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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, 1998
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO :
COMMISSION FILE NUMBER 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 February 26, 1999:
COMMON STOCK -- $22,717,380,720(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 February 26, 1999:
COMMON STOCK -- 593,989,545(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 20, 1999 are incorporated by reference into Part
III.
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WASHINGTON MUTUAL, INC.
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I...................................................... 1
ITEM 1. BUSINESS.......................................... 1
Overview............................................... 1
Corporate Developments................................. 2
Integration of Operations.............................. 3
Risk Factors........................................... 4
Mortgage Banking....................................... 7
Consumer Banking....................................... 8
Commercial Banking..................................... 9
Financial Services..................................... 10
Consumer Finance....................................... 10
Treasury Activities.................................... 11
Asset Quality.......................................... 13
Employees.............................................. 13
Business Combinations.................................. 14
Taxation............................................... 14
Environmental Regulation............................... 15
Regulation and Supervision............................. 16
Competitive Environment................................ 24
Principal Officers..................................... 25
ITEM 2. PROPERTIES........................................ 26
ITEM 3. LEGAL PROCEEDINGS................................. 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................ 27
PART II..................................................... 27
ITEM 5. MARKET FOR WASHINGTON MUTUAL'S COMMON STOCK AND
RELATED SECURITY HOLDER
MATTERS................................................ 27
ITEM 6. SELECTED FINANCIAL DATA........................... 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 31
General................................................ 31
Results Of Operations.................................. 31
Quarterly Results Of Operations........................ 40
Review Of Financial Condition.......................... 42
Provision and Reserve for Loan Losses.................. 46
Asset and Liability Management Strategy................ 52
Liquidity.............................................. 53
Capital Adequacy....................................... 54
Year 2000 Project...................................... 54
Accounting Developments Not Yet Adopted................ 56
Tax Contingency........................................ 56
Goodwill Litigation.................................... 57
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................ 59
Management of Interest Rate Risk and Derivative
Activities............................................ 62
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....... 63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................... 63
PART III.................................................... 64
PART IV..................................................... 64
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.................................... 64
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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, 1998, we had deposits of $85.49 billion and
stockholders' equity of $9.34 billion. Based on our consolidated assets of
$165.49 billion at December 31, 1998, we were the largest savings institution
and the eighth largest banking company in the United States.
We operate principally in California, Washington, Oregon, Florida, Texas
and Utah, and have operations in 31 other states and the District of Columbia.
Through our subsidiaries, we engage in the following business activities:
- Mortgage Banking
- Consumer Banking
- Commercial Banking
- Financial Services
- Consumer Finance
Our principal business offices are located at 1201 Third Avenue, Seattle,
Washington 98101. 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.
Mortgage Banking
We conduct mortgage banking through our banking subsidiaries, Washington
Mutual Bank, FA ("WMBFA"), Washington Mutual Bank ("WMB"), and Washington Mutual
Bank fsb ("WMBfsb"). The principal activities conducted by our mortgage banking
operations are the origination of single-family residential mortgages and
residential construction loans and the associated loan servicing activities. For
the year ended December 31, 1998, this group originated $43.62 billion of SFR
loans (including residential construction), making us the nation's fourth
largest single-family residential mortgage originator. At December 31, 1998, we
had a servicing portfolio of $154.24 billion of single-family residential
mortgage loans and residential construction loans. When we refer to
"single-family residential mortgage" loans or "SFR" loans in this Form 10-K, we
mean first lien mortgage loans on owner-occupied one-to-four-family residences.
Consumer Banking
The consumer banking business includes the sale of all consumer deposit
products, including checking accounts, and the associated servicing activities
as well as the origination of consumer loans through our consumer financial
centers. These consumer loan products include second equity mortgage loans and
lines of credit, manufactured housing loans, automobile, boat and recreational
vehicle loans and education loans. We conduct consumer banking in eight states
through 1,173 financial centers. The consumer banking group also has
approximately 1,200 employees in its telephone banking centers. At December 31,
1998, we had $85.49 billion in deposits and a consumer loan portfolio of $5.48
billion.
Commercial Banking
This business line is comprised of our commercial real estate group and
Western Bank, a separately named division of Washington Mutual Bank. This
business segment offers commercial business loans and commercial real estate
loans, comprised of multi-family residential loans and loans for nonresidential
real estate. The Western Bank division operates primarily in Washington and
Oregon and commenced operations
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in California as of the beginning of 1999 under the name WM Business Bank. The
commercial banking group provides personalized commercial banking services to
small to mid-sized businesses and makes available multi-family shelter-based
lending, commercial construction financing and other commercial real estate
loans. For the year ended December 31, 1998, Western Bank had average commercial
business loans outstanding of $1.49 billion compared with $1.14 billion for
1997. We also had $18.13 billion of commercial real estate loans in our
portfolio.
Financial Services
The financial services business consists of WM Financial Services, Inc., a
licensed broker-dealer; WM Advisors, Inc., the investment adviser to the WM
Group of Funds; WM Funds Distributor, Inc., the distributor of the WM Group of
Funds; and Washington Mutual Insurance Services, Inc. Through our broker-
dealer, WM Financial Services, we offer a wide range of investment products to
our customers, including mutual funds, variable and fixed annuities and general
securities.
The WM Group of Funds is a proprietary mutual fund complex formed through
the consolidation of the Composite Funds and the Sierra Trust Funds. At December
31, 1998, the WM Group of Funds consisted of 18 mutual funds, 18 variable
annuities and five managed asset funds. At that date, it had 215,052 accounts
and $4.93 billion in assets under management. As part of the acquisition of H.
F. Ahmanson & Company ("Ahmanson") in 1998, we acquired Griffin Financial
Investment Advisers, which is the investment adviser to The Griffin Funds, a
mutual fund family with $1.09 billion in assets under management at December 31,
1998. The Griffin Investment Advisers merged into WM Advisors and The Griffin
Funds merged into the WM Group of Funds in 1999.
Washington Mutual Insurance Services, Inc. supports the mortgage lending
process by offering customers property and casualty insurance products. The
group also offers insurance products to existing mortgage and deposit customers,
which includes mortgage life and accidental death and dismemberment, property
and casualty, and life insurance.
Consumer Finance
We conduct our consumer finance business through Aristar, Inc. and its
subsidiaries ("Aristar"). Through those companies, we make direct consumer
installment loans and purchase retail installment contracts from local retail
establishments through a network of over 500 branch offices located in 24
states, primarily in the southeastern United States. Aristar also accepts
deposits in Colorado and Utah through its industrial bank subsidiary. Aristar
generally conducts its business under the names Blazer Financial, City Finance
and First Community Industrial Bank. At December 31, 1998, Aristar had assets of
$2.77 billion and deposits of $187.5 million.
CORPORATE DEVELOPMENTS
Acquisitions
The Keystone Transaction. In December 1996, Keystone Holdings, Inc.
("Keystone Holdings") merged into WMI. As a result of the merger and related
transactions, all of Keystone Holdings subsidiaries, including American Savings
Bank, F.A. ("ASB"), became our subsidiaries.
The Great Western Merger. In July 1997, Great Western Financial Corporation
("Great Western") merged into New American Capital, Inc., our wholly-owned
subsidiary. As a result, all of the subsidiaries of Great Western, including
Great Western Bank, a Federal Savings Bank ("GWB"), and Aristar, became our
subsidiaries. In October 1997, Great Western Bank merged into American Savings
Bank, which changed its name to Washington Mutual Bank, FA.
The Ahmanson Merger. On October 1, 1998, Ahmanson merged into WMI. As a
result, Home Savings of America, FSB ("Home Savings") became our subsidiary. On
October 3, 1998, Home Savings merged into WMBFA. Prior to our merger with
Ahmanson, Ahmanson had acquired Coast Savings Financial, Inc. ("Coast"). We
anticipate that the complete integration of Home Savings into WMBFA's systems
will occur
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in mid-1999. For purposes of segment reporting under the newly effective
accounting standard, SFAS 131, Ahmanson is being treated as a separate segment
for the time periods discussed. See "Notes to Consolidated Financial
Statements -- Note 2: Business Combinations/Restructuring and Note 27: Lines of
Business."
Other Significant Actions
On April 20, 1998, our Board of Directors declared a 3-for-2 common stock
split in the form of a 50% stock dividend payable on June 1, 1998 to
shareholders of record as of May 18, 1998.
On May 22, 1998, we announced a new ten-year community reinvestment
commitment to the communities in which we do business. The new $120 billion
pledge targets loans and other financial support to traditionally underserved
communities. The pledge will take effect beginning in 1999 and replaces earlier
pledges made both by us and by the companies we acquired.
On August 28, 1998, our shareholders approved an amendment to our Restated
Articles of Incorporation to increase the number of authorized shares of common
stock from 800 million shares to 1.60 billion shares.
On January 1, 1998, we redeemed our Series C Preferred Stock at $25.00 per
share, plus unpaid dividends up to the redemption date.
On September 16, 1998, we redeemed our Series E Preferred Stock at $25.00
per share, plus unpaid dividends up to the redemption date.
On December 9, 1998, our common stock began trading on the New York Stock
Exchange under the trading symbol "WM." As a result, our common stock no longer
trades on The Nasdaq Stock Market.
INTEGRATION OF OPERATIONS
This section contains forward-looking statements that we have based on our
best judgments and currently available information. These forward-looking
statements are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond 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. Accordingly, we cannot assure you that we will achieve the
cost savings that we describe in the amounts or within the time periods
currently estimated. See "Risk Factors" beginning on page 4 for a discussion of
factors that may cause these forward-looking statements to differ from actual
results.
Operations
The integration of Great Western and its subsidiaries into our operations
is complete. We consolidated the administration of Great Western's payroll,
employee benefit plans, incentive compensation systems, and accounts payable
effective January 1, 1998. In the first and second quarters of 1998, we
consolidated 86 consumer financial centers of ASB and GWB. During the second
quarter of 1998, we converted 4.7 million deposit accounts representing $24.0
billion in deposits, and 1.5 million transaction card accounts at nearly 370
Great Western locations in Florida and northern and southern California. In
addition, we consolidated the approximately 650,000 mortgage and consumer loans
that made up the Great Western and ASB loan portfolios. By the end of third
quarter 1998, we had made all staff reductions related to the Great Western
Merger.
The decision in March 1998 to pursue the merger with Ahmanson caused
management to revise its plan for the integration of Great Western facilities,
staffing levels and the geographic location of corporate support functions.
These changes affected both the cost savings that were expected to be realized
from the Great Western Merger and the amount of transaction-related expenses for
the Great Western Merger. In addition, certain of these charges were factored
into the transaction-related expenses for the Ahmanson Merger.
We have identified 162 consumer financial centers in California to be
consolidated into neighboring offices as a result of the Ahmanson Merger. We
have scheduled the consolidations for mid-1999 to coincide with the projected
conversion of Home Savings branches in California to Washington Mutual systems
and
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signage. Conversion of Home Savings branches in Texas occurred in February 1999.
The conversion of all Ahmanson systems is expected to be completed in the third
quarter of 1999. Upon completion of all systems conversions, it is anticipated
that the Company will no longer operate from Ahmanson's Irwindale campus.
Cost Savings
Before the Great Western Merger, we projected annual pretax cost savings of
$340 million as part of the benefit of the merger. We originally anticipated
approximately $208 million in savings for 1998, with the full savings of $340
million being realized in 1999. Actual cost savings related to financial center
consolidations and improved productivity of the mortgage banking operations were
$243 million in 1998. These savings were significantly offset by an increase in
volume-related expenses of $194 million and investments in de novo financial
centers, upgraded information systems and other infrastructure related costs of
$57 million. We expect to achieve the full projected consolidation and
productivity savings of $340 million in 1999. However, expected increases in
volume-related expenses resulting from increases in internal growth and market
expansion, along with other increases in infrastructure-related expenses, could
reduce the amount of actual cost savings that we realize in 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Other Expense."
Before the Ahmanson Merger, we projected annual pretax savings of operating
costs of $199 million in 1999 and $330 million in 2000 and each year thereafter
as part of the benefits of that merger. We expect to achieve cost savings of
$199 million in 1999. We also expect volume-related expenses to increase from
internal growth and market expansion.
RISK FACTORS
COST SAVINGS MAY NOT BE
REALIZED We cannot assure you that we will achieve the
cost savings we anticipate through the
consolidation of administrative functions or
consumer financial centers, nor can we assure
you that any cost savings will occur in the
anticipated time periods. In addition, when
consumer financial centers are closed or
consolidated, financial institutions often lose
customers and deposits as a result. To the
extent that we lose customers or deposits
significantly in excess of the amount we
anticipated, our operations could be materially
adversely affected, particularly in the short
term. The forward-looking statements assume,
based on our historical experience following
acquisitions, that our customer base will
remain substantially intact during the period
presented in the forward-looking statements. To
the extent that the change in ownership of GWB
and Home Savings, the consolidation of branches
of WMBFA, or other factors result in a
significant temporary or long-term loss of
customers, actual results of our operations may
vary materially from the forward-looking
information presented.
CONSUMER BANKING
EXPANSION RISKS Our business plan includes increased fee income
from our consumer banking operations. The
sources of these fee increases include revised
policies for checking account services in new
consumer financial centers in California and
Texas in accordance with our programs,
implementation of our checking programs
throughout the WMBFA system, introduction of a
debit card to former Home Savings customers,
improved revenues in financial services
subsidiaries, and the introduction of consumer
loan products in consumer financial centers. We
have relatively limited experience with these
business initiatives in California, Florida and
Texas, where we expect the greatest expansion
of our consumer banking activities to occur.
Accordingly, we cannot assure you that
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our emphasis on consumer banking activities
will be successful in the California, Florida
or Texas markets or that we will achieve the
increase in fee income anticipated by our
business plan.
CONCENTRATION OF
OPERATIONS IN CALIFORNIA At December 31, 1998, 60% of our loan portfolio
and 73% 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. 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.
INTEREST RATE RISK We realize our income principally from the
differential between the interest earned on
loans and investments and the interest paid on
deposits and borrowings. The difference between
the repricing characteristics of
interest-earning assets and interest-bearing
liabilities affects net interest spreads.
Market interest rates have an impact on the
volume and rates on loans, investments,
deposits and borrowings. Significant
fluctuations in interest rates and spreads may
adversely affect net income. At the end of
1997, long-term interest rates declined
dramatically and the yield curve (the
difference between short-term and long-term
interest rates) became much flatter. This
interest rate environment continues. In this
type of interest rate environment, our
customers tend to prefer fixed-rate loans to
adjustable-rate mortgages ("ARMs") and thus
during 1998, originations of fixed-rate loans
were substantially higher than in previous
years. Lower long-term interest rates resulted
in refinancing activity in 1998 that was higher
than historical averages. As a result, our
ability to grow our asset size by retaining
ARMs in our portfolio has been and could
continue to be adversely affected. See
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations -- Asset and Liability Management
Strategy."
COMPETITION 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. Our most direct competition for
loans comes from other savings institutions,
national mortgage companies, insurance
companies, commercial banks and
government-sponsored enterprises ("GSEs")
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such as the 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.
READINESS FOR THE YEAR 2000 We are taking what we believe to be the
appropriate steps to avoid customer disruption
from the "Year 2000 Problem." The Year 2000
Problem could cause our information systems and
facilities, and those of our vendors, to
malfunction or fail in 1999 and 2000. Any
disruption could cause numerous problems for
us, such as diminished service levels, some
customer inconvenience and additional costs,
which we cannot estimate now. Our failure to
make our systems, or the failure of our vendors
to make their systems Year 2000 ready could
result in our inability to process our daily
business for some period of time or in other
significant business interruptions.
During 1998, we incurred expenses of $11.8
million to complete the inventory and
assessment and the renovation phases of our
"Year 2000 Project" to become Year 2000 ready.
We have finished the testing of internal
systems, the failure of which would have a
major impact on customers. Work on the final
phases involving validation, due diligence on
third-party services, testing of interactions
between our most critical internal systems,
testing of interactions with service providers
and vendors and development of contingency
plans is proceeding. We expect to incur
additional expenses of approximately $15.6
million in 1999.
We have adopted business contingency plans for
our most critical information systems and
facilities. If we are required to implement
these contingency plans, we believe that we
will minimize the effect on customers that
would occur in a temporary disruption in
services. If a prolonged disruption or failure
occurs, our contingency plans may not operate
as anticipated and our results of operations
may be adversely affected.
Despite our efforts, there is always the
possibility that we may not identify and
correct a Year 2000 Problem in our information
systems and facilities and those of our
suppliers before they occur or that our
contingency plans may not be adequate. Our
efforts to identify and address these problems,
and the expenses or liabilities we may incur to
fix them, could materially and adversely affect
our financial condition and results of
operations. In addition, federal regulators may
issue new regulations that require us to
perform additional work. If issued, new
regulations could increase the cost or delay
completion of our Year 2000 Project.
Although we are reviewing the Year 2000
compliance efforts of our vendors, we cannot be
sure that their efforts will be sufficient to
avoid a Year 2000 Problem.
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MORTGAGE BANKING
General
Our mortgage banking activities are carried out by our banking
subsidiaries, WMBFA, WMB and WMBfsb. Each of our banking subsidiaries has broad
lending powers, but statutory restrictions limit total investment in different
types of loans. All of our residential mortgage lending is subject to
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.
Federal guidelines require depository institutions to adopt written
policies that establish appropriate limits and standards for real estate loans
consistent with regulatory guidelines. According to these guidelines:
- we should not originate any commercial, multi-family or nonowner-occupied
SFR loan (including builder construction loans) with an initial
loan-to-value ratio in excess of 85%;
- we should not originate any owner-occupied SFR loan with a loan-to-value
ratio of 90% or above at origination, unless such loan is protected by
appropriate credit enhancement in the form of either mortgage insurance
or readily marketable collateral; and
- in appropriate circumstances, we may originate mortgage loans with
loan-to-value ratios exceeding these specified levels, if (i) the
aggregate amount of all loans in excess of these limits does not exceed a
specified level of our total capital and (ii) such loans are identified
in our records and reported at least quarterly to our Board of Directors.
At December 31, 1998, 6% of our SFR loan portfolio had loan-to-value ratios of
90% or above at origination and were without mortgage insurance.
SFR Lending
In 1998, we were the leading originator of SFR loans in Washington and
Oregon and the second leading originator in California. We make available to
borrowers a full range of SFR loans, including FHA-insured and VA-guaranteed
loans, conventional fixed-rate loans with a variety of maturities and
amortization schedules, and ARMs. ARMs are advantageous to us because
adjustable-rate loans better match the interest rate characteristics of our
liability base. In recent years, and particularly in the California market, we
have emphasized the origination of ARMs. As a result of the interest rate
environment that began in 1997 and is continuing, however, our customers have
preferred fixed-rate loans and accordingly, 56% of our SFR loan originations in
1998 were fixed rate.
The primary ARM products that we currently offer are indexed to the
12-month average of annual yields on actively traded United States Treasury
securities adjusted to a constant maturity of one year ("MTA"). Under our
current ARM programs, the borrower may choose among loans that have the initial
interest rate fixed for one, three or five years before the adjustments begin.
With some products, the borrower may elect, between the sixth and the 60th
months, to convert to a fixed-rate loan payable over the remainder of the
original term. There is no conversion fee, and the fixed interest rate is
indexed to the then current required net yield for loans sold to Fannie Mae.
There are a variety of payment options, some of which permit negative
amortization.
We originate loans through our consumer financial centers in Washington,
Oregon, Utah, Idaho and Montana and through home loan centers and mortgage
brokers in 29 states and the District of Columbia. In 1998, we originated loans
for the first time through our consumer financial centers in California and
Florida. Nearly half of our loans were originated through mortgage brokers. To
monitor credit quality, we conduct extensive due diligence and review the
stability and credit experience of each broker prior to accepting any
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loan packages. We subject loan production from the wholesale channel to the same
underwriting standards as loan production from our internal channels.
We originate loans that meet GSE standards for sale in the secondary market
("conforming loans") as well as loans that meet our underwriting standards but
not the secondary market standards of the GSEs ("nonconforming loans").
Nonconforming loans constituted approximately half of 1998's total SFR
originations. These loans may be nonconforming because:
- they exceed the maximum amount allowed by the secondary market ("jumbo
loans");
- the loan documentation lacks some information relating to the borrower's
credit or employment history but not the value of the collateral; or
- the borrower's credit history fails to meet secondary market standards.
All nonconforming loans are fully supported by appraisals and title insurance.
In addition, the permitted loan-to-value ratios are generally lower for
nonconforming loans than for conforming loans, and they decrease as the amount
of the loan increases.
SFR Construction Loans
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. We make builder construction loans to
borrowers that are in the business of building homes for resale. We make builder
construction loans on a house-by-house basis or, in certain circumstances,
through a collateralized, limited line of credit. Builder construction loans
involve somewhat more risk and different underwriting considerations than custom
construction loans.
Before we make an SFR construction loan, the borrower must obtain the
approval of various levels of our personnel, depending on the size and
characteristics of the loan. The approval requirements for SFR construction
loans are more stringent for properties other than single-family detached houses
than for single-family detached houses.
SFR construction loans are an integral part of our overall lending program.
Builder construction loans are of short duration, generally 12 to 18 months and
are generally priced at a higher rate than permanent residential loans. Custom
construction loans may also be of short duration, generally 9 to 12 months, or
may be 15 to 30 years if combined with permanent financing.
At December 31, 1998, 51% of our SFR construction portfolio was custom
construction loans and 49% was builder construction loans. Originations of SFR
construction loans for 1998 totaled $1.75 billion, an increase of 21% from $1.45
billion in 1997. We made substantially all of our 1998 SFR construction loan
originations in Washington, Oregon, Utah, Idaho and California.
CONSUMER BANKING
Through our banking subsidiaries, we offer consumer loan programs in
California, Washington, Oregon, Utah, Idaho, Montana, Florida and Texas. These
consumer loan programs include:
- manufactured housing loans;
- 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;
- 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 programs; and
- small business lines of credit of $100,000 or less.
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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 WMBFA's
service area.
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. 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.
At December 31, 1998, we had $85.49 billion in deposits as follows:
TYPE OF DEPOSIT AMOUNT
--------------- --------------
Time deposit accounts....................................... $43.74 billion
MMDAs and savings accounts.................................. 28.29 billion
Checking accounts........................................... 13.46 billion
Since 1995, we have been actively promoting a checking account product
called "Free Checking" which we introduced into our California and Florida
operations during 1997. This account has helped to reduce our overall cost of
funds by increasing the percentage of deposits that are noninterest bearing. We
expect to continue actively promoting our "Free Checking" account throughout our
markets. We also actively have promoted MMDAs because they have the advantage of
being variable-rate liabilities and are generally lower costing than time
deposits.
COMMERCIAL BANKING
We offer a full range of commercial banking products and services,
primarily through the Western Bank division of WMB. Our commercial business
loans are mainly loans to individuals and to small to mid-sized businesses. Some
of these loans are unsecured. A variety of business and personal assets secure
the others. In 1998, we originated $1.01 billion of commercial business loans.
Our commercial business loan portfolio totaled $1.13 billion at December 31,
1998.
In addition, we provide loans to commercial real estate owners and
developers. Commercial real estate lending generally entails greater risks than
residential mortgage lending, although less risk than commercial business
lending. Commercial real estate loans typically involve large loan balances
concentrated with single borrowers or groups of related borrowers. In addition,
the payment experience on loans secured by income-producing properties usually
depends on the successful operation of the real estate project that secures the
loan and thus may be subject, to a greater extent, to adverse conditions in the
real estate market or in the economy, particularly the interest rate
environment. Commercial real estate values tend to be cyclical and, while
commercial real estate values trended upward in many areas of the country in
1998, we carefully monitor the commercial real estate environment to determine
the level of our activity in this area.
In all commercial real estate lending, we consider the location,
marketability and overall attractiveness of the project. Our 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.
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Historically, we focused our commercial real estate lending on small to
mid-sized apartment lending (loans of $2.5 million or less). Beginning in 1996,
we broadened our lending scope by increasing our nonresidential real estate
lending at a faster pace than our apartment lending. This change in emphasis
reflected, in part, the development of our commercial banking operations which
we began in 1995. Home Savings, however, had restricted its commercial real
estate lending to apartments since 1990. The acquisition of Home Savings has
substantially changed the makeup of our commercial real estate loan portfolio.
At December 31, 1998, our commercial real estate portfolio contained $14.55
billion in apartment loans and $3.58 billion in nonresidential commercial real
estate loans.
FINANCIAL SERVICES
Our financial services business consists of WM Financial Services, Inc., a
licensed broker-dealer; WM Advisors, Inc., the investment adviser to WM Group of
Funds; WM Funds Distributor, Inc., the distributor of the WM Group of Funds; and
Washington Mutual Insurance Services, Inc. Through our broker-dealer, WM
Financial Services, we offer a wide range of investment products to our
customers, including mutual funds, variable and fixed annuities and general
securities. At December 31, 1998, we operated in seven states and had 319
financial consultants and 559 licensed personal financial representatives. On
January 1, 1999, the broker-dealer formerly owned by Ahmanson, Griffin Financial
Services, merged into WM Financial Services, so that our broker-dealer now
operates in one additional state, has 159 additional financial consultants and
has 55 additional personal financial representatives.
Our WM Group of Funds is a proprietary mutual fund complex formed through
the consolidation of our Composite Funds and Great Western's Sierra Trust Funds.
At December 31, 1998, the WM Group of Funds consisted of 18 mutual funds, 18
variable annuities and five managed asset funds, and had 215,052 accounts and
$4.93 billion in assets under management. We distribute these mutual funds,
non-proprietary mutual funds and variable annuities to our customers through the
WM Financial Services network located in the branches of our subsidiary banks
and to non-customers through a network of unaffiliated broker-dealers.
Ahmanson's mutual fund group, The Griffin Funds, merged with the WM Group of
Funds during March of 1999. At December 31, 1998, The Griffin Funds had $1.09
billion in assets.
Washington Mutual Insurance Services supports the mortgage lending process
by offering property and casualty insurance products. The group also offers
mortgage life and accidental death and dismemberment, property and casualty, and
life insurance products to existing mortgage and deposit customers.
CONSUMER FINANCE
Aristar makes direct consumer installment loans, including real estate
secured loans, and purchases retail installment contracts from local retail
establishments. Aristar also issues a credit card to facilitate revolving credit
transactions. 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 1998, originations had an average original
term of 63 months. In the year ended December 31, 1998, 72% of the originations
of all installment loans were unsecured or secured by luxury goods, automobiles
or other personal property. The remaining 28% 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 1998 had an average original term of 27 months.
The loans made by Aristar have a higher yield than the SFR loans and
consumer loans made by our banking subsidiaries, because these loans tend to
have higher risk. Many of Aristar's borrowers would not qualify for a loan from
our banking subsidiaries due to high debt-to-income ratios. In addition, Aristar
makes home equity loans primarily where the proceeds are used for purposes
unrelated to the property securing the loan, and thus bears more risk relating
to declining collateral values.
Aristar currently operates in 24 states, primarily in the southeastern
United States. In 1998, Aristar significantly increased its lending volume in
Texas as a result of changes in state law, which permitted non-purchase money
home equity lending in Texas beginning January 1, 1998. For the first time in
Texas, lenders may make home equity loans for purposes unrelated to the
property.
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TREASURY ACTIVITIES
Our treasury department has three primary responsibilities:
- interest rate risk management;
- acquisition of funds; and
- investment of excess funds.
It manages these responsibilities primarily through the purchase and sale of
mortgage-backed securities and whole loans in the secondary market and through
its borrowing practices.
Investing Activities
One way in which we manage our interest rate risk is by purchasing and
selling mortgage-backed securities in the secondary market. Mortgage-backed
securities ("MBS") are pools of loans that are transferred to a single purpose
trust or other special purpose entity created for the securitization.
Certificates issued by the trust or other special purpose entity represent
undivided ownership interests in those loans transferred to the trust or other
special purpose entity. Securitization of our loans provides us with increased
liquidity both because MBS are more readily marketable than the underlying loans
and because MBS can be used more readily as collateral for borrowing. During
1998, we also purchased a substantial amount of MBS and whole loans in the
secondary market in order to increase our asset base.
Prior to 1998, the primary ARM product originated by our operations in
California was indexed to the Cost of Funds Index of the Eleventh District
Federal Home Loan Bank (San Francisco) ("COFI"). At December 31, 1998,
approximately 49% of our real estate loan portfolio and 58% of our MBS were
indexed to COFI. The MBS we purchased in 1998 were both fixed rate and
adjustable rate tied to indices other than COFI. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Asset and
Liability Management Strategy."
We generally securitize a substantial portion of our fixed-rate SFR loan
production in order to sell the MBS in the secondary market. When we securitize
and sell these fixed-rate loans without recourse, as we generally do, they
become obligations of the applicable GSE. Generally, we retain the right to
service these loans for a fee fixed by the GSE.
Beginning in 1995, we securitized loans with Fannie Mae and Freddie Mac
under programs in which they have recourse against us as the originator 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.
We also purchase private issue MBS, collateralized mortgage obligations
("CMOs"), and loan pools in the secondary market. The yield on these assets
generally exceeds the yield on agency MBS because they expose us to certain
risks that are not inherent in agency MBS, such as credit risk and liquidity
risk. Neither the U.S. government nor any of its agencies guarantees these
assets, because the loan size, underwriting or underlying collateral often does
not meet set industry standards. Consequently, the potential for loss of the
principal investment is higher than for agency MBS. Furthermore, the complex
structure of certain CMOs in our portfolio increases the difficulty in assessing
the portfolio's risk and its fair value. Examples of some of the more complex
structures include certain CMOs where we hold subordinated tranches, certain
CMOs that have been resecuritized and certain securities that contain a
significant number of loans with principal balances in amounts larger than can
be sold as agency MBS.
Beginning in 1999, we began to acquire sub-prime single-family mortgage
loans in order to increase the yield in our loan portfolio. Loans are classified
as sub-prime because the borrowers have had past credit problems or have high
debt-to-income ratios. These borrowers would typically not qualify for
conforming
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loans. We anticipate that we will purchase increased amounts of sub-prime loans
in 1999. While we screen the portfolios of sub-prime loans we purchase for
unacceptable credit risk, these loans by their nature bear more credit risk than
is found in conforming loans that we originate or in agency MBS and,
accordingly, we expect that loan charge offs on these portfolios will be higher
than on our other portfolios.
We have instituted a policy of performing credit reviews on each individual
security or loan pool prior to purchase. Such a review includes consideration of
the collateral characteristics, borrower payment histories and information
concerning loan delinquencies and losses of the underlying collateral. After a
security is purchased, similar information is monitored on a periodic basis.
Furthermore, we have established internal guidelines limiting the geographic
concentration of the underlying collateral.
Under federal and state law, our banking subsidiaries must maintain a
minimum amount of assets that qualify as liquid for regulatory purposes. WMBFA
and WMBfsb have authority to make investments specified by the Home Owners' Loan
Act ("HOLA") and applicable regulations, including the purchase of governmental
obligations, investment grade commercial paper, and investment grade corporate
debt securities. Under Washington state law, WMB has authority, subject to a
numerical limit, to make any investment deemed prudent by its board of
directors, and may invest in commercial paper, corporate bonds, mutual fund
shares, debt and equity securities issued by creditworthy entities and interests
in real estate located inside or outside of Washington State. The Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), however,
prohibits a state bank (such as WMB) from making or retaining equity investments
that are not permissible for a national bank, subject to certain exceptions.
Despite these broad investment powers, at December 31, 1998, MBS accounted for
$46.42 billion or 99% of our total investment portfolio. At December 31, 1998,
75% of MBS were agency MBS. The remainder, $11.73 billion, were private issue
MBS and CMOs. See "Notes to Consolidated Financial Statements -- Note 4:
Securities."
Borrowing Activities
Because deposits have generally declined in recent years, 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, the issuance of mortgage-backed
bonds or notes, capital notes and other types of debt securities, the issuance
of commercial paper, and funds obtained as advances from the Federal Home Loan
Bank ("FHLB") of Seattle, the FHLB of San Francisco and the FHLB of 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% 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, 1998, we had $17.52 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 1998, WMBFA, WMB and WMBfsb had credit lines ranging
from 40% to 50% of total assets. At December 31, 1998, advances under these
credit lines totaled $39.75 billion and were secured by mortgage loans, MBS and
U.S. government and agency securities.
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, 1998, we held stock in FHLBs with an
aggregate value of $2.03 billion.
We offer wholesale deposits, primarily time deposit accounts, to political
subdivisions and public agencies. Generally, these deposits must be
collateralized. We consider wholesale deposits to be a borrowing source rather
than a customer relationship.
In addition to the borrowings discussed above, at December 31, 1998, we
were in a position to borrow an additional $33.66 billion, primarily through the
use of collateralized borrowings using unpledged mortgage-
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backed securities and other wholesale borrowing sources. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity."
ASSET QUALITY
We maintain an allowance to absorb credit losses inherent in the loan
portfolio. The allowance is based on an ongoing, quarterly assessment of the
probable estimated losses inherent in the loan portfolio, and to a lesser
extent, unused commitments to provide financing. 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
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,
consumer loans, consumer finance loans 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 and no
reserves are allocated to any specific loan. 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 portfolio. These judgments are
supported by analyses that fall into three general categories: (i) current and
anticipated economic conditions; (ii) a predictive analysis of the outcome of
the current portfolio (a migration analysis); and (iii) our 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 the commercial real estate over $1
million, commercial business and builder construction loan 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. We review these loans to assess the ability of the borrowing entity
to continue to service all of its interest and principal obligations and, as a
result, may adjust the risk grade accordingly. In the event that 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.
We have a Credit Policy Committee ("CPC") that provides reports to the
Board of Directors and continuously reviews loan quality. We also have internal
staff regularly review the classification of commercial business loans and
commercial real estate loans over $1 million and report such classification to
the CPC. Such reviews also assist management in establishing the level of the
reserve. We are also examined by our primary regulators. These examinations
generally occur annually and target various of our activities, including
specific segments of the loan portfolio.
EMPLOYEES
Our number of full-time equivalent employees decreased from 27,661 at
December 31, 1997 to 27,330 at December 31, 1998. We believe that we have been
successful in attracting quality employees and that our employee relations are
good.
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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 23.51 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
- ---------------
(1) This was an acquisition of selected assets and liabilities.
(2) The acquisition was of branches and deposits only. The only assets acquired
were branch facilities or loans collateralized by acquired savings deposits.
(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.
TAXATION
General
For federal income tax purposes, we report our income and expenses using
the accrual method of tax accounting and use the calendar year as our tax year.
Except for the interest expense rules pertaining to certain tax-exempt income
applicable to banks and the bad debt reserve deduction repealed in 1996, 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
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period beginning in 1997. The amount we would have to pay (based upon current
federal income tax rates) in federal income taxes each year of the six-year
period due to the Job Protection Act is not material.
The Job Protection Act also repeals the reserve method of accounting for
tax bad debt deductions. Thus, it requires thrifts to calculate the tax bad debt
deduction based on actual current loan losses.
State Income Taxation
The states of California, Oregon, Florida, Utah, Idaho and Montana, 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,
these state 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 will be introduced that
would repeal or limit this exemption.
Assistance Agreement
As a result of the Keystone Transaction and related transactions in 1996,
WMI and certain of its affiliates are parties to an agreement (the "Assistance
Agreement") with a predecessor of the Federal Savings & Loan Insurance
Corporation ("FSLIC") Resolution Fund (the "FRF"). 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 ("New West"). The provision for
such payments is reflected in the financial statements as a part of the line
item -- income taxes. See "Notes to Consolidated Financial Statements -- Note
17: 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.
Although CERCLA and similar state laws generally exempt holders of security
interests, the exemption may not be available if a secured party engages in the
management of its borrower or the collateral property in a manner deemed beyond
the protection of the secured party's interest. Recent federal and state
legislation, as well as guidance issued by the United States Environmental
Protection Agency and a number of court decisions, have provided assurance to
lenders regarding the activities they may undertake and remain within CERCLA's
secured party exemption. However, these assurances are not absolute and
generally will not protect a lender or fiduciary that participates or otherwise
involves itself in the management of its borrower, particularly in foreclosure
proceedings. As a result, CERCLA and similar state statutes may influence our
decision whether to foreclose on property that is found to be contaminated. Our
general policy is to obtain an environmental assessment prior to foreclosure on
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.
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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
through the Savings Association Insurance Fund (the "SAIF") and, to a lesser
extent, the Bank Insurance Fund (the "BIF") by the FDIC, which 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 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 relate primarily to fair credit practice matters. State laws establish
applicable licensing requirements, provide for periodic examinations and
establish maximum finance charges on credit extensions.
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 treated 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, including credit card loans; education 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, government or 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.
Each of WMB, WMBFA and WMBfsb is currently in compliance with QTL standards.
Failure to remain a QTL would restrict the ability of WMBFA, WMBfsb or WMB to
obtain advances from the FHLB. Failure to remain a QTL also would restrict the
ability of WMBFA or WMBfsb to branch and pay dividends. The OTS
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has recently 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 acquirer is an
individual, the OTS' lack of disapproval. In either case, the public must have
an opportunity to comment on the proposed acquisition, and the OTS must complete
an application review. Without prior approval from the OTS, WMI may not acquire
more than 5% of the voting stock of any savings institution that is not one of
its subsidiaries.
Annual Reporting; Examinations. Under 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.
State Regulation and Supervision. State statutes empower savings banks in
Washington, 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; and
- offer various trust and banking services to their customers.
Under state law, savings banks in Washington also generally have all of the
powers that federal mutual savings banks have under federal laws and
regulations.
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.
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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. The regulations
currently establish a three-tiered system of regulation, with the greatest
flexibility afforded to institutions that meet or exceed the capital
requirements.
A savings association that has capital immediately prior to, and on a pro
forma basis after giving effect to, a proposed capital distribution that is at
least equal to its capital requirements is considered a "Tier 1 association." At
December 31, 1998, WMBFA and WMBfsb were Tier 1 associations. Unless the OTS has
notified a Tier 1 association that it requires more than normal supervision, the
association may make capital distributions during a calendar year up to the
greater of:
- 100% of its net income to date during the calendar year plus the amount
that would reduce the association's "surplus capital ratio" (the
institution's excess capital over its capital requirement) to one-half of
its surplus capital ratio at the beginning of the calendar year, or
- 75% of the association's net income over the most recent four-quarter
period.
The association must give 30 days' prior notice to the OTS, but OTS approval is
not required. In addition, a Tier 1 association may make capital distributions
in excess of the foregoing limits if the OTS does not object within a 30-day
period following notice by the association.
The OTS has amended its capital distribution regulation effective April 1,
1999. 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, the savings institution now
must obtain prior approval from the OTS if it fails to meet certain regulatory
conditions or if, after giving effect to the proposed distribution, the
institution's capital distributions in a calendar year would exceed its
year-to-date net income plus retained net income for the preceding two years or
the association would not be at least adequately capitalized.
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 annual 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 1998, the assessment rate for both SAIF and BIF
deposits ranged from 0% to 0.27% of covered deposits. WMB, WMBFA and FCIB
qualify for the lowest rate on their BIF deposits, and WMB, WMBFA and WMBfsb
qualify for the lowest rate on their SAIF deposits. Accordingly, none of these
institutions paid any deposit insurance assessments in 1998.
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. The current FICO assessment rate for
BIF-insured deposits is 1.22 cents per $100 of deposits per year and 6.10 cents
per $100 of deposits per year for SAIF-insured deposits.
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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 (original maturity of at
least five years but less than 20 years) that may be included in Tier 2 capital
is limited to 50% of Tier 1 capital.
The FDIC 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, Fannie Mae and Freddie Mac
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 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
I capital to risk-weighted assets must be at least 4.00%.
In addition to the risk-based capital guidelines, the FDIC uses a leverage
ratio to evaluate a bank's capital adequacy. Most banks are required to maintain
a minimum leverage ratio of Tier 1 capital to average assets of at least 4.00%
to 5.00%. The FDIC retains the right to require a particular institution to
maintain a higher capital level based on 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, 1998:
TIER 1 CAPITAL TO TOTAL CAPITAL TO
TIER 1 CAPITAL TO RISK-WEIGHTED RISK-WEIGHTED
AVERAGE ASSETS ASSETS ASSETS
----------------- ----------------- ----------------
Regulatory minimum................... 4.00% - 5.00% 4.00% 8.00%
WMB's actual......................... 5.90 10.59 11.47
FCIB actual.......................... 20.02 24.01 25.27
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.
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OTS regulations incorporate a risk-based capital requirement that is
designed to be no less stringent than the capital standard applicable to
national banks. It is modeled in many respects on, but not identical to, the
risk-based capital requirements adopted by the FDIC. Associations whose exposure
to interest rate risk is deemed to be above normal will be required to deduct a
portion of such exposure in calculating their risk-based capital. The OTS may
establish, on a case-by-case basis, individual minimum capital requirements for
a savings association that vary from the requirements that otherwise would apply
under the OTS capital regulations. The OTS has not established such individual
minimum capital requirements for WMBFA or WMBfsb.
The following table sets forth the current regulatory requirement for
capital ratios for savings associations as compared with our capital ratios at
December 31, 1998:
CORE RISK- TOTAL RISK-
CORE TANGIBLE BASED BASED
CAPITAL CAPITAL CAPITAL CAPITAL
RATIO RATIO RATIO RATIO
------- -------- ---------- -----------
Regulatory minimum......................... 3.00%(1) 1.50% 4.00% 8.00%
WMBFA's actual............................. 5.76 5.76 10.22 12.11
WMBfsb's actual............................ 7.37 7.37 12.09 13.35
- ---------------
(1) Most savings associations are required to maintain a minimum leverage ratio
of at least 4.00% - 5.00%.
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 the 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
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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.
FDIC and OTS Regulation and Examination
The FDIC has adopted regulations to protect the deposit insurance funds and
depositors, including regulations governing the deposit insurance of various
forms of accounts. The FDIC also has adopted numerous regulations to protect the
safety and soundness of FDIC-regulated banks. These regulations cover a wide
range of subjects including financial reporting, change in bank control,
affiliations with securities firms and capital requirements. In certain
instances, these regulations restrict the exercise of powers granted by state
law.
An FDIC regulation and a joint FDIC/OTS policy statement place a number of
restrictions on the activities of WMB's and WMBFA's securities affiliates and on
such affiliates' transactions with WMB, WMBFA and WMBfsb. These restrictions
include requirements that such affiliates follow practices and procedures to
distinguish them from WMB, WMBFA and WMBfsb and that such affiliates give
customers notice from time to time of their separate corporate status and of the
distinction between insured deposits and uninsured nondeposit products.
FDICIA also prohibited banks, such as WMB, and their subsidiaries from
exercising certain powers that were granted by state law to make investments or
carry on activities as principal (i.e., for their own account) unless either (i)
national banks have power under federal law to make such investments or carry on
such activities, or (ii) the bank and such investments or activities meet
certain requirements established by FDICIA and the FDIC.
FDICIA imposed new supervisory standards requiring annual examinations,
independent audits, uniform accounting and management standards, and prompt
corrective action for problem institutions. As a result of FDICIA, depository
institutions and their affiliates are subject to federal standards governing
asset growth, interest rate exposure, executive compensation, and many other
areas of depository institution operations. FDICIA contains numerous other
provisions, including reporting requirements and revised regulatory standards
for, among other things, real estate lending.
The FDIC may sanction any FDIC-regulated bank that does not operate in
accordance with FDIC regulations, policies and directives. Proceedings may be
instituted against any FDIC-regulated bank, or any institution-affiliated party,
such as a trustee, director, officer, employee, agent, or controlling person of
the bank, who engages in unsafe and unsound practices, including violations of
applicable laws and regulations. The FDIC may revalue assets of an institution,
based upon appraisals, and may require the establishment of specific reserves in
amounts equal to the difference between such revaluation and the book value of
the assets. The State Director has similar authority under Washington state law,
and the OTS has similar authority under HOLA. The FDIC has additional authority
to terminate insurance of accounts, after notice and hearing, upon a finding
that the insured institution is or has engaged in any unsafe or unsound practice
that has not been corrected, is operating in an unsafe or unsound condition, or
has violated any applicable law, regulation, rule, or order of or condition
imposed by the FDIC.
Federal savings associations, such as WMBFA and WMBfsb, are subject to
regulatory oversight and examination by the OTS and the FDIC. HOLA and OTS
regulations delineate such associations' investment and lending powers. Federal
savings associations generally may not invest in noninvestment grade debt
securities, nor may they generally make equity investments, other than
investments in service corporations.
Federal law and regulations require that WMBFA and WMBfsb maintain liquid
assets in excess of a specified limit. See "Management's Discussion and Analysis
of Financial 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
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Omnibus Budget Reconciliation Act of 1993 (the "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 $41.6 million or less, plus 10% on amounts in excess of $41.6
million. Institutions may designate and exempt $4.9 million of certain
reservable liabilities from these reserve requirements. These amounts and
percentages are subject to adjustment by the Federal Reserve Board. Savings
banks and savings associations, 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 institution to exhaust
other reasonable alternative sources before borrowing from the Federal Reserve
Bank.
Numerous other regulations promulgated by the Federal Reserve Board affect
the business operations of our banking subsidiaries. These include regulations
relating to equal credit opportunity, electronic fund transfers, collection of
checks, truth in lending, truth in savings and availability of funds.
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.
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.
Under the regulations applicable before July 1, 1997, 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. Although subsequent CRA
examinations have occurred, we have not yet received the final results. 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.
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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.
As part of this commitment, we expect to continue our long-standing target
of returning 2% of our pretax earnings in contributions to the communities we
serve, with an emphasis on underserved areas. We will target 3% of our after-tax
earnings, plus an additional 10% of any net recovery from the resolution of
Ahmanson's goodwill litigation against the U.S. government, if that total
exceeds 2% of pretax earnings. These contributions are made through grants,
sponsorships, loans at below-market rates, in-kind donations, volunteer time and
other financial support.
Recent and Proposed Federal Legislation and Regulation
Effective June 1, 1997, federal legislation repealed certain restrictions
on the establishment of interstate branches by national banks and
state-chartered banks. In addition, bank holding companies are now generally
permitted to buy banks in any state. WMBFA and WMBfsb already had authority to
establish interstate branches under existing federal law and regulations, so
management expects that such legislation will primarily benefit our competitors.
In February 1999, the OTS proposed a regulation which could affect WMI's
ability to engage in certain nonbanking activities. If a savings and loan
holding company ("SLHC") owns more than one savings association, it is a
multiple SLHC. HOLA generally restricts multiple SLHCs and their non-association
subsidiaries to traditional savings association activities and services and to
activities permitted bank holding companies. These restrictions do not apply to
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 ("supervisory acquisition"). Such a multiple SLHC is
sometimes referred to as an "exempt" multiple SLHC. The OTS proposal states
that, under certain circumstances, an exempt multiple SLHC could lose its exempt
status if it or one of its 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 -- were acquired in 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 not permitted to multiple SLHCs.
Various legislative proposals relating to financial services companies have
been or are expected to be introduced in the current session of Congress. These
include proposals to restrict affiliations between banks and nonbanking
corporations including life insurance companies, and to require federal savings
institutions,
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such as WMBFA and WMBfsb, to convert to commercial banks. The outcome of these
legislative proposals cannot be forecast reliably.
Regulation of Nonbanking Affiliates
As a broker-dealer registered with the Securities and Exchange Commission
("SEC") and a member of the National Association of Securities Dealers, Inc.
("NASD"), WM Financial Services is subject to various regulations and
restrictions imposed by those entities, as well as by various state authorities.
As a registered investment advisor, WM Advisors is subject to various federal
and state securities regulations and restrictions.
The NASD has adopted and forwarded to the SEC for approval rules concerning
NASD member operations conducted in branches of depository institutions.
Although many of the NASD's proposed requirements are substantially similar to
the joint FDIC/OTS policy statement governing the activities of our securities
affiliates, the NASD proposal, if approved by the SEC, could impose additional
restrictions on these affiliates.
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 to the normal competitive factors described
above, our management at the holding company level has limited operating
experience in California, Florida and Texas.
Although consolidation has decreased the number of institutions competing
in our markets, both savings associations 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. For 1998, our
originations of SFR loans ranked first in both Washington and Oregon, and second
in California.
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PRINCIPAL OFFICERS
The following table sets forth certain information regarding the principal
officers of Washington Mutual:
EMPLOYEE OF
PRINCIPAL OFFICERS AGE CAPACITY IN WHICH SERVED COMPANY SINCE
- ------------------ --- ------------------------ -------------
Kerry K. Killinger.................. 49 Chairman of the Board of Directors, 1983
President and Chief Executive
Officer
Fay L. Chapman...................... 52 Executive Vice President and General 1997
Counsel
Craig S. Davis...................... 47 Executive Vice President 1996
Steven P. Freimuth.................. 42 Executive Vice President 1988
William A. Longbrake................ 55 Executive Vice President and Chief 1996
Financial Officer
Deanna W. Oppenheimer............... 40 Executive Vice President 1985
Craig E. Tall....................... 53 Executive Vice President 1985
S. Liane Wilson..................... 56 Executive Vice President 1985
Richard M. Levy..................... 40 Senior Vice President and Controller 1998
Norman H. Swick..................... 49 Senior Vice President and Chief Risk 1980
Officer
Douglas G. Wisdorf.................. 44 Senior Vice President and Deputy 1976
Chief
Financial Officer
Mr. Killinger has been Chairman, President and Chief Executive Officer of
WMI since its organization as a holding company in 1994. He has been Chairman of
the Board of Directors of WMB since 1991 and Chief Executive Officer since 1990.
Mr. Killinger became an Executive Vice President of WMB in 1983, a Senior
Executive Vice President of WMB in 1986 and the President and a director of WMB
in 1988.
Ms. Chapman became an Executive Vice President and General Counsel and
member of the Executive Committee of WMI in September 1997. 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. In his
capacity as Executive Vice President, Mr. Davis is responsible for SFR lending
and financial services. He was Director of Mortgage Origination of American
Savings Bank from 1993 through 1996 and served as President of ASB Financial
Services, Inc. from 1989 to 1993.
Mr. Freimuth became an Executive Vice President and member of the Executive
Committee in 1997. In this capacity, he is responsible for corporate lending
administration and human resources. He joined WMB as a Vice President in 1988
and became a Senior Vice President in 1991.
Mr. Longbrake rejoined WMI in October 1996 as Executive Vice President and
Chief Financial Officer and a member of the Executive Committee. In his capacity
as Executive Vice President, Mr. Longbrake is responsible for corporate finance.
From March of 1995 through September of 1996, he served as Deputy to the
Chairman for Finance and Chief Financial Officer of the FDIC. Mr. Longbrake was
Senior Executive Vice President and Chief Financial Officer of WMI from its
organization through February 1995. He was Chief Financial Officer of WMB from
1988 to 1995 and a member of our Executive Committee from its formation in 1990
until 1995 and again since 1996.
Ms. Oppenheimer has been an Executive Vice President of WMI since its
organization. She has been an Executive Vice President of WMB since 1993 and a
member of the Executive Committee since its formation in 1990. In this capacity,
Ms. Oppenheimer is responsible for corporate marketing and consumer bank
distribution. She has been an officer of WMB since 1985. She became an Assistant
Vice President of WMB in 1986, a Vice President in 1987 and a Senior Vice
President in 1989.
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Mr. Tall has been an Executive Vice President of WMI since its
organization. He had been an Executive Vice President of WMB since 1987 and a
member of the Executive Committee since its formation in 1990. In his capacity
as Executive Vice President, Mr. Tall is responsible for corporate development,
corporate properties, commercial banking and consumer finance.
Ms. Wilson has been an Executive Vice President of WMI since its
organization. She has been an Executive Vice President of WMB since 1988 and a
member the Executive Committee since its formation in 1990. In her capacity as
Executive Vice President, Ms. Wilson is responsible for corporate operations.
Mr. Levy has been a Senior Vice President and Controller 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 WMI since its organization.
He became Chief Risk Officer in 1998 and prior to that time was the Company's
General Auditor. He has been an officer of WMB since 1980. Mr. Swick became a
Vice President in 1984 and Senior Vice President in 1988. In this capacity, he
monitors our internal controls and credit risk.
Mr. Wisdorf has been Deputy Chief Financial Officer since 1996 and Senior
Vice President of WMI since its organization. Mr. Wisdorf was Controller of WMI
from 1994 to February 1998. He became Vice President and Controller of WMB in
1986 and has been an officer since 1978.
ITEM 2. PROPERTIES
As of December 31, 1998, the Company's banking subsidiaries conducted
business from 1,173 consumer financial centers, 55 Western Bank financial
centers, 16 business banking centers and 273 home loan centers and wholesale
loan centers in 37 states and the District of Columbia. Consumer finance
operations were conducted in over 500 locations in 24 states.
Washington Mutual's administrative offices are located at 1201 Third
Avenue, Seattle, Washington, 98101 where, as of December 31, 1998, the Company
leased approximately 236,000 square feet pursuant to a lease agreement that
starts to terminate in 2007. The Company also leases approximately 158,000
square feet of space in Seattle in the Second and Seneca Building pursuant to a
lease agreement that starts to terminate in 2001; approximately 75,000 square
feet in the adjoining building pursuant to a lease agreement that starts to
terminate in 2006; approximately 100,000 square feet in Seattle in the First
Interstate Building at 999 Third Avenue pursuant to a lease agreement that
starts to terminate in 1999; approximately 76,000 square feet in Seattle in the
1111 Third Avenue Building pursuant to a lease agreement that starts to
terminate in 2004; approximately 59,000 square feet in the Rainer Tower Building
at 1301 Fifth Avenue pursuant to a lease agreement that starts to terminate in
2003; and approximately 110,000 square feet in Bothell, Washington pursuant to a
lease agreement that terminates in 2009. The Company has multiple options to
renew leases at all locations.
WMBFA administrative and subsidiary operations are conducted from owned
office space totaling 280,000 square feet in Irvine, California; 237,000 square
feet in Stockton, California; and 305,000 square feet in Chatsworth, California;
and 87,000 square feet