broker-dealer, (2) WM Fund Advisors, Inc. ("WM Advisors") providing investment
advisory and distribution services for the WM Group of Funds, and (3) the
Annuity Program. At December 31, 2000, WMFS was licensed in 49 states and Puerto
Rico and operated in the eight states where our financial centers are located.
Over 500 financial consultants and 800 licensed bank employees provide
investment services to retail customers.
WM Advisors, our registered investment advisor subsidiary, had $8.21
billion of assets under management in 17 mutual funds, five asset management
portfolios, and one variable annuity at December 31, 2000. The WM Group of Funds
is managed both by WM Advisors and by three subadvisors. The WM Group of Funds
is distributed through our financial centers and is also distributed through a
network of over 400 broker-dealers and independent financial advisors. The
Annuity Program utilizes over 800 licensed bank employees who sell fixed
annuities to our customers.
HOME LOANS AND INSURANCE SERVICES GROUP
The Home Loans and Insurance Services Group ("Home Loans Group")
originates, purchases and services the single-family residential ("SFR")
mortgage assets of WMBFA, WMB, WMBfsb, and Long Beach Mortgage. This group also
includes the activities of Washington Mutual Insurance Services, Inc., an
insurance agency that supports the mortgage lending process, as well as the
insurance needs of all consumers doing business with us.
The Home Loans Group's mission is to be the premier catalyst for affordable
homeownership, using our proprietary approach to home lending encompassed in our
branding, the Power of Yes(TM). The goal of the Home Loans Group is to be the
nation's leading mortgage lender. We will measure our success by our origination
and servicing market share, our profitability, and brand awareness.
3
6
During 2000, the Home Loans Group announced partnerships with two
electronic mortgage origination companies to develop a mortgage origination and
decision-making platform known as Optis(TM). This system will be available in
all of our distribution channels, which will allow consumers to conduct business
with us according to their preferences. In the third quarter of 2000, we
re-launched www.wamumortgage.com. The new site possesses a more robust
recommendation engine, numerous calculators, interactive customer service, and
provides 24-hour customer access to the status of their loan application.
As of December 31, 2000, the Home Loans Group served about 1.2 million
households throughout the United States by providing a wide range of mortgage
financing products. Our principal banking subsidiaries offer first mortgage loan
products that provide permanent home financing as well as loans for the
construction of single-family homes. Permanent loans made available to consumers
include conventional fixed-rate and adjustable-rate mortgage ("ARM") loans,
FHA-insured, VA-guaranteed fixed-rate mortgage loans, and both fixed- and
adjustable-rate Jumbo (loan amounts in excess of $275,000) loans. All loan
products are offered with a variety of maturities, amortization schedules and,
in the case of ARMs, rate repricing frequencies.
The primary ARM products that we offer are indexed to the 12-month average
of the 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 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. We often
offer a "teaser" rate with our payment-capped ARMs, which means the initial
start rate of the loan is below market rates. 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 each
month: 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 we cannot change annually by more than a contractual
percentage, usually 7.5%. In addition, we offer loans with fixed initial start
rates for 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 remaining maturity of the loan. In addition, we offer
each of our loan products with a prepayment premium as well as at a different
rate without a prepayment premium.
These mortgage products are made available to consumers through various
distribution channels, which include retail home loan centers, wholesale home
loan centers, financial centers and the internet. For 2000, based on total
originations, the Home Loans Group was the nation's largest ARM lender as well
as the nation's largest Jumbo lender. In addition, the Home Loans Group was the
nation's fifth largest residential lender and sixth largest residential loan
servicer.
Two of our primary business objectives are to stabilize income and
diversify revenues. To achieve these objectives, we have implemented a
three-point strategy to generate: (1) spread income from loans held in
portfolio; (2) fee income through loan servicing, loan-related fees, and
insurance services income; and (3) gains from sales of loans and mortgage-backed
securities ("MBS").
The acquisitions of Bank United Corp. and the mortgage operations of The
PNC Financial Services Group, Inc. further diversify our mortgage operations
geographically, enhance our position in the home loan business, and build our
loan servicing portfolio. These acquisitions make us the nation's second largest
residential mortgage originator and fourth largest servicer of residential
mortgages based on pro forma numbers for the year ended December 31, 2000. They
enhance our position by giving us a stronger capability to originate loans in
all 50 states, including originating FHA-insured and VA-guaranteed loans on a
national scale. With the acquisition of WMMSC, we also obtained an improved
capability to securitize loans and sell the resulting MBS in the secondary
market and to generate fee income through master servicing activities.
Originations of prime SFR loans (excluding SFR construction loans)
increased during 2000, fueled particularly by originations of short-term ARMs,
which reprice primarily on a monthly basis according to the index (e.g., MTA,
11th District monthly weighted average cost of funds index ("COFI")) to which
the
4
7
ARMs are tied. The increase in short-term ARM originations was attributable to
the higher interest rate environment during the first half of 2000 and the
resulting customer preference for short-term ARMs over fixed-rate loans.
We generally sell the fixed-rate SFR loans we originate. Most of the
fixed-rate conforming mortgage loans are sold to Fannie Mae. In addition, we
securitize loans that are also sold to Fannie Mae. We use our own underwriting
standards and origination system to originate loans.
We occasionally securitize loans through 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 ("Non-Recourse MBS"). We can either sell 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 Home Loans Group has also been developing ways of selling ARM loans in
the secondary market to complement our existing strategy of selling fixed-rate
loans. Selling ARM loans in the secondary market will allow us to manage asset
growth more efficiently and should reduce the volatility of income related to
loans during changing interest rate environments. To achieve optimum pricing,
current ARM production that is not retained in the loan portfolio will either be
sold to investors shortly following origination or securitized and retained in
the available-for-sale securities portfolio for a period of time, and then sold
as Non-Recourse MBS. We expect to be able to increase the amount of noninterest
income relative to net interest income through gains on sales of loans and MBS
as well as loan servicing income.
Through Long Beach Mortgage, we are engaged in the business of originating,
purchasing and selling specialty mortgage loans. 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 and the District of Columbia. In 2000, none of Long Beach Mortgage's
wholesale brokers was responsible for more 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 280
account executives located in 59 offices.
Long Beach Mortgage has followed a strategy of selling or securitizing and
selling substantially all of its loan originations in the secondary market. Long
Beach Mortgage has historically sold its entire economic interest in the loan
except for the related servicing rights, which it has generally retained. In
2000, Long Beach Mortgage began securitizing and selling its production while
retaining rights to residual cash flows in the securities created.
The Home Loans Group also purchases loan portfolios with risk
characteristics similar to those of loans originated by Long Beach Mortgage.
Because these portfolios, as well as those of Long Beach Mortgage, tend to have
higher credit risk, they generally provide higher yields than the prime mortgage
loans made by our banking subsidiaries and WMHLI. Our typical borrowers within
these portfolios would generally not qualify for a loan from our banking
subsidiaries due to their credit history, higher debt-to-income ratio or other
factors. While we screen these portfolios for unacceptable credit risk, these
loans, by their nature, bear more credit risk than is found in prime mortgage
loans or in agency MBS. Accordingly, we expect that loan charge offs on these
portfolios will be higher over time than on our other mortgage portfolios.
In addition to SFR mortgage loans, the Home Loans Group also offers
construction financing on SFR properties. 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.
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
5
8
our loan amount plus all prior liens on the property or the replacement cost of
the property, whichever is less. We perform re-underwriting and appraisal review
on some of the loans acquired from our correspondents.
Washington Mutual Insurance Services, Inc. is an insurance agency that
supports the mortgage lending process by offering fire, homeowners, flood,
earthquake and other property and casualty insurance products to 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. The Washington Mutual Insurance Services, Inc.
website, wamuins.com, was launched in October 2000, providing information,
quotes, and buying capabilities over the internet.
SPECIALTY FINANCE GROUP
The Specialty Finance Group conducts operations through WMBFA, WMB, WMBfsb,
and Washington Mutual Finance. An array of commercial products are offered to
our customers through our group, all under the Washington Mutual brand name.
Additionally, consumer finance products are offered through Washington Mutual
Finance.
The Specialty Finance Group provides industry specialty financing for the
following business sectors: syndicated finance, asset-based finance, and
franchise finance. In each of these areas, we have developed specialized
expertise that allows us to serve our markets efficiently while at the same time
ensuring high credit quality from a diverse group of customers.
The merger with Bank United Corp. complements our plans to grow our
commercial business portfolio and extends our market presence into some of the
nation's most attractive geographic markets, including Texas. Like our existing
business, Bank United Corp. offers a full line of commercial products and
services to businesses across the nation. Lending programs added as a result of
the merger with Bank United Corp. include mortgage banker finance, and energy
and healthcare lending.
The Specialty Finance Group provides real estate secured financing for
commercial and multi-family real estate lending and residential builder
construction. As a result of the merger with Bank United Corp., the Group also
provides non-real estate secured lending activities, as previously mentioned. In
addition, the Specialty Finance Group provides loan servicing for these lending
activities.
Commercial and multi-family real estate loans are offered to property
owners and developers through 19 Washington Mutual commercial real estate
offices in Washington, Oregon, Utah, Colorado, and California. The payment
experience on loans secured by income-producing properties usually depends on
the successful operations of the real estate projects that secure the loans 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 parts of the country in 2000, we closely monitor the commercial
real estate environment to determine the appropriate level of our activity in
this area. In commercial real estate lending, we consider the project's
location, marketability, and overall attractiveness. Current underwriting
guidelines for commercial real estate loans require an economic analysis of each
property with regard to the annual revenue and expenses, debt service coverage,
and fair value to determine the maximum loan amount. Before we make a commercial
real estate loan, various levels of approvals must be obtained depending on the
size and characteristics of the loan.
Residential builder construction provides loans to borrowers who are in the
business of acquiring land and building homes for resale. Each builder loan is
made on a property-by-property basis and generally matures one to three years
from origination. Proper consideration is given to the higher risk inherent in
these transactions as each loan is underwritten. During 2000, substantially all
of our SFR builder construction loans were made in Washington, Oregon, Utah,
Florida, and California. The addition of Bank United Corp.'s residential builder
construction business qualifies us as one of the largest builder construction
lenders in the nation and diversifies our geographic market presence.
Mortgage banker finance provides small- and medium-sized mortgage and
consumer finance companies with credit facilities, including secured lines of
credit, securities purchased under agreements to resell and
6
9
working capital credit lines. Mortgage banker finance also offers cash
management, document custody, and deposit services to its customers.
Washington Mutual Finance currently operates 533 branches in 25 states,
primarily in the southeastern United States, Texas and California. Washington
Mutual Finance originates and services consumer installment loans and real
estate secured loans. These loans, which are generally held in the loan
portfolio, are primarily for personal, family or household purposes. These loans
typically have original terms ranging from 12 to 360 months. In 2000,
originations had an average original term of 74 months. Of the originations (in
dollars) in 2000, 70% were unsecured or secured by luxury goods, automobiles or
other personal property, and 30% were secured by real estate. Additionally,
Washington Mutual Finance acquires installment contracts from local retail
establishments, usually without recourse to the originating merchant. These
contracts are typically written with original terms of three to 60 months,
averaging 28 months in 2000.
The loans made by Washington Mutual Finance generally have a higher yield
than the prime mortgage loans made by our banking subsidiaries, because these
loans tend to have higher credit 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.
TREASURY DIVISION
The primary responsibilities of our treasury division are:
- interest rate risk management,
- liquidity management,
- investing activities,
- borrowing activities, and
- capital management.
Interest Rate Risk Management
We actively manage the amounts and maturities of our assets and liabilities
to mitigate repricing and prepayment risks. We sell fixed-rate loans, since they
are difficult to match in duration to liabilities because of prepayment risk and
longer maturities. To further mitigate repricing risk, prepayment risk, and to a
lesser extent cap risk, we use derivative instruments, such as interest rate
exchange agreements and interest rate cap agreements. See "Management of
Interest Rate Risk and Derivative Activities." We do not attempt to hedge lag or
basis risk because the impacts of these risks are usually short-lived and the
cost of hedging is high.
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 ultimately differ from actual results, 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 Management
Our liquidity policy is to maintain sufficient liquidity above daily
funding needs to protect against unforeseen liquidity demands. We manage
liquidity primarily through the securitization of mortgage loans and through
various sources of borrowings, including securities sold under agreements to
repurchase ("repurchase agreements"), Federal Home Loan Bank ("FHLB") advances,
and other secured and unsecured sources of funds.
7
10
Investing Activities
We manage the Company's purchased investment securities, which are
primarily comprised of agency MBS and investment grade private MBS. During 2000,
our purchases of MBS declined, since the MBS had acceptable, but lower returns
than loans originated by us and held in our portfolio or securitized and
retained.
Borrowing Activities
To keep pace with asset growth in recent years, we have increasingly relied
on wholesale borrowings to fund asset growth. Borrowings include repurchase
agreements, the purchase of federal funds, the issuance of capital notes and
other types of debt securities, the issuance of commercial paper, and funds
obtained as advances from the FHLBs of Seattle and San Francisco. We also have
access to the Federal Reserve Bank's discount window.
We actively engage in repurchase agreements with authorized broker-dealers
and major customers, selling U.S. Government debt securities and MBS under
agreements to repurchase them at a future date.
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. 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 owed to the lending FHLB. All advances must be fully secured by eligible
collateral. Eligible collateral includes all stock owned of the FHLBs, deposits
with the FHLBs, and certain mortgages or deeds of trust and securities of the
U.S. Government and its agencies.
Our depository institutions accept deposits, primarily time deposit
accounts, from political subdivisions and public agencies. We consider these
deposits to be a borrowing source rather than a customer relationship and,
hence, they are managed by the treasury division.
Other funding activities include the issuance of commercial paper by WMI
and Washington Mutual Finance. We have commercial paper facilities backed by
combined credit facilities from a syndicate of banks. We also issue senior and
subordinated debt at WMI and WMBFA, and senior notes at Washington Mutual
Finance.
Capital Management
In order to deploy accumulated capital, we repurchased our common stock
during the first half of 2000. From April 20, 1999, the inception of the
repurchase program, through June 30, 2000, we repurchased a total of 66.3
million shares as part of our previously announced purchase programs. We did not
repurchase any shares during the last half of 2000. During this time, capital
was accumulated to facilitate balance sheet growth and accommodate the
acquisitions of Bank United Corp. and the mortgage operations of The PNC
Financial Services Group, Inc. Our capital management strategy also focuses on
the risk-based capital and leverage ratios of our principal banking
subsidiaries.
EMPLOYEES
Our number of full-time equivalent employees ("FTE") at December 31, 2000
was 28,798, a slight increase from 28,509 at December 31, 1999. During the
previous year, the number of FTE also increased slightly from 27,957 at December
31, 1998, 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.
COMPETITIVE ENVIRONMENT
We operate in a highly competitive environment. The activities of our three
major lines of business (Banking and Financial Services, Home Loans and
Insurance Services, and Specialty Finance) are subject to
8
11
significant competition in attracting and retaining deposits and making loans as
well as in providing other financial services in all of our market areas.
Competition focuses on customer services, interest rates on loans and deposits,
lending limits and customer convenience, such as product lines offered and the
accessibility of services.
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. Enacted
in 1999, the Gramm-Leach-Bliley ("GLB") Act does not increase our authority to
affiliate, but it does benefit our competitors, as discussed below. See
"Business -- Regulation and Supervision." As with all banking organizations, we
have also experienced competition from nonbanking sources, including mutual
funds, corporate and governmental debt securities and other investment
alternatives offered within and outside of our primary market areas.
Our most direct competition for loans has traditionally come from other
savings institutions, national mortgage companies, insurance companies,
commercial banks and government-sponsored enterprises ("GSEs"). In addition to
the provisions of the GLB Act, technological advances and heightened e-commerce
activities have also increased accessibility to services without physical
presence, which has intensified competition among banking as well as nonbanking
companies in offering financial products and services. Although our competitors'
activities may make it a bigger challenge for us to achieve our financial goals,
we are continuously reassessing our overall competitive edge to attract more
customers for our products and services.
With the changes in technology and increased competition from banking as
well as from nonbanking entities, the traditional environment in which we have
operated in the past has been transformed into a fiercely dynamic and
competitive environment. Although we are faced with increased competitive
pressures, we remain adaptable to these changes by continuously reviewing and
redefining the ways in which we do our business and, as a result, we remain a
strong market force in our core areas.
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, we have made and will make forward-looking statements.
Our Form 10-K and other documents that we file with the Securities and Exchange
Commission have forward-looking statements. In addition, our senior management
may make forward-looking statements orally to analysts, investors, the media,
and others. Forward-looking statements can be identified by the fact that they
do not relate strictly to historical or current facts. They often include words,
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," or words of similar meaning, or future or conditional verbs, such
as "will," "would," "should," "could," or "may."
Forward-looking statements provide our expectations or predictions of
future conditions, events or results. They are not guarantees of future
performance. By their nature, forward-looking statements are subject to risks
and uncertainties. These statements speak only as of the date they are made. We
do not undertake to update forward-looking statements to reflect the impact of
circumstances or events that arise after the date the forward-looking statements
were made. There are a number of factors, many of which are beyond our control,
that could cause actual conditions, events or results to differ significantly
from those described in the forward-looking statements.
Some of these factors are described below.
Business and Economic Conditions
Our business and earnings are sensitive to general business and economic
conditions. These conditions include short-term and long-term interest rates,
inflation, monetary supply, fluctuations in both debt and equity capital
markets, the strength of the U.S. economy, and the local economies in which we
conduct business. If any of these conditions worsen, our business and earnings
could be adversely affected. For example, if interest rates continue to decline,
this could increase loan prepayments, which could lead to a decline in the value
of our mortgage servicing rights. An economic downturn or rising interest rate
9
12
environment could decrease the demand for loans and increase the number of
customers who become delinquent or default on their loans. An increase in
delinquencies or defaults could result in a higher level of charge offs and
provision for loan and lease losses, which could adversely affect our earnings.
Higher interest rates would also increase our cost of interest-bearing
liabilities, which could outpace the increase in the yield on interest-earning
assets and lead to a reduction in the net interest margin.
Diversification of Assets
We have reduced the percentage of SFR loans and MBS in our portfolio and
increased 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 credit risk. To
the extent that we need to increase our provision for loan and lease losses as a
result of these loans, our earnings could be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") -- Provision and Allowance for Loan and Lease Losses" in
this Form 10-K for more specific discussion.
Concentration of Operations in California
At December 31, 2000, 52% of our loan portfolio and 71% of our deposits
were concentrated in California. As a result, our results of operations and
financial condition are 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 experience greater delinquencies,
which may result in decreased net income and decreased collateral values on our
existing portfolio. We also may not be able to originate the volume or type of
loans or achieve the level of deposits that we currently anticipate.
The forward-looking statements contained within MD&A assume that the
California economy and real estate market will remain healthy. Worsening of
economic conditions or a significant decline in real estate values in California
could have a materially adverse effect on our results of operations and
financial condition.
Competition
We face significant competition both in attracting and retaining deposits
and in making loans in all of our markets. As with all banking organizations, we
have also experienced competition from nonbanking sources, including mutual
funds and securities brokerage companies. We expect increased competition in the
financial services industry as a result of recent legislation that removes many
of the restrictions on affiliations among banks, insurance companies, and
securities firms. 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.
Fiscal and Monetary Policies
Our business and earnings are significantly affected by the fiscal and
monetary policies of the federal government and its agencies. We are
particularly affected by the policies of the Federal Reserve Board, which
regulates the supply of money and credit in the United States. The Federal
Reserve Board's policies directly and indirectly influence the yield on our
interest-earning assets and the cost of our interest-bearing liabilities.
Changes in those policies are beyond our control and difficult to predict.
Mergers and Acquisitions
We expand our business, in part, by acquiring other financial institutions
or a portion of their business. We continue to explore opportunities to acquire
other financial institutions that will complement and enhance our key
strategies. A number of factors related to past and future acquisitions could
adversely affect our
10
13
business and earnings. In addition, our acquisitions are often subject to
regulatory approval. The failure to receive required regulatory approvals within
the time frame or on the conditions expected by management could also adversely
affect our business and earnings.
BUSINESS COMBINATIONS
Most of our growth since 1988 has occurred as a result of business
combinations. The following table summarizes our business combinations since
1988:
ACQUISITION NAME DATE ACQUIRED LOANS DEPOSITS ASSETS
---------------- -------------- ------- -------- -------
(DOLLARS IN MILLIONS)
Columbia Federal Savings Bank and Shoreline Savings
Bank............................................. April 29, 1988 $ 551 $ 555 $ 753
Old Stone Bank(1).................................. June 1, 1990 230 293 294
Frontier Federal Savings Association(2)............ June 30, 1990 -- 96 --
Williamsburg Federal Savings Bank(2)............... Sept. 14, 1990 -- 4 --
Vancouver Federal Savings Bank..................... July 31, 1991 200 253 261
CrossLand Savings, FSB(2).......................... Nov. 8, 1991 -- 185 --
Sound Savings and Loan Association................. Jan. 1, 1992 17 21 24
World Savings and Loan Association(2).............. March 6, 1992 -- 38 --
Great Northwest Bank............................... April 1, 1992 603 586 710
Pioneer Savings Bank............................... March 1, 1993 625 660 927
Pacific First Bank, A Federal Savings Bank......... April 9, 1993 3,771 3,832 5,861
Far West Federal Savings Bank(2)................... April 15, 1994 -- 42 --
Summit Savings Bank................................ Nov. 14, 1994 128 169 188
Olympus Bank, a Federal Savings Bank............... April 28, 1995 238 279 391
Enterprise Bank.................................... Aug. 31, 1995 93 139 154
Western Bank....................................... Jan. 31, 1996 501 696 776
Utah Federal Savings Bank.......................... Nov. 30, 1996 89 107 122
American Savings Bank, F.A. ....................... Dec. 20, 1996 14,563 12,815 21,894
United Western Financial Group..................... Jan. 15, 1997 273 300 404
Great Western Financial Corporation................ July 1, 1997 32,448 27,785 43,770
H.F. Ahmanson & Company(3)......................... Oct. 1, 1998 33,939 33,975 50,355
Industrial Bank.................................... Dec. 31, 1998 11 26 27
Long Beach Financial Corporation................... Oct. 1, 1999 415 -- 821
Alta Residential Mortgage Trust.................... Feb. 1, 2000 156 -- 158
Mortgage operations of The PNC Financial Services
Group, Inc.(1)................................... Jan. 31, 2001 3,290 -- 7,363
Bank United Corp................................... Feb. 9, 2001 15,095 7,673 18,286
- ---------------
(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.
TAXATION
General
For federal income tax purposes, we report income and expenses using the
accrual method of 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.
11
14
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 million (based
upon current federal income tax rates) each year of the six-year period in
federal income taxes 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, impose corporate income taxes on
companies doing business in those states.
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 ASB in 1996, we are party 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 12: 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 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, our realization on such loans.
12
15
REGULATION AND SUPERVISION
References in this section to applicable statutes and regulations are brief
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
ENTITY CHARTER REGULATOR STATE REGULATOR INSURANCE 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
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, the GLB Act was signed into law. The GLB Act
significantly reforms various aspects of the financial services business and
includes provisions which:
- establish a new framework under which bank holding companies and banks
(subject to numerous restrictions) 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;
- 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 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 GLB 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
conducted 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.
13
16
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 GLB Act will not prohibit us from
engaging in nonfinancial activities or acquiring nonfinancial subsidiaries.
However, the GLB 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 GLB Act included a change in the manner
of calculating the Resolution Funding Corporation ("REFCORP") obligations
payable by the FHLBs; a broadening of 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 GLB 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 when FHLBs have high income levels, thereby reducing the
return on members' investments. With the broadening in the purpose for which
FHLB advances can be used, our borrowing costs may rise as demand for advances
increases.
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, United States
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 remain a QTL also would restrict the
ability of WMBFA or WMBfsb to establish new branches and pay dividends.
Acquisitions by Savings and Loan Holding Companies. Neither WMI nor any
other person may acquire control of a savings institution or a savings and loan
holding company without the prior approval of the OTS, or, if the acquirer is an
individual, the OTS' lack of disapproval. In either case, the public must have
an opportunity to comment on the proposed acquisition, and the OTS must complete
an application review. Without prior approval from the OTS, WMI may not acquire
more than 5% of the voting stock of any savings institution that is not one of
its subsidiaries.
Annual Reporting; Examinations. Under 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 record
keeping requirements.
14
17
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 and WMBfsb. 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 currently subject to any regulatory capital
requirements, but each of its subsidiary depository institutions is subject to
various capital requirements. See "Regulation and Supervision-Capital
Requirements." The OTS has proposed a regulation which would require savings and
loan holding companies to give prior notice to the OTS of certain transactions
which could affect capital and which would also set forth the circumstances
under which the OTS would, on a case-by-case basis, review a holding company's
capital adequacy and, when necessary, require additional capital.
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:
- accepting deposits and paying interest on them;
- making loans on residential and other real estate;
- making a limited amount of consumer loans;
- making a limited amount of commercial loans;
- investing in corporate obligations, government debt securities, and other
securities;
- offering various trust and banking services to their customers; and
- owning subsidiaries that invest in real estate and carry on certain other
activities.
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:
- accepting deposits and paying interest on them;
- making loans on or investing in residential and other real estate;
- making consumer loans;
- making commercial loans;
- investing in corporate obligations, government debt securities, and other
securities;
15
18
- offering various trust and banking services to their customers; and
- owning 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 Capital Distributions. 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 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 is a member of the
BIF, but a portion of its 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
16
19
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 2000, the assessment rate
for both SAIF and BIF deposits ranged from zero to 0.27% of covered deposits.
WMB and WMBFA qualified for the lowest rate on their BIF deposits in 2000, and
WMB, WMBFA and WMBfsb qualified for the lowest rate on their SAIF deposits in
2000. Accordingly, none of these institutions paid any deposit insurance
assessments in 2000.
In addition to deposit insurance assessments, the FDIC is authorized to
collect assessments against insured deposits to be paid to the Financing
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 were assessed at the same rate by FICO. For the year 2000,
the average annual rate was 2.07 cents per $100 of insured deposits. Because we
have substantially more SAIF-insured deposits than BIF-insured deposits, this
change resulted 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 is subject to FDIC capital requirements, while WMBFA
and WMBfsb are subject to OTS capital requirements.
WMB. 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 MBS are placed in
the 20% risk category, loans secured by SFR properties and certain private issue
MBS are generally placed in the 50% risk category, and commercial real estate
and consumer loans are generally placed in the 100% risk category. These risk
weights are multiplied by corresponding asset balances to determine a
risk-weighted asset base. Certain off-balance sheet items are added to the
risk-weighted asset base by converting them to a balance sheet equivalent and
assigning them the appropriate risk weight in one of four categories.
Under FDIC guidelines, the ratio of total capital (Tier 1 capital plus Tier
2 capital) to risk-weighted assets must be at least 8.00%, and the ratio of Tier
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 average 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.
17
20
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, 2000:
TIER 1 CAPITAL TO
AVERAGE ASSETS TIER 1 CAPITAL TO TOTAL CAPITAL TO
(FDIC LEVERAGE RATIO) RISK-WEIGHTED ASSETS RISK-WEIGHTED ASSETS
--------------------- -------------------- --------------------
Regulatory Minimum......... 4.00%(1) 4.00% 8.00%
WMB's Actual............... 5.83 10.15 11.24
- ---------------
(1) The minimum leverage ratio guideline is 3% for financial institutions that
do not anticipate significant growth and that have well-diversified risk,
excellent asset quality, high liquidity, good earnings, effective management
and monitoring of market risk and, in general, are considered top-rate,
strong banking organizations.
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.
The following table sets forth the current regulatory requirement for
capital ratios for savings associations as compared with our capital ratios at
December 31, 2000:
TIER 1 CAPITAL
TO ADJUSTED
TOTAL ASSETS TANGIBLE CAPITAL TIER 1 CAPITAL TO TOTAL CAPITAL TO
(OTS TO TANGIBLE RISK-WEIGHTED RISK-WEIGHTED
LEVERAGE RATIO) ASSETS ASSETS ASSETS
--------------- ---------------- ----------------- ----------------
Regulatory Minimum...... 4.00%(1) 1.50% 4.00% 8.00%
WMBFA's Actual.......... 5.81 5.81 10.40 11.36
WMBfsb's Actual......... 6.97 6.97 11.14 12.10
- ---------------
(1) The minimum leverage ratio guideline is 3% for financial institutions that
do not anticipate significant growth and that have well-diversified risk,
excellent asset quality, high liquidity, good earnings, effective management
and monitoring of market risk and, in general, are considered top-rate,
strong banking organizations.
FDICIA Requirements
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.
18
21
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 leverage ratio 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 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
19
22
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 and WMBfsb are each
required to maintain a reserve 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 and WMBfsb 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.
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.
Federal Home Loan Bank System
The FHLB System was created in 1932 and consists of twelve regional FHLBs.
The FHLBs are federally chartered but privately owned institutions created by
Congress. The Federal Housing Finance Board ("Finance Board") is an agency of
the federal government and is generally responsible for regulating the FHLB
System. Each FHLB is owned by its member institutions. The primary purpose of
the FHLBs is to provide funding to their members for making housing loans as
well as for affordable housing and community development lending. FHLBs are
generally able to make advances to their member institutions at interest rates
that are lower than could otherwise be obtained by such institutions.
Under current rules, an FHLB member is generally required to purchase FHLB
stock in an amount equal to at least 5% of the aggregate outstanding advances
made by the FHLB to the member. The GLB Act and new regulations adopted by the
Finance Board in December 2000 require a new capital structure for the FHLBs.
The new capital structure will contain risk-based and leverage capital
requirements similar to those currently in place for depository institutions.
Each FHLB must submit a capital structure plan to the Finance Board for approval
within 270 days of the publication of the new regulations.
Generally, an institution is eligible to be a member of the FHLB for the
district where the member's principal place of business is located. WMBFA, whose
home office is Stockton, California, is a member of the San Francisco FHLB; WMB,
whose head office is in Seattle, is a member of the Seattle FHLB, as is
20
23
WMBfsb, whose home office is in Salt Lake City. Prior to its merger with WMBFA,
Bank United was a member of the Dallas FHLB. Under Finance Board regulations,
Bank United membership terminated when it merged into WMBFA. The Federal Home
Loan Bank Act provides, however, for membership of the FHLB adjoining the
district in which an institution is located if membership is demanded by
convenience and approved by the Finance Board. WMBFA has applied to become a
member of the Dallas FHLB. The Dallas FHLB has approved the application
contingent upon the approval of the Finance Board.
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 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 file available 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 commitment to
all areas in which we conduct business. The commitment replaced prior ones made
by us and the companies we acquired.
The $120 billion commitment targets single-family, small business and
consumer, and 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 ("LMI") census tracts, and borrowers earning less than
80% of median income. Of this amount, $30 billion is specifically
targeted to LMI borrowers.
- Small business and consumer lending -- $25 billion in loans to small
businesses and LMI consumers, including:
- Consumer loans and lines of credit to borrowers with low-to
moderate-incomes and in LMI census tracts, and
- Small businesses, with an emphasis on loans and lines of credit of
$50,000 or less and loans to people of color, women and disabled
persons.
- Multi-family lending -- $12.1 billion for multi-family structures,
including (among others) apartment and manufactured home park
developments, in LMI census tracts or serving families earning less than
80% of median income.
- Community investment -- $1.3 billion in investments and loans for
community development. This commitment area includes 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.
In addition to these goals and objectives, we made a commitment (along with
pledges in other areas, like diversity) to philanthropically support the
communities in which we conduct our business. Towards that end
21
24
we "will strive to return" to our neighborhoods the greater of 2% of our pre-tax
earnings or 3% of our after-tax earnings plus 10% of any net recovery from the
resolution of Ahmanson's goodwill litigation against the U.S. government. This
corporate support is 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.
As of December 31, 2000, we exceeded our 2000 targets for lending in LMI
neighborhoods and underserved market areas in the second year of our $120
billion, ten-year commitment in loans and investments.
Recent and Proposed Legislation and Regulation
The GLB Act is summarized in "Regulation and Supervision -- General." The
new capital structure for FHLBs is summarized in "Regulation and
Supervision -- Federal Home Loan Bank System."
In February 1999, the OTS proposed a regulation that 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 SLHCs and their non-association
subsidiaries to traditional savings association activities and services and to
activities permitted bank holding companies. These restrictions do not apply to
unitary SLHCs. 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 stated 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. This
proposal has been withdrawn by the OTS. The OTS may, however, issue the same or
a similar proposal in the future.
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 or a similar 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 SLHCs.
The OTS and other banking regulators proposed revisions to their capital
rules concerning the treatment of residual interests in asset securitizations
and other transfers of financial assets. Generally, the proposed rule would
require that risk-based capital be held in an amount equal to the amount of
residual interests retained on an institution's balance sheet and would limit
the amount of residual interests that may be included in Tier 1 capital.
The OTS has proposed a regulation which would require certain SLHCs to
notify the OTS before engaging in or committing to engage in a limited set of
debt transactions, transactions that reduce capital, some asset acquisitions,
and other transactions. In addition, while the regulation does not propose
capital requirements applicable to all SLHCs, the OTS is considering whether to
adopt a rule setting forth the circumstances in which it would review, on a
case-by-case basis, the capital adequacy of an SLHC and, when necessary, require
additional capital.
In January 2001, the four federal banking agencies jointly issued expanded
examination and supervision guidance relating to subprime lending activities. In
the guidance, "subprime" lending generally refers to programs that target
borrowers with weakened credit histories or lower repayment capacity. The
guidance principally applies to institutions with subprime lending programs with
an aggregate credit exposure equal to or greater than 25 percent of an
institution's Tier 1 capital. Such institutions would be subject to more
stringent risk management standards and, in many cases, additional capital
requirements. As a starting point, the guidance generally expects that such an
institution would hold capital against subprime portfolios in an
22
25
amount that is one and one half to three times greater than the amount
appropriate for similar types of non-subprime assets.
The guidance is primarily directed at insured depository institutions.
WMBFA currently holds specialty mortgage finance loans in excess of 25 percent
of its Tier 1 capital and could be adversely affected by the application of the
guidance. A significant portion of these loans and the consumer finance loans
originated by Washington Mutual Finance may be considered subprime loans under
the guidance. While WMI, Long Beach Mortgage and Washington Mutual Finance are
not currently subject to any specific capital requirements imposed by the
federal banking agencies, the OTS does have certain examination authority over
WMI in its capacity as an SLHC and, accordingly, WMI and its nonbanking
subsidiaries could also be adversely affected by the guidance. Management is
currently analyzing the impact of the guidance on the conduct of its business.
In December 2000, the Federal Reserve Board published proposed regulations
which would implement the Home Ownership and Equity Protection Act ("HOEPA").
HOEPA, which was enacted in 1994, imposes additional disclosure requirements
and certain substantive limitations on certain mortgage loans with rates or fees
above specified levels. The proposed regulations would lower the rate levels
that trigger the application of HOEPA and would include additional fees in the
calculation of the fee amount that triggers HOEPA. The loans Washington Mutual
currently makes are generally below the rate and fee levels that trigger HOEPA.
However, if the changes to the rate levels and the calculation of fee amounts in
the proposed regulation are adopted, more of the loans we currently offer would
be subject to HOEPA.
Regulation of Nonbanking Affiliates
As broker-dealers registered with the Securities and Exchange Commission
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.
23
26
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................... 51 Chairman of the Board of Directors, 1983
President and
Chief Executive Officer
Fay L. Chapman....................... 54 Senior Executive Vice President and General 1997
Counsel
Craig S. Davis....................... 49 President, Home Loans and Insurance Services 1996
Group
William W. Ehrlich................... 34 Executive Vice President, Corporate 1993
Relations
Steven P. Freimuth................... 44 Senior Executive Vice President, Corporate 1988
Services
William A. Longbrake................. 57 Vice Chair and Chief Financial Officer 1996
Deanna W. Oppenheimer................ 42 President, Banking and Financial Services 1985
Group
Craig E. Tall........................ 55 Vice Chair, Corporate Development and 1985
Specialty
Finance Group
S. Liane Wilson...................... 58 Vice Chair, Corporate Technology 1985
Robert H. Miles...................... 44 Senior Vice President and Controller 1999
Mr. Killinger is Chairman, President and Chief Executive Officer of
Washington Mutual. He was named President and 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 has been Senior Executive Vice President and General Counsel
since 1999. She became Executive Vice President, General Counsel and a member of
the Executive Committee in 1997. Prior to joining Washington Mutual, Ms. Chapman
was a partner with Foster Pepper & Shefelman PLLC, a Seattle, Washington law
firm, since 1979.
Mr. Davis is President, Home Loans and Insurance Services Group. He is
responsible for single family lending and insurance services. Mr. Davis became
Executive Vice President and a member of the Executive Committee in January
1997. Prior to joining Washington Mutual, he was Director of Mortgage
Originations of American Savings Bank, F.A. from 1993 through 1996 and served as
President of ASB Financial Services, Inc. from 1989 to 1993.
Mr. Ehrlich has been Executive Vice President, Corporate Relations and a
member of the Executive Committee since 1999. He is responsible for overseeing
the Company's corporate public relations, employee communications, government
relations and investor relations. Mr. Ehrlich became Assistant Vice President of
Corporate Communications in 1994 and Senior Vice President in 1998. He joined
Washington Mutual as a public relations consultant in 1990 and then rejoined the
Company in 1993 as a coordinator in the Mergers and Acquisitions Department.
Mr. Freimuth has been Senior Executive Vice President, Corporate Services
since 1999. He is responsible for a variety of central corporate support areas,
including human resources and credit oversight. Mr. Freimuth became Senior Vice
President in 1991 and Executive Vice President and a member of the Executive
Committee in 1997. Mr. Freimuth joined WMB as a Vice President in 1988.
Mr. Longbrake has been Vice Chair and Chief Financial Officer since 1999.
He is responsible for corporate finance. Mr. Longbrake rejoined Washington
Mutual as Executive Vice President and Chief Financial Officer and a member of
the Executive Committee in October 1996. From March of 1995 through September of
1996, he served as Deputy to the Chairman for Finance and Chief Financial
Officer of the FDIC.
Mr. Miles has been Senior Vice President and Controller since January 2001.
He serves as Washington Mutual's principal accounting officer. Mr. Miles joined
the Company as Senior Vice President and Corporate
24
27
Tax Manager in June 1999. Prior to joining the Company, Mr. Miles was Director,
Domestic Taxes of BankBoston, N.A.
Ms. Oppenheimer is President, Banking and Financial Services Group. She is
responsible for consumer banking, financial services and business banking. Ms.
Oppenheimer became Executive Vice President in 1993 and has been a member of the
Executive Committee since its formation in 1990. She has been an officer of the
Company since 1985.
Mr. Tall is Vice Chair, Corporate Development and Specialty Finance Group.
He is responsible for mergers and acquisitions, commercial real estate,
specialty commercial lending, and the consumer finance subsidiaries. Mr. Tall
became Executive Vice President in 1987 and Vice Chair in 1999. He has been a
member of the Executive Committee since its formation in 1990.
Ms. Wilson has been Vice Chair, Corporate Technology since 1999. She is
responsible for corporate information technology. Ms. Wilson became an Executive
Vice President in 1988 and has been a member of the Executive Committee since
its formation in 1990. Ms. Wilson joined WMB in 1985 as Senior Vice President of
Information Technology.
ITEM 2. PROPERTIES
As of December 31, 2000, our banking subsidiaries conducted business in 42
states through 1,053 consumer financial centers, 71 Western Bank branches, 10 WM
Business Bank offices in California, 183 home loan centers and 23 wholesale loan
centers. Consumer finance operations were conducted in over 590 locations in 38
states.
The administration offices that we owned or leased were as follows:
APPROXIMATE TERMINATION OR
LOCATION LEASED/OWNED SQUARE FOOTAGE RENEWAL DATE(1)
-------- ------------ -------------- ---------------
1201 3rd Ave., Seattle, WA....................... Leased 289,000 2007
1191 2nd Ave., Seattle, WA....................... Leased 115,000 2006
1101 2nd Ave., Seattle, WA....................... Leased 75,000 2006
999 3rd Ave., Seattle, WA........................ Leased 43,000 2004
1111 3rd Ave., Seattle, WA....................... Leased 161,000 2004
1301 5th Ave., Seattle, WA....................... Leased 59,000 2008
1401 2nd Ave., Seattle, WA....................... Leased 85,000 2009
1501 4th Ave., Seattle, WA....................... Leased 50,000 2004
2520 & 2530 223rd St. SE, Bothell, WA............ Leased 110,000 2008
188 106th Ave. NE, Bellevue, WA.................. Leased 39,000 2002
17875/77 Van Karman, Irvine, CA.................. Owned 156,000 n.a.
3351 Michaelson Dr., Irvine, CA.................. Leased 47,000 2004
Stockton, CA(2).................................. Owned 252,000 n.a.
Chatsworth, CA(2)................................ Owned 327,000 n.a.
Chatsworth, CA(2)................................ Leased 644,000 2003 - 2015
1000 Wilshire Blvd., Los Angeles, CA............. Leased 19,000 2002
1100 Town & Country Rd., Orange, CA.............. Leased 73,000 2001 - 2002
8900 Grand Oak Circle, Tampa, FL................. Owned 71,000 n.a.
3405 McLemore Dr., Pensacola, FL................. Leased 50,000 2004
- ---------------
(1) The Company has options to renew leases at most locations.
(2) Multiple locations.
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.
25
28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of
2000.
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 2, 2001, there were 583,802,776 shares issued
and outstanding held by 35,207 shareholders of record. The closing price of our
common stock on March 2, 2001 was $51.10 per share.
Common Stock
The high and low common stock prices by quarter were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------ ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
Fourth quarter.......................... $55.88 $37.88 $35.94 $25.13
Third quarter........................... 40.56 30.19 36.63 27.94
Second quarter.......................... 32.63 24.63 41.94 34.63
First quarter........................... 27.00 21.81 45.25 38.44
The cash dividends declared by quarter were as follows:
YEAR ENDED
DECEMBER 31,
----------------
2000 1999
------ ------
Fourth quarter............................................. $0.300 $0.260
Third quarter.............................................. 0.290 0.250
Second quarter............................................. 0.280 0.240
First quarter.............................................. 0.270 0.230
Preferred Stock
At December 31, 2000, 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, 2000 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.
26
29
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,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA
Interest income............. $ 13,783 $ 12,062 $ 11,221 $ 10,203 $ 9,892
Interest expense............ 9,472 7,610 6,929 6,287 6,027
Net interest income......... 4,311 4,452 4,292 3,916 3,865
Provision for loan and lease
losses.................... 185 167 162 247 498
Noninterest income.......... 1,984 1,509 1,507 980 819
Noninterest expense......... 3,126 2,910 3,268 3,111 3,595
Income before income
taxes..................... 2,984 2,884 2,369 1,538 591
Net income.................. 1,899 1,817 1,487 885 375
Net income attributable to
common stock.............. 1,899 1,817 1,471 830 292
Net income per common share:
Basic..................... 3.55 3.17 2.61 1.56 0.55
Diluted................... 3.54 3.16 2.56 1.52 0.54
Average diluted common
shares used to calculate
earnings per share........ 536,463,063 574,553,031 578,562,305 556,759,023 539,058,104
Cash dividends paid per
common share:
Pre-business
combinations(1)........ $ 1.14 $ 0.98 $ 0.82 $ 0.71 $ 0.60
Post-business
combinations(2)........ 1.14 0.98 0.73 0.66 0.65
Common stock dividend payout
ratio(2).................. 32.95% 31.40% 29.32% 40.61% 94.12%
Return on average assets.... 1.01 1.04 0.96 0.63 0.28
Return on average
stockholders' equity...... 21.15 19.66 16.62 11.73 4.70
Return on average common
stockholders' equity...... 21.15 19.66 16.67 11.95 3.95
27
30
DECEMBER 31,
-------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET DATA
Assets............... $ 194,716 $ 186,514 $ 165,493 $ 143,522 $ 137,329
Securities........... 58,724 60,786 47,046 37,025 35,036
Loans held for
sale............... 3,404 794 1,827 1,141 1,399
Loans held in
portfolio.......... 119,626 113,746 107,612 97,531 92,610
Deposits............. 79,574 81,130 85,492 83,429 87,509
Borrowings........... 101,656 94,327 65,200 49,976 40,015
Stockholders'
equity............. 10,166 9,053 9,344 7,601 7,426
Ratio of
stockholders'
equity to total
assets............. 5.22% 4.85% 5.65% 5.30% 5.41%
Diluted book value
per common share... $ 19.26(3) $ 16.18(3) $ 16.07(3) $ 13.23(3)(4) $ 12.52(3)(4)
Number of common
shares outstanding
at end of period... 527,855,720(3) 559,589,272(3) 581,408,525(3) 550,689,721(3)(4) 554,811,012(3)(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
OVERVIEW
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 "Factors That May
Affect Future Results" included in this Form 10-K.
Our net income for 2000 was $1.90 billion, compared with $1.82 billion in
1999 and $1.49 billion in 1998. We had diluted earnings per share of $3.54 in
2000, $3.16 in 1999 and $2.56 in 1998.
During 2000, one of management's goals was to decrease the proportion of
SFR loans on our balance sheet by selling SFR loans and MBS. We continued our
policy of selling substantially all of our fixed-rate SFR originations and the
specialty mortgage finance loans originated by our subsidiary, Long Beach
Mortgage. We also began to sell ARM loans in the secondary market. In order to
achieve optimum pricing, current ARM production that is not held in the loan
portfolio is either sold to investors shortly following origination or
securitized and retained in the available-for-sale securities portfolio for a
period of time, and then sold. As a result of this initiative, we sold $18.07
billion of adjustable-rate loans during 2000. This strategy of selling current
ARM production or securitizing and retaining as securities for sale at a later
time resulted in an increase in the balance of loans held for sale to $3.40
billion at December 31, 2000, from $794 million at year-end 1999.
Growing noninterest income is an important part of our strategy to reduce
our exposure to changes in interest rates. During 2000, noninterest income
represented 32% of total revenue (net interest income and noninterest income),
compared with 25% for 1999. We increased the amount of noninterest income
relative to net interest income by producing gains on sales of loans and
increasing our loan servicing income, as well as increasing depositor and other
retail banking fees.
We also expanded our capability to generate loans. Total loan volume
increased by $7.07 billion from 1999 to 2000. To further mitigate our exposure
to adverse changes in interest rates, we increased our originations of non-SFR
loans to 29% of total originations during 2000, compared with 22% for the prior
year. We also purchased specialty mortgage finance and commercial loans to
further diversify our balance sheet. These loans have the benefit of yielding
wider margins, compared with our traditional home mortgage products. These
specialty mortgage finance and commercial loans also have more predictable and
stable prepayment rates. The characteristics of these portfolios should mitigate
our exposure to margin compression during periods of rising interest rates. As
this strategy also increases our credit risk, management closely monitors the
performance of these loans.
Starting in 1998 and continuing in 1999, we purchased shorter duration
investment grade MBS in the secondary market. The MBS had acceptable, but lower
returns than loans originated by us and held in our portfolio. 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. From the second quarter of 1999
through June 30, 2000, we purchased a total of 66.3 million shares as part of
our previously announced repurchase programs totaling 111.3 million shares. We
have not
29
32
repurchased any of our common stock since the second quarter of 2000. Management
instead focused on internal growth and acquisitions as a means of deploying
capital.
On January 31, 2001, we acquired the mortgage operations of The PNC
Financial Services Group, Inc. The principal subsidiaries acquired in that
transaction were renamed Washington Mutual Home Loans, Inc. ("WMHLI") and
Washington Mutual Mortgage Securities Corp. ("WMMSC"). The acquisition further
diversifies our mortgage operations geographically and expands our loan
origination, servicing and securitization capacity. At January 31, 2001, WMHLI
and WMMSC had total assets of approximately $7 billion.
On February 9, 2001, we acquired Bank United Corp. This acquisition
enhances our existing plans to grow our commercial business and expands our
ability to originate FHA-insured and VA-guaranteed loans. At February 9, 2001,
Bank United Corp. had total assets of approximately $18 billion.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income was $4.31 billion for 2000, compared with $4.45 billion
in 1999 and $4.29 billion in 1998. The decline in net interest income for 2000
was due to the decrease in the net interest spread and margin, partially offset
by an increase in average interest-earning assets. The net interest spread and
margin were 2.25% and 2.38% for 2000, compared with 2.48% and 2.63% for 1999.
The net interest spread and margin were 2.70% and 2.88% for 1998.
The compression in the net interest spread and margin was primarily due to
the fact that our liabilities reprice to market rates more quickly than our
assets. This compression was in response to the rising interest rate environment
during the first half of 2000, evidenced by an increase in the average
three-month London Interbank Offered Rate ("LIBOR") from 6.14% in the fourth
quarter of 1999 to 6.70% in the third quarter of 2000, and by a 100 basis point
increase in the federal funds rate from 5.50% in November 1999 to 6.50% in May
2000. Accordingly, the cost of our interest-bearing liabilities increased 71
basis points to 5.37% for 2000 from 4.66% for 1999. This increase was primarily
due to a 91 basis point increase in the cost of our borrowings from 5.52% in
1999 to 6.43% in 2000. The increased usage of wholesale borrowings (our primary
funding source for asset growth) also contributed to the higher borrowing
expense. The cost of our interest-bearing liabilities and cost of borrowings
were 4.83% and 5.85% for 1998.
Interest rates stabilized during the latter half of 2000, which caused an
improvement in the net interest margin during the fourth quarter. The net
interest spread and margin rose to 2.29% and 2.42% for the fourth quarter,
compared with 2.19% and 2.31% for the third quarter. Reflecting this lower
interest rate environment, adjustable-rate SFR loan originations were 76% of
total SFR originations for the fourth quarter of 2000, as compared with an
average of 88% over the prior three quarters.
The overall yield on our interest-earning assets increased 48 basis points
during 2000, driven primarily by a 57 basis point increase in the yield on our
loans to 7.97%, compared with 7.40% for 1999. The rise in the yield on our loan
portfolio was the result of adjustments to variable-rate loans tied to
treasury-based indices and COFI. For the same reasons, there was a 36 basis
point increase in the yield on our other interest-earning assets to 6.97% for
2000, compared with 6.61% for 1999. For 1998, the overall yield on our
interest-earning assets was 7.53%, which was primarily attributable to the 7.73%
yield on our loan portfolio.
With the reduction in the federal funds rate to 5.50% in January 2001,
coupled with the "snap back" effect on our ARM portfolio from the rate increases
during the first half of 2000, we anticipate an improvement in the net interest
margin during 2001. If interest rates remain stable or decline further, then the
net interest margin could expand even further. If further rate reductions do
occur, we may adopt the strategy of extending the maturity range of our
wholesale borrowings and increasing our holdings of interest rate cap contracts
embedded within these liabilities. Restructuring this portfolio in such a manner
would reduce our exposure to margin compression during periods of rising
interest rates.
30
33
Certain average balances, together with the total dollar amounts of
interest income and expense and the weighted average interest rates, were as
follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------- ----------------------------- -----------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME OR AVERAGE INCOME OR AVERAGE INCOME OR
BALANCE(1) RATE EXPENSE BALANCE(1) RATE EXPENSE BALANCE(1) RATE EXPENSE
---------- ---- --------- ---------- ---- --------- ---------- ---- ---------
(DOLLARS IN MILLIONS)
ASSETS
Cash equivalents, securities and
FHLB stock...................... $ 63,067 6.97% $ 4,395 $ 56,177 6.61% $ 3,714 $ 43,484 7.02% $ 3,054
Loans(2).......................... 117,742 7.97 9,388 112,859 7.40 8,348 105,595 7.73 8,167
-------- ------- -------- ------- -------- -------
Total interest-earning
assets.................. 180,809 7.62 13,783 169,036 7.14 12,062 149,079 7.53 11,221
Other assets...................... 6,763 5,750 6,042
-------- -------- --------
Total assets.............. $187,572 $174,786 $155,121
======== ======== ========
LIABILITIES
Deposits:
Checking accounts............... $ 14,120 0.46 65 $ 13,645 0.60 82 $ 12,165 0.61 75
Savings accounts and MMDAs...... 29,816 4.05 1,207 30,267 4.82 1,460 25,924 3.65 947
Time deposit accounts........... 36,340 5.55 2,018 39,183 4.16 1,628 48,341 5.31 2,566
-------- ------- -------- ------- -------- -------
Total deposits............ 80,276 4.10 3,290 83,095 3.82 3,170 86,430 4.15 3,588
Borrowings:
Repurchase agreements........... 28,491 6.33 1,804 26,082 5.36 1,397 17,695 5.67 1,004
Advances from FHLBs............. 56,979 6.33 3,608 47,008 5.37 2,522 30,110 5.65 1,701
Federal funds purchased and
commercial paper.............. 3,442 6.52 224 2,421 5.19 126 4,122 5.61 231
Other........................... 7,198 7.59 546 4,958 7.97 395 5,226 7.76 405
-------- ------- -------- ------- -------- -------
Total borrowings.......... 96,110 6.43 6,182 80,469 5.52 4,440 57,153 5.85 3,341
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities............. 176,386 5.37 9,472 163,564 4.66 7,610 143,583 4.83 6,929
-------- ------- -------- ------- -------- -------
Other liabilities................. 2,207 1,978 2,591
-------- -------- --------
Total liabilities............... 178,593 165,542 146,174
STOCKHOLDERS' EQUITY.............. 8,979 9,244 8,947
-------- -------- --------
Total liabilities and
stockholders' equity............ $187,572 $174,786 $155,121
======== ======== ========
Net interest spread and net
interest income................. 2.25 $ 4,311 2.48 $ 4,452 2.70 $ 4,292
======= ======= =======
Net interest margin............... 2.38 2.63 2.88
- ---------------
(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.
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:
2000 VS. 1999 1999 VS. 1998
----------------------------------- ----------------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO DUE TO
-------------------- -------------------
VOLUME(1) RATE TOTAL CHANGE VOLUME(1) RATE TOTAL CHANGE
---------- ------- ------------ ---------- ------ ------------
(DOLLARS IN MILLIONS)
INTEREST INCOME
Cash equivalents, securities and
FHLB stock....................... $ 473 $ 208 $ 681 $ 848 $(188) $ 660
Loans(2)........................... 371 669 1,040 547 (366) 181
----- ------ ------ ------ ----- ------
Total interest income.... 844 877 1,721 1,395 (554) 841
INTEREST EXPENSE
Deposits:
Checking accounts................ 3 (20) (17) 9 (2) 7
Savings accounts and MMDAs....... (21) (232) (253) 176 337 513
Time deposit accounts............ (125) 515 390 (437) (501) (938)
----- ------ ------ ------ ----- ------
Total deposit expense.... (143) 263 120 (252) (166) (418)
Borrowings:
Repurchase agreements............ 137 270 407 452 (59) 393
Advances from FHLBs.............. 587 499 1,086 911 (90) 821
Federal funds purchased and
commercial paper.............. 61 37 98 (89) (16) (105)
Other............................ 171 (20) 151 (21) 11 (10)
----- ------ ------ ------ ----- ------
Total borrowing
expense................ 956 786 1,742 1,253 (154) 1,099
----- ------ ------ ------ ----- ------
Total interest expense... 813 1,049 1,862 1,001 (320) 681
----- ------ ------ ------ ----- ------
Net interest income................ $ 31 $ (172) $ (141) $ 394 $(234) $ 160
===== ====== ====== ====== ===== ======
- ---------------
(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.
32
35
Noninterest Income
Noninterest income consisted of the following:
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(IN MILLIONS)
Depositor and other retail banking fees.................. $ 976 $ 764 $ 569
Securities fees and commissions.......................... 318 271 192
Insurance fees and commissions........................... 44 43 42
Loan servicing income.................................... 147 112 117
Loan related income...................................... 117 103 111
Gain on sale of loans.................................... 262 109 133
Gain on sale of retail deposit branch systems............ -- -- 289
Loss from securities..................................... (1) (12) (30)
Other income............................................. 121 119 84
------ ------ ------
Total noninterest income....................... $1,984 $1,509 $1,507
====== ====== ======
Depositor and other retail banking fees of $976 million for 2000 increased
28% from $764 million for 1999 and 72% from $569 million for 1998. The increase
in 2000 was primarily due to higher collections of nonsufficient funds and other
fees on existing checking accounts from higher customer usage and fee increases.
The increase from 1998 to 1999 was primarily due to collecting more debit card,
ATM, nonsufficient funds and other fees that resulted from an increased number
of checking accounts. The number of checking accounts increased by more than
500,000 during 2000 to 4.8 million accounts at December 31, 2000 and over
400,000 during 1999 to 4.3 million accounts at December 31, 1999.
Securities fees and commissions increased to $318 million for 2000 from
$271 million in 1999 and $192 million in 1998. During 2000, we earned more
investment management fees due to the growth in assets under management in the
WM Group of Funds. Assets under management grew from $7.42 billion at December
31, 1999 to $8.21 billion at December 31, 2000. Higher volume of securities
transactions in 2000 also contributed to the increase in fee income.
Loan servicing income increased to $147 million in 2000, compared with $112
million in 1999 and $117 million in 1998. The increase was primarily due to
growth in loans serviced for others as a result of loan sales and
securitizations. The impact of this portfolio growth was partially offset by an
increase in the amortization of mortgage servicing rights ("MSR") primarily
resulting from the larger servicing portfolio. We also incurred an MSR
impairment of $9 million during the fourth quarter of 2000 due to an increase in
prepayment estimates as a result of falling long-term interest rates. The
weighted average servicing fee was approximately 43 basis points during 2000 and
39 basis points during 1999.
Loan related income was $117 million in 2000, up from $103 million in 1999
and $111 million in 1998. This income is comprised of late charges, prepayment
fees, reconveyance fees, and other miscellaneous fees. The increase in income
from 1999 to 2000 resulted from increased volume of late charges on the loan
portfolio and higher prepayment fees on the purchased specialty mortgage finance
portfolio as the result of increased refinancing activity. The decrease in
income from 1998 to 1999 was due to the rise in interest rates, which caused a
decline in loan prepayments and the related prepayment fees. Late charges also
decreased as a result of a downward trend in delinquencies.
Gain on sale of loans increased to $262 million for 2000, compared with
$109 million in 1999 and $133 million in 1998. The gain for 2000 was
attributable to the sale of fixed- and adjustable-rate loans, which included
$12.90 billion of seasoned loans and $8.71 billion of current loan production.
Additionally, we sold $3.74 billion of loans originated by Long Beach Mortgage.
The gains for 1999 and 1998 resulted from sales of $8.96 billion and $18.24
billion of current loan production, which were comprised of fixed-rate loans.
Sales of loans originated by Long Beach Mortgage contributed $23 million towards
the 1999 gains.
33
36
Losses from securities were $1 million during 2000, compared with $12
million during 1999 and $30 million during 1998. During the first half of 2000,
we incurred net losses on MBS sales. The proceeds from these sales were used to
repurchase our common stock. These sales also reduced our interest rate
sensitivity. Substantially offsetting these losses were $9 million in gains from
the sale of ARM loan originations in 2000 that were securitized and held in the
available-for-sale securities portfolio for a period of time prior to being
sold, as well as $9 million in gains from the sale of securities that were
purchased as hedges against our MSR portfolio.
Noninterest Expense
Noninterest expense consisted of the following:
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(IN MILLIONS)
Compensation and benefits................................ $1,348 $1,186 $1,189
Occupancy and equipment.................................. 604 565 498
Telecommunications and outsourced information services... 323 276 256
Depositor and other retail banking losses................ 105 107 88
Transaction-related expense.............................. -- 96 508
Amortization of goodwill and other intangible assets..... 106 98 104
Advertising and promotion................................ 132 111 114
Postage.................................................. 98 89 77
Professional fees........................................ 101 70 61
Regulatory assessments................................... 31 59 63
Office supplies.......................................... 30 35 42
Travel and training...................................... 63 52 45
Other expense............................................ 185 166 223
------ ------ ------
Total noninterest expense...................... $3,126 $2,910 $3,268
====== ====== ======
Compensation and benefits expense increased to $1.35 billion, compared with
$1.19 billion for both 1999 and 1998. A significant portion of the increase was
due to increased commission expense resulting from the higher volume of loan
originations and securities transactions. Other significant factors were
increases in base compensation expense and higher premiums on employee medical
and dental insurance. Also contributing to the increase was the acquisition of
Long Beach Mortgage in October 1999, which was not included in our results prior
to its acquisition. Full-time equivalent employees ("FTE") were 28,798 at
December 31, 2000, compared with 28,509 at December 31, 1999 and 27,957 at
December 31, 1998.
Occupancy and equipment expense was $604 million in 2000, compared with
$565 million for 1999 and $498 million for 1998. The increase during 2000 was
primarily due to higher rent and depreciation expense that resulted from
additional building leases and the leasehold improvements thereon, and computer
equipment upgrades. Similar computer system upgrades caused an increase in
equipment expense during 1999, partially offset by occupancy expense reductions
from the closure of 162 consumer financial centers in California as a result of
the merger with Ahmanson.
Telecommunications and outsourced information services expense was $323
million in 2000, compared with $276 million in 1999 and $256 million in 1998. In
2000, the increase reflected higher use of services resulting from additional
locations, higher levels of customer support, and increased use of outsourced
data processing. During 2000, the opening of 26 financial centers in new
markets, in conjunction with project Occasio(TM) as well as the development of
Optis(TM), also contributed to higher telecommunications expense.
We completed the integration of Ahmanson in the fourth quarter of 1999. As
a result, there were no transaction-related expenses incurred in 2000.
34
37
Advertising and promotion expense increased to $132 million in 2000 from
$111 million in 1999 and $114 million in 1998. The increase during 2000 was
primarily due to additional costs associated with campaigns for various loan and
deposit products. In 1998, we incurred additional costs associated with
campaigns designed to introduce products to the California market.
Professional fees for 2000 were $101 million, compared with $70 million in
1999 and $61 million in 1998. The 2000 increase was attributable to various
consulting projects designed to streamline our processes and procedures, and to
develop and deliver new products.
Regulatory assessments were $31 million in 2000, compared with $59 million
in 1999 and $63 million in 1998. The overall assessment rate for Savings
Association Insurance Fund deposits was significantly reduced in the first
quarter of 2000, which caused a corresponding decrease in regulatory
assessments. See "Business -- Regulation and Supervision -- FDIC Insurance."
Other expense increased to $185 million in 2000 from $166 million in 1999.
The increase of $19 million during 2000 was mainly comprised of increases in
loan expenses, contributions, and other outside services. The higher loan
expenses in 2000 were attributable to an overall increase in loan originations
and purchases. The decrease from 1998 to 1999 was due to 1998 expenses
associated with the donation of land for open space to support further
development of property owned by Ahmanson as a real estate investment.
Taxation
Income taxes include federal and applicable state income taxes and payments
in lieu of taxes. The provision for income taxes was $1.09 billion for 2000,
which represented an effective tax rate of 36.37%.
In connection with the Keystone Transaction, we acquired 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 of Financial Corporation of America. In connection with the 1988
Acquisition, the Internal Revenue Service (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
Federal Savings and Loan Association 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 FDIC, including an Assistance
Agreement.
See "Notes to Consolidated Financial Statements -- Note 12: Income Taxes."
REVIEW OF FINANCIAL CONDITION
Assets. At December 31, 2000, our assets were $194.72 billion, an increase
of $8.21 billion or 4% from $186.51 billion at December 31, 1999. This increase
primarily resulted from the retention of loans originated by us, either as loans
or in securitized form, and the purchase of whole loans. In particular, loans
held for sale and loans held in portfolio increased by $2.61 billion and $5.88
billion.
Securities. Our securities portfolio decreased by $2.07 billion or 3% to
$58.72 billion at December 31, 2000 from $60.79 billion at year-end 1999. The
decrease was primarily due to principal paydowns and sales of MBS that had been
purchased in 1998 and the first half of 1999, partially offset by the retention
of MBS that were created from loan securitizations. In 2001, we expect to
increase our purchases of other investment securities, such as government bonds.
These bonds have fixed-maturities, are non-callable and non-prepayable and are
expected to serve as economic hedges of mortgage servicing rights, which are
subject to prepayment risk in a declining interest rate environment.
At December 31, 2000, we held $21.99 billion of private issue MBS and CMOs.
Of this total, 73% were rated the highest investment grade (AAA), 3% were rated
investment grade (AA through BBB), 1% were rated below investment grade and 23%
were unrated.
35
38
At December 31, 2000, 60% of MBS were adjustable rate. Of the 60% indexed
to an adjustable rate, 52% were indexed to COFI, 34% to U.S. Treasury indices,
and 14% to other indices. The remaining 40% of MBS were fixed-rate.
Loans. Total loans at December 31, 2000 were $123.03 billion, up $8.49
billion or 7% from $114.54 billion at December 31, 1999. This increase was
primarily due to growth in ARM, second mortgage and other consumer, and
specialty mortgage finance loans. These increases were partially offset by sales
and securitizations of SFR loans as well as principal payments. During 2000, we
expanded our capacity to generate loans and developed a market to sell ARM
loans, in addition to our ongoing policy of selling fixed-rate loans. This was
done as part of our strategy to remix the balance sheet and to become less
reliant on net interest income by increasing gain on sale of loans and loan
servicing income. Our current strategy is to hold newly originated monthly
adjustable-rate loans during periods of high prepayment activity and sell a
sufficient amount during periods of low prepayment activity to stabilize balance
sheet growth over time. This strategy of selling current ARM production or
securitizing and retaining as securities for sale at a later time resulted in an
increase in the balance of loans held for sale to $3.40 billion at December 31,
2000, from $794 million at year-end 1999.
Loans (exclusive of the allowance for loan and lease losses) consisted of
the following:
DECEMBER 31,
------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- ------- -------
(DOLLARS IN MILLIONS)
SFR................................... $ 83,113 $ 80,628 $ 81,102 $72,161 $69,101
SFR construction...................... 1,431 1,243 1,020 877 728
Second mortgage and other consumer:
Banking subsidiaries................ 7,992 6,393 5,478 4,913 4,216
Washington Mutual Finance........... 2,486 2,134 1,853 1,800 1,730
Specialty mortgage finance............ 7,254 4,452 722 529 463
Commercial business................... 2,274 1,452 1,129 838 395
Commercial real estate:
Apartment buildings................. 15,658 15,261 14,559 14,022 13,871
Other commercial real estate........ 2,822 2,977 3,576 3,551 3,513
-------- -------- -------- ------- -------
$123,030 $114,540 $109,439 $98,691 $94,017
======== ======== ======== ======= =======
We have been diversifying our SFR loans by product type from a COFI
concentration to Treasury-based. This diversification reduces our interest rate
risk because Treasury-based loans have repricing frequencies that more closely
match the repricing of our borrowings. This diversification is achieved through
the securitization and sale of COFI-based loans and paydowns of portfolio loans
indexed to COFI. At December 31, 2000, 88% of SFR loans were adjustable rate, of
which 66% were indexed to U.S. Treasury indices, 28% were indexed to COFI, and
6% to other indices. The remaining 12% of the SFR loan portfolio at year-end
2000 were fixed rate. At December 31, 1999, 85% of SFR loans were adjustable
rate, of which 52% were indexed to U.S. Treasury indices, 42% were indexed to
COFI, and 6% to other indices. The remaining 15% of the year-end 1999 SFR loan
portfolio were fixed rate.
36
39
Loan volume (originations and purchases) was as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN MILLIONS)
SFR:
Adjustable rate..................................... $37,286 $33,114 $20,929
Fixed rate.......................................... 6,631 10,678 23,960
------- ------- -------
43,917 43,792 44,889
SFR construction:
Custom.............................................. 639 977 1,017
Builder............................................. 1,210 1,026 731
Second mortgage and other consumer:
Banking subsidiaries................................ 5,004 2,946 3,096
Washington Mutual Finance........................... 2,342 2,101 1,838
Specialty mortgage finance............................ 8,249 5,009 429
Commercial business................................... 2,695 1,186 1,013
Commercial real estate:
Apartment buildings................................. 1,601 1,673 2,015
Other commercial real estate........................ 358 236 472
------- ------- -------
$66,015 $58,946 $55,500
======= ======= =======
Originations and purchases were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN MILLIONS)
Originated............................................ $59,263 $51,589 $52,431
Purchased............................................. 6,752 7,357 3,069
------- ------- -------
$66,015 $58,946 $55,500
======= ======= =======
Our loan originations increased 15% to $59.26 billion in 2000 from $51.59
billion the year before. In particular, originations of short-term ARMs, which
reprice primarily on a monthly basis, increased to $31.65 billion in 2000,
compared with $15.24 billion in 1999. The increase in short-term ARM
originations in 2000 was attributable to the higher interest rate environment
during the first half of 2000 and customer preference for short-term ARMs over
fixed-rate loans.
We purchased $6.75 billion of loans in 2000, compared with $7.36 billion in
1999 and $3.07 billion in 1998. Of the 2000 purchases, $4.01 billion were
specialty mortgage finance loans with a weighted average yield of 8.50%. The
1999 purchases included $3.30 billion of specialty mortgage finance loans with a
weighted average yield of 8.70%.
Real estate construction (including SFR construction and commercial real
estate construction) and commercial business loans by maturity date were as
follows:
DECEMBER 31, 2000
----------------------------------------------------
REAL ESTATE COMMERCIAL
CONSTRUCTION BUSINESS
------------------ --------------------
ARMS FIXED-RATE ARMS FIXED-RATE TOTAL
---- ---------- ------ ---------- ------
(DOLLARS IN MILLIONS)
Due within one year......................... $824 $244 $ 730 $190 $1,988
After one but within five years............. 123 13 294 161 591
After five years............................ 40 454 423 476 1,393
---- ---- ------ ---- ------
$987 $711 $1,447 $827 $3,972
==== ==== ====== ==== ======
37
40
MSR increased to $1.02 billion at December 31, 2000 from $643 million at
December 31, 1999. Additions of $516 million to MSR during the year were
primarily due to loan sales and securitizations. The acquisitions of Bank United
Corp. and the mortgage operations of The PNC Financial Services Group, Inc. adds
about $2 billion of MSR to our balance sheet.
Deposits. Deposits declined slightly to $79.57 billion at December 31, 2000
from $81.13 billion at December 31, 1999.
Our goal is to increase the ratio of transaction accounts to total
deposits. As a result, savings accounts, MMDAs and checking accounts have
increased to 57% of total deposits at year-end 2000, compared with 54% at
year-end 1999. These three products have the benefit of interest-free funding or
lower costs, compared with time deposit accounts. Even though transaction
accounts are more liquid, we consider them to be a 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.
Time deposit accounts in amounts of $100,000 or more totaled $8.75 billion
and $8.84 billion at December 31, 2000 and 1999. At December 31, 2000, $3.14
billion of these deposits mature within three months, $2.02 billion mature in
over three to six months, $2.63 billion mature in over six months to one year,
and $962 million mature after one year.
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 repurchase agreements
and advances from the FHLBs of Seattle and San Francisco. The exact mix at any
given time is dependent upon the market pricing of the individual borrowing
sources.
Our wholesale borrowing portfolio increased by $3.60 billion at December
31, 2000, compared with the prior year. Other borrowings also increased by $3.73
billion over December 31, 1999. These increases in funding were used primarily
to support asset growth.
Certain portions of the repurchase agreements and advances from FHLBs
contain embedded derivatives. See "Notes to Consolidated Financial
Statements -- Note 9: Repurchase Agreements and Note 10: Advances from FHLBs."
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses represents management's estimate of
credit losses inherent in our loan and lease portfolios. Management performs
periodic reviews of the portfolios in order to identify these inherent losses,
and to assess the overall probability of collection of these portfolios. The
process by which the allowance is determined encompasses the analysis of the
historical performance of each loan category and an assessment of current
economic and portfolio trends and conditions, as well as specific risk factors
impacting the loan and lease portfolios. We monitor delinquency, default, and
loss rates, among other factors impacting portfolio risk. In addition,
non-homogeneous type loans, such as commercial business and commercial real
estate loans, are reviewed on an individual loan basis in order to identify
impairment, and for risk rating purposes.
As of December 31, 2000, 76% of the allowance was allocated to individual
loans or loan categories, although the entire allowance was available for charge
offs across the entire loan and lease portfolio.
38
41
Changes in the allowance for loan and lease losses were as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
Balance, beginning of year.................... $1,042 $1,068 $1,048 $1,066 $ 979
Provision for loan and lease losses........... 185 167 162 247 498
Identified allowance for loans sold or
securitized................................. (36) (1) (74) (25) --
Allowance acquired through business
combinations................................ -- -- 108 11 16
------ ------ ------ ------ ------
1,191 1,234 1,244 1,299 1,493
Loans charged off:
SFR and SFR construction.................... (20) (38) (66) (141) (297)
Second mortgage and other consumer:
Banking subsidiaries..................... (43) (46) (34) (23) (12)
Washington Mutual Finance................ (120) (97) (90) (80) (60)
Specialty mortgage finance.................. (5) -- -- -- --
Commercial business......................... (11) (5) (5) (3) (1)
Commercial real estate:
Apartments............................... (2) (15) (22) (41) (67)
Other commercial real estate............. (2) (22) (10) (17) (48)
------ ------ ------ ------ ------
Total charge offs................... (203) (223) (227) (305) (485)
Recoveries of loans previously charged off:
SFR and SFR construction.................... 1 4 18 22 27
Second mortgage and other consumer:
Banking subsidiaries..................... 4 3 2 3 1
Washington Mutual Finance................ 17 16 16 18 16
Specialty mortgage finance.................. 1 -- -- -- --
Commercial business......................... 1 1 1 -- --
Commercial real estate:
Apartments............................... 1 3 6 7 9
Other commercial real estate............. 1 4 8 4 5
------ ------ ------ ------ ------
Total recoveries.................... 26 31 51 54 58
------ ------ ------ ------ ------
Net charge offs............................. (177) (192) (176) (251) (427)
------ ------ ------ ------ ------
Balance, end of year.......................... $1,014 $1,042 $1,068 $1,048 $1,066
====== ====== ====== ====== ======
Net charge offs as a percentage of average
loans....................................... 0.15% 0.17% 0.17% 0.26% 0.48%
During the second quarter of 2000, in conjunction with our continued
expansion of our lending activity beyond traditional SFR loans, management
enhanced its methodology for determining the allocated components of the
allowance. This enhancement resulted in an allocation of previously unallocated
allowance amounts to individual loan categories. Portions of the allowance for
loan and lease losses are now allocated to cover estimated losses inherent in
each loan and lease category as well as to individual loans. Management also
maintains an unallocated component of the allowance to cover estimated credit
losses not fully considered in the allocated portion of the allowance. Factors
impacting the level of the unallocated component include modeling deficiencies
resulting from the absence of comprehensive historical information, lack of
credit performance data related to newly developed loan products or programs,
changes in underwriting standards and other factors impacting the estimation of
credit losses.
39
42
An analysis of the allowance for loan and lease losses was as follows:
DECEMBER 31,
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997
----------------------- ----------------------- ----------------------- -----------------------
LOAN LOAN LOAN LOAN
CATEGORY CATEGORY CATEGORY CATEGORY
AS A % OF AS A % OF AS A % OF AS A % OF
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN MILLIONS)
Specific and allocated
allowances:
SFR........................ $ 250 68% $ -- 70% $ -- 74% $ -- 73%
SFR construction........... 8 1 5 1 1 1 2 1
Second mortgage and other
consumer:
Banking subsidiaries...... 115 6 -- 6 -- 5 -- 5
Washington Mutual
Finance................. 104 2 -- 2 -- 2 -- 2
Specialty mortgage
finance................... 52 6 -- 4 -- 1 -- *
Commercial business........ 44 2 18 1 17 1 3 1
Commercial real estate:
Apartment buildings....... 138 13 59 13 126 13 123 14
Other commercial real
estate.................. 64 2 -- 3 -- 3 -- 4
------ --- ------ --- ------ --- ------ ---
Total allocated
allowance.......... 775 100 82 100 144 100 128 100
Unallocated allowance...... 239 -- 960 -- 924 -- 920 --
------ --- ------ --- ------ --- ------ ---
Total allowance for
loan and lease
losses............. $1,014 100% $1,042 100% $1,068 100% $1,048 100%
====== === ====== === ====== === ====== ===
DECEMBER 31,
-----------------------
1996
-----------------------
LOAN
CATEGORY
AS A % OF
ALLOWANCE TOTAL LOANS
--------- -----------
(DOLLARS IN MILLIONS)
Specific and allocated
allowances:
SFR........................ $ -- 73%
SFR construction........... -- 1
Second mortgage and other
consumer:
Banking subsidiaries...... -- 4
Washington Mutual
Finance................. -- 2
Specialty mortgage
finance................... -- 1
Commercial business........ 1 *
Commercial real estate:
Apartment buildings....... 174 15
Other commercial real
estate.................. -- 4
------ ---
Total allocated
allowance.......... 175 100
Unallocated allowance...... 891 --
------ ---
Total allowance for
loan and lease
losses............. $1,066 100%
====== ===
- ---------------
* Less than 1%.
We record an allowance for recourse obligations to cover inherent losses on
loans securitized and retained in our MBS portfolio for which we retain the
credit risk, and to cover estimated losses on loans and MBS sold to third
parties for which a recourse obligation exists. A regular review is performed to
determine the adequacy of the allowance for recourse obligations. As of December
31, 2000, the allowance for recourse obligations totaled $104 million, compared
with $113 million at year-end 1999.
The total loss coverage percentage is the allowance for loan and lease
losses and the allowance for recourse obligations as a percentage of nonaccrual
loans:
DECEMBER 31,
--------------------
2000 1999 1998
---- ---- ----
Total loss coverage percentage.............................. 126% 140% 129%
At December 31, 2000 and 1999, we had $16.16 billion and $18.12 billion of
loans securitized and retained with recourse, and $4.06 billion and $4.65
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, they are included in nonaccrual loans. Management generally
classifies loans as nonaccrual if the timely collection of principal and
interest is not expected, any portion of the loan has been charged off, or the
loan is four payments or more past due.
Nonperforming assets were $1.04 billion or 0.53% of total assets at
December 31, 2000, compared with $1.03 billion or 0.55% of total assets at
year-end 1999.
40
43
Nonperforming assets consisted of the following:
DECEMBER 31,
----------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
Nonaccrual loans:
SFR......................................... $ 529 $ 602 $ 752 $ 845 $ 999
SFR construction............................ 18 18 9 10 9
Second mortgage and other consumer:
Banking subsidiaries..................... 51 43 39 29 25
Washington Mutual Finance................ 66 55 52 49 43
Specialty mortgage finance.................. 179 57 2 2 3
Commercial business......................... 12 10 7 3 1
Commercial real estate:
Apartment buildings...................... 10 22 44 38 65
Other commercial real estate............. 21 20 33 58 29
------ ------ ------ ------ ------
886 827 938 1,034 1,174
Foreclosed assets............................. 153 199 275 341 470
Other nonperforming assets.................... -- -- -- -- 7
------ ------ ------ ------ ------
Total nonperforming assets.......... $1,039 $1,026 $1,213 $1,375 $1,651
====== ====== ====== ====== ======
Nonperforming assets as a percentage of total
assets...................................... 0.53% 0.55% 0.73% 0.96% 1.20%
If interest on nonaccrual loans had been recognized, such income would have
been $83 million in 2000, $67 million in 1999 and $66 million in 1998.
Specialty mortgage finance loans on nonaccrual status increased by $122
million during 2000 and by $55 million during 1999 due to the continued growth
and seasoning of this portfolio. This increase in nonaccrual loans was
consistent with our expectations. We expect the balance of nonaccrual loans to
increase as the portfolio continues to grow and season. The balance of specialty
mortgage finance loans increased to $7.26 billion at year-end 2000 from $4.45
billion at year-end 1999.
Loans (exclusive of the allowance for loan and lease losses) and nonaccrual
loans by geographic concentration at December 31, 2000 were as follows:
WASHINGTON
CALIFORNIA OREGON OTHER TOTAL
---------------------- ---------------------- ------------------------- ----------------------
PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL PORTFOLIO(1) NONACCRUAL PORTFOLIO NONACCRUAL
--------- ---------- --------- ---------- ------------ ---------- --------- ----------
(DOLLARS IN MILLIONS)
SFR........................ $42,797 $240 $12,221 $ 76 $28,095 $213 $ 83,113 $529
SFR construction........... 335 5 731 5 365 8 1,431 18
Second mortgage and other
consumer:
Banking subsidiaries..... 3,791 9 2,982 30 1,219 12 7,992 51
Washington Mutual
Finance................ 259 5 40 1 2,187 60 2,486 66
Specialty mortgage
finance.................. 1,534 32 316 10 5,404 137 7,254 179
Commercial business........ 255 1 930 11 1,089 -- 2,274 12
Commercial real estate:
Apartment buildings...... 14,232 9 1,106 -- 320 1 15,658 10
Other commercial real
estate................. 1,384 7 1,056 1 382 13 2,822 21
------- ---- ------- ---- ------- ---- -------- ----
$64,587 $308 $19,382 $134 $39,061 $444 $123,030 $886
======= ==== ======= ==== ======= ==== ======== ====
Loans and nonaccrual loans
as a percentage of total
loans and total
nonaccrual loans......... 52% 35% 16% 15% 32% 50% 100% 100%
- ---------------
(1) Of this category, Florida had the largest portfolio balance of approximately
$4.94 billion.
At December 31, 2000, nonaccrual loans in California accounted for 35% of
total nonaccrual loans, down from 49% in 1999. Due to the concentration of our
loans in California, the California real estate market
41
44
requires continual review. In general, real estate values have increased during
1998, 1999 and 2000. However, economic performance within California may vary
significantly among property types or by region.
Impaired Loans
Commercial real estate loans over $1 million and all commercial business
and builder construction loans are individually evaluated for impairment.
Management generally identifies loans to be evaluated for impairment when such
loans are on nonaccrual status or have been restructured. However, not all
nonaccrual loans are impaired. Loans are considered impaired when it is probable
that we will be unable to collect all amounts contractually due, including
scheduled interest payments. Restructured loans are evaluated for impairment
based on the contractual terms specified by the original loan agreement, rather
than the contractual terms specified by the restructuring agreement. Loans
performing under restructured terms beyond a specified performance period are
classified as accruing, but may still be deemed impaired. 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.
OPERATING SEGMENTS
Effective January 1, 2001, we realigned our business segments. Separately,
we are in the process of enhancing our segment reporting process methodologies
and allocations and will be reporting segment results under these new
methodologies and as realigned beginning with the first quarter of 2001.
For the historical periods presented in this Form 10-K, we managed our
business along five major operating segments: Consumer Banking, Mortgage
Banking, Commercial Banking, Financial Services, and Consumer Finance. Although
we did not consider the Treasury group to be an operating segment, it managed
investments and interest rate risk. Generally, MBS that we purchased were
allocated to Treasury. Refer to Note 23 of the Notes to the Consolidated
Financial Statements for summarized financial information for these operating
segments.
Deposit accounts managed by the Western Bank/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 related
interest expense is allocated to those segments. The consumer banking segment
was allocated an amount of assets equal to the excess of its deposits over its
balance of consumer loans. The other segments were allocated an amount of
indebtedness in excess of deposits necessary to support the interest-earning
assets of the segment. The rate on such indebtedness was our weighted average
borrowing cost.
Consumer Banking
Net interest income was $2.50 billion in 2000, $2.49 billion in 1999, and
$2.56 billion in 1998. Net interest income for the consumer banking group
increased slightly from 1999 to 2000 primarily due to the increase in the net
interest spread and margin, whereas the decline from 1998 to 1999 was due to the
compression of the net interest spread and margin. The yield on the consumer
banking group's SFR and consumer loans responded more quickly than the cost of
deposits to the rise in short-term interest rates during the first half of 2000.
Noninterest income was $1.04 billion in 2000, $817 million in 1999, and $626
million in 1998. The rise in noninterest income during the comparative periods
resulted from an increase in depositor and other retail banking fees associated
with higher collections of nonsufficient funds and other fees on existing
checking accounts from higher customer usage and fee increases. The increase
from 1998 to 1999 was primarily due to collecting more debit card, ATM,
nonsufficient funds and other fees that resulted from an increased number of
checking accounts. The number of checking accounts increased by more than
500,000 during 2000 to 4.8 million accounts at December 31, 2000 and over
400,000 during 1999 to 4.3 million accounts at December 31, 1999.
Mortgage Banking
Net interest income was $741 million in 2000, $796 million in 1999, and
$833 million in 1998. The decline in net interest income during the comparative
periods was primarily due to the compression of the net interest spread and
margin in the mortgage banking group. The cost of borrowings for the mortgage
banking
42
45
group responded more quickly than the yield on ARMs to the rise in short-term
interest rates during the first half of 2000. In addition, the volume of
wholesale borrowings increased during 2000 to fund asset growth. Noninterest
income was $431 million in 2000, $259 million in 1999, and $326 million in 1998.
Noninterest income increased from 1999 to 2000 primarily as a result of
increased gain on sale of loans, loan servicing income, and other income. The
increase in gain on sale of loans was attributable to the sale of $12.90 billion
of seasoned loans and $8.71 billion of current loan production during 2000. The
increase in loan servicing income was primarily due to growth in loans serviced
for others as a result of loan sales and securitizations. The impact of this
portfolio growth was partially offset by an increase in mortgage servicing
rights amortization. The decline in noninterest income from 1998 to 1999 was due
to a decrease in loan servicing income and loan related income. In addition,
gain on sale of loans was lower in 1999 due to a decrease in fixed-rate loan
originations and sales.
Total assets increased $8.61 billion, nearly 19%, to $54.98 billion at
December 31, 2000 from $46.37 billion at year-end 1999. This increase was
primarily due to an increase in MBS.
Commercial Banking
Net interest income was $362 million in 2000, $376 million in 1999, and
$368 million in 1998. The decline in net interest income from 1999 to 2000
resulted from the compression of the net interest spread and margin in the
commercial real estate portfolio. Repricing indices for the majority of the
commercial real estate portfolio responded more slowly to the rise in short-term
interest rates than the cost of borrowings. Net interest income was higher in
1999, compared with 1998, due to an increase in the net interest spread and
margin in the commercial real estate portfolio. Noninterest income was $34
million in 2000, $30 million in 1999, and $24 million in 1998. Noninterest
expense was $128 million in 2000, $104 million in 1999, and $101 million in
1998. The increase in noninterest expense during 2000 was primarily due to
higher compensation and benefits expense within commercial real estate lending
and as a result of our expansion of WM Business Bank offices in California.
Financial Services
Noninterest income was $371 million in 2000, $317 million in 1999, and $230
million in 1998. Noninterest income was up during the comparative periods due to
increased securities fees and commissions. During these periods, there were
higher sales of investment products and growth of assets under management.
Noninterest expense was $240 million in 2000, $200 million in 1999, and $165
million in 1998. The increase in noninterest expense was primarily due to an
increase in commission expense related to a higher volume of securities
transactions.
Consumer Finance
Net interest income was $354 million in 2000, $255 million in 1999, and
$203 million in 1998. The increase during the comparative periods was due to an
increase in the net interest spread and margin. Average loans increased as a
result of the growth in loans originated, purchases of specialty mortgage
finance loans, and the acquisition of Long Beach Mortgage on October 1, 1999.
Noninterest income was $141 million in 2000, $56 million in 1999, and $10
million in 1998. The increase during the comparative periods was primarily due
to an increase in gains on sales of loans originated by Long Beach Mortgage.
Noninterest expense was $274 million in 2000 compared with $164 million in 1999
and $127 million in 1998. The increase in 2000 was primarily due to the
inclusion of Long Beach Mortgage operating expenses.
Total assets increased $2.88 billion to $10.25 billion at December 31, 2000
from $7.37 billion at year-end 1999. This increase was primarily due to
purchases of specialty mortgage finance loans, in addition to loans originated
and purchased by Washington Mutual Finance.
ASSET AND LIABILITY MANAGEMENT STRATEGY
Our long-term 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
43
46
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,
2000, approximately 78% of our total SFR loan and MBS portfolio had adjustable
rates.
During periods of moderate to high market interest rates, our customers
prefer ARMs. ARMs are also well received whenever long-term rates remain
appreciably higher than short-term rates. During 2000, market interest rates
rose 50 to 100 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 4
basis points, compared with 88 basis points in 1999. Even though short-term
rates were not significantly lower than long-term rates, 85% of our SFR loan
originations were ARMs, while 15% were fixed rate during 2000 due to higher
long-term rates compared with recent years.
Prior to the upward trend in interest rates in late 1999 and 2000, a low
and flat yield curve and significant repricings during 1998 and early 1999
resulted in lowered asset yields. Subsequently, when short-term interest rates
rose, the higher funding costs compressed the net interest margin. This
compression began to lessen in the latter half of 2000 as interest rates
stabilized and the yield on assets tied to lagging market indices rose. We
estimate that it takes three to four quarters for asset yields to catch up with
increases in funding costs after an increase in short-term interest rates.
However, continued higher short-term rates during the latter half of 2000
limited the widening of the net interest margin.
To manage the risk of timing differences in the repricing of assets and
liabilities, our interest-earning assets are matched with interest-bearing
liabilities that have similar repricing characteristics. For example, in
general, our fixed-rate loans are matched with long-term deposits and
borrowings, and our ARMs are matched with short-term deposits and borrowings.
Periodically, mismatches are identified and managed by adjusting the repricing
characteristics of our interest-bearing liabilities with derivatives.
Derivatives such as interest rate cap and exchange agreements are generally
utilized to match the duration of liabilities to that of the assets.
We also continue to sell fixed-rate loans to adjust the balance between
interest-sensitive liabilities and interest-sensitive assets. During 2000, we
started to sell adjustable-rate loans with three-to five-year initial fixed
rates. To establish balance sheet flexibility and diversity, we also began to
sell some monthly option ARMs in 2000. We continued to purchase specialty
mortgage finance loans during 2000.
Lag risk
During 2000, lag risk was 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 necessary to compute the
index. The COFI used to reprice ARMs and adjustable-rate MBS generally 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. In
periods of rising interest rates, the net interest margin will compress if the
repricing period of liabilities is shorter than the repricing period of assets
because funding costs will rise faster than asset yields. The impact in periods
of falling interest rates would be positive. Repricing risk can be managed by
changing the repricing characteristics of interest-bearing liabilities with
derivatives.
44
47
Prepayment risk
In a declining interest rate environment with a flat yield curve,
customers' preference for fixed-rate loans usually results 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.
During such periods, it is likely that we would continue to securitize ARMs, but
hold them in the portfolio, rather than selling them, to offset some of this
risk. When prepayments occur on our loan servicing portfolio, the value of MSR
may decline as servicing cash flows diminish. In addition, premiums related to
loans and MBS on our Consolidated Statement of Financial Condition 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 a
variety of indices which may react differently to changes in interest rates.
Loans tied to the COFI index create a form of basis risk. Our general cost of
funds is higher than most other savings institutions whose costs are a component
of the COFI index because a larger portion of our liabilities are borrowings,
rather than lower costing deposits. To reduce basis risk, we offer 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. Management has reduced 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. There continues to be basis risk with the MTA
index, as it moves with the Treasury rates, and most of our borrowings are tied
to LIBOR indices.
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.
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 (representing the cost
of total interest-bearing liabilities) 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, 2000........................................ 5.60% 5.60% 6.11% --% 0.51%
September 30, 2000....................................... 5.51 5.50 5.96 (0.01) 0.45
June 30, 2000............................................ 5.27 5.21 5.69 (0.06) 0.42
March 31, 2000........................................... 5.08 4.96 5.34 (0.12) 0.26
Cap risk
The lifetime interest rate caps that we offer to ARM borrowers introduce
another element of interest rate risk to our earnings. In periods of rising
interest rates, it is possible for the repriced interest rates (index rate plus
the margin) to exceed the lifetime interest caps of existing ARM loans.
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.
45
48
We monitor our ability to meet short-term cash requirements using
guidelines established by our Boards 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 2000 of $1.90 billion, $503 million for net noncash
items and $881 million of other net cash inflows from operating activities. Cash
flows from investing activities consisted mainly of proceeds from sales and
purchases of securities, loan and security principal repayments, loan
originations and sales of loans. In 2000, cash flows from investing activities
included sales, maturities and principal payments on securities totaling $12.22
billion. Loans originated and purchased for investment were in excess of
repayments and sales by $15.86 billion. Cash flows from financing activities
consisted of the net change in our deposit accounts and short-term borrowings,
deposits sold, the proceeds and repayments of long-term borrowings and FHLBs
advances, and the repurchase of our common stock. In 2000, the above mentioned
financing activities increased cash and cash equivalents by $4.76 billion on a
net basis. Cash and cash equivalents were $2.62 billion at December 31, 2000.
See "Consolidated Financial Statements -- Consolidated Statements of Cash
Flows."
As of December 31, 2000, we had two revolving credit facilities: a $1.20
billion 364-day facility and a $600 million four-year facility, which provide
back-up for our commercial paper programs. At December 31, 2000, we had $841
million available under these facilities, which represents the total amount of
the two revolving credit facilities, net of the amount of commercial paper
outstanding at year end.
With the acquisition of the mortgage operations of The PNC Financial
Services Group, Inc. on January 31, 2001, we paid off approximately $7 billion
of intercompany borrowings to their former parent company. The funds were
borrowed through additional advances from FHLBs and by federal funds purchased.
CAPITAL ADEQUACY
Our capital (stockholders' equity) was $10.17 billion at December 31, 2000,
up from $9.05 billion at December 31, 1999. In order to effectively deploy
capital, we repurchased our common stock during the first half of 2000. During
the second half of 2000, we used capital to facilitate balance sheet growth and
retained additional capital in anticipation of completing the announced
acquisitions of Bank United Corp., WMHLI and WMMSC. The decrease in unrealized
loss on available-for-sale securities to $51 million at December 31, 2000 from
$667 million at December 31, 1999 in addition to net income of $1.90 billion for
2000 more than offset the stock repurchases during the first half of 2000. This
caused a rise in the ratio of stockholders' equity to total assets to 5.22% at
year-end 2000, compared with 4.85% at year-end 1999.
The regulatory capital ratios of WMBFA, WMB and WMBfsb and minimum
regulatory requirements to be categorized as well capitalized were as follows:
DECEMBER 31, 2000
------------------------ WELL-CAPITALIZED
WMBFA WMB WMBFSB MINIMUM
----- ----- ------ ----------------
Tier 1 capital to total assets................... 5.81% 5.83% 6.97% 5.00%
Tier 1 capital to risk-weighted assets........... 10.40 10.15 11.14 6.00
Total capital to risk-weighted assets............ 11.36 11.24 12.10 10.00
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, 2000.
Our broker-dealer subsidiaries are also subject to capital requirements. At
December 31, 2000, both of our securities subsidiaries were in compliance with
their applicable capital requirements.
RECENTLY ISSUED ACCOUNTING STANDARDS ADOPTED IN THESE FINANCIAL STATEMENTS
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, was issued in September 2000 and replaces
SFAS No. 125 of the same title. This statement revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral, and requires certain disclosures, but carries over most of SFAS No.
125's provisions without reconsideration. This
46
49
statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001 and is effective
for recognition and reclassification of collateral and for disclosures relating
to securitization transactions and collateral for fiscal years ending after
December 15, 2000. Our adoption of this statement is not expected to materially
affect our results of operations or financial condition. See "Notes to
Consolidated Financial Statements -- Note 3: Securities and Note 5: Mortgage
Banking Activities."
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
On January 1, 2001, we recorded a transition adjustment representing a $0.6
million loss ($0.4 million net of tax) related to the implementation of SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This loss
will be reflected in our earnings for the first quarter of 2001. This loss
represents the excess of book value over the remaining fair value of certain
interest rate cap agreements designated as cash flow hedges and the difference
between book value and fair value of forward loan sale contracts for which hedge
accounting was not elected. These losses were partially offset by unrealized
gains representing the fair value of commitments to originate loans that will be
held for sale when originated. We consider these commitments to be derivatives
and are therefore carried at market value.
The adoption of SFAS No. 133 on January 1, 2001 also resulted in an $11
million decrease ($7 million net of tax) in other comprehensive income. This
decrease represents $43 million ($27 million net of tax) in unrealized losses on
interest rate swap agreements and interest rate cap agreements designated as
cash flow hedges. This was partially offset by the net unrealized gain of $32
million ($20 million net of tax) that resulted from the reclassification of our
entire held-to-maturity MBS and investment portfolios of $16.57 billion to
available for sale upon adopting SFAS No. 133.
In conjunction with the reclassification of our held-to-maturity MBS
portfolio to available for sale, $126 million was allocated to MSR, representing
retained interests from securitizations of loans that we had completed after
January 1, 1996 and for which no MSR had been previously capitalized. MSR are
capitalized for all securitizations of loans occurring after January 1, 1996
that are either sold or retained in the available-for-sale securities portfolio.
The adoption of SFAS No. 133 on January 1, 2001 also resulted in a $151
million increase in derivative-related assets, a $129 million increase in the
book values of hedged borrowings, and a $66 million increase in
derivative-related liabilities. Management does not anticipate that SFAS No. 133
will significantly increase the volatility of earnings or stockholders' equity
reported in future periods.
TAX CONTINGENCY
From 1981 through 1985, Ahmanson acquired thrift institutions in six states
through Federal Savings and Loan Insurance Corporation ("FSLIC")-assisted
transactions. The position was that assistance received from the FSLIC included
out-of-state branching rights valued at approximately $740 million. Prior to
December 31, 1998, Ahmanson had sold its 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, 2000 could approach $238
million.
The Internal Revenue Service has completed its examination of the Ahmanson
federal income tax returns for the years 1990 through 1993. The return for 1993
included the proposed adjustment related to the abandonment of the Missouri
branching rights. The matter is currently before the Appeals Branch of the
Service. In accordance with generally accepted accounting principles, we do not
believe it is appropriate at this time to reflect any tax benefits in our
financial statements.
47
50
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 that 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, trials have been concluded and opinions have been issued in a
number of actions in the United States Court of Federal Claims (the "Court") in
which savings institutions and investors in savings institutions sought damages
from the U.S. Government based on breach of contract and other theories.
Generally, in cases in which these opinions on the merits have been issued by
the Court, either the plaintiff(s), the defendant (U.S. Government), or both the
plaintiff(s) and the defendant, have opted to appeal the Court's decision. Such
appeals are now pending before the United States Court of Appeals for the
Federal Circuit (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 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 $34 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 that remain subjects of the lawsuit totaled approximately $460
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 pursue a favorable outcome of this lawsuit.
American Savings Bank, F.A.
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
48
51
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 cash proceeds, after reduction for certain tax and litigation-related costs
and expenses, exceed $333 million.
Coast and Bank United Corp.
Prior to their acquisitions, Coast and Bank United Corp. had similar
lawsuits against the U.S. Government. Generally, securities representing
interests in these lawsuits were issued to Coast and Bank United Corp.
shareholders. These securities, called contingent payment rights certificates,
are currently traded on the NASDAQ Stock Market under the symbols CCPRZ and
BNKUZ, respectively. We do not own a significant number of these securities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which we are exposed is interest rate risk. The majority
of our interest rate risk arises from the instruments, positions and
transactions entered into for purposes other than trading. They include loans,
securities, deposits, borrowings, long-term debt and derivative financial
instruments used for asset/liability management. Interest rate risk occurs when
assets and liabilities reprice or mature at different times or frequencies as
market interest rates change.
During the year, we implemented additional methodologies for analyzing
interest rate risk. These included projecting net interest income based on
parallel and non-parallel changes in the yield curve. The results of these
analyses are used as part of our overall framework for asset/liability
management. Accordingly, we have changed our market risk analysis from a tabular
presentation to a presentation of net interest income sensitivity.
The table below indicates the sensitivity of pretax net interest income to
interest rate movements. The comparative scenarios assume that interest rates
rise or fall in even quarterly increments over the next twelve months for a
total increase or decrease of 200 basis points. The interest rate scenarios are
used for analytical purposes and do not necessarily represent management's view
of future market movements.
Our net interest income sensitivity profile as of year-end 2000 and 1999 is
stated below:
GRADUAL CHANGE IN RATES
------------------------
-200BP +200BP
-------- --------
Net interest income change for the one-year period
beginning:
January 1, 2001........................................... 11.0% (12.4)%
January 1, 2000........................................... 11.3% (11.6)%
Our net interest income at risk position has not changed significantly
year-over-year. Assumptions are made in modeling the sensitivity of net interest
income. The simulation model captures expected prepayment behavior under
changing interest rate environments. Additionally, the model captures the impact
of interest rate caps and floors on adjustable-rate products. Assumptions
regarding interest rate or balance behavior of non-maturity deposits reflect
management's best estimate of future behavior. Sensitivity of new loan volume to
market interest rate levels is included as well.
We analyze additional interest rate scenarios, including more extreme
rising and falling rate environments to support interest rate risk management.
These additional scenarios also address the risk exposure in time periods beyond
the twelve months captured in this net interest income sensitivity analysis.
49
52
Management of Interest Rate Risk and Derivative Activities
To mitigate interest rate risk, we use derivative instruments, such as
interest rate exchange agreements and interest rate cap agreements. At December
31, 2000, we had entered into interest rate exchange agreements and interest
rate cap agreements with notional values of $22.18 billion. Additionally, $13.20
billion of interest rate floors and $751 million of interest rate caps have been
embedded within certain borrowings as of December 31, 2000. The majority of
these derivative contracts embedded within the borrowings will not become
effective until the first quarter of 2001 and beyond. Derivative instruments, if
not used appropriately, can subject a company to unintended financial exposure.
These instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the Statement of Financial Condition. The contract
or notional amount of these instruments reflects the extent of involvement 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. 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 20:
Interest Rate Risk Management."
Our strategy is to use derivative instruments to hedge the repricing risk
associated with deposits and borrowings. For example, we have entered into
interest rate cap agreements to provide an additional layer of 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. There can
be no assurance that interest rate exchange agreements and interest rate cap
agreements will provide us with protection in all scenarios or to the full
extent of our exposure.
During 2000, we entered into borrowing arrangements which contain embedded
derivative instruments. These instruments included caps and floors. Interest
rate floors are intended to hedge prepayment risk associated with our loans, MBS
and MSR. With interest rate floors, we will receive cash flows when the interest
rate index drops below certain levels (strike rate). The amount of the cash
flows are calculated based on the difference between the strike rate and the
index rate multiplied by the notional amount. Similarly, the interest rate caps
provide us cash flows when the interest rate index exceeds the strike rate.
Interest rate caps are intended to hedge repricing of liabilities and securities
that are purchased to hedge MSR.
We also hedge the risks associated with the mortgage pipeline. The mortgage
pipeline consists of fixed-and adjustable-rate SFR loans which will be sold in
the secondary market. The risk with the mortgage pipeline is that interest rates
might 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 and option contracts. A forward
sales agreement protects us in a rising interest rate environment since the
sales price and delivery date have already been established. A forward sales
agreement, however, is different from 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 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.
50
53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For financial statements, see Index to Consolidated Financial Statements on
page 53.
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
17, 2001. 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 53.
(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 2000:
1. Report filed October 19, 2000. 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.
(c) EXHIBITS:
The Index of Exhibits is included in the version of this Form 10-K filed
with the Securities and Exchange Commission.
51
54
SIGNATURES
Pursuant to the requirements of 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 February 20, 2001.
WASHINGTON MUTUAL, INC.
/s/ KERRY K. KILLINGER
--------------------------------------
Kerry K. Killinger
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on February 20, 2001.
/s/ KERRY K. KILLINGER /s/ WILLIAM A. LONGBRAKE
- -------------------------------------------- --------------------------------------------
Kerry K. Killinger William A. Longbrake
Chairman, President and Chief Executive Vice Chair and Chief Financial Officer
Officer; Director (Principal Executive (Principal Financial Officer)
Officer)
/s/ ROBERT H. MILES
--------------------------------------------
Robert H. Miles
Senior Vice President and Controller
(Principal Accounting Officer)
/s/ DOUGLAS P. BEIGHLE /s/ PHILLIP D. MATTHEWS
- -------------------------------------------- --------------------------------------------
Douglas P. Beighle Phillip D. Matthews
Director Director
- -------------------------------------------- --------------------------------------------
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
- -------------------------------------------- --------------------------------------------
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
- --------------------------------------------
Enrique Hernandez, Jr.
Director
52
55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ 54
Consolidated Statements of Income for the years ended
December 31, 2000, 1999, and 1998......................... 55
Consolidated Statements of Financial Condition at December
31, 2000 and 1999......................................... 56
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the years ended December 31,
2000, 1999 and 1998....................................... 57
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... 58
Notes to Consolidated Financial Statements.................. 60
Supplementary Data.......................................... 106
53
56
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, 2000 and 1999, and the related consolidated statements of income,
stockholders' equity and comprehensive income, and of cash flows for each of the
three years in the period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with 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 provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial condition of Washington Mutual, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America.
/s/ DELOITTE & TOUCHE
Seattle, Washington
February 23, 2001
54
57
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
INTEREST INCOME
Loans....................................................... $ 9,388 $ 8,348 $ 8,167
Available-for-sale securities............................... 2,811 2,481 1,708
Held-to-maturity securities................................. 1,319 1,050 1,175
Other interest and dividend income.......................... 265 183 171
------- ------- -------
Total interest income..................................... 13,783 12,062 11,221
INTEREST EXPENSE
Deposits.................................................... 3,290 3,170 3,588
Borrowings.................................................. 6,182 4,440 3,341
------- ------- -------
Total interest expense.................................... 9,472 7,610 6,929
------- ------- -------
Net interest income....................................... 4,311 4,452 4,292
Provision for loan and lease losses......................... 185 167 162
------- ------- -------
Net interest income after provision for loan and lease
losses................................................. 4,126 4,285 4,130
NONINTEREST INCOME
Depositor and other retail banking fees..................... 976 764 569
Securities fees and commissions............................. 318 271 192
Insurance fees and commissions.............................. 44 43 42
Loan servicing income....................................... 147 112 117
Loan related income......................................... 117 103 111
Gain on sale of loans....................................... 262 109 133
Gain on sale of retail deposit branch systems............... -- -- 289
Loss from securities........................................ (1) (12) (30)
Other income................................................ 121 119 84
------- ------- -------
Total noninterest income.................................. 1,984 1,509 1,507
NONINTEREST EXPENSE
Compensation and benefits................................... 1,348 1,186 1,189
Occupancy and equipment..................................... 604 565 498
Telecommunications and outsourced information services...... 323 276 256
Depositor and other retail banking losses................... 105 107 88
Transaction-related expense................................. -- 96 508
Amortization of goodwill and other intangible assets........ 106 98 104
Other expense............................................... 640 582 625
------- ------- -------
Total noninterest expense................................. 3,126 2,910 3,268
------- ------- -------
Income before income taxes................................ 2,984 2,884 2,369
Income taxes................................................ 1,085 1,067 882
------- ------- -------
NET INCOME.................................................. $ 1,899 $ 1,817 $ 1,487
======= ======= =======
Net income attributable to common stock..................... $ 1,899 $ 1,817 $ 1,471
======= ======= =======
Net income per common share:
Basic..................................................... $ 3.55 $ 3.17 $ 2.61
Diluted................................................... 3.54 3.16 2.56
See Notes to Consolidated Financial Statements.
55
58
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents................................... $ 2,622 $ 3,040
Available-for-sale securities, total amortized cost of
$42,288 and $42,564:
Encumbered................................................ 23,576 17,531
Unencumbered.............................................. 18,583 23,854
-------- --------
42,159 41,385
Held-to-maturity securities, total fair value of $16,486 and
$19,037:
Encumbered................................................ 9,566 10,074
Unencumbered.............................................. 6,999 9,327
-------- --------
16,565 19,401
Loans held for sale......................................... 3,404 794
Loans:
Loans held in portfolio................................... 119,626 113,746
Allowance for loan and lease losses....................... (1,014) (1,042)
-------- --------
Total loans, net of allowance for loan and lease
losses................................................ 118,612 112,704
Mortgage servicing rights ("MSR")........................... 1,017 643
Investment in Federal Home Loan Banks ("FHLBs")............. 3,260 2,917
Goodwill and other intangible assets........................ 1,084 1,200
Other assets................................................ 5,993 4,430
-------- --------
Total assets........................................... $194,716 $186,514
======== ========
LIABILITIES
Deposits:
Checking accounts......................................... $ 14,500 $ 13,490
Savings accounts and money market deposit accounts
("MMDAs").............................................. 30,656 30,048
Time deposit accounts..................................... 34,418 37,592
-------- --------
Total deposits......................................... 79,574 81,130
Federal funds purchased and commercial paper................ 4,115 867
Securities sold under agreements to repurchase ("repurchase
agreements").............................................. 29,756 30,163
Advances from FHLBs......................................... 57,855 57,094
Other borrowings............................................ 9,930 6,203
Other liabilities........................................... 3,320 2,004
-------- --------
Total liabilities...................................... 184,550 177,461
STOCKHOLDERS' EQUITY
Common stock, no par value: 1,600,000,000 shares authorized,
539,855,720 and 571,589,272 shares issued and
outstanding............................................... -- --
Capital surplus -- common stock............................. 1,425 2,205
Accumulated other comprehensive loss:
Unrealized loss on securities............................. (51) (667)
Minimum pension liability adjustment...................... (3) (7)
Retained earnings........................................... 8,795 7,522
-------- --------
Total stockholders' equity............................. 10,166 9,053
-------- --------
Total liabilities and stockholders' equity............. $194,716 $186,514
======== ========
See Notes to Consolidated Financial Statements.
56
59
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
CAPITAL ACCUMULATED COMMON
SURPLUS -- OTHER STOCK
PREFERRED COMMON COMPREHENSIVE RETAINED IN
TOTAL STOCK STOCK INCOME (LOSS) EARNINGS TREASURY
------- --------- ---------- ------------- -------- --------
(IN MILLIONS)
BALANCE, December 31, 1997............... $ 7,601 $ 597 $ 2,630 $ 62 $5,244 $(932)
Comprehensive income:
Net income -- 1998..................... 1,487 -- -- -- 1,487 --
Other comprehensive income (loss), net
of tax:
Net unrealized gains on securities
arising during the year, net of
reclassification adjustments....... 25 -- -- 25 -- --
Minimum pension liability
adjustment......................... (13) -- -- (13) -- --
-------
Total comprehensive income............... 1,499 -- -- -- -- --
Cash dividends declared on preferred
stock.................................. (20) -- -- -- (20) --
Cash dividends declared on common
stock.................................. (436) -- -- -- (436) --
Repurchase of common stock............... (24) -- -- -- -- (24)
Redemption or conversion of preferred
stock.................................. (313) (597) (112) -- -- 396
Common stock issued to acquire Coast
Savings Financial, Inc. ("Coast")...... 925 -- 373 -- -- 552
Common stock issued through employee
stock plans, including tax benefit..... 112 -- 115 -- -- (3)
Treasury shares retired.................. -- -- (11) -- -- 11
------- ----- ------- ----- ------ -----
BALANCE, December 31, 1998............... 9,344 -- 2,995 74 6,275 --
------- ----- ------- ----- ------ -----
Comprehensive income:
Net income -- 1999..................... 1,817 -- -- -- 1,817 --
Other comprehensive income (loss), net
of tax:
Net unrealized losses on securities
arising during the year, net of
reclassification adjustments....... (754) -- -- (754) -- --
Minimum pension liability
adjustment......................... 6 -- -- 6 -- --
-------
Total comprehensive income............... 1,069 -- -- -- -- --
Cash dividends declared on common
stock.................................. (570) -- -- -- (570) --
Common stock repurchased and retired..... (1,082) -- (1,082) -- -- --
Common stock issued to acquire Long Beach
Financial Corp......................... 207 -- 207 -- -- --
Common stock issued through employee
stock plans, including tax benefit..... 85 -- 85 -- -- --
------- ----- ------- ----- ------ -----
BALANCE, December 31, 1999............... 9,053 -- 2,205 (674) 7,522 --
------- ----- ------- ----- ------ -----
Comprehensive income:
Net income -- 2000..................... 1,899 -- -- -- 1,899 --
Other comprehensive income, net of tax:
Net unrealized gains on securities
arising during the year, net of
reclassification adjustments....... 616 -- -- 616 -- --
Minimum pension liability
adjustment......................... 4 -- -- 4 -- --
-------
Total comprehensive income............... 2,519 -- -- -- -- --
Cash dividends declared on common
stock.................................. (626) -- -- -- (626) --
Common stock repurchased and retired..... (869) -- (869) -- -- --
Common stock issued through employee
stock plans, including tax benefit..... 89 -- 89 -- -- --
------- ----- ------- ----- ------ -----
BALANCE, December 31, 2000............... $10,166 $ -- $ 1,425 $ (54) $8,795 $ --
======= ===== ======= ===== ====== =====
See Notes to Consolidated Financial Statements.
57
60
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $ 1,899 $ 1,817 $ 1,487
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan and lease losses................... 185 167 162
Gain on sale of loans................................. (262) (109) (133)
Loss from securities.................................. 1 12 30
Depreciation and amortization......................... 539 400 313
Stock dividends from FHLBs............................ (221) (139) (112)
Transaction-related expense........................... -- -- 82
Origination of loans held for sale.................... (13,123) (4,996) (13,501)
Proceeds from sales of loans held for sale............ 12,610 8,960 18,238
Decrease (increase) in other assets................... 802 (506) 256
Increase (decrease) in other liabilities.............. 592 (336) 93
-------- -------- --------
Net cash provided by operating activities........... 3,022 5,270 6,915
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities.................................... (2,843) (17,091) (17,389)
Sales and maturities of securities......................... 3,842 1,680 2,585
Principal payments on securities........................... 8,373 12,411 10,010
Purchases of investment in FHLBs........................... (136) (787) (344)
Purchases of loans......................................... (6,752) (7,357) (3,069)
Proceeds from sales of loans............................... 13,164 55 49
Origination of loans, net of principal payments............ (22,271) (16,571) (7,733)
Proceeds from sales of foreclosed assets................... 265 354 609
Cash (used for) provided by acquisitions................... (23) (144) 400
Purchases of premises and equipment, net................... (272) (319) (320)
Purchases of bank owned life insurance..................... (1,000) -- --
-------- -------- --------
Net cash used by investing activities, carried
forward.......................................... (7,653) (27,769) (15,202)
See Notes to Consolidated Financial Statements.
58
61
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(IN MILLIONS)
Net cash used by investing activities, brought
forward.......................................... (7,653) (27,769) (15,202)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in deposits....................................... (1,553) (4,289) (1,103)
Deposits sold.............................................. (3) (73) (3,236)
(Decrease) increase in short-term borrowings............... (6,373) 5,413 2,335
Proceeds from long-term borrowings......................... 32,615 15,881 1,383
Repayments of long-term borrowings......................... (19,817) (9,911) (3,650)
Proceeds from FHLBs advances............................... 88,749 87,174 67,189
Repayments of FHLBs advances............................... (87,990) (69,828) (53,882)
Cash dividends paid on preferred and common stock.......... (626) (570) (456)
Redemption of preferred stock.............................. -- -- (313)
Repurchase of common stock................................. (869) (1,082) (24)
Other...................................................... 80 67 81
-------- -------- --------
Net cash provided by financing activities........... 4,213 22,782 8,324
-------- -------- --------
(Decrease) increase in cash and cash equivalents.... (418) 283 37
Cash and cash equivalents, beginning of year........ 3,040 2,757 2,720
-------- -------- --------
Cash and cash equivalents, end of year.............. $ 2,622 $ 3,040 $ 2,757
======== ======== ========
NONCASH ACTIVITIES
Loans exchanged for MBS.................................... $ 7,414 $ 14,764 $ 754
Real estate acquired through foreclosure................... 255 338 512
Loans originated to facilitate the sale of foreclosed
assets................................................... 36 65 55
Loans held for sale originated to refinance existing
loans.................................................... 631 2,512 5,289
Loans held in portfolio originated to refinance existing
loans.................................................... 3,361 4,347 2,556
Loans held in portfolio transferred to loans held for
sale..................................................... 1,314 -- --
Trade date purchases not yet settled....................... 306 -- 2,610
Trade date sales not yet settled........................... 301 -- --
CASH PAID DURING THE YEAR FOR
Interest on deposits....................................... 3,287 3,151 3,610
Interest on borrowings..................................... 6,257 4,251 3,195
Income taxes............................................... 389 827 814
See Notes to Consolidated Financial Statements.
59
62
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, buy and sell residential loans, consumer loans, and commercial
loans, and engage in certain commercial banking activities. The Company
originates, purchases, sells and services specialty mortgage finance loans
through its subsidiaries, Washington Mutual Finance Corporation ("Washington
Mutual Finance") and Long Beach Mortgage Company ("Long Beach Mortgage"). In
addition, WMBFA purchases specialty mortgage finance loans. Through licensed
subsidiaries, Washington Mutual also markets annuities and other insurance
products, offers full service securities brokerage operations, 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, 2000, 52% of the Company's loan portfolio and 71% of the Company's deposits
were concentrated in California.
Certain reclassifications have been made to the 1999 and 1998 financial
statements to conform to the 2000 presentation. All intercompany transactions
and balances have been eliminated.
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"). The Ahmanson Merger was accounted for as a pooling 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 February 13, 1998, Ahmanson had acquired Coast Savings Financial, Inc.
("Coast"). On October 1, 1999, Washington Mutual acquired Long Beach Financial
Corporation, parent of Long Beach Mortgage. Both acquisitions were accounted for
as purchases.
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.
60
63
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Held-to-Maturity Securities
Investments classified as held to maturity are accounted for at amortized
cost because the Company has both the positive intent and the ability to hold
those securities to maturity. Other than temporary declines in fair value are
recognized in the income statement as loss from securities.
Available-for-Sale Securities
Securities not classified as 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 available-for-sale 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 in the income statement as loss
from securities.
Loans Held for Sale
Loans held for sale include originated and purchased mortgage loans
intended for sale in the secondary market. The loans so designated are carried
at the lower of net cost or fair value on an aggregate basis.
Loans Held in Portfolio
Loans held in portfolio are recorded 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 contractual term of the loan adjusted for actual
prepayments.
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 all commercial business
and builder construction loans are individually evaluated for impairment.
Management generally identifies loans to be evaluated for impairment when such
loans are on nonaccrual status or have been restructured. However, not all
nonaccrual loans are impaired. Loans are considered impaired when it is probable
that the Company will be unable to collect all amounts contractually due,
including scheduled interest payments. Restructured loans are evaluated for
impairment based on the contractual terms specified by the original loan
agreement, rather than the contractual terms specified by the restructuring
agreement. Loans performing under restructured terms beyond a specified
performance period are classified as accruing, but may still be deemed impaired.
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. All other loans are reviewed on a collective basis.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses represents management's estimate of
credit losses inherent in the Company's loan and lease portfolios as of the
balance sheet date. Management performs periodic reviews of its portfolios to
identify these inherent losses, and to assess the overall probability of
collection of these portfolios. The process by which the allowance is determined
encompasses the analysis of the historical performance of each loan category and
an assessment of current economic and portfolio trends and conditions, as well
as specific risk factors impacting the loan and lease portfolios. The Company
monitors delinquency, default, and loss rates, among other factors impacting
portfolio risk. In addition, non-homogeneous type loans, such as commercial
business and commercial real estate loans, are reviewed on an individual loan
basis in order to identify impairment and for risk rating purposes.
61
64
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
When available information confirms that specific loans or portions thereof
are uncollectible, these amounts are charged off against the allowance for loan
and lease 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 if and when they exceed a specified 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.
Allowance for Recourse Obligations
The Company records an allowance for recourse obligations to cover inherent
losses on loans securitized and retained in its mortgage-backed securities
("MBS") portfolio for which the Company retains the credit risk and to cover
estimated losses on loans and MBS sold to third parties for which a recourse
obligation exists. A regular review is performed to determine the adequacy of
the allowance for recourse obligations. The review is substantially similar to
the review of the adequacy of the allowance for loan and lease losses, because
the sold loans and securities, as to which a recourse obligation exists, are
similar to the Company's single-family residential ("SFR") loan portfolio.
Increases to the allowance for recourse obligations are recorded as loss from
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
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, was issued in September 2000 and replaces
SFAS No. 125 of the same title. This statement revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but carries over most of SFAS No.
125's provisions without reconsideration. This statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001 and is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. The
adoption of this statement by the Company is not expected to materially affect
the results of operations or financial condition of the Company. See "Notes to
Consolidated Financial Statements -- Note 3: Securities and Note 5: Mortgage
Banking Activities."
In connection with securitizations or transfers, certain retained
interests, including MSR, are recorded at their allocated carrying value based
on their relative fair value. Initially and at subsequent measurement dates,
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
62
65
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commensurate with the risks associated with the cash flows. The amounts and
timing of the cash flows are estimated after considering various economic
factors including prepayment, delinquency, default and loss assumptions.
Valuation of retained interests in securitizations may also involve the use of
quoted market prices on same or similar securities.
MSR are capitalized at their allocated carrying value and amortized in
proportion to, and over the period of, estimated future net servicing income.
The Company assesses impairment of the MSR 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 MSR are stratified based on the following characteristics of the
underlying loans: fixed-rate mortgage loans by loan type (conforming,
nonconforming, and government) and by coupon rate (less than 7.5%, between 7.5%
and less than 9.0%, and greater than or equal to 9.0%) and adjustable-rate
mortgage ("ARM") loans. The Company changed the stratification used for
impairment review in the fourth quarter of 2000 and such change did not have a
material effect on the financial statements.
In order to determine the fair value of the MSR, the Company uses a model
that estimates the present value of expected future cash flows. Assumptions used
in the model include market discount rates and anticipated prepayment speeds.
The prepayment speeds are determined in relation to forecasted yield curves of
selected government securities. 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 and other intangible assets represent the excess of purchase price
over the fair value of net assets acquired by the Company. The excess cost over
fair value of net assets acquired consists of goodwill, core deposit premiums,
and other intangible assets. 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
reviews its intangible assets periodically for other-than-temporary impairment.
If such impairment is indicated, recoverability of the asset is assessed based
on expected undiscounted net cash flows.
Repurchase Agreements
The Company enters into agreements under which it sells securities subject
to an obligation to repurchase the same or similar securities. Under these
arrangements, the Company transfers legal control over the assets but still
retains effective control through an agreement that both entitles and obligates
the Company to repurchase the assets. As a result, 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. These securities are classified as encumbered.
63
66
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Income taxes are accounted for using the asset and liability method. Under
this method, a deferred tax asset or liability is determined based on the
enacted tax rates which will be in effect when the differences between the
financial statement carrying amounts and tax bases of existing assets and
liabilities are expected to be reported in the Company's income tax returns. The
comprehensive deferred tax provision for the year is equal to the change in the
deferred tax 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 federal tax filings generally include all subsidiaries.
Earnings Per Share
Earnings per share ("EPS") are presented under two formats: basic EPS and
diluted EPS. EPS is computed by dividing net income (after deducting dividends
on preferred stock) by the weighted average number of common shares outstanding
during the year. Diluted EPS is 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 dilutive potential common
shares, such as stock options.
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. Interest
rate exchange agreements and interest rate cap agreements designated against
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 interest-earning assets and
deposits and borrowings. Such redesignations are recorded at fair value at the
time of transfer.
64
67
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company may write covered call options on its available-for-sale
portfolio. If the option is exercised, the option fee is recorded as an
adjustment to the gain or loss on the sale of the security. If the option is not
exercised, the option fee is recognized as fee income.
Recently Issued Accounting Standards Not Yet Adopted
On January 1, 2001, the Company recorded a transition adjustment
representing a $0.6 million loss ($0.4 million net of tax) related to the
implementation of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This loss will be reflected in the Company's earnings for
the first quarter of 2001. This loss represents the excess of book value over
the remaining fair value of certain interest rate cap agreements designated as
cash flow hedges and the difference between book value and fair value of forward
loan sale contracts for which hedge accounting was not elected. These losses
were partially offset by unrealized gains representing the fair value of
commitments to originate loans that will be held for sale when originated. The
Company considers these commitments to be derivatives and are therefore carried
at market value.
The adoption of SFAS No. 133 on January 1, 2001 also resulted in an $11
million decrease ($7 million net of tax) in other comprehensive income. This
decrease represents $43 million ($27 million net of tax) in unrealized losses on
interest rate swap agreements and interest rate cap agreements designated as
cash flow hedges. This was partially offset by the net unrealized gain of $32
million ($20 million net of tax) that resulted from the reclassification of the
Company's entire held-to-maturity MBS and investment portfolios of $16.57
billion to available for sale upon adopting SFAS No. 133.
In conjunction with the reclassification of the Company's held-to-maturity
MBS portfolio to available for sale, $126 million was allocated to MSR,
representing retained interests from securitizations of loans that the Company
had completed after January 1, 1996 and for which no MSR had been previously
capitalized. MSR are capitalized for all securitizations of loans occurring
after January 1, 1996 that are either sold or retained in the available-for-sale
securities portfolio.
The adoption of SFAS No. 133 on January 1, 2001 also resulted in a $151
million increase in derivative-related assets, a $129 million increase in the
book values of hedged borrowings, and a $66 million increase in
derivative-related liabilities. Management does not anticipate that SFAS No. 133
will significantly increase the volatility of earnings or stockholders' equity
reported in future periods.
NOTE 2: BUSINESS COMBINATIONS
On January 31, 2001, Washington Mutual, Inc. acquired the mortgage
operations of The PNC Financial Services Group, Inc. The principal subsidiaries
acquired in that transaction were renamed Washington Mutual Home Loans, Inc.
("WMHLI") and Washington Mutual Mortgage Securities Corp. ("WMMSC"). At January
31, 2001, WMHLI and WMMSC had total assets of approximately $7 billion.
On February 9, 2001, Washington Mutual, Inc. acquired Texas-based Bank
United Corp. This acquisition was accounted for as a purchase. At February 9,
2001, Bank United Corp. had total assets of approximately $18 billion. The
Company issued approximately 42,600,000 shares of its common stock to acquire
Bank United Corp. Each share of Bank United Corp. common stock was converted
into 1.3 shares of Washington Mutual, Inc. common stock.
65
68
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3: SECURITIES
The amortized cost, unrealized gains, unrealized losses, and fair value of
securities were as follows:
DECEMBER 31, 2000
------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE YIELD(1)
--------- ---------- ---------- ------- --------
(DOLLARS IN MILLIONS)
AVAILABLE-FOR-SALE SECURITIES
Investment securities:
U.S. Government and agency............ $ 1,432 $ 39 $ (1) $ 1,470 6.28%
Corporate debt........................ 118 -- (1) 117 6.22
Municipal............................. 40 1 (1) 40 6.04
Equity securities:
Preferred stock.................... 178 1 (5) 174 6.16
Other securities................... 15 -- (6) 9 --
------- ---- ----- -------
1,783 41 (14) 1,810
MBS:
U.S. Government and agency............ 24,639 123 (191) 24,571 6.78
Private issue......................... 15,866 64 (152) 15,778 7.08
------- ---- ----- -------
40,505 187 (343) 40,349
------- ---- ----- -------
$42,288 $228 $(357) $42,159 6.87
======= ==== ===== =======
HELD-TO-MATURITY SECURITIES
Investment securities:
Corporate debt........................ $ 20 $ -- $ -- $ 20 7.98%
Municipal............................. 117 3 (1) 119 5.48
------- ---- ----- -------
137 3 (1) 139
MBS:
U.S. Government and agency............ 10,211 30 (107) 10,134 7.04
Private issue......................... 6,217 49 (53) 6,213 6.96
------- ---- ----- -------
16,428 79 (160) 16,347
------- ---- ----- -------
$16,565 $ 82 $(161) $16,486 7.00
======= ==== ===== =======
- ---------------
(1) Weighted average yield at end of year based on the amortized cost of the
securities.
66
69
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE YIELD(1)
--------- ---------- ---------- ------- --------
(DOLLARS IN MILLIONS)
AVAILABLE-FOR-SALE SECURITIES
Investment securities:
U.S. Government and agency............ $ 60 $-- $ (3) $ 57 5.18%
Corporate debt........................ 163 -- -- 163 6.19
Municipal............................. 7 -- -- 7 5.59
Equity securities:
Preferred stock.................... 189 2 (8) 183 6.13
Other securities................... 7 -- (5) 2 --
------- --- ------- -------
426 2 (16) 412 6.27
MBS:
U.S. Government and agency............ 27,883 17 (703) 27,197 6.33
Private issue......................... 14,255 5 (484) 13,776 6.61
------- --- ------- -------
42,138 22 (1,187) 40,973 6.43
------- --- ------- -------
$42,564 $24 $(1,203) $41,385 6.42
======= === ======= =======
HELD-TO-MATURITY SECURITIES
Investment securities:
Corporate debt........................ $ 20 $-- $ (1) $ 19 7.97%
Municipal............................. 118 2 (3) 117 5.52
------- --- ------- -------
138 2 (4) 136 5.88
MBS:
U.S. Government and agency............ 11,990 52 (283) 11,759 6.41
Private issue......................... 7,273 -- (131) 7,142 6.52
------- --- ------- -------
19,263 52 (414) 18,901 6.45
------- --- ------- -------
$19,401 $54 $ (418) $19,037 6.45
======= === ======= =======
- ---------------
(1) Weighted average yield at end of year based on the amortized cost of the
securities.
67
70
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair value of debt securities by contractual maturity was as follows:
DECEMBER 31, 2000
-----------------------------------------------------------------------------
DUE AFTER ONE AFTER FIVE
FAIR WITHIN BUT WITHIN BUT WITHIN
VALUE YIELD(1) ONE YEAR YIELD(1) FIVE YEARS YIELD(1) TEN YEARS
------- -------- -------- -------- ---------- -------- ----------
(DOLLARS IN MILLIONS)
AVAILABLE-FOR-SALE SECURITIES
Investment securities:
U.S. Government and
agency................... $ 1,470 6.28% $ -- --% $240 5.97% $1,224
Corporate debt............. 117 6.22 17 6.18 67 6.33 11
Municipal.................. 40 6.04 -- -- -- -- --
MBS(2):
U.S. Government and
agency................... 24,571 6.78 151 7.63 355 7.66 217
Private issue.............. 15,778 7.08 -- -- -- -- --
------- ---- ---- ------
$41,976 6.87 $168 7.48 $662 6.91 $1,452
======= ==== ==== ======
HELD-TO-MATURITY SECURITIES
Investment securities:
Corporate debt............. $ 20 7.98% $ -- --% $ -- --% $ --
Municipal.................. 119 5.48 4 5.34 14 5.45 20
MBS(2):
U.S. Government and
agency................... 10,134 7.04 -- -- 6 6.78 78
Private issue.............. 6,213 6.96 18 6.55 -- -- 3
------- ---- ---- ------
$16,486 7.00 $ 22 6.34 $ 20 5.86 $ 101
======= ==== ==== ======
DECEMBER 31, 2000
-------------------------------
AFTER
YIELD(1) TEN YEARS YIELD(1)
-------- --------- --------
(DOLLARS IN MILLIONS)
AVAILABLE-FOR-SALE SECURITIES
Investment securities:
U.S. Government and
agency................... 6.34% $ 6 7.42%
Corporate debt............. 6.56 22 7.48
Municipal.................. -- 40 6.04
MBS(2):
U.S. Government and
agency................... 5.98 23,848 6.77
Private issue.............. -- 15,778 7.08
-------
6.29 $39,694 6.89
=======
HELD-TO-MATURITY SECURITIES
Investment securities:
Corporate debt............. --% $ 20 7.98%
Municipal.................. 5.54 81 5.48
MBS(2):
U.S. Government and
agency................... 6.62 10,050 7.04
Private issue.............. 7.60 6,192 6.96
-------
6.44 $16,343 7.00
=======
Amortized cost of debt securities by contractual maturity was as follows:
DECEMBER 31, 2000
-------------------------------------------------------------------------------
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 MILLIONS)
AVAILABLE-FOR-SALE SECURITIES
Investment securities:
U.S. Government and agency... $ 1,432 6.28% $ -- --% $238 5.97% $1,188
Corporate debt............... 118 6.22 17 6.18 68 6.34 11
Municipal.................... 40 6.04 -- -- -- -- --
MBS(2):
U.S. Government and agency... 24,639 6.78 151 7.63 354 7.66 217
Private issue................ 15,866 7.08 -- -- -- -- --
------- ---- ---- ------
$42,095 6.87 $168 7.48 $660 6.91 $1,416
======= ==== ==== ======
HELD-TO-MATURITY SECURITIES
Investment securities:
Corporate debt............... $ 20 7.98% $ -- --% $ -- --% $ --
Municipal.................... 117 5.48 4 5.34 14 5.45 19
MBS(2):
U.S. Government and agency... 10,211 7.04 -- -- 6 6.78 78
Private issue................ 6,217 6.96 18 6.55 -- -- 3
------- ---- ---- ------
$16,565 7.00 $ 22 6.34 $ 20 5.86 $ 100
======= ==== ==== ======
DECEMBER 31, 2000
-------------------------------
AFTER
YIELD(1) TEN YEARS YIELD(1)
-------- --------- --------
(DOLLARS IN MILLIONS)
AVAILABLE-FOR-SALE SECURITIES
Investment securities:
U.S. Government and agency... 6.34% $ 6 7.42%
Corporate debt............... 6.56 22 7.48
Municipal.................... -- 40 6.04
MBS(2):
U.S. Government and agency... 5.98 23,917 6.77
Private issue................ -- 15,866 7.08
-------
6.29 $39,851 6.89
=======
HELD-TO-MATURITY SECURITIES
Investment securities:
Corporate debt............... --% $ 20 7.98%
Municipal.................... 5.54 80 5.48
MBS(2):
U.S. Government and agency... 6.62 10,127 7.04
Private issue................ 7.60 6,196 6.96
-------
6.44 $16,423 7.00
=======
- ---------------
(1) Weighted average yield at end of year based on the amortized cost of the
securities.
(2) MBS were allocated based on contractual principal maturities assuming no
prepayments.
In addition to agency MBS, the securities portfolio contained investment
grade private issue MBS of $16.66 billion and $14.40 billion at December 31,
2000 and 1999. At December 31, 2000, 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 $1.12 billion and a
fair value of $1.11 billion;
68
71
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Norwest Asset Securities Corp. with an amortized cost of $1.05 billion and a
fair value of $1.03 billion; and Residential Funding Mortgage Services Inc. with
an amortized cost of $1.23 billion and a fair value of $1.21 billion; and
Washington Mutual Bank, FA, with an amortized cost of $14.61 billion and a fair
value of $14.64 billion.
Proceeds from sales of securities in the available-for-sale portfolio
during 2000, 1999 and 1998 were $4.14 billion, $1.44 billion and $2.16 billion.
The Company realized $27 million in gains and $29 million in losses on these
sales during 2000. The Company realized $4 million in gains and $13 million in
losses on sales during 1999. Similarly, the Company realized $19 million in
gains and $1 million in losses during 1998.
Pledged securities having a fair value of $33.07 billion and an amortized
cost of $33.22 billion are also subject to certain agreements which may allow
the secured party to either sell, rehypothecate or otherwise pledge the
securities. In accordance with SFAS No. 140, these amounts have been separately
identified in the statement of financial condition. In addition, securities with
an amortized cost of $13.21 billion and a fair value of $13.03 billion were
pledged to secure public deposits, other borrowings, FHLB advances and access to
the Federal Reserve discount window. The Company had not accepted any securities
as collateral that it was permitted to sell or repledge as of December 31, 2000.
With the adoption of SFAS No. 133 on January 1, 2001, the Company reclassified
its entire held-to-maturity MBS and investment portfolios of $16.57 billion to
available for sale.
NOTE 4: LOANS
Loans consisted of the following:
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
LOAN BALANCE(1) LOAN COMMITMENTS(2)
-------------------- --------------------
(IN MILLIONS)
SFR............................................... $ 83,113 $ 80,628 $ 2,722 $ 3,528
SFR construction.................................. 1,431 1,243 958 966
Second mortgage and other consumer:
Banking subsidiaries............................ 7,992 6,393 5,192 3,777
Washington Mutual Finance....................... 2,486 2,134 240 251
Specialty mortgage finance........................ 7,254 4,452 487 427
Commercial business............................... 2,274 1,452 1,076 952
Commercial real estate:
Apartment buildings............................. 15,658 15,261 184 185
Other commercial real estate.................... 2,822 2,977 50 203
Allowance for loan and lease losses............... (1,014) (1,042) -- --
Outstanding letters of credit..................... -- -- 327 292
-------- -------- ------- -------
$122,016 $113,498 $11,236 $10,581
======== ======== ======= =======
- ---------------
(1) Includes net unamortized deferred loan origination costs of $401 million at
December 31, 2000 and $186 million at December 31, 1999.
(2) Includes commitments by the Company to originate loans as well as
undisbursed amounts of closed loans.
69
72
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amount of impaired loans and the related allowances were as follows:
DECEMBER 31,
--------------
2000 1999
----- -----
(IN MILLIONS)
Impaired loans:
With allowances........................................... $226 $305
Without allowances........................................ 285 316
---- ----
$511 $621
==== ====
Allowance for impaired loans................................ $ 40 $ 82
The average balance of impaired loans and the related interest income
recognized were as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(IN MILLIONS)
Average balance of impaired loans........................... $566 $670 $834
Interest income recognized.................................. 38 46 59
Loans totaling $62.43 billion and $69.34 billion at December 31, 2000 and
1999 were pledged to secure advances from FHLBs.
70
73
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the allowance for loan and lease losses were as follows:
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(IN MILLIONS)
Balance, beginning of year............................... $1,042 $1,068 $1,048
Provision for loan and lease losses...................... 185 167 162
Identified allowance for loans sold or securitized....... (36) (1) (74)
Allowance acquired through business combinations......... -- -- 108
------ ------ ------
1,191 1,234 1,244
Loans charged off:
SFR and SFR construction............................... (20) (38) (66)
Second mortgage and other consumer:
Banking subsidiaries................................ (43) (46) (34)
Washington Mutual Finance........................... (120) (97) (90)
Specialty mortgage finance............................. (5) -- --
Commercial business.................................... (11) (5) (5)
Commercial real estate:
Apartments.......................................... (2) (15) (22)
Other commercial real estate........................ (2) (22) (10)
------ ------ ------
Total charge offs.............................. (203) (223) (227)
Recoveries of loans previously charged off:
SFR and SFR construction............................... 1 4 18
Second mortgage and other consumer:
Banking subsidiaries................................ 4 3 2
Washington Mutual Finance........................... 17 16 16
Specialty mortgage finance............................. 1 -- --
Commercial business.................................... 1 1 1
Commercial real estate:
Apartments.......................................... 1 3 6
Other commercial real estate........................ 1 4 8
------ ------ ------
Total recoveries............................... 26 31 51
------ ------ ------
Net charge offs.......................................... (177) (192) (176)
------ ------ ------
Balance, end of year..................................... $1,014 $1,042 $1,068
====== ====== ======
Changes in the allowance for recourse obligations were as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(IN MILLIONS)
Balance, beginning of year.................................. $113 $144 $ 80
Transfers................................................... -- (15) 74
Charge offs, net of provision for recourse losses........... (9) (16) (10)
---- ---- ----
Balance, end of year........................................ $104 $113 $144
==== ==== ====
During 1998, in connection with the Ahmanson Merger, $74 million was
transferred from the allowance for loan and lease losses to the allowance for
recourse obligations to conform with Washington Mutual's policy.
71
74
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5: MORTGAGE BANKING ACTIVITIES
During 2000, the Company sold residential mortgage loans in securitization
transactions and retained servicing responsibilities and subordinated interests.
The Company receives annual servicing fees equal to a percentage of the
outstanding balance and rights to cash flows remaining after the investors in
the securitization trust have received their contractual payments. The book
balance of loans securitized and sold during the year ended December 31, 2000
was $16.90 billion. Of those loans, $812 million are held by investors and
securitization trusts that have recourse to the Company. The Company recognized
pretax gains of $189 million on these securitizations. The Company's retained
interests are subordinate to investors' interests.
Key economic assumptions used in measuring the value of all the retained
interests accounted for as sales (excluding MSR) at the date of securitization
during the year were as follows (rates per annum and weighted based on principal
amounts securitized):
YEAR ENDED DECEMBER 31, 2000
-------------------------------------------
ADJUSTABLE-RATE MORTGAGE LOANS
------------------------------
GOVERNMENT NON-GOVERNMENT SPECIALTY
SPONSORED SPONSORED MORTGAGE
ENTERPRISE ENTERPRISE FINANCE
----------- --------------- ---------
(DOLLARS IN MILLIONS)
Constant prepayment rate ("CPR")............... 20.00% 20.00% 33.30%
Weighted-average life (in years)............... 8.3 9.7 9.1
Spread to risk free rate(1).................... 1.20 2.98 n.a.
Risk free rate................................. 5.45 4.92 n.a.
Expected annual credit losses as a percentage
of average principal balance................. n.a. n.a. 2.82
Residual cash flows discounted at.............. n.a. n.a. 30.00
Other(2)....................................... $ 3 $ (26) n.a.
- ---------------
(1) Represents the Company's estimate of the incremental rate of return over the
U.S. Treasury instruments of similar duration demanded by investors taking
into consideration the additional risks (e.g., credit or liquidity)
associated with a particular security.
(2) Represents the assumed value/(cost) of a hypothetical derivative used to
reduce the LIBOR to COFI basis risk inherent in certain retained interests.
The assumed value/(cost) of the hypothetical derivative was included in the
determination of the fair value of the retained interests.
Key economic assumptions used in measuring the value of all capitalized MSR
created during the year, inclusive of securitizations recorded as sales,
securitizations entirely retained, and whole loan sales, were as follows (rates
per annum):
YEAR ENDED DECEMBER 31, 2000
---------------------------------------------------------------------------
FIXED-RATE MORTGAGE LOANS ADJUSTABLE-RATE MORTGAGE LOANS
---------------------------- ------------------------------
GOVERNMENT NON-GOVERNMENT GOVERNMENT NON-GOVERNMENT SPECIALTY
SPONSORED SPONSORED SPONSORED SPONSORED MORTGAGE
ENTERPRISE ENTERPRISE ENTERPRISE ENTERPRISE FINANCE
---------- -------------- ----------- --------------- ---------
CPR......................... 10.50% 12.00% 23.00% 24.00% 30.90%
Cash flows discounted at.... 9.50 12.00 13.00 13.00 14.00
72
75
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2000, key economic assumptions and the sensitivity of the
current fair value of retained interests (excluding MSR) to immediate changes in
those assumptions were as follows:
DECEMBER 31, 2000
------------------------------------------------
FIXED-RATE ADJUSTABLE-RATE MORTGAGE LOANS
-------------- ------------------------------
NON-GOVERNMENT GOVERNMENT NON-GOVERNMENT
SPONSORED SPONSORED SPONSORED
ENTERPRISE ENTERPRISE ENTERPRISE
-------------- ----------- ---------------
(DOLLARS IN MILLIONS)
Fair value of retained interests.......... $ 932 $1,103 $1,951
Weighted-average life (in years).......... 6.9 8.8 9.5
CPR....................................... 11.00% 18.00% 17.01%
Impact on fair value of 25% decrease.... $ 1 $ 6 $ 6
Impact on fair value of 50% decrease.... 3 14 19
Impact on fair value of 100% increase... 1 (14) (9)
Impact on fair value of 200% increase... 2 (21) (10)
Spread to risk free rate(1)............... 1.42% 1.37% 2.46%
Impact on fair value of 10% decrease.... $ 7 $ 10 $ 25
Impact on fair value of 25% decrease.... 19 23 70
Impact on fair value of 25% increase.... (18) (23) (67)
Impact on fair value of 50% increase.... (35) (45) (129)
Risk free rate............................ 5.55% 5.55% 5.55%
Impact on fair value of 10% decrease.... $ 24 $ 5 $ 11
Impact on fair value of 25% decrease.... 64 12 28
Impact on fair value of 25% increase.... (56) (12) (28)
Impact on fair value of 50% increase.... (107) (24) (53)
Other(2).................................. n.a. 9 (43)
Impact on fair value of 10% decrease.... n.a. 8 6
Impact on fair value of 25% decrease.... n.a. 13 15
Impact on fair value of 25% increase.... n.a. (11) (15)
Impact on fair value of 50% increase.... n.a. (24) (31)
- ---------------
(1) Represents the Company's estimate of the incremental rate of return over the
U.S. Treasury instruments of similar duration demanded by investors taking
into consideration the additional risks (e.g., credit or liquidity)
associated with a particular security.
(2) Represents the assumed value/(cost) of a hypothetical derivative used to
reduce the LIBOR to COFI basis risk inherent in certain retained interests.
The assumed value/(cost) of the hypothetical derivative was included in the
determination of the fair value of the retained interests.
At December 31, 2000, Specialty Mortgage Finance retained interests
(excluding MSR) were not material.
73
76
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2000, key economic assumptions and the sensitivity of the
current fair value for all capitalized MSR to immediate changes in those
assumptions were as follows:
DECEMBER 31, 2000
----------------------------------
MORTGAGE SERVICING RIGHTS
----------------------------------
ADJUSTABLE- FIXED- SPECIALTY
RATE RATE MORTGAGE
LOANS LOANS FINANCE
----------- ------ ---------
(DOLLARS IN MILLIONS)
Fair value of capitalized MSR......................... $ 513 $ 580 $ 32
Weighted-average life (in years)...................... 4.1 5.7 2.6
CPR................................................... 19.20% 10.60% 30.60%
Impact on fair value of 25% decrease................ $ 67 $ 124 $ 5
Impact on fair value of 50% decrease................ 164 275 13
Impact on fair value of 100% increase............... (142) (276) n.a.
Impact on fair value of 200% increase............... (206) (384) n.a.
Impact on fair value of 25% increase................ n.a. n.a. (4)
Impact on fair value of 50% increase................ n.a. n.a. (7)
Future cash flows discounted at....................... 12.00% 10.70% 14.00%
Impact on fair value of 10% decrease................ n.a. n.a. 1
Impact on fair value of 25% decrease................ $ 14 $ 40 $ 2
Impact on fair value of 50% decrease................ 29 81 n.a.
Impact on fair value of 25% increase................ (14) (37) (2)
Impact on fair value of 50% increase................ (29) (74) (3)
These sensitivities are hypothetical and should be used with caution. As
the figures indicate, changes in fair value based on a variation in assumptions
generally cannot be extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. Also, in this table,
the effect of a variation in a particular assumption on the fair value of the
retained interest is calculated without changing any other assumption; in
reality, changes in one factor may result in changes in another (for example,
increases in market interest rates may result in lower prepayments and increased
credit losses), which might magnify or counteract the sensitivities.
Static pool losses are calculated by summing the actual and projected
future credit losses and dividing them by the original balance of each pool of
assets. As of December 31, 2000, static pool losses for all Adjustable
Non-Government Sponsored Enterprise assets and Specialty Mortgage Finance assets
that were valued using specific credit loss assumptions were not material.
The table below summarizes certain cash flows received from and paid to
securitization trusts:
YEAR ENDED
DECEMBER 31, 2000
------------------
(IN MILLIONS)
Proceeds from new securitizations........................... $17,012
Principal and interest received on retained interests....... 360
Servicing fees received (1)................................. 276
Loan repurchases (1)........................................ 177
- ---------------
(1) Amounts include cash received/paid related to all transfers of loans,
including securitizations accounted for as sales, securitizations retained,
and whole loan sales.
74
77
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table below presents quantitative information about delinquencies, net
credit losses, and components of securitized financial assets and other assets
managed together with them: (Excludes securitized assets that an entity
continues to service but which it has no other continuing involvement.)
YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2000
--------------------------------------------- -----------------
UNPAID PRINCIPAL PRINCIPAL AMOUNT OF LOANS
BALANCE ON NONACCRUAL STATUS NET CREDIT LOSSES
---------------- ------------------------- -----------------
(IN MILLIONS)
Mortgage loans.................. $115,058 $563 $30
Specialty Mortgage Finance
loans......................... 6,005 267 9
-------- ---- ---
Total loans managed... $121,063 $830 $39
======== ==== ===
Comprised of:
Loans sold, including
securitizations............ $ 9,432
Loans held in portfolio....... 79,178
Loans securitized and
retained................... 32,453
--------
Total loans managed... $121,063
========
Changes in the balance of MSR were as follows:
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999 1998
------- ----- -----
(IN MILLIONS)
Balance, beginning of year.................................. $ 643 $461 $311
Additions................................................... 516 266 240
Amortization of MSR......................................... (133) (88) (89)
Impairment adjustment....................................... (9) 4 (1)
------ ---- ----
Balance, end of year........................................ $1,017 $643 $461
====== ==== ====
At December 31, 2000, the loan servicing portfolio with capitalized MSR
totaled $79.34 billion compared with $55.27 billion at December 31, 1999.
Changes in the valuation for impairment of MSR were as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(IN MILLIONS)
Balance, beginning of year.................................. $ 4 $ 8 $7
Net change.................................................. 9 (4) 1
--- --- --
Balance, end of year........................................ $13 $ 4 $8
=== === ==
As of December 31, 2000, the Company serviced 306 Government National
Mortgage Association ("GNMA") loan pools with an outstanding security balance of
$179 million. The Company did not issue any additional GNMA loan pools during
2000.
As of December 31, 2000, Long Beach Mortgage did not service any
FHA-insured mortgage loans. Long Beach Mortgage also did not originate any
FHA-insured mortgage loans during 2000.
75
78
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6: OTHER ASSETS
Other assets consisted of the following:
DECEMBER 31,
----------------
2000 1999
------ ------
(IN MILLIONS)
Premises and equipment...................................... $1,568 $1,559
Investment in bank owned life insurance..................... 1,456 417
Accrued interest receivable................................. 1,157 980
Foreclosed assets........................................... 153 199
Other assets................................................ 1,659 1,275
------ ------
$5,993 $4,430
====== ======
Depreciation expense for 2000, 1999 and 1998 was $246 million, $207 million
and $146 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 $197 million, $191 million and $183 million in 2000, 1999
and 1998.
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
--------- ------------- --------- -------------
(IN MILLIONS)
Year ending December 31,
2001................................ $ 159 $23 $ 8 $2
2002................................ 148 21 8 --
2003................................ 133 15 8 --
2004................................ 117 2 8 --
2005................................ 95 -- 6 --
Thereafter............................ 376 -- 48 --
------ --- --- --
$1,028 $61 $86 $2
====== === === ==
76
79
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7: DEPOSITS
Deposits consisted of the following:
DECEMBER 31,
------------------
2000 1999
------- -------
(IN MILLIONS)
Checking accounts:
Interest bearing.......................................... $ 5,925 $ 6,215
Noninterest bearing....................................... 8,575 7,275
------- -------
14,500 13,490
Savings accounts............................................ 5,436 5,654
MMDAs....................................................... 25,220 24,394
Time deposit accounts:
Due within one year....................................... 30,678 32,202
After one but within two years............................ 2,633 4,100
After two but within three years.......................... 440 764
After three but within four years......................... 254 210
After four but within five years.......................... 380 264
After five years.......................................... 33 52
------- -------
34,418 37,592
------- -------
$79,574 $81,130
======= =======
Accrued but unpaid interest on deposits included in other liabilities
totaled $79 million and $68 million at December 31, 2000 and 1999.
NOTE 8: FEDERAL FUNDS PURCHASED AND COMMERCIAL PAPER
Federal funds purchased and commercial paper consisted of the following:
DECEMBER 31,
--------------
2000 1999
------ ----
(IN MILLIONS)
Federal funds purchased..................................... $3,156 $525
Commercial paper............................................ 959 342
------ ----
$4,115 $867
====== ====
Federal funds purchased had remaining average maturities of 33 days at
December 31, 2000. Commercial paper had remaining average maturities of 17 days
at December 31, 2000.
77
80
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial data pertaining to federal funds purchased and commercial paper
were as follows:
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
FEDERAL FUNDS PURCHASED
Weighted average interest rate, end of year.............. 6.57% 5.74% 5.25%
Weighted average interest rate during the year........... 6.52 5.11 5.60
Average balance of federal funds purchased............... $2,856 $2,001 $3,758
Maximum amount outstanding at any month end.............. 6,668 2,836 6,070
COMMERCIAL PAPER
Weighted average interest rate, end of year.............. 6.95% 6.20% 5.63%
Weighted average interest rate during the year........... 6.51 5.54 5.65
Average balance of commercial paper...................... $ 586 $ 420 $ 364
Maximum amount outstanding at any month end.............. 959 651 516
NOTE 9: REPURCHASE AGREEMENTS
Scheduled maturities of repurchase agreements were as follows:
DECEMBER 31,
------------------
2000 1999
------- -------
(IN MILLIONS)
Due within 30 days.......................................... $ 7,125 $ 4,450
After 30 but within 90 days................................. 5,549 10,543
After 90 but within 180 days................................ 5,926 4,539
After 180 days but within one year.......................... 1,550 1,656
After one year.............................................. 9,606 8,975
------- -------
$29,756 $30,163
======= =======
Financial data pertaining to repurchase agreements were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
Weighted average interest rate, end of year........... 6.61% 5.81% 5.38%
Weighted average interest rate during the year........ 6.33 5.36 5.67
Average balance of repurchase agreements.............. $28,491 $26,082 $17,695
Maximum amount outstanding at any month end........... 30,726 30,163 18,340
At December 31, 2000, interest rate floors and caps embedded in repurchase
agreements were as follows:
WEIGHTED WEIGHTED
AVERAGE INDEX AT AVERAGE
NOTIONAL AMOUNT STRIKE INDEX DECEMBER 31, 2000 LIFE(1)
--------------------- -------- ------------- ----------------- -----------
(DOLLARS IN MILLIONS) (IN MONTHS)
Floors(2)............ $13,200 5.99% 3 month LIBOR 6.40% 49
Caps(3).............. 680 7.62 3 month LIBOR 6.40 43
- ---------------
(1) Weighted average life is computed from the contractual start date to the
maturity date.
(2) Contractual start dates range from December 20, 2000 to July 17, 2003.
(3) Contractual start dates range from May 26, 2000 to January 15, 2001.
78
81
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10: ADVANCES FROM FHLBS
As members of the FHLBs of San Francisco and Seattle, WMBFA, WMB, and
WMBfsb maintain credit lines that are percentages of their total regulatory
assets, subject to collateralization requirements. Advances are collateralized
in the aggregate by all stock owned of the FHLBs, by deposits with the FHLBs,
and by certain mortgages or deeds of trust and securities of the U.S. Government
and its agencies. The maximum amount of credit, which the FHLBs will extend for
purposes other than meeting withdrawals, varies from time to time in accordance
with their policies. The interest rates charged by the FHLBs for advances vary
depending upon maturity, the cost of funds in the individual FHLB and the
purpose of the borrowing.
Scheduled maturities of advances from FHLBs were as follows:
DECEMBER 31,
----------------------------------------------------
2000 1999
------------------------ ------------------------
RANGES OF RANGES OF
INTEREST INTEREST
AMOUNT RATES AMOUNT RATES
------- ------------- ------- -------------
(DOLLARS IN MILLIONS)
Due within one year.............. $42,596 5.74% - 6.72% $34,107 4.50% - 9.34%
After one but within two years... 12,051 3.50 - 6.73 18,444 5.21 - 6.40
After two but within three
years.......................... 1,627 5.19 - 6.94 2,960 3.50 - 6.55
After three but within four
years.......................... 1,225 6.33 - 8.65 200 5.76 - 6.03
After four but within five
years.......................... 175 5.39 - 7.45 1,225 6.05 - 8.65
After five years................. 181 2.80 - 8.57 158 2.80 - 8.57
------- -------
$57,855 $57,094
======= =======
Financial data pertaining to advances from FHLBs were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
Weighted average interest rate, end of year........... 6.57% 5.92% 5.35%
Weighted average interest rate during the year........ 6.33 5.37 5.65
Average balance of advances from FHLBs................ $56,979 $47,008 $30,110
Maximum amount outstanding at any month end........... 59,325 57,094 39,749
At December 31, 2000, interest rate caps embedded in advances from FHLBs
were as follows:
WEIGHTED WEIGHTED
AVERAGE INDEX AT AVERAGE
NOTIONAL AMOUNT STRIKE INDEX DECEMBER 31, 2000 LIFE(1)
--------------- -------- ------------- ----------------- -----------
(DOLLARS IN MILLIONS) (IN MONTHS)
$71(2) 7.25% 3 month LIBOR 6.40% 37
- ---------------
(1) Weighted average life is computed from the contractual start date to the
maturity date.
(2) Contractual start date is July 20, 2000.
79
82
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11: OTHER BORROWINGS
Other borrowings consisted of the following:
DECEMBER 31,
---------------------------------------------------
2000 1999
---------------------- -------------------------
INTEREST INTEREST
AMOUNT RATE(S) AMOUNT RATE(S)
------ ------------ ------ ---------------
(DOLLARS IN MILLIONS)
Senior notes:
Due in 2000....................... $ -- --% $ 552 6.13% - 7.65%
Due in 2001....................... 650 5.88 - 7.75 649 5.88 - 7.75
Due in 2002....................... 764 6.00 - 8.60 763 6.00 - 8.60
Due in 2003....................... 150 6.50 149 6.50
Due in 2004....................... 200 5.85 200 5.85
Due in 2005....................... 598 7.25 - 8.25 149 7.25
Due in 2006....................... 1,238 7.25 - 7.50 1,236 7.25 - 7.50
Subordinated notes:
Due in 2000....................... -- -- 325 5.23 - 6.15
Due in 2001....................... 150 9.88 150 9.88
Due in 2004....................... 548 6.50 - 7.88 548 6.50 - 7.88
Due in 2006....................... 99 6.63 99 6.63
Due in 2010....................... 495 8.25 -- --
Trust preferred securities(1):
Due in 2025....................... 100 8.25 99 8.25
Due in 2026....................... 149 8.36 149 8.36
Due in 2027....................... 694 8.21 - 8.38 693 8.21 - 8.38
Asset transfers accounted for as
secured financing due in 2001..... 4,044 6.67 -- --
Other............................... 51 4.20 - 15.21 442 4.20 - 15.20
------ ------
$9,930 $6,203
====== ======
- ---------------
(1) Inclusive of capitalized issuance costs.
The Company is the guarantor of four separate issues of trust preferred
securities, as discussed below:
On May 31, 1997, Washington Mutual Capital I ("WMC I"), a wholly-owned
subsidiary of Washington Mutual, issued $400 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 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 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 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 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
80
83
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
connection with the capital trust's issuance of these securities, Ahmanson
issued to the capital trust $155 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 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 million principal amount of its
8.25% subordinated deferrable interest notes, due 2025 (the "subordinated notes
due 2025"). The sole assets of GWFT I are and will be the subordinated notes due
2025.
Obligations of Great Western and Ahmanson under the above described
arrangements were assumed by the Company. Washington Mutual's obligations under
these and related agreements, taken together, constitute a full and
unconditional guarantee by the Company of the obligations specified above.
The Company has a right to defer payment of interest on the debentures at
any time or from time to time for a period not exceeding the extension period
described in the table below with respect to each deferral period, provided that
no extension period may extend beyond the stated maturity of the respective
debentures. Distributions paid on the securities are recorded as interest
expense in the Consolidated Statements of Income.
Financial data pertaining to trust preferred securities were as follows:
DECEMBER 31, 2000 AND 1999
-------------------------------------------------------------------------------------------
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 MILLIONS)
Great Western Financial Trust $100 $ 3 $103 2025 8.250% 20 consecutive On or after
I........................... quarters December 31,
2000
Great Western Financial Trust 300 9 309 2027 8.206 Ten consecutive On or after
II.......................... semi-annual February 1,
periods 2007
Washington Mutual Capital I... 400 12 412 2027 8.375 Ten consecutive On or after
semi-annual June 1, 2007
periods
Ahmanson Trust I.............. 150 5 155 2026 8.360 Ten consecutive On or after
semi-annual December 1,
periods 2026
---- --- ----
$950 $29 $979 8.306
==== === ====
At December 31, 2000 and 1999, the Company had unused lines of credit
totaling $243 million and $793 million with the Federal Reserve Bank discount
window.
At December 31, 2000, the Company had two revolving credit facilities with
The Chase Manhattan Bank as administrative agent: a $1.20 billion 364-day
facility and a $600 million four-year facility, which provide back-up for the
Company's commercial paper programs. At December 31, 2000, the Company had $841
million available under these facilities, which represents the total amount of
the two revolving credit facilities, net of the amount of commercial paper
outstanding at year-end.
As of December 31, 2000, the Company had entered into eight letters of
credit with the FHLBs of San Francisco and Seattle, for a total of $248 million.
These letters of credit provide credit enhancement on housing revenue bonds and
certain of the Company's private issue MBS.
81
84
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12: INCOME TAXES
Income taxes (benefits) from continuing operations consisted of the
following:
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(IN MILLIONS)
Current:
Federal................................................ $ 524 $ 443 $ 866
State and local........................................ 99 34 183
Payments in lieu....................................... 34 34 35
------ ------ ------
657 511 1,084
Deferred:
Federal................................................ 435 397 (325)
State and local........................................ 42 156 (43)
Payments in lieu....................................... (49) 3 166
------ ------ ------
428 556 (202)
------ ------ ------
$1,085 $1,067 $ 882
====== ====== ======
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, 2000. Due to the remote nature of events that 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 Ahmanson for 1994 through September
1998, Washington Mutual for 1994 through 1997, and 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. Accordingly, the Company has not recorded any
benefit with respect to this issue.
As of December 31, 2000, the Company's accrual for income taxes payable is
sufficient to cover any expected liabilities arising from these examinations.
82
85
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,
------------------
2000 1999
------- -------
(IN MILLIONS)
Deferred tax assets:
Net operating loss carryforwards.......................... $ 452 $ 504
Provision for loan and lease losses and foreclosed
assets................................................. 367 371
Unrealized losses on securities........................... 31 437
Merger costs.............................................. 164 172
Compensation differences.................................. 65 68
State and local taxes..................................... 30 70
Other..................................................... 80 56
------- -------
1,189 1,678
Payments in lieu............................................ (185) (139)
Valuation allowance......................................... (164) (239)
------- -------
Deferred tax asset, net of payments in lieu and valuation
allowance................................................. 840 1,300
Deferred tax liabilities:
Loan fees................................................. (479) (460)
Stock dividends from FHLBs................................ (500) (436)
Basis difference on premises and equipment................ (147) (147)
Gain on loan sales........................................ (320) (81)
Other..................................................... (218) (157)
------- -------
(1,664) (1,281)
------- -------
Net deferred tax (liability) asset.......................... $ (824) $ 19
======= =======
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 $164 million
at December 31, 2000 and $239 million at December 31, 1999 relate primarily to
net operating losses that are limited by Internal Revenue Code Section 382 as a
result of the acquisition of Keystone Holdings, Inc. (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 the Company'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. These
amounts are considered payments in lieu. 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.
83
86
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, 2000
------------------
FEDERAL STATE
-------- ------
(IN MILLIONS)
Expiring in:
2001...................................................... $ -- $402
2002...................................................... -- 536
2004...................................................... 316 --
2005...................................................... 668 --
2008...................................................... 16 --
------ ----
$1,000 $938
====== ====
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,
---------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
AS A AS A AS A
PERCENTAGE PERCENTAGE PERCENTAGE
OF PRETAX OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------ ---------- ------ ---------- ------ ----------
(DOLLARS IN MILLIONS)
Income taxes computed at statutory rates.... $1,044 35.00% $1,009 35.00% $829 35.00%
Tax effect of:
State income tax, net of federal tax
benefit................................. 93 3.12 122 4.24 95 4.03
Payments in lieu.......................... 46 1.54 34 1.18 202 8.51
Valuation allowance change from prior
year.................................... (75) (2.51) (45) (1.57) (258) (10.90)
Other..................................... (23) (0.78) (53) (1.85) 14 0.61
------ ------ ----
Income taxes included in the
Consolidated Statements of
Income........................... $1,085 36.37 $1,067 37.00 $882 37.25
====== ====== ====
NOTE 13: 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 American Savings Bank, F.A. ("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 loan
facilities to customers. Washington Mutual holds collateral to support letters
of credit when deemed necessary. At December 31, 2000, outstanding letters of
credit issued by Washington Mutual totaled $327 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.
84
87
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14: STOCKHOLDERS' EQUITY
Common Stock
Changes in common stock issued and outstanding were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(NUMBER OF SHARES IN THOUSANDS)
Shares issued and outstanding, beginning of year...... 571,589 593,409 589,790
Common stock issued through employee stock plans...... 3,097 3,386 4,158
Common stock issued for acquisitions.................. -- 6,338 --
Common stock repurchased and retired.................. (34,830) (31,544) (539)
------- ------- -------
Shares issued and outstanding, end of year............ 539,856 571,589 593,409
======= ======= =======
Cash dividends paid per share were as follows(1):
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Fourth quarter........................................... $0.300 $0.260 $0.220
Third quarter............................................ 0.290 0.250 0.207
Second quarter........................................... 0.280 0.240 0.200
First quarter............................................ 0.270 0.230 0.193
- ---------------
(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 $70 million in 1998. No common
cash dividends were paid by acquired companies in 1999 or 2000.
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.
In October 2000, the 1994 Shareholder Rights Plan expired in accordance
with its terms. On December 19, 2000, the Company's Board of Directors adopted a
new Shareholder Rights Plan and declared a dividend of one right for each
outstanding share of common stock to shareholders of record on January 4, 2001.
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.
Preferred Stock
There was no preferred stock (10,000,000 shares authorized) issued or
outstanding at December 31, 2000 and 1999. The preferred stock previously
outstanding was redeemed in 1998.
85
88
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15: EARNINGS PER SHARE
Information used to calculate EPS was as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net income
Net income................................... $ 1,899 $ 1,817 $ 1,487
Accumulated dividends on preferred stock..... -- -- (16)
------------ ------------ ------------
Net income attributable to common stock...... 1,899 1,817 1,471
Accumulated dividends on convertible
preferred stock............................ -- -- 9
------------ ------------ ------------
Diluted net income attributable to common
stock...................................... $ 1,899 $ 1,817 $ 1,480
============ ============ ============
Weighted average shares
Basic weighted average number of common
shares outstanding......................... 534,174,655 572,652,277 564,420,541
Dilutive effect of potential common shares... 2,288,408 1,900,754 14,141,764
------------ ------------ ------------
Diluted weighted average number of common
shares outstanding......................... 536,463,063 574,553,031 578,562,305
============ ============ ============
Net income per common share
Basic........................................ $ 3.55 $ 3.17 $ 2.61
Diluted...................................... 3.54 3.16 2.56
Options to purchase an average of 7,182,297 shares of common stock at an
average exercise price of $36.21 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,
Inc. (the parent of ASB) 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, Inc. 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, 2000, the contingencies were not met, and
therefore, the contingently issuable shares were not included in the above
computations.
On February 9, 2001, Washington Mutual, Inc. issued approximately
42,600,000 shares of common stock for the acquisition of Bank United Corp.
86
89
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16: COMPREHENSIVE INCOME
The following table presents the components of other comprehensive income
and the related tax effect allocated to each component:
BEFORE TAX NET OF
AMOUNT TAX EFFECT TAX
---------- ---------- ----------
(IN MILLIONS)
1998
Unrealized gain on securities:
Net unrealized gains on securities available for
sale arising during the year.................. $ 85 $ 32 $ 53
Reclassification of net gains on securities
available for sale included in net income..... (18) (7) (11)
Amortization of market adjustment for MBS
transferred in 1997 from available-for-sale to
held-to-maturity.............................. (27) (10) (17)
------- ----- -----
Net unrealized gains............................... 40 15 25
------- ----- -----
Minimum pension liability adjustment............... (22) (9) (13)
------- ----- -----
Other comprehensive income......................... $ 18 $ 6 $ 12
======= ===== =====
1999
Unrealized loss on securities:
Net unrealized losses on securities available for
sale arising during the year.................. $(1,243) $(493) $(750)
Reclassification of net losses on securities
available for sale included in net income..... 9 3 6
Amortization of market adjustment for MBS
transferred in 1997 from available-for-sale to
held-to-maturity.............................. (17) (7) (10)
------- ----- -----
Net unrealized losses.............................. (1,251) (497) (754)
------- ----- -----
Minimum pension liability adjustment............... 10 4 6
------- ----- -----
Other comprehensive loss........................... $(1,241) $(493) $(748)
======= ===== =====
2000
Unrealized gain on securities:
Net unrealized gains on securities available for
sale arising during the year.................. $ 1,004 $ 384 $ 620
Reclassification of net losses on securities
available for sale included in net income..... 2 1 1
Amortization of market adjustment for MBS
transferred in 1997 from available-for-sale to
held-to-maturity.............................. (8) (3) (5)
------- ----- -----
Net unrealized gains............................... 998 382 616
------- ----- -----
Minimum pension liability adjustment............... 6 2 4
------- ----- -----
Other comprehensive income......................... $ 1,004 $ 384 $ 620
======= ===== =====
87
90
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17: REGULATORY CAPITAL REQUIREMENTS
WMI is not subject to regulatory capital requirements. However, each of its
subsidiary depository institutions is subject to various regulatory capital
requirements. WMB is subject to FDIC capital requirements while WMBFA and WMBfsb
are subject to Office of Thrift Supervision ("OTS") capital requirements.
The capital adequacy requirements are quantitative measures established by
regulation that require WMBFA, WMB and WMBfsb to maintain minimum amounts and
ratios of capital. The FDIC requires WMB to maintain minimum ratios of Tier 1
and total capital to risk-weighted assets as well as Tier 1 capital to average
assets. The OTS requires WMBFA and WMBfsb to maintain minimum ratios of Tier 1
and total capital to risk-weighted assets, as well as Tier 1 capital to adjusted
total assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") created a statutory framework that increased the importance of
meeting applicable capital requirements. FDICIA established five capital
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. An institution's
category depends upon where its capital levels are in relation to relevant
capital measures, which include a risk-based capital measure, a leverage ratio
capital measure, and certain other factors. The federal banking agencies
(including the FDIC and the OTS) have adopted regulations that implement this
statutory framework. Under these regulations, an institution is treated as well
capitalized if its ratio of total capital to risk-weighted assets is 10.00% or
more, its ratio of Tier 1 capital to risk-weighted assets is 6.00% or more, its
leverage capital ratio is 5.00% or more and it is not subject to any federal
supervisory order or directive to meet a specific capital level.
Under these same regulations, an institution is treated as adequately
capitalized if its ratio of total capital to risk-weighted assets is 8.00% or
more, its ratio of Tier 1 capital to risk-weighted assets is 4.00% or more, its
leverage capital ratio is 4.00% or more, and it is not subject to any federal
supervisory order or directive to meet a specific capital level.
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 institutions 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.
88
91
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, 2000
---------------------------------------------------------
MINIMUM TO BE
CATEGORIZED AS WELL
REGULATORY CAPITALIZED UNDER
MINIMUM PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
--------------- --------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- -------- -------
(DOLLARS IN MILLIONS)
WMBFA
Total capital to risk-weighted assets... $9,763 11.36% $6,873 8.00% $8,591 10.00%
Tier 1 capital to risk-weighted
assets................................ 8,942 10.40 3,436 4.00 5,155 6.00
Tier 1 capital to adjusted total assets
(leverage)............................ 8,942 5.81 6,158 4.00(1) 7,698 5.00
Tangible capital to tangible assets..... 8,941 5.81 2,309 1.50 n.a. n.a.
WMB
Total capital to risk-weighted assets... 2,241 11.24 1,595 8.00 1,994 10.00
Tier 1 capital to risk-weighted
assets................................ 2,023 10.15 798 4.00 1,196 6.00
Tier 1 capital to average assets
(leverage)............................ 2,023 5.83 1,388 4.00(1) 1,735 5.00
WMBfsb
Total capital to risk-weighted assets... 83 12.10 55 8.00 69 10.00
Tier 1 capital to risk-weighted
assets................................ 76 11.14 27 4.00 41 6.00
Tier 1 capital to adjusted total assets
(leverage)............................ 76 6.97 44 4.00(1) 55 5.00
Tangible capital to tangible assets..... 76 6.97 16 1.50 n.a. n.a.
- ---------------
(1) The minimum leverage ratio guideline is 3% for financial institutions that
do not anticipate significant growth and that have well-diversified risk,
excellent asset quality, high liquidity, good earnings, effective management
and monitoring of market risk and, in general, are considered top-rate,
strong banking organizations.
89
92
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 MILLIONS)
WMBFA
Total capital to risk-weighted assets... $9,065 11.15% $6,503 8.00% $8,129 10.00%
Tier 1 capital to risk-weighted
assets................................ 8,091 9.95 3,252 4.00 4,877 6.00
Tier 1 capital to adjusted total assets
(leverage)............................ 8,091 5.53 5,856 4.00(1) 7,320 5.00
Tangible capital to tangible assets..... 8,089 5.53 2,196 1.50 n.a. n.a.
WMB
Total capital to risk-weighted assets... 2,103 10.90 1,543 8.00 1,929 10.00
Tier 1 capital to risk-weighted
assets................................ 1,963 10.18 772 4.00 1,157 6.00
Tier 1 capital to average assets
(leverage)............................ 1,963 5.67 1,385 4.00(1) 1,732 5.00
WMBfsb
Total capital to risk-weighted assets... 77 15.21 40 8.00 51 10.00
Tier 1 capital to risk-weighted
assets................................ 70 13.94 20 4.00 30 6.00
Tier 1 capital to adjusted total assets
(leverage)............................ 70 8.58 33 4.00(1) 41 5.00
Tangible capital to tangible assets..... 70 8.58 12 1.50 n.a. n.a.
- ---------------
(1) The minimum leverage ratio guideline is 3% for financial institutions that
do not anticipate significant growth and that have well-diversified risk,
excellent asset quality, high liquidity, good earnings, effective management
and monitoring of market risk and, in general, are considered top-rate,
strong banking organizations.
Management believes that WMBFA, WMB and WMBfsb individually met all capital
adequacy requirements, as of December 31, 2000, 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
90
93
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determine banks' interest rate risk on a case-by-case basis, and would not adopt
a standardized measure or establish an explicit minimum capital charge for
interest rate risk.
NOTE 18: 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 30 million
common shares. During 2000, the Board of Directors approved an increase in the
maximum number of common shares available for grant from 18 million to 30
million.
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 vested 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
10,045,033 and 9,128,792 shares of common stock were fully exercisable at
December 31, 2000 and 1999.
91
94
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock options granted, exercised, or forfeited were as follows:
WEIGHTED WEIGHTED AVERAGE
AVERAGE FAIR VALUE PER
NUMBER OF EXERCISE PRICE OF SHARE OF OPTIONS
OPTION SHARES OPTION SHARES AT DATE OF GRANT
------------- ----------------- ----------------
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 acquisitions.......... 1,592,783 13.42
----------
Balance, December 31, 1999...................... 17,014,698 28.94
Granted in 2000................................. 5,374,185 48.30 15.27
Exercised in 2000............................... (1,710,503) 31.64
Forfeited in 2000............................... (725,275) 32.91
----------
Balance, December 31, 2000...................... 19,953,105 34.95
==========
Financial data pertaining to outstanding stock options were as follows:
DECEMBER 31, 2000
- ---------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE NUMBER OF EXERCISE PRICE
RANGES OF NUMBER OF REMAINING EXERCISE PRICE OF EXERCISABLE OF EXERCISABLE
EXERCISE PRICES OPTION SHARES YEARS OPTION SHARES OPTION SHARES OPTION SHARES
- --------------- ------------- --------- ----------------- ------------------ ------------------
$ 5.63 - $10.97 455,493 2.7 $ 9.80 455,493 $ 9.80
11.52 - 20.66 1,567,956 4.5 15.57 1,567,956 15.57
21.00 - 30.49 5,143,503 8.2 25.52 2,613,126 25.60
31.44 - 35.58 4,507,681 6.3 33.07 2,157,111 33.29
36.07 - 40.56 1,690,624 3.1 39.29 1,659,752 39.30
41.13 - 44.92 1,584,424 7.0 44.85 1,564,234 44.89
45.54 - 50.13 5,003,424 10.0 50.11 27,361 47.90
---------- ----------
19,953,105 34.95 10,045,033 30.30
========== ==========
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
92
95
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,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
Net income attributable to common stock
Basic:
As reported.................................... $1,899 $1,817 $1,471
Pro forma...................................... 1,880 1,803 1,446
Diluted:
As reported.................................... 1,899 1,817 1,480
Pro forma...................................... 1,880 1,803 1,455
Net income per common share
Basic:
As reported.................................... $ 3.55 $ 3.17 $ 2.61
Pro forma...................................... 3.52 3.15 2.56
Diluted:
As reported.................................... 3.54 3.16 2.56
Pro forma...................................... 3.50 3.14 2.52
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:
YEAR ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
-------------- -------------- -------
Annual dividend yield..................... 2.37% - 2.57% 2.24% - 2.45% 2.68%
Expected volatility....................... 30.46 - 34.26 27.51 - 31.61 27.71
Risk free interest rate................... 5.11 - 6.71 4.54 - 6.29 5.44
Granted options expected life............. 5 - 7.25 years 4 - 5 years 5 years
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 684,490, 474,893 and 203,904 shares of restricted stock in 2000,
1999 and 1998. 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, 2000 was $23
million.
The total compensation expense recognized for the restricted shares was $21
million, $9 million and $9 million in 2000, 1999 and 1998. Restricted shares
accrue dividends. All canceled or forfeited shares become available for future
grants.
NOTE 19: EMPLOYEE BENEFITS PROGRAMS
Pension Plan
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
93
96
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's policy to fund the Pension Plan on a current basis to the extent
deductible under federal income tax regulations. The Pension Plan's assets
consist primarily of mutual funds and equity securities.
Changes in the projected benefit obligation were as follows:
YEAR ENDED
DECEMBER 31,
--------------
2000 1999
----- -----
(IN MILLIONS)
Benefit obligation, beginning of year....................... $604 $681
Actuarial (gain) loss....................................... 67 (61)
Interest cost............................................... 51 45
Service cost................................................ 26 31
Benefits paid............................................... (53) (64)
Amendments.................................................. 16 (28)
---- ----
Benefit obligation, end of year............................. $711 $604
==== ====
Changes in Pension Plan assets were as follows:
YEAR ENDED
DECEMBER 31,
--------------
2000 1999
----- -----
(IN MILLIONS)
Fair value of assets, beginning of year..................... $786 $756
Actual return on assets..................................... (14) 94
Benefits paid............................................... (53) (64)
---- ----
Fair value of assets, end of year........................... $719 $786
==== ====
Reconciliations of funded status were as follows:
DECEMBER 31,
--------------
2000 1999
----- -----
(IN MILLIONS)
Funded status............................................... $ 8 $182
Unrecognized net (gain) loss................................ 82 (59)
Unamortized prior service cost.............................. (4) (24)
Remaining unamortized, unrecognized net asset............... (2) (2)
--- ----
Prepaid benefit cost........................................ $84 $ 97
=== ====
Net periodic expense for the Pension Plan was as follows:
YEAR ENDED
DECEMBER 31,
--------------------
2000 1999 1998
---- ---- ----
(IN MILLIONS)
Interest cost............................................... $51 $45 $42
Service cost................................................ 26 31 33
Expected return on assets................................... (61) (62) (62)
Amortization of prior service credit........................ (4) (5) (5)
Recognized net actuarial loss............................... -- 1 --
Curtailment gain............................................ -- (3) --
--- --- ---
Net periodic expense........................................ $12 $ 7 $ 8
=== === ===
94
97
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Weighted average assumptions used in accounting for the Pension Plan were
as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
Assumed discount rate....................................... 7.75% 7.75% 6.75%
Assumed rate of compensation increase....................... 6.00 5.15 4.83
Expected return on assets................................... 8.00 8.56 9.00
Nonqualified Defined Benefit Plans and Other Postretirement Benefit Plans
The Company, as successor to previously acquired companies 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 previously acquired companies 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,
------------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
NONQUALIFIED OTHER NONQUALIFIED OTHER
DEFINED POSTRETIREMENT DEFINED POSTRETIREMENT
BENEFIT PLANS BENEFITS BENEFIT PLANS BENEFITS
------------- -------------- ------------- --------------
(IN MILLIONS)
Benefit obligation, beginning of
year................................. $99 $30 $104 $39
Interest cost.......................... 7 2 7 2
Actuarial (gain) loss.................. 1 (1) (2) (9)
Service cost........................... -- 1 -- 1
Benefits paid.......................... (9) (3) (10) (2)
Curtailment gain....................... -- -- -- (1)
--- --- ---- ---
Benefit obligation, end of year........ $98 $29 $ 99 $30
=== === ==== ===
For measurement of the net periodic cost of other postretirement benefit
plans, a 5.75% annual increase in the medical card trend rate was assumed for
2000 and thereafter. The assumed discount rate was 7.75% for 2000 and 1999, and
6.75% for 1998.
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.
Company contributions to savings plans were $41 million, $39 million and
$36 million in 2000, 1999 and 1998.
95
98
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
NOTE 20: 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, forward sales
contracts, interest rate floors, and purchased puts.
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 gain on sale of loans. As of December 31, 2000 and
1999, the Company had $2.36 billion and $635 million 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 2000, the Company did terminate interest rate exchange agreements and
interest rate cap agreements. However, during 1999, the Company did not
terminate any such agreements.
Scheduled maturities of interest rate exchange agreements were as follows:
DECEMBER 31, 2000
---------------------------------------------------
NOTIONAL RECEIVE PAY CARRYING FAIR
AMOUNT RATE(1) RATE(1) VALUE VALUE
-------- ------- ------- -------- -----
(DOLLARS IN MILLIONS)
Designated against deposits and borrowings:
Due within one year.......................... $ 8,644 6.67% 6.29% $-- $(10)
After one but within two years............... 2,524 6.75 6.59 -- (24)
After two but within three years............. 478 6.36 6.02 -- (2)
After three years............................ 2,252 7.18 6.65 -- 130
------- --- ----
$13,898 6.76 6.39 $-- $ 94
======= === ====
- ---------------
(1) As of December 31, 2000, the notional amount of interest rate exchange
agreements in which the Company paid a fixed rate was $11.01 billion. The
Company paid a variable rate for the remaining interest rate exchange
agreements. The terms of each agreement had specific LIBOR or COFI reset and
index requirements that resulted in different rates for each agreement. The
rate represented the weighted average rate as of the last reset date for
each agreement.
96
99
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
-----------------------------------------------
NOTIONAL RECEIVE PAY CARRYING FAIR
AMOUNT RATE(1) RATE(1) VALUE VALUE
-------- ------- ------- -------- -----
(DOLLARS IN MILLIONS)
Designated against deposits and borrowings:
Due within one year.................................. $ 5,376 6.15% 5.40% $-- $33
After one but within two years....................... 2,756 6.01 5.37 -- 31
After two but within three years..................... 769 6.11 6.21 -- 9
After three years.................................... 1,502 6.59 6.17 -- 5
------- --- ---
$10,403 6.17 5.56 $-- $78
======= === ===
- ---------------
(1) As of December 31, 1999, the Company paid a fixed rate on all of its
interest rate exchange agreements. The terms of each agreement had specific
LIBOR or COFI reset and index requirements that resulted in different rates
for each agreement. The 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, 2000
-------------------------------------------------
SHORT-TERM
NOTIONAL STRIKE RECEIPT CARRYING FAIR
AMOUNT RATE RATE(1) VALUE VALUE
-------- ------ ---------- -------- -----
(DOLLARS IN MILLIONS)
Designated against deposits and borrowings:
Due within one year(2).............................. $7,502 6.01% 6.73% $ 6 $16
After one but within two years(3)................... 380 7.47 6.46 2 --
After two but within three years(4)................. 214 7.86 6.26 1 --
After three years(5)................................ 190 8.14 5.59 2 --
------ --- ---
$8,286 6.17 6.68 $11 $16
====== === ===
- ---------------
(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 $349 million notional amount with a weighted average
ceiling of 6.88%.
(3) Included corridors of $80 million notional amount with a weighted average
ceiling of 9.50%.
(4) Included corridors of $90 million notional amount with a weighted average
ceiling of 9.50%.
(5) Included corridors of $191 million notional amount with a weighted average
ceiling of 9.48%.
DECEMBER 31, 1999
-------------------------------------------------
SHORT-TERM
NOTIONAL STRIKE RECEIPT CARRYING FAIR
AMOUNT RATE RATE(1) VALUE VALUE
-------- ------ ---------- -------- -----
(DOLLARS IN MILLIONS)
Designated against deposits and borrowings:
Due within one year(2).............................. $ 2,640 5.88% 6.08% $ 1 $ 6
After one but within two years(3)................... 7,704 6.01 6.14 33 48
After two but within three years(4)................. 380 7.47 5.81 2 2
After three years(5)................................ 405 7.99 5.13 4 1
------- --- ---
$11,129 6.10 6.08 $40 $57
======= === ===
- ---------------
(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 million notional amount with a weighted
average ceiling of 6.52%.
(3) Included corridors of $349 million notional amount with a weighted average
ceiling of 6.88%.
(4) Included corridors of $80 million notional amount with a weighted average
ceiling of 9.50%.
(5) Included corridors of $281 million notional amount with a weighted average
ceiling of 9.49%.
97
100
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial data pertaining to interest rate exchange agreements were as
follows:
YEAR ENDED DECEMBER 31,
----------------------------
2000 1999 1998
------- ------- ------
(DOLLARS IN MILLIONS)
Weighted average net effective (benefit) cost, end of
year...................................................... (0.37)% (0.61)% 0.54%
Weighted average net effective (benefit) cost during the
year...................................................... (0.33) 0.15 0.37
Monthly average notional amount of interest rate exchange
agreements................................................ $14,340 $ 7,801 $3,042
Maximum notional amount of interest rate exchange agreements
at any month end.......................................... 15,634 10,403 3,824
Net cost included in interest income on available-for-sale
securities................................................ -- 2 2
Net cost included in interest expense on deposits........... 1 4 3
Net (benefit) cost included in interest expense on
borrowings................................................ (48) 6 6
Financial data pertaining to interest rate cap agreements were as follows:
YEAR ENDED DECEMBER 31,
----------------------------
2000 1999 1998
------- ------- ------
(IN MILLIONS)
Monthly average notional amount of interest rate cap
agreements................................................ $ 9,520 $ 7,657 $3,260
Maximum notional amount of interest rate cap agreements at
any month end............................................. 11,129 11,411 3,875
Net cost included in interest income on available-for-sale
securities................................................ -- -- 1
Net cost included in interest expense on deposits........... 2 3 5
Net cost included in interest expense on borrowings......... 27 14 1
Changes in interest rate exchange agreements and interest rate cap
agreements were as follows:
YEAR ENDED DECEMBER 31, 2000
------------------------------
INTEREST RATE INTEREST RATE
EXCHANGE CAP
AGREEMENTS AGREEMENTS
------------- -------------
(IN MILLIONS)
Notional balance, beginning of year......................... $10,403 $11,129
Additions................................................... 9,771 --
Maturities.................................................. (5,476) (2,643)
Terminations................................................ (800) (200)
------- -------
Notional balance, end of year............................... $13,898 $ 8,286
======= =======
NOTE 21: 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.
98
101
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, real estate held for investment,
foreclosed assets and intangible assets. In addition, the value of the servicing
rights for loans sold in which the MSR has not been capitalized was excluded
from the valuation. Deposit intangibles were also excluded from the fair value
estimates. 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.
Assets and liabilities whose carrying amounts approximate fair value
include cash and cash equivalents, available-for-sale securities, investment in
FHLBs, checking accounts, savings accounts and MMDAs, and federal funds
purchased and commercial paper.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument as of December 31, 2000 and 1999:
Cash and cash equivalents -- The carrying amount represented fair value.
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 held for sale -- Fair values were derived from quoted market prices,
internal estimates and pricing of similar instruments.
Loans held in portfolio -- 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.
MSR -- The fair value of MSR was estimated using projected cash flows,
adjusted for the effects of anticipated prepayments, using a market discount
rate. The fair value estimates exclude the value of the servicing rights for
loans sold in which the MSR has not been capitalized.
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 at its par value.
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.
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. The fair value of embedded purchased floors and caps 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.
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.
99
102
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The estimated fair value of the Company's financial instruments was as
follows:
DECEMBER 31,
--------------------------------------------
2000 1999
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN MILLIONS)
FINANCIAL ASSETS:
Held-to-maturity securities................... $ 16,565 $ 16,486 $ 19,401 $ 19,037
Loans held for sale........................... 3,404 3,447 794 794
Loans held in portfolio....................... 118,612 117,689 112,704 112,094
MSR........................................... 1,017 1,125 643 825
FINANCIAL LIABILITIES:
Time deposits................................. 34,418 34,539 37,592 37,398
Repurchase agreements......................... 29,756 29,596 30,163 30,158
Advances from FHLBs........................... 57,855 57,951 57,094 57,065
Trust preferred securities.................... 943 888 941 898
Other borrowings.............................. 8,987 9,070 5,262 5,244
DERIVATIVE FINANCIAL INSTRUMENTS(1):
Interest rate exchange agreements:
Designated against deposits and
borrowings............................... -- 94 -- 78
Interest rate cap agreements:
Designated against deposits and
borrowings............................... 11 16 40 57
OTHER OFF-BALANCE SHEET INSTRUMENTS:
Forward sales contracts designated against
loans...................................... -- 8 -- 8
Off-balance sheet loan commitments............ -- 2 -- (3)
- ---------------
(1) See Note 20: Interest Rate Risk Management.
100
103
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 22: 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,
--------------------------
2000 1999 1998
------ ------ ------
(IN MILLIONS)
INTEREST INCOME
Notes receivable from subsidiaries.......................... $ 34 $ 12 $ 36
Other interest income....................................... 1 14 2
------ ------ ------
Total interest income..................................... 35 26 38
INTEREST EXPENSE
Notes payable to subsidiaries............................... 49 49 55
Other borrowings............................................ 163 106 85
------ ------ ------
Total interest expense.................................... 212 155 140
------ ------ ------
Net interest expense...................................... (177) (129) (102)
Provision for loan and lease losses......................... 1 -- --
------ ------ ------
Net interest expense after provision...................... (178) (129) (102)
NONINTEREST INCOME
Other income................................................ 5 10 2
------ ------ ------
Total noninterest income.................................. 5 10 2
NONINTEREST EXPENSE
Compensation and benefits................................... 28 16 27
Transaction-related expense................................. -- 12 58
Other expense............................................... 34 19 13
------ ------ ------
Total noninterest expense................................. 62 47 98
------ ------ ------
Net loss before income tax benefit, dividends from
subsidiaries and equity in undistributed income of
subsidiaries........................................... (235) (166) (198)
Income tax benefit.......................................... 105 65 86
Dividends from subsidiaries................................. 784 1,140 849
Equity in undistributed earnings of subsidiaries............ 1,245 778 750
------ ------ ------
NET INCOME.................................................. $1,899 $1,817 $1,487
====== ====== ======
101
104
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
------------------
2000 1999
------- -------
(IN MILLIONS)
ASSETS
Cash and cash equivalents................................... $ 388 $ 284
Available-for-sale securities............................... 6 5
Loans....................................................... 5 333
Accounts and notes receivable from subsidiaries............. 363 132
Investment in subsidiaries.................................. 12,479 10,614
Other assets................................................ 280 198
------- -------
Total assets.............................................. $13,521 $11,566
======= =======
LIABILITIES
Notes payable to subsidiaries............................... $ 567 $ 566
Other borrowings............................................ 2,400 1,804
Other liabilities........................................... 388 143
------- -------
Total liabilities......................................... 3,355 2,513
STOCKHOLDERS' EQUITY........................................ 10,166 9,053
------- -------
Total liabilities and stockholders' equity................ $13,521 $11,566
======= =======
102
105
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $1,899 $1,817 $1,487
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for loan and lease losses.................... 1 -- --
Increase in income taxes receivable.................... 65 80 15
Equity in undistributed earnings of subsidiaries....... (1,245) (778) (742)
(Increase) decrease in other assets.................... (147) 117 (85)
(Decrease) increase in other liabilities............... (134) 466 31
------ ------ ------
Net cash provided by operating activities............ 439 1,702 706
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments on available-for-sale securities......... -- 4 1
Origination of loans, net of principal payments............. 327 (287) (32)
(Increase) decrease in notes receivable from subsidiaries... (232) 82 (45)
Investment in subsidiaries.................................. (404) (2,052) (892)
Dividends received from subsidiaries........................ 784 1,140 849
------ ------ ------
Net cash provided (used) by investing activities..... 475 (1,113) (119)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable to subsidiaries................. 1 (108) (4)
Proceeds from (repayments of) other borrowings.............. 596 846 (189)
Issuance of common stock through employee stock plans....... 88 84 81
Issuance of common stock to acquire Long Beach Mortgage..... -- 207 --
Redemption of preferred stock............................... -- -- (313)
Repurchase of common stock, net............................. (869) (1,082) (24)
Cash dividends paid......................................... (626) (570) (456)
------ ------ ------
Net cash used by financing activities................ (810) (623) (905)
------ ------ ------
Increase (decrease) in cash and cash equivalents..... 104 (34) (318)
Cash and cash equivalents, beginning of year......... 284 318 636
------ ------ ------
Cash and cash equivalents, end of year............... $ 388 $ 284 $ 318
====== ====== ======
103
106
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 23: OPERATING SEGMENTS
Effective January 1, 2001, the Company realigned its business segments.
Separately, the Company is in the process of enhancing its segment reporting
process methodologies and allocations and will be reporting segment results
under these new methodologies and as realigned beginning with the first quarter
of 2001.
For the historical periods presented in these financial statements, the
Company managed its business along five major operating segments: Consumer
Banking, Mortgage Banking, Commercial Banking, Financial Services, and Consumer
Finance. Although the Company did not consider the Treasury group to be an
operating segment, it managed investments and interest rate risk. Generally, MBS
that the Company purchased were allocated to Treasury.
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.
Consumer banking includes deposit products (with their related fee income)
and all consumer loan products originated through its 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. The principal activities conducted by mortgage banking are the
origination of SFR and residential construction loans, and all loan servicing
activities. 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.
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.
104
107
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial highlights by line of business were as follows:
YEAR ENDED DECEMBER 31, 2000
------------------------------------------------------------------------------
CONSUMER MORTGAGE COMMERCIAL FINANCIAL CONSUMER TREASURY/
BANKING BANKING BANKING SERVICES FINANCE OTHER TOTAL
-------- -------- ---------- --------- -------- --------- --------
(IN MILLIONS)
Condensed income statement
Net interest income after provision for loan
and lease losses............................. $ 2,501 $ 741 $ 362 $ -- $ 354 $ 168 $ 4,126
Noninterest income............................. 1,036 431 34 371 141 (29) 1,984
Noninterest expense............................ 1,852 575 128 240 274 57 3,126
Income taxes................................... 606 215 98 49 88 29 1,085
------- ------- ------- ---- ------- ------- --------
Net income..................................... $ 1,079 $ 382 $ 170 $ 82 $ 133 $ 53 $ 1,899
======= ======= ======= ==== ======= ======= ========
DECEMBER 31, 2000
------------------------------------------------------------------------------
Total assets................................... $81,973 $54,984 $21,563 $131 $10,250 $25,815 $194,716
======= ======= ======= ==== ======= ======= ========
YEAR ENDED DECEMBER 31, 1999
------------------------------------------------------------------------------
CONSUMER MORTGAGE COMMERCIAL FINANCIAL CONSUMER TREASURY/
BANKING BANKING BANKING SERVICES FINANCE OTHER TOTAL
-------- -------- ---------- --------- -------- --------- --------
(IN MILLIONS)
Condensed income statement
Net interest income after provision for loan
and lease losses............................. $ 2,495 $ 796 $ 376 $ 1 $ 255 $ 362 $ 4,285
Noninterest income............................. 817 259 30 317 56 30 1,509
Transaction-related expense.................... 69 19 1 3 -- 4 96
Noninterest expense............................ 1,788 532 104 200 164 26 2,814
Income taxes................................... 535 185 111 45 58 133 1,067
------- ------- ------- ---- ------ ------- --------
Net income..................................... $ 920 $ 319 $ 190 $ 70 $ 89 $ 229 $ 1,817
======= ======= ======= ==== ====== ======= ========
DECEMBER 31, 1999
------------------------------------------------------------------------------
Total assets................................... $83,713 $46,373 $20,180 $124 $7,371 $28,753 $186,514
======= ======= ======= ==== ====== ======= ========
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------------------------
CONSUMER MORTGAGE COMMERCIAL FINANCIAL CONSUMER TREASURY/
BANKING BANKING BANKING SERVICES FINANCE OTHER TOTAL
-------- -------- ---------- --------- -------- --------- --------
(IN MILLIONS)
Condensed income statement
Net interest income after provision for loan
and lease losses............................. $ 2,557 $ 833 $ 368 $ 2 $ 203 $ 167 $ 4,130
Noninterest income............................. 626 326 24 230 10 291 1,507
Transaction-related expense.................... 366 122 6 7 -- 7 508
Noninterest expense............................ 1,734 534 101 165 127 99 2,760
Income taxes................................... 401 186 106 25 34 130 882
------- ------- ------- ---- ------ ------- --------
Net income..................................... $ 682 $ 317 $ 179 $ 35 $ 52 $ 222 $ 1,487
======= ======= ======= ==== ====== ======= ========
DECEMBER 31, 1998
------------------------------------------------------------------------------
Total assets................................... $88,369 $36,105 $19,540 $115 $2,764 $18,600 $165,493
======= ======= ======= ==== ====== ======= ========
105
108
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
SUPPLEMENTARY DATA
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Results of operations on a quarterly basis were as follows:
YEAR ENDED DECEMBER 31, 2000
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Interest income......................................... $3,304 $3,362 $3,485 $3,632
Interest expense........................................ 2,220 2,270 2,451 2,531
------ ------ ------ ------
Net interest income..................................... 1,084 1,092 1,034 1,101
Provision for loan and lease losses..................... 41 44 47 53
Noninterest income...................................... 423 500 511 550
Noninterest expense..................................... 744 775 785 822
------ ------ ------ ------
Income before income taxes.............................. 722 773 713 776
Income taxes............................................ 264 282 260 279
------ ------ ------ ------
Net income.............................................. $ 458 $ 491 $ 453 $ 497
====== ====== ====== ======
Net income attributable to common stock................. $ 458 $ 491 $ 453 $ 497
====== ====== ====== ======
Net income per common share:
Basic................................................. $ 0.83 $ 0.92 $ 0.86 $ 0.94
Diluted............................................... 0.83 0.92 0.86 0.94
YEAR ENDED DECEMBER 31, 1999
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Interest income......................................... $2,854 $2,960 $3,059 $3,189
Interest expense........................................ 1,727 1,811 1,939 2,133
------ ------ ------ ------
Net interest income..................................... 1,127 1,149 1,120 1,056
Provision for loan and lease losses..................... 41 43 41 42
Noninterest income...................................... 352 364 370 423
Noninterest expense..................................... 730 749 700 731
------ ------ ------ ------
Income before income taxes.............................. 708 721 749 706
Income taxes............................................ 264 268 279 256
------ ------ ------ ------
Net income.............................................. $ 444 $ 453 $ 470 $ 450
====== ====== ====== ======
Net income attributable to common stock................. $ 444 $ 453 $ 470 $ 450
====== ====== ====== ======
Net income per common share:
Basic................................................. $ 0.76 $ 0.78 $ 0.83 $ 0.80
Diluted............................................... 0.76 0.78 0.83 0.80
106
109
WASHINGTON MUTUAL, INC.
INDEX OF EXHIBITS
DESCRIPTION
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Restated Articles of Incorporation of the Company, as amended.
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999. File No.
0-25188).
3.2 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Washington Mutual, Inc. creating a class of
preferred stock, Series RP (filed herewith).
3.3 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Washington Mutual, Inc. creating a class of
preferred stock, Series H (filed herewith).
3.4 Bylaws of the Company, as amended (Incorporated by reference 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 December 20, 2000 between Registration and
Mellon Investor Services, L.L.C. (Incorporated by reference from
the Company's Current Report on Form 8-K filed January 8, 2001.
File No. 0-25188).
4.2 The registrant will furnish upon request copies of all instruments
defining the rights of holders of long-term debt instruments of
registrant and its consolidated subsidiaries.
10.1 Intentionally omitted.
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 the
Company, Keystone Holdings Partners, L.P., the Federal Deposit
Insurance Corporation as manager of the FSLIC Resolution Fund, and
The Bank of New York (Incorporated by reference to the Company's
Current Report on Form 8-K dated January 3, 1997. File No.
0-25188).
10.4 364-Day Credit Agreement by and among the Company, Washington
Mutual Finance Corporation, The Chase Manhattan Bank as
Administrative Agent and certain lenders (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000. File No. 0-25188).
10.5 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
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999. File No.
0-25188).
110
Management Contracts and Compensatory Plans and Arrangements (Exhibits
10.6-10.73)
10.6 Washington Mutual 1994 Stock Option Plan As Amended and Restated
as of February 15, 2000 (filed herewith).
10.6.1 First Amendment to the Washington Mutual 1994 Stock Option Plan
Amended and Restated as of February 15, 2000 (filed herewith).
10.7 Washington Mutual Restricted Stock Plan As Amended and Restated
as of January 18, 2000 (filed herewith).
10.7.1 Amendment to the Washington Mutual Restricted Stock Plan As
Amended and Restated as of January 18, 2000 (filed herewith).
10.7.2 Amendment to the Washington Mutual Restricted Stock Plan As
Amended and Restated as of January 18, 2000 (filed herewith).
10.8* Washington Mutual Employees' Stock Purchase Program.
10.8.1 Amendment to the Washington Mutual Employees' Stock Purchase Plan
(filed herewith).
10.8.2 Amendment to the Washington Mutual Employees' Stock Purchase Plan
(filed herewith).
10.8.3 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).
10.8.4 Third Amendment to the Washington Mutual Employees' Stock
Purchase Program (filed herewith).
10.8.5 Second Amendment to the Washington Mutual Employees' Stock
Purchase Program (filed herewith).
10.9 Washington Mutual, Inc. Retirement Savings and Investment Plan
Amended and Restated Effective September 30, 1998 (filed as an
exhibit to the Company's Current Report on Form 8-K dated December
22, 1998. File No. 0-25188).
10.9.1 Amendment to the Washington Mutual, Inc. Retirement Savings
and Investment Plan Amended and Restated Effective September 30,
1998 (filed herewith).
10.9.2 Amendment to the Washington Mutual, Inc. Retirement Savings and
Investment Plan Amended and Restated Effective September 30,
1998 (filed herewith).
10.9.3 Amendment to the Washington Mutual, Inc. Retirement Savings and
Investment Plan Amended and Restated Effective September 30,
1998 (filed herewith).
10.9.4 Amendment to the Washington Mutual, Inc. Retirement Savings and
Investment Plan Amended and Restated Effective September 30,
1998 (filed herewith).
10.10* Washington Mutual Employee Service Award Plan.
10.11*** Supplemental Employee's Retirement Plan for Salaried Employees of
Washington Mutual.
10.12*** Washington Mutual Supplemental Executive Retirement Accumulation
Plan.
10.13 Washington Mutual, Inc. Cash Balance Pension Plan Amended and
Restated Effective September 30, 1998 (filed herewith).
10.13.1 Amendment to the Washington Mutual, Inc. Cash Balance Pension Plan
Amended and Restated Effective September 30, 1998 (filed
herewith).
10.13.2 Amendment to the Washington Mutual, Inc. Cash Balance Pension Plan
Amended and Restated Effective September 30, 1998 (filed
herewith).
10.13.3 Amendment to the Washington Mutual, Inc. Cash Balance Pension Plan
Amended and Restated Effective September 30, 1998 (filed
herewith).
10.14 Washington Mutual Deferred Compensation Plan for Directors and
Certain Highly Compensated Employees Amended and Restated
Effective January 1, 2000 (filed as an exhibit to the Company's
Registration Statement on Form S-8. File No. 333-87675).
10.15 Washington Mutual Bonus and Incentive Plan for Executive Officers
and Senior Management As Amended and Restated Effective January
1, 1999 (filed herewith).
10.16** Employment Contract of Kerry K. Killinger.
10.17** Employment Contract for Executive Officers.
10.18 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).
10.19 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).
10.19.1 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).
10.19.2 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).
10.19.3 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).
10.20 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).
10.20.1 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
Report on Form 10-K for the year ended December 31, 1994
File No. 001-04075).
10.20.2 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).
10.20.3 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).
2
111
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.21 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).
10.21.1 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).
10.21.2 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).
10.22 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).
10.23 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).
10.23.1 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).
10.24 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).
10.25 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).
10.25.1 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).
10.26 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).
10.27 H.F. Ahmanson & Company 1998 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).
10.28 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).
10.29 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).
3
112
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.29.1 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).
10.29.2 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).
10.30 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).
10.30.1 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).
10.30.2 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).
10.31 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).
10.31.1 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).
10.32 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).
10.32.1 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).
10.33 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).
10.34 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).
10.34.1 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).
10.34.2 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).
10.35 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).
10.36 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).
10.37 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).
4
113
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.37.1 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).
10.37.2 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).
10.38 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).
10.38.1 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).
10.39 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).
10.39.1 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).
10.40 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).
10.41 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).
10.42 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).
10.43 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).
10.44 Long Beach Financial Corporation 1997 Stock Incentive Plan.
(Incorporated by reference to Exhibit 10.6 to the Long Beach
Financial Corporation's Registration Statement on Form S-1,
Commission File No. 333-22013)
12.(a) Computation of Ratios of Earnings to Fixed Charges (filed herewith).
(b) Computation of Ratios of Earnings to Fixed Charges and Preferred
Dividends (filed herewith).
21. List of Subsidiaries of the Registrant (filed herewith).
23. Consent of Deloitte & Touche LLP (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.
5