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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20529
FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED
DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO :
COMMISSION FILE NUMBER 1-14667
WASHINGTON MUTUAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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WASHINGTON 91-1653725
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1201 THIRD AVENUE 98101
SEATTLE, WASHINGTON (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 461-2000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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Common Stock New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. YES X NO _ .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of March 3, 2000:
COMMON STOCK -- 12,444,200,149(1)
(1) Does not include any value attributable to 12,000,000 shares that are held
in escrow and not traded.
The number of shares outstanding of the issuer's classes of common stock as
of March 3, 2000:
COMMON STOCK -- 558,327,194(2)
(2) Includes the 12,000,000 shares held in escrow.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held April 18, 2000, are incorporated by reference into Part
III.
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WASHINGTON MUTUAL, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I...................................................... 1
ITEM 1. BUSINESS.......................................... 1
Overview............................................... 1
Key Strategic Initiatives.............................. 2
Consumer Banking....................................... 3
Mortgage Banking....................................... 4
Commercial Banking..................................... 5
Financial Services..................................... 6
Consumer Finance....................................... 7
Treasury Activities.................................... 7
Asset Quality.......................................... 9
Employees.............................................. 10
Risk Factors........................................... 10
Business Combinations.................................. 11
Taxation............................................... 12
Environmental Regulation............................... 12
Regulation and Supervision............................. 13
Competitive Environment................................ 22
Principal Officers..................................... 23
ITEM 2. PROPERTIES........................................ 24
ITEM 3. LEGAL PROCEEDINGS................................. 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................ 25
PART II..................................................... 25
ITEM 5. MARKET FOR OUR COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS......................................... 25
ITEM 6. SELECTED FINANCIAL DATA........................... 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 29
Overview............................................... 29
Results of Operations.................................. 30
Quarterly Results of Operations........................ 38
Review of Financial Condition.......................... 38
Provision and Reserve for Loan Losses.................. 43
Lines of Business...................................... 47
Asset and Liability Management Strategy................ 49
Liquidity.............................................. 54
Capital Adequacy....................................... 54
Year 2000 Project...................................... 55
Accounting Developments Not Yet Adopted................ 55
Tax Contingency........................................ 56
Goodwill Litigation.................................... 57
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................ 59
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....... 63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................... 63
PART III.................................................... 63
PART IV..................................................... 63
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.................................... 63
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PART I
ITEM 1. BUSINESS
OVERVIEW
With a history dating back to 1889, Washington Mutual, Inc. is a financial
services company committed to serving consumers and small to mid-sized
businesses. At December 31, 1999, we had deposits of $81.13 billion and
stockholders' equity of $9.05 billion. Based on our consolidated assets of
$186.51 billion at December 31, 1999, we were the largest savings institution
and the ninth largest banking company in the United States.
We conduct our business operations through our subsidiaries. Our principal
banking subsidiaries are Washington Mutual Bank, FA ("WMBFA"), Washington Mutual
Bank ("WMB") and Washington Mutual Bank fsb ("WMBfsb"). Our other principal
subsidiaries are Washington Mutual Finance Corporation, Long Beach Mortgage
Company and WM Financial Services, Inc.
Our assets have increased approximately 762% in the last four years. A
substantial portion of our growth has been through acquisitions. In December
1996, we acquired the parent of American Savings Bank (the "Keystone
Transaction"), which gave us our first depository institution in California. In
July 1997, we acquired Great Western Financial Corporation and in October 1998,
we acquired H. F. Ahmanson & Co., the parent of Home Savings of America. In
February 1998, H.F. Ahmanson had acquired Coast Savings Financial, Inc. During
1999, we completed the integration of Home Savings into our company. As part of
this integration, we consolidated 162 consumer financial centers in California
into neighboring offices.
In October 1999, we acquired Long Beach Financial Corporation, the parent
of Long Beach Mortgage. Long Beach Mortgage is a specialty mortgage finance
company that originates, purchases, sells and services specialty mortgage
finance loans. Specialty mortgage finance loans are loans to borrowers who
generally would not qualify for a loan from our banking subsidiaries due to the
borrower's credit history, high debt-to-income ratios or other factors. Long
Beach Mortgage originates its loans primarily through a nationwide network of
approximately 12,500 independent loan brokers. Long Beach Mortgage has retained
its brand name and is operating with its previous management team as a separate
subsidiary of our company.
As a result of the acquisitions described above, our company has been
transformed into a national financial services company. Although we operate
principally in California, Washington, Oregon, Florida, Texas and Utah, we have
physical operations in 40 states. Through our subsidiaries, we engage in the
following business activities:
- Consumer Banking
- Mortgage Banking
- Commercial Banking
- Financial Services
- Consumer Finance
Our principal business offices are located at 1201 Third Avenue, Seattle,
Washington 98101 and our telephone number is (206) 461-2000. When we refer to
"we" or "Washington Mutual" or the "Company" in this Form 10-K, we mean
Washington Mutual, Inc., as well as its consolidated subsidiaries. When we refer
to WMI, we mean Washington Mutual, Inc. exclusively.
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KEY STRATEGIC INITIATIVES
We have established performance goals for the period from 2000 through 2004
that are somewhat different from our goals for the prior five-year period. Our
goals for the next five years are to:
- remix the balance sheet;
- diversify revenue sources;
- reduce interest rate risk;
- operate more efficiently;
- actively manage credit risk; and
- employ capital strategies that effectively balance returns and risk.
We intend to remix our balance sheet by decreasing the percentage of
single-family residential ("SFR") mortgage loans and mortgage-backed securities
("MBS") on our balance sheet from approximately 83% to between 60-65% of assets
and to increase the percentage of commercial business and commercial real estate
loans, consumer loans and specialty mortgage finance loans. We further intend to
decrease the percentage of certificates of deposits in our deposit base and to
increase the percentage of core checking and savings deposits. We believe that
we will improve our net interest margin if we are successful with these
strategies.
Our goal is to diversify revenue sources through continued growth of
noninterest income, primarily fees derived from our consumer banking products
and our financial services businesses, and through increased mortgage banking
income and servicing fees from increased loan originations and the
securitization and sale of a substantial portion of those loans.
We intend to reduce our sensitivity to interest rate changes through a
combination of a remix of our balance sheet and growth in noninterest income.
Our asset remix is intended to reduce the percentage of fixed-rate and
medium-term SFR loans and MBS and increase the amount of commercial business
loans and shorter-term loans. We also plan to remix our liabilities by
increasing our core checking and savings deposits. Our goal of increasing the
amount of fee income and mortgage banking revenue will also reduce our reliance
on net interest income and decrease earnings volatility.
Our goal is an operating efficiency ratio of less than 45%. We intend to
achieve this goal by streamlining our processes and procedures, deploying
technology solutions to improve productivity, leveraging our infrastructure to
support revenue growth and offering accessible, low cost customer transaction
channels.
The change in the composition of our assets will increase the credit risk
to which we are exposed. We believe that our loan loss reserve will increase,
but our goal is that nonperforming assets remain below 1% of assets.
Our capital strategy will focus on return on equity and growth of earnings
per share rather than on asset growth. Our goal is a return on common equity of
at least 20% per year and growth in earnings per share of at least 13% per year.
As part of our strategy, we intend to increase the amount of higher-yielding
assets. We will continue to use share repurchases at appropriate prices to
manage our capital. We will strive to achieve a ratio of common equity to assets
of greater than 5% and a ratio of capital to risk-weighted assets (computed in
accordance with the methodology used by the Federal Reserve Board to measure the
capital of bank holding companies) of greater than 11%.
This section contains forward-looking statements, which are not historical
facts and pertain to our future operating results. These forward-looking
statements are within the meaning of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond our control. In addition, these forward-looking
statements are subject to assumptions with respect to future business strategies
and decisions that are subject to change. Actual results may differ materially
from the results discussed in these forward-looking statements for the reasons,
among others, discussed under the heading "Business-Risk Factors" included in
this Form 10-K.
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CONSUMER BANKING
Our Consumer Banking Group offers a comprehensive line of retail financial
products and services to individuals and small businesses. We provide service to
4.6 million households through multiple delivery channels that include over
1,000 traditional financial centers, both free-standing and in-store, and over
1,400 automated teller machines located in eight states. We also offer our
customers the convenience of 24-hour telephone and internet banking services.
Our Consumer Banking Group's strategy is based on acquiring and building
profitable relationships with customers through an attractive array of product
offerings, convenient service options and quality service. Since 1995, we have
actively promoted "Free Checking," which we believe is a powerful tool in
attracting new customers who may utilize fee-based services and increase the
number and balance of the accounts they maintain with us.
A primary focus of our Consumer Banking Group in 1999 was the integration
of the Home Savings financial centers. As part of this integration, the deposit
and lending systems were converted and 162 financial centers were consolidated
into other financial centers due to overlapping service areas. Equally important
was the implementation of our consumer banking strategy in former Home Savings
financial centers and the continuation of our strategy in former Great Western
and American Savings financial centers.
Our Consumer Banking Group offers the following loan products:
- second mortgage loans for purposes unrelated to the property securing the
loan and for a variety of purposes related to the property, including its
renovation or remodeling;
- manufactured housing loans;
- purchase money loans for automobiles, pleasure boats and recreational
vehicles;
- student loans;
- loans secured by deposit accounts;
- secured and unsecured loans made under our line of credit or term loan
programs; and
- small business lines of credit (up to $100,000).
In addition to being an important part of our orientation toward consumer
financial services, consumer loans provide greater net interest income due to
their generally higher yields. The size of our consumer loan portfolio has grown
in recent years as we have begun to introduce these products into California,
Florida and Texas.
Consumer loans generally are secured loans. Our decision to make a consumer
loan is based on an evaluation of the collateral and the borrower's
creditworthiness, including such factors as income, other indebtedness and
credit history. Lines of credit are subject to our periodic review. If a
borrower's financial circumstances change, then we may revise or cancel the
borrower's line of credit as we deem appropriate. Consumer lending may involve
special risks, including decreases in the value of collateral and transaction
costs associated with realization on the collateral.
Our consumer banking operations also offer various consumer deposit
products, including money market deposit accounts ("MMDAs") and checking
accounts as well as the more traditional savings accounts and time deposit
accounts. The MMDAs generally require higher minimum balances and offer higher
yields than savings accounts. We offer interest-bearing and noninterest-bearing
checking accounts. We assess monthly service charges on interest-bearing
checking accounts, unless the depositor maintains a minimum balance. We assess
no monthly fees on the vast majority of our noninterest-bearing checking
accounts.
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At December 31, 1999, the Consumer Banking Group had $79.47 billion in
deposits as follows:
TYPE OF DEPOSIT AMOUNT
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Time deposit accounts....................................... $37.01 billion
MMDAs and savings accounts.................................. 29.54 billion
Checking accounts........................................... 12.92 billion
Our Consumer Banking Group manages its excess cash from deposits by
investing in the SFR loan portfolio managed by the Mortgage Banking Group.
MORTGAGE BANKING
Our Mortgage Banking Group serves over 1.2 million households in meeting
their residential mortgage financing needs throughout the United States and is
the nation's fifth largest mortgage originator. The Mortgage Banking Group
offers a broad array of SFR mortgage products in 29 states and the District of
Columbia through multiple distribution channels, including the internet.
During 1999, we originated a total of $40.24 billion in SFR mortgages
(excluding SFR construction loans). This was about 3% lower than our 1998
origination levels, as higher interest rates slowed mortgage refinancing
activity. Slower refinance activity affected the entire mortgage market in 1999,
as total SFR originations in the United States were approximately 11% lower in
1999 than in 1998. The slower pace of refinancing activity also reduced the
volume of loans that we securitized and sold, to $8.96 billion in 1999 from
$18.24 billion in 1998. At December 31, 1999, we serviced a total of $158.88
billion in SFR loans, of which $48.64 billion were SFR loans serviced for
others.
First mortgage loan products offered through our principal banking
subsidiaries include permanent home financing as well as loans for the
construction of single-family homes. Permanent loans made available to consumers
include conventional adjustable-rate mortgage ("ARM") loans and conventional,
FHA-insured, and VA-guaranteed fixed-rate mortgage loans. All loan products are
offered with a variety of maturities and amortization schedules.
We generally securitize a majority of our originated fixed-rate SFR loans
and sell the securities to third party investors. We generally retain the
servicing rights on the loans underlying these securities. We recognize mortgage
banking income on the sale of the securities.
We generally retain originated ARM loans in our portfolio. From time to
time, we securitize these loans and retain them in our investment portfolio to
support liquidity and other corporate objectives. During 1999, we created four
series of real estate mortgage investment conduit ("REMIC") securities and
retained $9.57 billion of these securities. We also securitized $4.77 billion of
loans into agency MBS which we retained in our portfolio.
Beginning in 1995, we securitized loans with Fannie Mae and Freddie Mac
under programs in which they have recourse against us as the servicer of the
loans ("Recourse MBS"). These securitizations primarily involve ARMs. They
generally are less costly and sometimes require less documentation than
securitizations without recourse. We generally can sell these Recourse MBS in
the secondary market or use them to collateralize borrowings and to meet
regulatory liquidity requirements. We have retained the majority of Recourse MBS
in our portfolio. The remainder were sold to third parties. We establish a
recourse liability to cover the estimated loss on these obligations.
In September 1999, we entered into a strategic alliance with Fannie Mae,
under which most of the sales and securitizations of our fixed-rate conforming
mortgage loans will be to Fannie Mae. We will use our own underwriting system to
originate the loans. In addition, our agreement provides that we will work
closely with Fannie Mae in sharing credit risk management and to develop
additional products in the future.
The primary ARM products that we offer are indexed to the 12-month average
of the average annual yields on actively traded United States Treasury
securities adjusted to a constant maturity of one year ("MTA"). Under our
current programs, a borrower may choose among loans that have interim payment
caps
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or interim interest rate caps. Our loans with payment caps typically have
monthly rate adjustments with initial start rates fixed for one-, three-, six-,
or twelve-months. These loans offer our borrowers payment flexibility not
offered in other loan products, which has made this our most popular
home-financing product. The loans feature four payment options, including a
minimum payment based on the start rate, a payment that covers the full interest
due, a payment that ensures full amortization over the term of the loan, and a
payment that amortizes the loan over 15 years. These loans typically have
payments that cannot change annually by more than a contractual percentage,
usually 7.5%. In addition, we offer loans with initial start rates of one-,
three-, or five-years and annual rate adjustments thereafter. The annual rate
adjustments are usually limited to 2% and the payments are always re-amortized
to the original maturity of the loan. We often offer a "teaser" rate which means
the rate for the first two to three months of the loan is below market rates.
Our mortgage products are made available to the consumer through various
channels of distribution, which include retail home loan centers, wholesale home
loan centers, financial centers and the internet. In 1999, our 176 retail home
loan centers accounted for 43% of SFR originations, our 22 wholesale home loan
centers accounted for 48% of SFR originations and our consumer bank financial
centers accounted for 9% of SFR originations. In September 1999, we began to
originate loans directly through our web site, www.wamumortgage.com. Internet
originations are supported by our call center in Fullerton, California. In
January 2000, we announced an agreement to acquire Alta Residential Mortgage
Trust ("Alta") and the introduction of our correspondent distribution channel,
which will be responsible for the acquisition of loans on a flow basis from
other originators. In 1999, we acquired $347.4 million in correspondent product,
primarily from Alta.
All loans originated are subject to the same nondiscriminatory underwriting
standards. All loans are subject to underwriting review and approval by various
levels of our personnel, depending on the size and characteristics of the loan.
We require title insurance on all first liens on real property securing loans.
We also require our borrowers to maintain property and casualty insurance in an
amount at least equal to the total of our loan amount plus all prior liens on
the property or the replacement cost of the property, whichever is less. For
loans acquired from correspondents, we perform re-underwriting and appraisal
review of the loans purchased.
We finance two different categories of SFR construction loans. We make
custom construction loans to the intended occupant of a house to finance the
house's construction. We typically combine construction phase financing with
permanent financing of the completed home. In 1999, we originated $977.5 million
in custom construction loans.
We also make builder construction loans to borrowers who are in the
business of building homes for resale. Each builder loan is made on a
property-by-property basis and generally matures 12 to 18 months from
origination. Proper consideration is given to the higher risk inherent in these
transactions as each loan is underwritten. We made substantially all of our 1999
SFR builder construction loans in Washington, Oregon, Utah and California. Total
builder construction loan originations were $1.03 billion for 1999.
COMMERCIAL BANKING
Our Commercial Banking Group comprises two primary business lines:
commercial banking, operating under the brand names of WM Business Bank and
Western Bank; and commercial real estate lending, operating under the Washington
Mutual brand.
We offer a full range of commercial banking products and services to small
to mid-sized businesses and individuals through 74 Western Bank offices in the
Northwest and seven WM Business Bank offices in California. Commercial business
loans are typically either unsecured, or secured by business, real estate,
and/or personal assets, depending on the borrower's financial capacity and
company performance. For 1999, Western Bank and WM Business Bank average loans
grew by $405.8 million and average deposits increased by $240.9 million from
1998. At December 31, 1999, total deposits in Western Bank and WM Business Bank
were $1.47 billion, of which 39% were demand accounts. At the same date we had
$1.25 billion in commercial business loans.
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In December 1999, we entered into a strategic alliance with Franchise
Finance Corporation of America and certain of its affiliates ("FFCA") for the
sale and purchase of commercial loans. FFCA specializes in making commercial
loans to franchisees of some of the country's leading fast food restaurants,
convenience stores and automotive after-care shops. Under the terms of the
alliance, we will purchase loans originated by FFCA. We expect to retain these
loans in our portfolio. The alliance will be for a three-year term, with two
one-year renewal options. We anticipate that we will purchase $4-5 billion in
loans during the three-year period. We will perform re-underwriting and
replacement cost review of the loans purchased.
We offer commercial real estate loans to property owners and developers
through 17 Washington Mutual Commercial Real Estate offices in Washington,
Oregon, Utah, and California. Adjustable- and fixed-rate term loans for
multi-family properties represented 96% of the $2.29 billion in originations for
1999 with the balance in commercial construction and other commercial property
types. These loans typically involve large loan balances concentrated with
single borrowers or groups of related borrowers. In addition, the payment
experience on loans secured by income-producing properties usually depends on
the successful operation of the real estate project that secures the loan and
thus may be subject to adverse conditions in the real estate market or in the
economy, particularly the interest rate environment. Commercial real estate
values tend to be cyclical and, while commercial real estate values trended
upward in many areas of the country in 1999, we carefully monitor the commercial
real estate environment to determine the level of our activity in this area.
In all commercial real estate lending, location, marketability and overall
attractiveness of the project are considered. Current underwriting guidelines
for commercial real estate loans require us to perform an economic analysis of
each property with regard to the annual revenue and expenses, debt service
coverage and fair value to determine the maximum loan amount. Before we make a
commercial real estate loan, the borrower must obtain the approval of various
levels of our personnel, depending on the size and characteristics of the loan.
At December 31, 1999, commercial real estate loans totaled $18.24 billion
of which $15.26 billion were apartments and $2.98 billion were other real estate
property types. Approximately 85% of total commercial real estate loans were
secured by real property in California.
FINANCIAL SERVICES
Our Financial Services Group consists of three lines of business: (1) WM
Financial Services, Inc. ("WMFS"), a licensed broker-dealer, (2) investment
advisory and distribution services for the WM Group of Funds, and (3) Washington
Mutual Insurance Services, Inc., a full-service insurance agency. All three
business activities are key drivers of our fee income and leverage the Consumer
Banking Group's distribution system. As part of the continued focus on fee
generation as a greater percentage of the revenue mix, the Financial Services
Group will emphasize greater cross-selling efforts with the Consumer Banking
Group. In addition, WMFS will initiate marketing campaigns in new markets and
seek increased incremental revenue from existing clients.
Through WMFS we offer a wide range of investment products to our clients,
including mutual funds, variable and fixed annuities, and general securities. At
December 31, 1999, WMFS operated in seven states with approximately 500
financial consultants. In addition, our Consumer Bank Annuity Program utilizes
over 800 licensed bank employees who sell fixed annuities to consumer bank
customers.
WM Fund Advisors, Inc. ("WM Advisors"), our registered investment advisor
subsidiary, had assets under management of $7.42 billion at December 31, 1999 in
18 mutual funds, five asset management portfolios, and one variable annuity. The
WM Group of Funds are managed both by WM Advisors and by three subadvisors. The
WM Group of Funds are distributed to financial services clients through the WMFS
network in more than 1,000 consumer bank financial centers. The WM Group of
Funds are also distributed through a network of over 300 independent
broker-dealers. Sales support to these independent broker-dealers will be
significantly expanded in 2000 with a focus on asset allocation.
Washington Mutual Insurance Services is an insurance agency that supports
the mortgage lending process by offering fire, homeowners, flood, earthquake and
other property and casualty insurance products to
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borrowers. In addition, the agency offers mortgage life insurance, accidental
death and dismemberment, term, whole life, and other life insurance products to
existing mortgage and deposit customers.
CONSUMER FINANCE
Our Consumer Finance Group consists of Washington Mutual Finance
Corporation (formerly Aristar, Inc.) and Long Beach Mortgage.
Washington Mutual Finance makes consumer installment loans and real estate
secured loans, and purchases retail installment contracts from local retail
establishments. These consumer credit transactions are primarily for personal,
family or household purposes. Installment loans typically have original terms
ranging from 12 to 360 months. In 1999, originations had an average original
term of 71 months. In the year ended December 31, 1999, 69% of the originations
of all installment loans were unsecured or secured by luxury goods, automobiles
or other personal property and 31% were secured by real estate. We generally
acquire retail installment contracts without recourse to the originating
merchant. These contracts are typically written with original terms of three to
60 months and for 1999 had an average original term of 28 months. At December
31, 1999, Washington Mutual Finance had $3.26 billion of assets.
Washington Mutual Finance currently operates in 25 states, primarily in the
southeastern United States. In 1998 and 1999, Washington Mutual Finance
significantly increased its lending volume in Texas as a result of changes in
state law, which permitted non-purchase money home lending in Texas beginning
January 1, 1998.
Long Beach Mortgage is engaged in the business of originating, purchasing
and selling specialty mortgage finance loans secured by one-to-four family
residences. Long Beach Mortgage originates loans primarily through wholesale
channels of production. Long Beach Mortgage's nationwide network of independent
mortgage loan brokers generates loans in all 50 states. In 1999, Long Beach
Mortgage's single largest producing wholesale broker was responsible for less
than 1% of Long Beach Mortgage's wholesale originations during the year. Long
Beach Mortgage maintains a close working relationship with brokers through its
sales force of approximately 300 account executives located in 69 offices.
Long Beach Mortgage historically has followed a strategy of selling
substantially all of its loan originations in the secondary market. Long Beach
Mortgage typically sells its entire economic interest in the loan except for the
related servicing rights, which it has generally retained. Cash from loan sales
has been used by Long Beach Mortgage to repay borrowings previously made under
its warehouse financing facility.
The loans made by our consumer finance subsidiaries generally have a higher
yield than the SFR loans and consumer loans made by our banking subsidiaries
because these loans tend to have higher risk. Our typical consumer finance
borrower would generally not qualify for a loan from our banking subsidiaries
due to their credit history, high debt-to-income ratio or other factors.
Beginning in 1999, we began to acquire specialty mortgage finance loans in
order to increase the yield on our loan portfolio. The loans are managed by the
Consumer Finance Group. While we screen the portfolios of purchased specialty
mortgage finance loans for unacceptable credit risk, these loans, by their
nature, bear more credit risk than is found in standard mortgage loans that we
originate or in agency MBS. Accordingly, we expect that loan charge offs on
these portfolios will be higher than on our other portfolios.
At December 31, 1999, we had $4.45 billion of specialty mortgage finance
loans in our portfolio.
TREASURY ACTIVITIES
The primary responsibilities of our treasury department are:
- interest rate risk management;
- liquidity management;
- investing activities;
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- borrowing activities; and
- capital management.
Interest Rate Risk Management
Our interest rate risk is managed in accordance with risk measurements and
limits established by the Boards of Directors of WMI and our depository
institutions. The activities undertaken by the treasury department include
entering into interest rate swap, interest rate cap and other derivative
contracts in order to more closely match the duration of our assets and
liabilities. In 1999, we entered into $16.40 billion (notional amount) in
interest rate contracts with 19 counterparties.
Liquidity Management
Our liquidity policy is to maintain sufficient liquidity above daily
funding needs to protect against unforeseen liquidity demands. We manage our
liquidity primarily through the purchase and sale of MBS in the secondary market
and through our borrowing practices. At December 31, 1999, we had $19.82 billion
in unencumbered MBS and $3.04 billion in cash and cash equivalents. We also had
$23.72 billion in additional borrowings primarily through the use of FHLB
advances, collateralized borrowings using unpledged MBS, other wholesale
borrowing sources and deposits of public funds.
Investing Activities
In 1999, we purchased a substantial amount of agency MBS and collateralized
mortgage obligations ("CMOs") in the secondary market. We also purchased private
issue MBS and CMOs, and SFR loan pools in the secondary market. The yield on
these latter assets generally exceeds that of agency MBS because they expose us
to certain risks not inherent in agency MBS, such as credit risk and liquidity
risk.
We have a policy of performing credit reviews on each individual security
or loan pool prior to purchase. Such a review includes consideration of the
collateral characteristics, credit enhancement structures, borrower payment
histories and information concerning loan delinquencies and losses of the
underlying collateral, where applicable. After a purchase is made, similar
information is monitored on a periodic basis. Furthermore, we have established
internal guidelines limiting concentrations of certain risk factors.
Borrowing Activities
Deposits have generally declined in recent years. As a result, we
increasingly have relied on wholesale borrowings to fund our asset growth.
Borrowings include securities sold under agreements to repurchase ("reverse
repurchase agreements"), the purchase of federal funds, proceeds from the
issuance of mortgage-backed bonds or notes, capital notes and other types of
debt securities, and the issuance of commercial paper and funds obtained as
advances from the FHLBs of Seattle, San Francisco, and Topeka. We also have
access to the Federal Reserve Bank's discount window. Under Washington state
law, WMB may borrow up to 30% of its total assets, but reverse repurchase
agreements are not deemed borrowings under such law, and the 30% also does not
apply to borrowings from federal, state or municipal governments, agencies or
instrumentalities, including the FHLBs.
We actively engage in reverse repurchase agreements with authorized
broker-dealers and major customers, selling U.S. Government and corporate debt
securities and MBS under agreements to repurchase them or similar securities at
a future date. At December 31, 1999, we had $30.16 billion of such borrowings.
WMB and WMBfsb are members of the FHLB of Seattle and WMBFA is a member of
the FHLB of San Francisco. As members, each company maintains a credit line that
is a percentage of its total regulatory assets, subject to collateralization
requirements. At year-end 1999, WMBFA, WMB and WMBfsb had credit lines ranging
from 40% to 50% of total assets. At December 31, 1999, advances under these
credit lines totaled $57.09 billion and were secured by mortgage loans, MBS and
U.S. Government and agency securities.
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A member of an FHLB is generally required to purchase stock of the FHLB in
an amount equal to at least 5% of the aggregate outstanding advances made by the
FHLB to the member. At December 31, 1999, we held stock in FHLBs with an
aggregate value of $2.92 billion.
We offer wholesale deposits, primarily time deposit accounts, to political
subdivisions and public agencies. We consider wholesale deposits to be a
borrowing source rather than a customer relationship.
Other funding activities include the issuance of commercial paper by WMI
and Washington Mutual Finance. We have combined commercial paper facilities
backed by credit facilities from a syndicate of banks. We also issue senior
notes at WMI and Washington Mutual Finance.
Capital Management
In 1999, the Board of Directors authorized the repurchase of 56.3 million
of our shares. We repurchased 31.5 million shares during 1999. Approximately 6.3
million of these shares were used for the acquisition of Long Beach Financial
Corporation. The share repurchase program provides management with a means to
utilize excess capital. Our capital management strategy also focuses on the
risk-based capital and leverage ratios of our principal banking subsidiaries.
ASSET QUALITY
We maintain a reserve for credit losses inherent in the loan portfolio. The
reserve is based on an ongoing, quarterly assessment of the probable estimated
losses inherent in the loan portfolio. This quarterly analysis provides a
mechanism for ensuring that estimated losses reasonably approximate actual
observed losses, as any differences between estimated and actual losses will be
immediately addressed in the assessment and resulting loan loss reserve
provision.
In analyzing our existing loan portfolios, we apply specific monitoring
policies and procedures which vary according to the relative risk profile and
other characteristics of the loans within the various portfolios. Our SFR,
second mortgage and other consumer, specialty mortgage finance and commercial
real estate loans under $1 million are relatively homogeneous, and no single
loan is individually significant in terms of its size or potential risk of loss.
Therefore, we review these portfolios by analyzing their performance as a pool
of loans against which we apply a general reserve. Our determination of the
level of the reserve and, correspondingly, the provision for loan losses for
these homogenous loan pools rests upon various judgments and assumptions used to
determine the risk characteristics of the portfolios. These judgments are
supported by analyses that fall into three general categories: (i) current and
historical economic conditions; (ii) a predictive analysis of the performance
and level of loss of the current portfolio; and (iii) prior loan loss
experience. These systematic analyses provide a self-correcting mechanism to
reduce differences between estimated and actual observed losses in the
portfolios.
In contrast, our monitoring process for commercial real estate loans over
$1 million, and the commercial banking and builder construction portfolios
includes a periodic review of individual loans. Loans that are performing but
have shown some signs of weakness are evaluated under more stringent reporting
and oversight policies. We review these loans to assess the ability of the
borrower to continue to service all of its interest and principal obligations
and, as a result, may adjust the risk grade accordingly. If we believe that full
collection of principal and interest is not reasonably assured, the loan will be
appropriately downgraded and, if warranted, placed on nonaccrual status. In that
event, an allocated reserve will be established for it, even though the loan may
be current as to principal and interest payments.
Our primary depository institutions each has a Credit Policy Committee
("CPC") that continuously monitors and reviews loan quality and reports to its
respective Board of Directors. We also have internal staff regularly review the
classification of commercial loans and commercial real estate loans over $1
million and report such classification to the relevant CPC. Such reviews assist
management in establishing the level of the reserves.
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EMPLOYEES
Our number of full-time equivalent employees ("FTE") increased slightly
from 27,957 at December 31, 1998 to 28,509 at December 31, 1999, primarily as a
result of approximately 1,000 employees added in the acquisition of Long Beach
Mortgage. We believe that we have been successful in attracting quality
employees and that our employee relations are good.
RISK FACTORS
THE INTEREST RATE ENVIRONMENT HAS COMPRESSED OUR MARGINS AND ADVERSELY AFFECTED
OUR NET INTEREST INCOME
The rising interest rate environment has increased our funding costs at a
faster rate than the increase in the yield on our loans and investments. This
margin compression has negatively affected our net interest income, which is the
largest component of our earnings. In addition, our deposits have declined and
our short-term borrowings have increased at the same time that we increased the
fixed-rate portion of our MBS portfolio. If these trends continue, we expect
that net interest income will continue to be adversely affected.
The rising interest rate environment may negatively affect the volume of
loan originations. SFR mortgage originations in the United States declined from
1998 to 1999 by approximately 11% due primarily to a rising interest rate
environment. This environment has continued into 2000. If interest rates
continue to rise, we expect that SFR mortgage originations will decline during
2000. If this occurs, our loan originations may be negatively affected.
AS WE CONTINUE TO DIVERSIFY OUR ASSETS, OUR CREDIT QUALITY MAY SUFFER
Our strategic plan calls for us to reduce the percentage of SFR loans and
MBS in our portfolio and to increase the percentage of consumer loans,
commercial business loans and specialty mortgage finance loans. Although these
loans generally provide a higher yield than our SFR loans and MBS, they also
carry more risk, and consequently, there is a risk of greater loan losses in
this part of the portfolio. To the extent that we have to increase our provision
for loan loss as a result of these loans, our earnings could be adversely
affected.
WE FACE COMPETITION FROM OTHER FINANCIAL SERVICES COMPANIES IN ALL OUR MARKETS
We face significant competition both in attracting and retaining deposits
and in making loans in all of our markets. Our most direct competition for
deposits has historically come from other savings institutions, credit unions
and commercial banks doing business in our primary market areas of California,
Washington, Oregon, Florida, Texas and Utah. As with all banking organizations,
we have also experienced competition from nonbanking sources, including mutual
funds and securities brokerage companies. Recent legislation that removes many
of the restrictions on affiliations among banks, insurance companies and
securities firms is expected to increase competition in the financial services
industry. Our most direct competition for loans comes from other savings
institutions, national mortgage companies, insurance companies, commercial banks
and government-sponsored enterprises ("GSEs"), such as Fannie Mae and Freddie
Mac. Competition from such sources could increase in the future and could
adversely affect our ability to achieve our financial goals. In addition,
competitive factors such as the lower cost structure of less regulated
originators and the influence of the GSEs in establishing rates heavily
influence our lending activities.
THE CONCENTRATION OF OPERATIONS IN CALIFORNIA MAY ADVERSELY AFFECT OUR RESULTS
OF OPERATIONS IF THE CALIFORNIA ECONOMY OR REAL ESTATE MARKET DECLINES
At December 31, 1999, 54% of our loan portfolio and 72% of our deposits
were concentrated in California. As a result, our financial condition and
results of operations will be particularly subject to the conditions in the
single-family and multi-family residential markets in California. If economic
conditions generally, or in California in particular, worsen or if the market
for residential real estate declines, we may suffer decreased net income or
losses associated with higher default rates and decreased collateral values on
our existing portfolio. We might also not be able to originate the volume or
type of loans or achieve the level of deposits that we currently anticipate.
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The forward-looking statements regarding our results of operations assume
that the California economy and real estate market will remain healthy. A
worsening of current economic conditions or a significant decline in real estate
values in California could cause actual results to vary materially from the
forward-looking statements.
BUSINESS COMBINATIONS
Most of our growth since 1988 has occurred as a result of banking business
combinations. The following table summarizes our business combinations since
April 1988:
NUMBER OF
ACQUISITION NAME DATE ACQUIRED LOANS DEPOSITS ASSETS LOCATIONS
---------------- -------------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
Columbia Federal Savings Bank and
Shoreline Savings Bank............. April 29, 1988 $ 551.0 $ 555.0 $ 752.6 26
Old Stone Bank(1).................... June 1, 1990 229.5 292.6 294.0 7
Frontier Federal Savings
Association(2)..................... June 30, 1990 -- 95.6 -- 6
Williamsburg Federal Savings
Bank(2)............................ Sept. 14, 1990 -- 4.3 -- 3
Vancouver Federal Savings Bank....... July 31, 1991 200.1 253.4 260.7 7
CrossLand Savings, FSB(2)............ Nov. 8, 1991 -- 185.4 -- 15
Sound Savings and Loan Association... Jan. 1, 1992 16.8 20.5 23.5 1
World Savings and Loan
Association(2)..................... March 6, 1992 -- 37.8 -- 2
Great Northwest Bank................. April 1, 1992 603.2 586.4 710.4 17
Pioneer Savings Bank................. March 1, 1993 624.5 659.5 926.5 17
Pacific First Bank, A Federal Savings
Bank............................... April 9, 1993 3,770.7 3,831.7 5,861.3 129
Far West Federal Savings Bank(2)..... April 15, 1994 -- 42.2 -- 3
Summit Savings Bank.................. Nov. 14, 1994 127.5 169.3 188.1 4
Olympus Bank, a Federal Savings
Bank............................... April 28, 1995 237.8 278.6 391.4 11
Enterprise Bank...................... Aug. 31, 1995 92.8 138.5 153.8 1
Western Bank......................... Jan. 31, 1996 500.8 696.4 776.3 42
Utah Federal Savings Bank............ Nov. 30, 1996 88.9 106.7 122.1 5
American Savings Bank, F.A........... Dec. 20, 1996 14,562.9 12,815.4 21,893.5 224
United Western Financial Group....... Jan. 15, 1997 272.7 299.9 404.1 16
Great Western Financial
Corporation........................ July 1, 1997 32,448.3 27,785.1 43,769.8 1,138
H.F. Ahmanson & Company(3)........... Oct. 1, 1998 33,939.1 33,974.6 50,354.7 436
Industrial Bank...................... Dec. 31, 1998 11.1 26.1 27.2 1
Long Beach Financial Corporation..... Oct. 1, 1999 414.7 -- 821.4 66
Alta Residential Mortgage Trust...... Feb. 1, 2000 156.0 -- 158.1 1
- ---------------
(1) This was an acquisition of selected assets and/or liabilities.
(2) The acquisition was of branches and deposits only. The only assets acquired
were branch facilities or loans collateralized by acquired savings deposits.
(3) Includes loans, deposits and assets acquired by Ahmanson from Coast.
See "Notes to Consolidated Financial Statements -- Note 2: Business
Combinations/Restructuring" for a discussion of accounting treatment for certain
of the acquisitions.
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TAXATION
General
For federal income tax purposes, we report income and expenses using the
accrual method of tax accounting on a calendar year basis. We are subject to
federal income tax, under existing provisions of the Internal Revenue Code of
1986, as amended (the "Code"), in generally the same manner as other
corporations.
Tax Bad Debt Reserve Recapture
The Small Business Job Protection Act of 1996 (the "Job Protection Act")
requires that qualified thrift institutions, such as WMBFA, WMB and WMBfsb,
generally recapture for federal income tax purposes that portion of the balance
of their tax bad debt reserves that exceeds the December 31, 1987 balance, with
certain adjustments. Such recaptured amounts generally are to be taken into
ordinary income ratably over a six-year period beginning in 1997. Accordingly,
we have paid or will have to pay approximately an additional $4.2 million (based
upon current federal income tax rates) in federal income taxes each year of the
six-year period due to the Job Protection Act.
State Income Taxation
The states of California, Oregon, Florida, Texas, Utah and Idaho, as well
as many other states in which we do business, have corporate income taxes, which
are imposed on companies doing business in those states. Our operations in
California, Oregon and Florida result in substantial corporate income tax
expense in those states. As our operations in the remaining states increase, the
corporate income taxes will have an increasing effect on our results of
operations or financial condition.
The state of Washington does not currently have a corporate income tax.
Washington imposes on businesses a business and occupation tax based on a
percentage of gross receipts. Currently, the tax does not apply to interest
received on loans secured by first mortgages or deeds of trust on residential
properties. However, it is possible that legislation might be introduced in the
future that would repeal or limit this exemption.
Assistance Agreement
As a result of the acquisition of American Savings Bank in 1996, we are
parties to an agreement (the "Assistance Agreement") with a predecessor of the
Federal Savings & Loan Insurance Corporation Resolution Fund (the "FRF"). The
Assistance Agreement provides, in part, for the payment to the FRF over time of
75% of most of the federal tax savings and 19.5% of most of the California tax
savings (in each case computed in accordance with specific provisions contained
in the Assistance Agreement) attributable to the utilization of certain tax loss
carryforwards of New West Federal Savings and Loan Association. The provision
for such payments is reflected in the financial statements as "Income Taxes."
See "Notes to Consolidated Financial Statements -- Note 15: Income Taxes."
ENVIRONMENTAL REGULATION
Our business and properties are subject to federal and state laws and
regulations governing environmental matters, including the regulation of
hazardous substances and wastes. For example, under the federal Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and similar
state laws, owners and operators of contaminated properties may be liable for
the costs of cleaning up hazardous substances without regard to whether such
persons actually caused the contamination. Such laws may affect us both as an
owner of properties used in or held for our business, and as a secured lender of
property that is found to contain hazardous substances or wastes.
Further, although CERCLA exempts holders of security interests, the
exemption may not be available if a secured party engages in the management of
its borrower or the collateral property in a manner deemed
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beyond the protection of the secured party's interest. Recent federal and state
legislation, as well as guidance issued by the United States Environmental
Protection Agency and a number of court decisions, have provided assurance to
lenders regarding the activities they may undertake and remain within CERCLA's
secured party exemption. However, these assurances are not absolute and
generally will not protect a lender or fiduciary that participates or otherwise
involves itself in the management of its borrower, particularly in foreclosure
proceedings. As a result, CERCLA and similar state statutes may influence our
decision whether to foreclose on property that is found to be contaminated. Our
general policy is to obtain an environmental assessment prior to foreclosure of
commercial property. The existence of hazardous substances or wastes on such
property may cause us to elect not to foreclose on the property, thereby
limiting, and in some instances precluding, us from realizing on such loans.
REGULATION AND SUPERVISION
References in this section to applicable statutes and regulations are brief
and incomplete summaries only. You should consult the statutes and regulations
for a full understanding of the details of their operation.
General
As a savings and loan holding company, WMI is subject to regulation by the
Office of Thrift Supervision ("OTS"). WMBFA and WMBfsb are federal savings
associations and are subject to extensive regulation and examination by the OTS,
which is their primary federal regulator. Their deposit accounts are insured by
the Federal Deposit Insurance Corporation ("FDIC") through the Savings
Association Insurance Fund (the "SAIF") and, to a lesser extent, in the case of
WMBFA, the Bank Insurance Fund (the "BIF"). The FDIC also has some authority to
regulate WMBFA and WMBfsb. WMB is subject to regulation and supervision by the
Director of Financial Institutions of the State of Washington ("State
Director"). The FDIC insures the deposit accounts of WMB through both the BIF
and the SAIF. The FDIC examines and regulates WMB and other state-chartered
banks that are not members of the Federal Reserve System ("FDIC-regulated
banks"). Federal and state laws and regulations govern, among other things,
investment powers, deposit activities, borrowings, maintenance of guaranty funds
and retained earnings.
PRIMARY
FEDERAL STATE INSURANCE
ENTITY CHARTER REGULATOR REGULATOR FUND(S)
------ ---------- --------- ----------------- ---------
WMI................................ State (WA) OTS n.a. n.a.
WMBFA.............................. Federal OTS None SAIF, BIF
WMB................................ State (WA) FDIC WA State Director BIF, SAIF
WMBfsb............................. Federal OTS None SAIF
We also own a small industrial bank, First Community Industrial Bank
("FCIB"), in Denver, Colorado. FCIB is a state-chartered institution that is
regulated by Colorado state authorities in addition to the FDIC. State law
specifies the investments that this institution may make and the activities in
which it may engage.
State and federal laws govern our consumer finance subsidiaries. Federal
laws apply to various aspects of their lending practices. State laws establish
applicable licensing requirements, provide for periodic examinations and
establish maximum finance charges on credit extensions.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "1999 Act"). The 1999 Act significantly reforms
various aspects of the financial services business. The 1999 Act includes
provisions which:
- establish a new framework under which bank holding companies and, subject
to numerous restrictions, banks can own securities firms, insurance
companies and other financial companies;
- generally subject banks to the same securities regulation as other
providers of securities products;
- prohibit new unitary savings and loan holding companies from engaging in
nonfinancial activities or affiliating with nonfinancial entities;
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- provide consumers with new protections regarding the transfer and use of
their nonpublic personal information by financial institutions; and
- change the FHLB system in numerous ways, which are described in more
detail below.
The provisions in the 1999 Act permitting full affiliations between bank
holding companies or banks and other financial companies do not increase our
authority to affiliate. As a unitary savings and loan holding company, we were
generally permitted to have such affiliations prior to the enactment of the 1999
Act. It is expected, however, that these provisions will benefit our
competitors.
The provisions subjecting banks to securities regulation are not expected
to significantly affect us since primarily all of our securities business is
through securities subsidiaries that are already subject to such regulation.
Some new provisions restricting or regulating ownership of insurance companies
by banks apply also to savings institutions, and may hinder WMBFA, WMBfsb or WMB
from acquiring certain insurance companies.
The prohibition on the ability of new unitary savings and loan holding
companies to engage in nonfinancial activities or affiliating with nonfinancial
entities generally applies only to savings and loan holding companies that were
not, or had not submitted an application to become, savings and loan holding
companies as of May 4, 1999. Since we were treated as a unitary savings and loan
holding company prior to that date, the 1999 Act will not prohibit us from
engaging in nonfinancial activities or acquiring nonfinancial subsidiaries.
However, the 1999 Act generally restricts any nonfinancial entity from acquiring
us unless such nonfinancial entity was, or had submitted an application to
become, a savings and loan holding company as of May 4, 1999.
Management does not believe that complying with the new consumer privacy
provision will have a significant impact on our business.
Changes to the FHLB system in the 1999 Act included a change in the manner
of calculating the Resolution Funding Corporation ("REFCORP") obligations
payable by the FHLBs; a broadening in the purposes for which FHLB advances may
be used; and removal of the requirement that federal savings associations be
FHLB members. Previously, the aggregate amount of the annual REFCORP obligation
paid by all FHLBs was $300 million. The 1999 Act imposes an annual obligation
equal to 20% of the net earnings of the FHLBs. This change will result in a
greater obligation in years where FHLBs have high income levels, thereby
reducing the return on members' investments. The broadening in the purpose for
which FHLB advances can be used could result in higher borrowing costs because
of increased demand for advances.
Holding Company Regulation
WMI is a multiple savings and loan holding company, as defined by federal
law, because it owns three savings associations: WMB, WMBFA and WMBfsb. WMB is a
state-chartered savings bank that has elected to be treated as a savings
association for purposes of the federal savings and loan holding company law.
WMI is regulated as a unitary savings and loan holding company because WMBFA and
WMBfsb are deemed to have been acquired in supervisory transactions. Therefore,
certain restrictions under federal law on the activities and investments of
multiple savings and loan holding companies do not apply to WMI. These
restrictions will apply to WMI if WMB, WMBFA or WMBfsb fails to be a qualified
thrift lender ("QTL"). By this we mean generally that:
- at least 65% of a specified asset base must consist of: loans to small
businesses, credit card loans, educational loans, or certain assets
related to domestic residential real estate, including residential
mortgage loans and mortgage securities, or
- at least 60% of total assets must consist of cash, U.S. Government or
government agency debt or equity securities, fixed assets, or loans
secured by: deposits, real property used for residential, educational,
church, welfare or health purposes, or real property in certain urban
renewal areas.
WMB, WMBFA and WMBfsb are currently in compliance with QTL standards.
Failure to remain a QTL would restrict the ability of WMBFA, WMBfsb or WMB to
obtain advances from the FHLB. Failure to
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remain a QTL also would restrict the ability of WMBFA or WMBfsb to establish new
branches and pay dividends.
The OTS has proposed a regulation that could affect WMI's treatment as a
unitary savings and loan holding company. See "-- Recent and Proposed Federal
Legislation and Regulation."
Acquisitions by Savings and Loan Holding Companies. Neither WMI nor any
other person may acquire control of a savings institution or a savings and loan
holding company without the prior approval of the OTS, or, if the acquiror is an
individual, the OTS' lack of disapproval. In either case, the public must have
an opportunity to comment on the proposed acquisition, and the OTS must complete
an application review. Without prior approval from the OTS, WMI may not acquire
more than 5% of the voting stock of any savings institution that is not one of
its subsidiaries.
Annual Reporting; Examinations. Under the Home Owners' Loan Act ("HOLA")
and OTS regulations WMI, as a savings and loan holding company, must file
periodic reports with the OTS. In addition, WMI must comply with OTS
recordkeeping requirements.
WMI is subject to holding company examination by the OTS. The OTS may take
enforcement action if the activities of a savings and loan holding company
constitute a serious risk to the financial safety, soundness or stability of a
subsidiary savings association.
Commonly Controlled Depository Institutions; Affiliate
Transactions. Depository institutions are "commonly controlled" if they are
controlled by the same holding company or if one depository institution controls
another depository institution. WMI controls WMB, WMBFA, WMBfsb and FCIB. The
FDIC has authority to require FDIC-insured banks and savings associations to
reimburse the FDIC for losses it incurs in connection either with the default of
a "commonly controlled" depository institution or with the FDIC's provision of
assistance to such an institution.
WMB, WMBFA and WMBfsb, as holding company subsidiaries that are depository
institutions, are subject to both qualitative and quantitative limitations on
the transactions they conduct with WMI and its other subsidiaries.
Capital Adequacy. WMI is not subject to any regulatory capital
requirements, but each of its subsidiary depository institutions is subject to
various capital requirements. See "-- Capital Requirements."
Subsidiary Savings Institution Regulation
As federally-chartered savings associations, WMBFA and WMBfsb are subject
to regulation and supervision by the OTS. As a state-chartered savings bank, WMB
is subject to regulation and supervision by the State Director and the FDIC.
Federal Regulation and Supervision of WMBFA and WMBfsb. Federal statutes
empower federal savings institutions, such as WMBFA and WMBfsb, to conduct,
subject to various conditions and limitations, business activities that include
the following:
- accept deposits and pay interest on them;
- make loans on residential and other real estate;
- make a limited amount of consumer loans;
- make a limited amount of commercial loans;
- invest in corporate obligations, government debt securities, and other
securities;
- offer various trust and banking services to their customers; and
- own subsidiaries that invest in real estate and carry on certain other
activities.
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OTS regulations further delineate such institutions' investment and lending
powers. Federal savings institutions generally may not invest in
noninvestment-grade debt securities, nor may they generally make equity
investments, other than investments in service corporations.
State Regulation and Supervision. Washington state statutes empower savings
banks, such as WMB, to conduct, subject to various conditions and limitations,
business activities that include the following:
- accept deposits and pay interest on them;
- make loans on or invest in residential and other real estate;
- make consumer loans;
- make commercial loans;
- invest in corporate obligations, government debt securities, and other
securities;
- offer various trust and banking services to their customers; and
- own subsidiaries that engage in a wide variety of activities.
Under state law, savings banks in Washington also generally have all of the
powers that federal mutual savings banks have under federal laws and
regulations.
Federal Prohibitions on Exercise of State Bank Powers. Federal law
prohibits banks, such as WMB, and their subsidiaries from exercising certain
powers that were granted by state law to make investments or carry on activities
as principal (i.e., for their own account) unless either (i) national banks have
power under federal law to make such investments or carry on such activities, or
(ii) the bank and such investments or activities meet certain requirements
established by federal law and the FDIC.
Federal Restrictions on Transactions with Affiliates. All banks and savings
institutions are subject to affiliate and insider transaction rules applicable
to member banks of the Federal Reserve System set forth in Sections 23A, 23B,
22(g) and 22(h) of the Federal Reserve Act, as well as such additional
limitations as the institution's primary federal regulator may adopt. These
provisions prohibit or limit a savings institution from extending credit to, or
entering into certain transactions with affiliates, principal stockholders,
directors and executive officers of the savings institution and its affiliates.
For these purposes, the term "affiliate" generally includes a holding company
such as WMI and any company under common control with the savings institution.
In addition, the federal law governing unitary savings and loan holding
companies flatly prohibits WMB, WMBFA or WMBfsb from making any loan to any
affiliate whose activity is not permitted for a subsidiary of a bank holding
company. This law also prohibits WMB, WMBFA or WMBfsb from making any equity
investment in any affiliate that is not its subsidiary. We currently are in
material compliance with all these provisions.
Restrictions on Subsidiary Savings Institution Dividends. WMI's principal
sources of funds are cash dividends paid to it by its banking and other
subsidiaries, investment income and borrowings. Federal and state law limits the
ability of a depository institution, such as WMB, WMBFA or WMBfsb, to pay
dividends or make other capital distributions.
Washington state law prohibits WMB from declaring or paying a dividend
greater than its retained earnings if doing so would cause its net worth to be
reduced below (i) the amount required for the protection of preconversion
depositors or (ii) the net worth requirements, if any, imposed by the State
Director.
OTS regulations limit the ability of savings associations such as WMBFA and
WMBfsb to pay dividends and make other capital distributions. Associations (such
as WMBFA and WMBfsb) that are subsidiaries of a savings and loan holding company
must file a notice with the OTS at least 30 days before the proposed declaration
of a dividend or approval of the proposed capital distribution by its board of
directors. In addition, a savings association must obtain prior approval from
the OTS if it fails to meet certain regulatory conditions, if, after giving
effect to the proposed distribution, the association's capital distributions in
a calendar year would exceed its year-to-date net income plus retained net
income for the preceding two years or the
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association would not be at least adequately capitalized or if the distribution
would violate a statute, regulation, regulatory agreement or a regulatory
condition to which the association is subject.
FDIC Insurance
The FDIC insures the deposits of each of our banking subsidiaries to the
applicable maximum in each institution. The FDIC administers two separate
deposit insurance funds, the BIF and the SAIF. The BIF is a deposit insurance
fund for commercial banks and some state-chartered savings banks. The SAIF is a
deposit insurance fund for most savings associations. WMB and FCIB are members
of the BIF, but a portion of WMB's deposits is insured through the SAIF. WMBFA
and WMBfsb are members of the SAIF, but a portion of WMBFA's deposits is insured
through the BIF. WMB and WMBFA are subject to payment of assessments ratably to
both funds.
The FDIC has established a risk-based system for setting deposit insurance
assessments. Under the risk-based assessment system, an institution's insurance
assessments vary according to the level of capital the institution holds and the
degree to which it is the subject of supervisory concern. In addition,
regardless of the potential risk to the insurance fund, federal law requires the
FDIC to establish assessment rates that will maintain each insurance fund's
ratio of reserves to insured deposits at $1.25 per $100. Both funds currently
meet this reserve ratio. During 1999, the assessment rate for both SAIF and BIF
deposits ranged from zero to 0.27% of covered deposits. WMB, WMBFA and FCIB
qualified for the lowest rate on their BIF deposits in 1999, and WMB, WMBFA and
WMBfsb qualified for the lowest rate on their SAIF deposits in 1999.
Accordingly, none of these institutions paid any deposit insurance assessments
in 1999.
In addition to deposit insurance assessments, the FDIC is authorized to
collect assessments against insured deposits to be paid to the Finance
Corporation ("FICO") to service FICO debt incurred in the 1980s. The FICO
assessment rate is adjusted quarterly.
Before 2000, the FICO assessment rate for SAIF-insured deposits was five
times higher than the rate for BIF-insured deposits. The average annual
assessment rate in 1999 was 5.925 cents per $100 of SAIF-insured deposits and
1.185 cents per $100 of BIF-insured deposits. Beginning in 2000, SAIF- and
BIF-insured deposits will be assessed at the same rate by FICO. For the first
quarter of 2000, the annualized rate will be 2.12 cents per $100 of insured
deposits. Because we have substantially more SAIF-insured deposits than
BIF-insured deposits, this change will result in an overall reduction of the
amount of our FICO assessments.
Capital Requirements
Each of our subsidiary depository institutions is subject to various
capital requirements. WMB and FCIB are each subject to FDIC capital
requirements, while WMBFA and WMBfsb are subject to OTS capital requirements.
WMB and FCIB. FDIC regulations recognize two types or tiers of capital:
core ("Tier 1") capital and supplementary ("Tier 2") capital. Tier 1 capital
generally includes common stockholders' equity and noncumulative perpetual
preferred stock less most intangible assets. Tier 2 capital, which is limited to
100% of Tier 1 capital, includes such items as qualifying general loan loss
reserves, cumulative perpetual preferred stock, mandatory convertible debt, term
subordinated debt and limited life preferred stock; however, the amount of term
subordinated debt and intermediate term preferred stock that may be included in
Tier 2 capital is limited to 50% of Tier 1 capital.
The FDIC uses a combination of risk-based guidelines and leverage ratios to
evaluate capital adequacy. Under the risk-based capital guidelines, different
categories of assets are assigned different risk weights, based generally on the
perceived credit risk of the asset. For example, U.S. Treasury Bills and GNMA
securities are placed in the 0% risk category, FNMA and FHLMC securities are
placed in the 20% risk category, loans secured by SFR properties and certain
private issue MBS are generally placed in the 50% risk category, and commercial
real estate and consumer loans are generally placed in the 100% risk category.
These risk weights are multiplied by corresponding asset balances to determine a
risk-weighted asset base. Certain off-balance
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sheet items are added to the risk-weighted asset base by converting them to a
balance sheet equivalent and assigning them the appropriate risk weight in one
of four categories.
Under FDIC guidelines, the ratio of total capital (Tier 1 capital plus Tier
2 capital) to risk-weighted assets must be at least 8.00%, and the ratio of Tier
1 capital to risk-weighted assets must be at least 4.00%.
In addition to the risk-based capital guidelines, the FDIC uses a leverage
ratio to evaluate a bank's capital adequacy. Most banks are required to maintain
a minimum leverage ratio of Tier 1 capital to total assets of 4.00%. The FDIC
retains the right to require a particular institution to maintain a higher
capital level based on the institution's particular risk profile.
The FDIC may consider other factors that may affect a bank's financial
condition. These factors may include interest rate risk exposure, liquidity,
funding and market risks, the quality and level of earnings, concentration of
credit risk, risks arising from nontraditional activities, loan and investment
quality, the effectiveness of loan and investment policies, and management's
ability to monitor and control financial operating risks.
The following table sets forth the current regulatory requirement for
capital ratios for FDIC regulated banks as compared with our capital ratios at
December 31, 1999:
TIER 1 CAPITAL TO TIER 1 CAPITAL TO TOTAL CAPITAL TO
AVERAGE TOTAL ASSETS RISK-WEIGHTED ASSETS RISK-WEIGHTED ASSETS
-------------------- -------------------- --------------------
Regulatory Minimum........... 4.00% 4.00% 8.00%
WMB's Actual................. 5.67 10.18 10.90
FCIB's Actual................ 16.15 20.87 22.13
WMBFA and WMBfsb. The OTS requires savings associations, such as WMBFA and
WMBfsb, to meet each of three separate capital adequacy standards:
- a core capital leverage requirement;
- a tangible capital requirement; and
- a risk-based capital requirement.
For a limited time, core capital may include certain amounts of qualifying
supervisory goodwill.
OTS regulations incorporate a risk-based capital requirement that is
designed to be no less stringent than the capital standard applicable to
national banks. It is modeled in many respects on, but not identical to, the
risk-based capital requirements adopted by the FDIC. Associations whose exposure
to interest-rate risk is deemed to be above normal will be required to deduct a
portion of such exposure in calculating their risk-based capital. The OTS may
establish, on a case-by-case basis, individual minimum capital requirements for
a savings association that vary from the requirements that otherwise would apply
under the OTS capital regulations. The OTS has not established such individual
minimum capital requirements for WMBFA or WMBfsb.
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The following table sets forth the current regulatory requirement for
capital ratios for savings associations as compared with our capital ratios at
December 31, 1999:
TIER 1 CAPITAL TANGIBLE CAPITAL TIER 1 CAPITAL TO TOTAL CAPITAL TO
TO ADJUSTED TO ADJUSTED RISK-WEIGHTED RISK-WEIGHTED
TOTAL ASSETS TOTAL ASSETS ASSETS ASSETS
-------------- ---------------- ----------------- ----------------
Regulatory Minimum............. 3.00%(1) 1.50% 4.00% 8.00%
WMBFA's Actual................. 5.53 5.53 9.95 11.15
WMBfsb's Actual................ 8.58 8.58 13.94 15.21
- ---------------
(1) Most savings associations are required to maintain a minimum leverage ratio
of 4.00%.
FDICIA Requirements and Prompt Corrective Action
FDICIA created a statutory framework that increased the importance of
meeting applicable capital requirements. FDICIA established five capital
categories:
- well-capitalized;
- adequately capitalized;
- undercapitalized;
- significantly undercapitalized; and
- critically undercapitalized.
An institution's category depends upon where its capital levels are in
relation to relevant capital measures, which include a risk-based capital
measure, a leverage ratio capital measure, and certain other factors. The
federal banking agencies (including the FDIC and the OTS) have adopted
regulations that implement this statutory framework. Under these regulations, an
institution is treated as well-capitalized if its ratio of total capital to
risk-weighted assets is 10.00% or more, its ratio of core capital to
risk-weighted assets is 6.00% or more, its ratio of core capital to adjusted
total assets is 5.00% or more, and it is not subject to any federal supervisory
order or directive to meet a specific capital level. In order to be adequately
capitalized, an institution must have a total risk-based capital ratio of not
less than 8.00%, a Tier 1 risk-based capital ratio of not less than 4.00%, and a
leverage ratio of not less than 4.00%. Any institution that is neither well
capitalized nor adequately capitalized will be considered undercapitalized.
Federal law requires that the federal banking agencies risk-based capital
guidelines take into account various factors including interest rate risk,
concentration of credit risk, risks associated with nontraditional activities,
and the actual performance and expected risk of loss of multi-family mortgages.
In 1994, the federal banking agencies jointly revised their capital standards to
specify that concentration of credit and nontraditional activities are among the
factors that the agencies will consider in evaluating capital adequacy. In that
year, the OTS and FDIC amended their risk-based capital standards with respect
to the risk weighting of loans made to finance the purchase or construction of
multi-family residences. The OTS adopted final regulations adding an interest
rate risk component to the risk-based capital requirements for savings
associations (such as WMBFA and WMBfsb), although implementation of the
regulation has been delayed. Management believes that the effect of including
such an interest rate risk component in the calculation of risk-adjusted capital
will not cause WMBFA or WMBfsb to cease to be well-capitalized. In June 1996,
the FDIC and certain other federal banking agencies (not including the OTS)
issued a joint policy statement providing guidance on prudent interest rate risk
management principles. The agencies stated that they would evaluate the banks'
interest rate risk on a case-by-case basis, and would not adopt a standardized
measure or establish an explicit minimum capital charge for interest rate risk.
Other FDIC and OTS Regulations and Examination Authority
The FDIC has adopted regulations to protect the deposit insurance funds and
depositors, including regulations governing the deposit insurance of various
forms of accounts. The FDIC also has adopted
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numerous regulations to protect the safety and soundness of FDIC-regulated
banks. These regulations cover a wide range of subjects including financial
reporting, change in bank control, affiliations with securities firms and
capital requirements. In certain instances, these regulations restrict the
exercise of powers granted by state law.
An FDIC regulation and a joint FDIC/OTS policy statement place a number of
restrictions on the activities of WMB's and WMBFA's securities affiliates and on
such affiliates' transactions with WMB, WMBFA and WMBfsb. These restrictions
include requirements that such affiliates follow practices and procedures to
distinguish them from WMB, WMBFA and WMBfsb and that such affiliates give
customers notice from time to time of their separate corporate status and of the
distinction between insured deposits and uninsured nondeposit products.
FDICIA imposes supervisory standards requiring periodic OTS or FDIC
examinations, independent audits, uniform accounting and management standards,
and prompt corrective action for problem institutions. As a result of FDICIA,
depository institutions and their affiliates are subject to federal standards
governing asset growth, interest rate exposure, executive compensation, and many
other areas of depository institution operations. FDICIA contains numerous other
provisions, including reporting requirements and revised regulatory standards
for, among other things, real estate lending.
The FDIC may sanction any FDIC-regulated bank that does not operate in
accordance with FDIC regulations, policies and directives. Proceedings may be
instituted against any FDIC-regulated bank, or any institution-affiliated party,
such as a trustee, director, officer, employee, agent, or controlling person of
the bank, who engages in unsafe and unsound practices, including violations of
applicable laws and regulations. The FDIC may revalue assets of an institution,
based upon appraisals, and may require the establishment of specific reserves in
amounts equal to the difference between such revaluation and the book value of
the assets. The State Director has similar authority under Washington state law,
and the OTS has similar authority under HOLA. The FDIC has additional authority
to terminate insurance of accounts, after notice and hearing, upon a finding
that the insured institution is or has engaged in any unsafe or unsound practice
that has not been corrected, is operating in an unsafe or unsound condition, or
has violated any applicable law, regulation, rule, or order of or condition
imposed by the FDIC.
Federal law and regulations require that WMBFA and WMBfsb maintain liquid
assets in excess of a specified limit. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity."
Federal regulation of depository institutions is intended for the
protection of depositors (and the BIF and the SAIF), and not for the protection
of stockholders or other creditors. In addition, a provision in the Omnibus
Budget Reconciliation Act of 1993 ("Budget Act") requires that in any
liquidation or other resolution of any FDIC-insured depository institution,
claims for administrative expenses of the receiver and for deposits in U.S.
branches (including claims of the FDIC as subrogee of the insured institution)
shall have priority over the claims of general unsecured creditors.
Federal Reserve Regulation
Under Federal Reserve Board regulations, WMB, WMBFA, WMBfsb and FCIB are
each required to maintain reserves against their transaction accounts (primarily
interest-bearing and noninterest-bearing checking accounts). Because reserves
must generally be maintained in cash or in noninterest-bearing accounts, the
effect of the reserve requirements is to increase an institution's cost of
funds. These regulations generally require that WMB, WMBFA, WMBfsb and FCIB each
maintain reserves against net transaction accounts in the amount of 3% on
amounts of $44.3 million or less, plus 10% on amounts in excess of $44.3
million. Institutions may designate and exempt $5.0 million of certain
reservable liabilities from these reserve requirements. These amounts and
percentages are subject to adjustment by the Federal Reserve Board. A savings
bank, like other depository institutions maintaining reservable accounts, may
borrow from the Federal Reserve Bank discount window, but the Federal Reserve
Board's regulations require the savings bank to exhaust other reasonable
alternative sources before borrowing from the Federal Reserve Bank.
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Numerous other regulations promulgated by the Federal Reserve Board affect
the business operations of our banking subsidiaries. These include regulations
relating to equal credit opportunity, electronic fund transfers, collection of
checks, truth in lending, truth in savings and availability of funds.
Community Reinvestment Act
The Community Reinvestment Act ("CRA") requires financial institutions
regulated by the federal financial supervisory agencies to ascertain and help
meet the credit needs of their delineated communities, including low- to
moderate-income neighborhoods within those communities, while maintaining safe
and sound banking practices. The regulatory agency assigns one of four possible
ratings to an institution's CRA performance and is required to make public an
institution's rating and written evaluation. The four possible ratings of
meeting community credit needs are outstanding, satisfactory, needs to improve,
and substantial noncompliance. In 1999, WMBFA and WMBfsb each received an
"outstanding" CRA rating from the OTS, and WMB and FCIB received an
"outstanding" CRA rating from the FDIC. These ratings reflect our commitment to
meeting the credit needs of the communities we serve.
Under regulations that apply to all CRA performance evaluations after July
1, 1997, many factors play a role in assessing a financial institution's CRA
performance. The institution's regulator must consider its financial capacity
and size, legal impediments, local economic conditions and demographics,
including the competitive environment in which it operates. The evaluation does
not rely on absolute standards, and the institutions are not required to perform
specific activities or to provide specific amounts or types of credit. We
maintain a CRA statement for public viewing, as well as an annual CRA highlights
document. These documents describe our credit programs and services, community
outreach activities, public comments and other efforts to meet community credit
needs.
In May 1998, we announced a ten-year, $120 billion community reinvestment
commitment to the communities in which we do business. This commitment replaces
prior commitments made by us and the companies we have acquired.
The $120 billion commitment targets single-family lending, small business
and consumer lending, multi-family lending and community investment at the
following levels:
- Single-family lending -- $81.6 billion in affordable housing loans to
minority racial and ethnic borrowers, borrowers in low- to
moderate-income census tracts and borrowers earning less than 80% of
median income. Of this amount, $30 billion will target low- to
moderate-income borrowers.
- Small business and consumer lending -- $25 billion in loans to small
businesses and consumers with low to moderate incomes, including consumer
loans and lines of credit to borrowers with low to moderate incomes and
in low- to moderate-income census tracts and to small businesses with an
emphasis on loans and lines of credit of $50,000 or less and on loans to
people of color, women and disabled persons.
- Multi-family lending -- $12.1 billion for apartment and manufactured home
park developments in low- to moderate-income census tracts or serving
families earning less than 80% of median income.
- Community investment -- $1.3 billion in investments and loans to
community development and low-income housing initiatives, tax-exempt
housing revenue bonds, minority financial institutions and community
banks and financial institutions targeting minority racial and ethnic
communities or other community needs.
We will strive to return to our neighborhoods the greater of (a) 2% of
pretax earnings or (b) 3% of after-tax earnings plus 10% of the net recovery
from the resolution of Ahmanson's goodwill litigation against the U.S.
Government. These funds will be returned through grants, sponsorships, loans at
below market rates, in-kind donations, paid employee volunteer time, and other
financial support of our efforts to develop our communities.
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Recent and Proposed Federal Legislation and Regulation
The 1999 Act, parts of which take effect in 2000, is summarized in
"Regulation and Supervision -- General."
In February 1999, the OTS proposed a regulation which could affect WMI's
treatment as a unitary savings and loan holding company. If a holding company
owns more than one savings association, it is a multiple savings and loan
holding company ("SLHC"); if it owns only one savings association, it is a
unitary SLHC. HOLA generally restricts multiple SLHC's and their non-association
subsidiaries to traditional savings association activities and services and to
activities permitted bank holding companies. These restrictions do not apply to
unitary SLHC's. In addition, these restrictions do not apply to a multiple SLHC
if all, or all but one, of its subsidiary savings associations were acquired in
transactions involving a sale or transfer from an ailing or failing institution.
Such savings associations are sometimes referred to as "supervisory"
acquisitions, and a multiple SLHC is sometimes referred to as an "exempt"
multiple SLHC if all, or all but one, of its subsidiary associations are
supervisory acquisitions. The OTS proposal states that, under certain
circumstances, an exempt multiple SLHC could lose its exempt status if it or one
of its supervisory subsidiary associations is involved in a merger.
WMI has had the status of an exempt multiple SLHC because two of its three
subsidiary associations -- WMBFA and WMBfsb -- have been deemed supervisory
acquisitions. However, both WMBFA and WMBfsb, as well as WMI, have been involved
in subsequent merger transactions. Accordingly, it is possible that, if the
proposed regulation were adopted, the OTS could assert that WMI is not an exempt
multiple SLHC. If that were to occur, WMI would have to merge its subsidiary
associations or discontinue activities, including real estate development
activities, not permitted to multiple SLHC's. In either case management would
not expect these actions to have a material adverse affect on our results of
operations or financial condition.
Regulation of Nonbanking Affiliates
As broker-dealers registered with the Securities and Exchange Commission
("SEC") and as members of the National Association of Securities Dealers, Inc.
("NASD"), WM Financial Services and our mutual fund distributor subsidiary are
subject to various regulations and restrictions imposed by those entities, as
well as by various state authorities. As our registered investment advisor, WM
Advisors is subject to various federal and state securities regulations and
restrictions.
The NASD has adopted rules concerning NASD member operations conducted in
branches of depository institutions. The NASD requirements are substantially
similar to the policy statements governing the activities of our securities
affiliates previously issued by the various banking regulators.
Our consumer finance subsidiaries are subject to various federal and state
laws and regulations, including those relating to truth-in-lending, equal credit
opportunity, fair credit reporting, real estate settlement procedures, debt
collection practices and usury. The subsidiaries are subject to various state
licensing and examination requirements.
COMPETITIVE ENVIRONMENT
We face significant competition in attracting and retaining deposits and
making loans in all of our market areas. Our most direct competition for
deposits has historically come from savings institutions, credit unions and
commercial banks doing business in our primary market areas of California,
Washington, Oregon, Florida, Texas and Utah. As with all banking organizations,
however, we have also experienced competition from nonbanking sources, including
mutual funds, corporate and governmental debt securities and other investment
alternatives. Our most direct competition for loans comes from other savings
institutions, national mortgage companies, insurance companies, commercial banks
and GSEs. Our competitors' activities may make it difficult for us to achieve
our financial goals. In addition, effective June 1, 1997, federal legislation
repealed certain restrictions on the establishment of interstate branches by
national banks and state-chartered banks. Bank holding companies are now also
generally permitted to buy banks in any state. WMBFA and
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WMBfsb already had authority to establish interstate branches under existing
federal law and regulations, so management expects that such legislation will
primarily benefit our competitors.
Although consolidation has decreased the number of institutions competing
in our markets, both savings and commercial banks have reemphasized their focus
on the consumer, making competition for retail deposits and loans extremely
fierce. While the increased competitive pressures make the banking environment
more difficult, we remain a strong market force.
PRINCIPAL OFFICERS
The following table sets forth certain information regarding the principal
officers of Washington Mutual:
EMPLOYEE OF
PRINCIPAL OFFICERS AGE CAPACITY IN WHICH SERVED COMPANY SINCE
------------------ --- ------------------------ -------------
Kerry K. Killinger................... 50 Chairman of the Board of Directors, 1983
President and Chief Executive Officer
Fay L. Chapman....................... 53 Senior Executive Vice President and General 1997
Counsel
Craig S. Davis....................... 48 President, Mortgage Banking and Financial 1996
Services Groups
William W. Ehrlich................... 33 Executive Vice President 1993
Steven P. Freimuth................... 43 Senior Executive Vice President, Corporate 1988
Services
William A. Longbrake................. 56 Vice Chair and Chief Financial Officer 1996
Deanna W. Oppenheimer................ 41 President, Consumer Banking Group 1985
Craig E. Tall........................ 54 Vice Chair, Corporate Development, Consumer 1985
Finance and Commercial Banking
S. Liane Wilson...................... 57 Vice Chair, Corporate Technology 1985
Richard M. Levy...................... 41 Senior Vice President and Controller 1998
Norman H. Swick...................... 50 Senior Vice President and Chief Risk Officer 1980
Mr. Killinger has been Chairman, President and Chief Executive Officer of
Washington Mutual since 1991. He was named President and a director in 1988,
Chief Executive Officer in 1990 and Chairman in 1991. Mr. Killinger joined
Washington Mutual as an Executive Vice President of WMB in 1983.
Ms. Chapman became an Executive Vice President and General Counsel and
member of Washington Mutual's Executive Committee in September 1997. She became
a Senior Executive Vice President in 1999. Prior to that, Ms. Chapman had been a
partner with Foster Pepper & Shefelman PLLC, a Seattle, Washington law firm,
since 1979.
Mr. Davis became an Executive Vice President and member of the Executive
Committee in January 1997, following our merger with Keystone Holdings. He
became President, Mortgage Banking and Financial Services Groups in 1999. Mr.
Davis is responsible for lending and financial services. He was Director of
Mortgage Origination of American Savings Bank ("ASB") from 1993 through 1996 and
served as President of ASB Financial Services, Inc. from 1989 to 1993.
Mr. Ehrlich became an Assistant Vice President of Corporate Communications
in 1994, a Senior Vice President in 1998 and an Executive Vice President of
Corporate Relations and a member of the Executive Committee in 1999. Mr. Ehrlich
is responsible for overseeing the Company's corporate communications, government
relations and leadership training areas. He joined Washington Mutual as a public
relations consultant in 1990 and then rejoined Washington Mutual in 1993 as a
coordinator in the Mergers and Acquisitions Department.
Mr. Freimuth became an Executive Vice President and member of the Executive
Committee in 1997 and Senior Executive Vice President, Corporate Services in
1999. Mr. Freimuth is responsible for human resources, loan servicing and
corporate credit. He joined WMB as a Vice President in 1988 and became a Senior
Vice President in 1991.
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Mr. Longbrake rejoined Washington Mutual in October 1996 as Executive Vice
President and Chief Financial Officer and a member of the Executive Committee.
He became Vice Chair in 1999. Mr. Longbrake is responsible for corporate
finance. From March of 1995 through September of 1996, he served as Deputy to
the Chairman for Finance and Chief Financial Officer of the FDIC.
Ms. Oppenheimer has been an Executive Vice President of Washington Mutual
since 1993 and a member of the Executive Committee since its formation in 1990.
She became President, Consumer Banking Group in 1999. Ms. Oppenheimer is
responsible for corporate marketing and consumer bank distribution. She has been
an officer of Washington Mutual since 1985.
Mr. Tall became an Executive Vice President of Washington Mutual in 1987
and has been a member of the Executive Committee since its formation in 1990. He
became Vice Chair, Corporate Development, Consumer Finance and Commercial
Banking in 1999. Mr. Tall is responsible for corporate development, commercial
banking and consumer finance.
Ms. Wilson became an Executive Vice President of Washington Mutual in 1988
and has been a member of the Executive Committee since its formation in 1990.
She became Vice Chair, Corporate Technology in 1999. Ms. Wilson is responsible
for corporate information technology.
Mr. Levy has been a Senior Vice President and Controller of WMI since
February 1998. In this capacity he is Washington Mutual's principal accounting
officer. Prior to joining the Company, Mr. Levy was Executive Vice President and
Chief Financial Officer of Community Trust Bancorp from 1995 to 1997. Prior to
that, he was the Controller of Bank of America Texas, N.A.
Mr. Swick has been a Senior Vice President of Washington Mutual since 1988.
He became Chief Risk Officer in 1998 and prior to that time was the Company's
General Auditor. In his current capacity, he is responsible for Washington
Mutual's risk management program which identifies and monitors risk throughout
the Company.
ITEM 2. PROPERTIES
As of December 31, 1999, our banking subsidiaries conducted business from
1,025 consumer financial centers, 48 Western Bank branches, 33 business banking
centers, 176 home loan centers and 22 wholesale loan centers in 40 states.
Consumer finance operations were conducted in over 600 locations in 38 states.
Washington Mutual's administrative offices are located at 1201 Third
Avenue, Seattle, Washington 98101 where, as of December 31, 1999, we leased
approximately 244,000 square feet pursuant to a lease agreement that starts to
terminate in 2007. We also lease approximately 115,000 square feet of space in
Seattle in the Second and Seneca Building pursuant to a lease agreement that
starts to terminate in 2001; approximately 75,000 square feet in the adjoining
building pursuant to a lease agreement that starts to terminate in 2006;
approximately 10,000 square feet in Seattle in the First Interstate Building at
999 Third Avenue pursuant to a lease agreement that terminates in 2003;
approximately 122,000 feet in Seattle in the 1111 Third Avenue Building pursuant
to a lease agreement that terminates in 2004; approximately 62,000 square feet
in the Rainier Tower Building at 1301 Fifth Avenue pursuant to a lease agreement
that starts to terminate in 2003; approximately 86,000 square feet in Seattle in
the Newmark Building at 1401 Second Avenue pursuant to a lease agreement that
terminates in 2009; approximately 40,000 square feet in Seattle in the Century
Square Building at 1501 Fourth Avenue pursuant to a lease agreement that
terminates in 2002; and approximately 110,000 square feet in Bothell, Washington
pursuant to a lease agreement that terminates in 2009. We have options to renew
leases at most locations.
WMBFA administrative and subsidiary operations are conducted from owned
office space totaling 156,000 square feet in Irvine, California; approximately
47,000 square feet in Irvine pursuant to a lease agreement that starts to
terminate in 2004; approximately 327,000 square feet of owned office space in
Chatsworth, California; approximately 644,000 square feet in Chatsworth pursuant
to a lease agreement that starts to terminate in 2003; approximately 252,000
square feet of owned office space in Stockton, California; and approximately
23,000 square feet in Los Angeles pursuant to a lease agreement that starts to
terminate in 2003. We have options to renew leases at most locations.
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In 1999, approximately 1,265,000 square feet of office space on the
Irwindale-Baldwin Park, City of Industry and St. Louis campuses (the "Home
Savings Campuses") were closed and operations were consolidated with similar
operations on other administrative campuses to make more efficient use of the
office space. Approximately 24% of this vacated space was sublet to third
parties during 1999. We anticipate subletting the additional space in 2000.
During 1999, we closed 162 consumer financial centers. At December 31, 1999, 65%
of these sites have been disposed of through sale, sublease or termination of
the lease.
In February 1999, we sold a vacant WMBFA facility that totaled
approximately 385,000 square feet located in Canoga Park, California that had
housed the Coast operations and administrative offices prior to its acquisition
by Home Savings in 1998.
Washington Mutual Finance administrative operations are conducted from
owned office space totaling 71,000 square feet in Tampa, Florida.
Long Beach Mortgage administrative operations are conducted from 81,000
square feet of leased office space located in Orange, California. The facilities
are covered by several leases that, in general, expire in 2001 and 2002, and
have an option to renew for five years.
See "Notes to Consolidated Financial Statements -- Note 7: Premises and
Equipment."
ITEM 3. LEGAL PROCEEDINGS
We have certain litigation and negotiations in progress resulting from
activities arising from normal operations. In the opinion of management, none of
these matters is likely to have a materially adverse effect on our results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of
1999.
PART II
ITEM 5. MARKET FOR OUR COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Our common stock trades on The New York Stock Exchange under the symbol WM.
Prior to December 9, 1998, our common stock traded on The Nasdaq Stock Market
under the symbol WAMU. As of March 3, 2000, there were 558,327,194 shares issued
and outstanding held by 36,861 shareholders of record. The closing price of our
common stock on March 3, 2000 was $23.13 per share.
Common Stock
The high and low common stock prices by quarter were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
Fourth quarter.......................... $35.94 $25.13 $41.25 $28.50
Third quarter........................... 36.63 27.94 46.06 31.13
Second quarter.......................... 41.94 34.63 50.92 40.94
First quarter........................... 45.25 38.44 49.95 36.75
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Cash dividends paid per share were as follows:
YEAR ENDED
DECEMBER 31,
----------------
1999 1998
------ ------
Fourth quarter............................................. $0.260 $0.220
Third quarter.............................................. 0.250 0.207
Second quarter............................................. 0.240 0.200
First quarter.............................................. 0.230 0.193
Dividend amounts have not been restated to reflect pooling combinations.
Preferred Stock
At December 31, 1999, we had no preferred stock outstanding.
Payment of Dividends and Policy
Payment of future dividends is subject to declaration by the Board of
Directors. Factors considered in determining the size of dividends are the
amount and stability of profits, adequacy of capitalization, and expected asset
and deposit growth of our subsidiaries. Our dividend policy is also dependent on
the ability of WMB, WMBFA and WMBfsb to pay dividends to their respective parent
company, which is influenced by legal, regulatory and economic restrictions. See
"Business -- Regulation and Supervision -- Restrictions on Subsidiary Savings
Institution Dividends."
Our retained earnings at December 31, 1999 included a pre-1988 thrift bad
debt reserve for tax purposes of $2.01 billion for which no federal income taxes
have been provided. In the future, if the thrift bad debt reserve is used for
any purpose other than to absorb bad debt losses, or if any of the banking
subsidiaries no longer qualifies as a bank, we will incur a federal income tax
liability, at the then prevailing corporate tax rate, to the extent of such
subsidiaries' pre-1988 thrift bad debt reserve. As a result, our ability to pay
dividends in excess of current earnings may be limited.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data for
Washington Mutual and is derived from and should be read in conjunction with the
Consolidated Financial Statements of Washington Mutual and the Notes thereto,
which are included in this Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA
Interest income.................. $ 12,062,198 $ 11,221,468 $ 10,202,531 $ 9,892,290 $ 9,860,408
Interest expense................. 7,610,408 6,929,743 6,287,038 6,027,177 6,306,724
------------ ------------ ------------ ------------ ------------
Net interest income.............. 4,451,790 4,291,725 3,915,493 3,865,113 3,553,684
Provision for loan losses........ 167,076 161,968 246,642 498,568 344,624
Noninterest income............... 1,508,997 1,507,200 980,535 819,361 1,224,370
Noninterest expense.............. 2,909,551 3,267,500 3,111,117 3,595,271 2,761,174
------------ ------------ ------------ ------------ ------------
Income before income taxes,
cumulative effect of accounting
changes, and minority
interest....................... 2,884,160 2,369,457 1,538,269 590,635 1,672,256
Income taxes..................... 1,067,096 882,525 653,151 201,707 654,593
Cumulative effect of change in
tax accounting method.......... -- -- -- -- 234,742
Minority interest in earnings of
consolidated subsidiaries...... -- -- -- 13,570 15,793
------------ ------------ ------------ ------------ ------------
Net income....................... $ 1,817,064 $ 1,486,932 $ 885,118 $ 375,358 $ 767,128
============ ============ ============ ============ ============
Net income attributable to common
stock.......................... $ 1,817,064 $ 1,470,990 $ 830,087 $ 291,723 $ 673,099
============ ============ ============ ============ ============
Net income per common share:
Basic.......................... $ 3.17 $ 2.61 $ 1.56 $ 0.55 $ 1.23
Diluted........................ 3.16 2.56 1.52 0.54 1.21
Average diluted common shares
used to calculate earnings per
share.......................... 574,553,031 578,562,305 556,759,023 539,058,104 585,045,390
Cash dividends paid per common
share:
Pre-business combinations(1)... $ 0.98 $ 0.82 $ 0.71 $ 0.60 $ 0.51
Post-business
combinations(2)............. 0.98 0.73 0.66 0.65 0.51
Common stock dividend payout
ratio(2)....................... 31.40% 29.32% 40.61% 94.12% 37.26%
Return on average assets......... 1.04 0.96 0.63 0.28 0.56
Return on average stockholders'
equity......................... 19.66 16.62 11.73 4.70 10.02
Return on average common
stockholders' equity........... 19.66 16.67 11.95 3.95 10.14
27
30
DECEMBER 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET DATA
Assets.................... $186,513,630 $165,493,281 $143,522,398 $137,328,541 $137,142,972
Available-for-sale
securities.............. 41,384,318 32,917,053 19,817,226 25,431,464 31,181,617
Held-to-maturity
securities.............. 19,401,465 14,129,482 17,207,854 9,605,367 10,967,204
Loans..................... 113,497,225 108,370,906 97,624,348 92,943,126 85,335,568
Deposits.................. 81,129,768 85,492,141 83,429,433 87,509,358 88,019,469
Borrowings................ 94,326,616 65,200,489 49,976,377 40,014,735 38,261,697
Stockholders' equity...... 9,052,679 9,344,400 7,601,085 7,426,137 8,421,102
Ratio of stockholders'
equity to total
assets.................. 4.85% 5.65% 5.30% 5.41% 6.14%
Diluted book value per
common share............ $ 16.18(3) $ 16.07(3) $ 13.23(3)(4) $ 12.52(3)(4) $ 13.31(4)
Number of common shares
outstanding at end of
period.................. 559,589,272(3) 581,408,525(3) 550,689,721(3)(4) 554,811,012(3)(4) 583,622,187(4)
- ---------------
(1) Amounts paid by acquired companies prior to their combination with the
Company were not included.
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