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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO :
COMMISSION FILE NUMBER 1-14667
WASHINGTON MUTUAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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WASHINGTON 91-1653725
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NUMBER)
1201 THIRD AVENUE, SEATTLE, WASHINGTON 98101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 461-2000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock New York Stock Exchange
8% Corporate Premium Income Equity Securities New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of March 2, 2001:
COMMON STOCK -- $28,799,686,768(1)
(1) Does not include any value attributable to 12,000,000 shares that are held
in escrow and not traded.
The number of shares outstanding of the issuer's classes of common stock as
of March 2, 2001:
COMMON STOCK -- 583,802,776(2)
(2) Includes the 12,000,000 shares held in escrow.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held April 17, 2001, are incorporated by reference into Part
III.
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WASHINGTON MUTUAL, INC.
2000 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I...................................................... 1
ITEM 1. BUSINESS.......................................... 1
Overview............................................... 1
Banking and Financial Services Group................... 1
Home Loans and Insurance Services Group................ 3
Specialty Finance Group................................ 6
Treasury Division...................................... 7
Employees.............................................. 8
Competitive Environment................................ 8
Factors That May Affect Future Results................. 9
Business Combinations.................................. 11
Taxation............................................... 11
Environmental Regulation............................... 12
Regulation and Supervision............................. 13
Principal Officers..................................... 24
ITEM 2. PROPERTIES........................................ 25
ITEM 3. LEGAL PROCEEDINGS................................. 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................ 26
PART II..................................................... 26
ITEM 5. MARKET FOR OUR COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS......................................... 26
ITEM 6. SELECTED FINANCIAL DATA........................... 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 29
Overview............................................... 29
Results of Operations.................................. 30
Review of Financial Condition.......................... 35
Provision and Allowance for Loan and Lease Losses...... 38
Operating Segments..................................... 42
Asset and Liability Management Strategy................ 43
Liquidity.............................................. 45
Capital Adequacy....................................... 46
Recently Issued Accounting Standards Adopted in These
Financial Statements.................................. 46
Recently Issued Accounting Standards Not Yet Adopted... 47
Tax Contingency........................................ 47
Goodwill Litigation.................................... 48
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................ 49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....... 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................... 51
PART III.................................................... 51
PART IV..................................................... 51
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.................................... 51
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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. Based on our consolidated assets at December 31, 2000, we were the
largest savings institution and the seventh largest banking company in the
United States.
Our principal business offices are located at 1201 Third Avenue, Seattle,
Washington 98101 and our telephone number is (206) 461-2000. When we refer to
"we" or "Washington Mutual" or the "Company" in this Form 10-K, we mean
Washington Mutual, Inc., and its consolidated subsidiaries. When we refer to
WMI, we mean Washington Mutual, Inc. exclusively.
Our business operations are conducted by our subsidiaries. Our principal
banking subsidiaries are Washington Mutual Bank, FA ("WMBFA"), Washington Mutual
Bank ("WMB") and Washington Mutual Bank fsb ("WMBfsb"). Our other principal
subsidiaries are Washington Mutual Finance Corporation ("Washington Mutual
Finance"), Long Beach Mortgage Company ("Long Beach Mortgage") and WM Financial
Services, Inc. ("WMFS").
Our assets have grown over the last five years primarily through
acquisitions. In 1996, we acquired Keystone Holdings, Inc., the parent of
American Savings Bank, F.A. ("ASB"). This acquisition, referred to as the
"Keystone Transaction," gave us our first depository institution in California.
In 1997, we acquired Great Western Financial Corporation ("Great Western") and
in October 1998, we acquired H.F. Ahmanson & Co. ("Ahmanson"). In February 1998,
Ahmanson had acquired Coast Savings Financial, Inc. (the "Coast Acquisition").
On January 31, 2001, we acquired the mortgage operations of The PNC
Financial Services Group, Inc. The principal subsidiaries acquired in that
transaction were renamed Washington Mutual Home Loans, Inc. ("WMHLI") and
Washington Mutual Mortgage Securities Corp. ("WMMSC").
On February 9, 2001, we acquired Texas-based Bank United Corp., which was
merged into Washington Mutual, Inc. As a result, all of the subsidiaries of Bank
United Corp., including Bank United, a federally chartered savings bank, became
our subsidiaries. Bank United was subsequently merged into WMBFA.
As a result of the acquisitions described above, our company has been
transformed into a national financial services company. Although we operate
principally in California, Washington, Oregon, Florida, Texas and Utah, we have
physical operations in 42 states.
Effective January 1, 2001, we realigned our business segments. The
following discussion of our business portrays our business as it is now being
managed. Separately, we are in the process of enhancing our segment reporting
process methodologies and allocations and will be reporting segment results
under the new methodologies and as realigned beginning with the first quarter of
2001.
These business segments are:
- Banking and Financial Services Group
- Home Loans and Insurance Services Group
- Specialty Finance Group
- Treasury Division
BANKING AND FINANCIAL SERVICES GROUP
Our Banking and Financial Services Group ("Banking & FS") offers a
comprehensive line of consumer and business financial products and services to
individuals and small and middle market businesses. We provide service to
approximately five million households through multiple delivery channels: over
1,100 finan-
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cial centers (both free-standing and in-store), including 35 business banking
centers, and over 1,600 automated teller machines located in eight states. We
also offer our customers the convenience of 24-hour telephone and internet
banking and investment services.
Our strategy is to expand our base of consumer and business relationships
by combining national convenience with local customer service and a broad-based
product line. In addition to traditional banking products, we offer investment
management, securities brokerage services and annuity products through our
subsidiaries and affiliates. In May 2000, we launched our own web complex, made
up of our banking site, wamu.com; Invest1to1.com and wmfinancial.com, which
provide on-line financial planning and stock trading; and wmgroupoffunds.com,
featuring WM Group of Funds information and interaction with investors and
financial advisors. In partnership with our Home Loans & Insurance Services
Group, mortgage loans and insurance products are made available through our
financial centers.
Banking & FS offers various consumer and business deposit products, as well
as a variety of value-added, fee-based banking services. Deposit products
offered include checking accounts, savings accounts, money market deposit
accounts ("MMDAs") and time deposit accounts. Fee-based services include, but
are not limited to:
- payment choices, including debit card, pay-by-phone, on-line banking,
money orders, bank checks, and traveler's checks,
- a membership program featuring free checks, a variety of product
discounts, shopping and travel services, and credit card protection
service, and
- safety deposit box rentals.
A primary focus of the Banking & FS Group in 2000 was the opening of
financial centers in Las Vegas with project Occasio(TM) (Latin for "favorable
opportunity"), which features a completely new retail approach to banking.
Occasio(TM) provides Banking & FS an additional vehicle for expanding into new
market areas where acquisition opportunities may be limited. Based on the
favorable customer acceptance and strong results in Las Vegas, we will expand
into Phoenix beginning in 2001 and will open a total of approximately 40
financial centers in Phoenix throughout 2001 and 2002. Occasio(TM) financial
centers welcome customers in an open, free-flowing retail environment where they
can either interact with roaming customer service representatives or become
engaged by high-tech, self-help, touch screens. Occasio(TM) focuses on the
customer and how the customer chooses to be served. Customers can also log onto
Washington Mutual's home page, which provides links to all of our internet
products and services.
One of Banking & FS's primary business objectives is to expand consumer and
business lending activities, as they generally offer higher yields than prime
mortgage lending activities. The size of our consumer and commercial business
loan portfolio has grown in recent years, partly due to the introduction of the
consumer lending product line in California, Florida and Texas and the expansion
of WM Business Bank in California. The following consumer loan products are
available through our financial centers:
- second mortgage loans, both for purposes unrelated to the property
securing the loan and for a variety of purposes related to the property,
including its renovation or remodeling,
- manufactured housing loans,
- purchase money loans for automobiles, marine and recreational vehicles,
- student loans,
- loans secured by deposit accounts, and
- secured and unsecured loans made under our line of credit or term loan
programs.
We offer a full line of business loan products and banking services through
our Western Bank offices in the northwest and WM Business Bank offices in
California. We concentrate on developing and maintaining
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strong client relationships with small and mid-sized companies. Our core
business customers are companies with $5 million to $100 million in sales. We
provide the following loan products to our business customers:
- business lines of credit,
- working capital loans,
- equipment loans,
- loans secured by real estate, and
- Small Business Administration ("SBA") loans.
We also offer an array of banking services to our business customers
including:
- international trade finance,
- deposit, cash, and treasury management services, and
- merchant bankcard services.
Commercial business loans are made on a secured or unsecured basis.
Collateral for secured commercial loans may be business assets, real estate,
personal assets, or some combination thereof. Our decision to make a consumer or
commercial loan is based on an evaluation of the borrower's financial capacity,
including such factors as income, other indebtedness and credit history; company
performance, in the case of commercial loans; and collateral.
The merger with Bank United Corp. enhances our presence in the State of
Texas. Prior to the merger, our operations served more than 125,000 households
through 48 financial centers in and around Dallas and Houston. The merger with
Bank United Corp. adds over 300,000 households and approximately 160 financial
centers to our Texas presence and expands our market coverage into the Austin
and San Antonio markets. The merger with Bank United Corp. strengthens our
market position for business lending in Texas, as well as nationally through SBA
lending offices located in some of the nation's most attractive geographic
markets.
Our investment services are offered through: (1) WMFS, a licensed
broker-dealer, (2) WM Fund Advisors, Inc. ("WM Advisors") providing investment
advisory and distribution services for the WM Group of Funds, and (3) the
Annuity Program. At December 31, 2000, WMFS was licensed in 49 states and Puerto
Rico and operated in the eight states where our financial centers are located.
Over 500 financial consultants and 800 licensed bank employees provide
investment services to retail customers.
WM Advisors, our registered investment advisor subsidiary, had $8.21
billion of assets under management in 17 mutual funds, five asset management
portfolios, and one variable annuity at December 31, 2000. The WM Group of Funds
is managed both by WM Advisors and by three subadvisors. The WM Group of Funds
is distributed through our financial centers and is also distributed through a
network of over 400 broker-dealers and independent financial advisors. The
Annuity Program utilizes over 800 licensed bank employees who sell fixed
annuities to our customers.
HOME LOANS AND INSURANCE SERVICES GROUP
The Home Loans and Insurance Services Group ("Home Loans Group")
originates, purchases and services the single-family residential ("SFR")
mortgage assets of WMBFA, WMB, WMBfsb, and Long Beach Mortgage. This group also
includes the activities of Washington Mutual Insurance Services, Inc., an
insurance agency that supports the mortgage lending process, as well as the
insurance needs of all consumers doing business with us.
The Home Loans Group's mission is to be the premier catalyst for affordable
homeownership, using our proprietary approach to home lending encompassed in our
branding, the Power of Yes(TM). The goal of the Home Loans Group is to be the
nation's leading mortgage lender. We will measure our success by our origination
and servicing market share, our profitability, and brand awareness.
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During 2000, the Home Loans Group announced partnerships with two
electronic mortgage origination companies to develop a mortgage origination and
decision-making platform known as Optis(TM). This system will be available in
all of our distribution channels, which will allow consumers to conduct business
with us according to their preferences. In the third quarter of 2000, we
re-launched www.wamumortgage.com. The new site possesses a more robust
recommendation engine, numerous calculators, interactive customer service, and
provides 24-hour customer access to the status of their loan application.
As of December 31, 2000, the Home Loans Group served about 1.2 million
households throughout the United States by providing a wide range of mortgage
financing products. Our principal banking subsidiaries offer first mortgage loan
products that provide permanent home financing as well as loans for the
construction of single-family homes. Permanent loans made available to consumers
include conventional fixed-rate and adjustable-rate mortgage ("ARM") loans,
FHA-insured, VA-guaranteed fixed-rate mortgage loans, and both fixed- and
adjustable-rate Jumbo (loan amounts in excess of $275,000) loans. All loan
products are offered with a variety of maturities, amortization schedules and,
in the case of ARMs, rate repricing frequencies.
The primary ARM products that we offer are indexed to the 12-month average
of the annual yields on actively traded United States Treasury securities
adjusted to a constant maturity of one-year ("MTA"). Under our current programs,
a borrower may choose among loans that have interim payment caps or interim
interest rate caps.
Our loans with payment caps typically have monthly rate adjustments with
initial start rates fixed for one-, three-, six-, or twelve-months. We often
offer a "teaser" rate with our payment-capped ARMs, which means the initial
start rate of the loan is below market rates. These loans offer our borrowers
payment flexibility not offered in other loan products, which has made this our
most popular home-financing product. The loans feature four payment options each
month: a minimum payment based on the start rate; a payment that covers the full
interest due; a payment that ensures full amortization over the term of the
loan; and a payment that amortizes the loan over 15 years. These loans typically
have payments that we cannot change annually by more than a contractual
percentage, usually 7.5%. In addition, we offer loans with fixed initial start
rates for one-, three-, or five-years and annual rate adjustments thereafter.
The annual rate adjustments are usually limited to 2% and the payments are
always re-amortized to the remaining maturity of the loan. In addition, we offer
each of our loan products with a prepayment premium as well as at a different
rate without a prepayment premium.
These mortgage products are made available to consumers through various
distribution channels, which include retail home loan centers, wholesale home
loan centers, financial centers and the internet. For 2000, based on total
originations, the Home Loans Group was the nation's largest ARM lender as well
as the nation's largest Jumbo lender. In addition, the Home Loans Group was the
nation's fifth largest residential lender and sixth largest residential loan
servicer.
Two of our primary business objectives are to stabilize income and
diversify revenues. To achieve these objectives, we have implemented a
three-point strategy to generate: (1) spread income from loans held in
portfolio; (2) fee income through loan servicing, loan-related fees, and
insurance services income; and (3) gains from sales of loans and mortgage-backed
securities ("MBS").
The acquisitions of Bank United Corp. and the mortgage operations of The
PNC Financial Services Group, Inc. further diversify our mortgage operations
geographically, enhance our position in the home loan business, and build our
loan servicing portfolio. These acquisitions make us the nation's second largest
residential mortgage originator and fourth largest servicer of residential
mortgages based on pro forma numbers for the year ended December 31, 2000. They
enhance our position by giving us a stronger capability to originate loans in
all 50 states, including originating FHA-insured and VA-guaranteed loans on a
national scale. With the acquisition of WMMSC, we also obtained an improved
capability to securitize loans and sell the resulting MBS in the secondary
market and to generate fee income through master servicing activities.
Originations of prime SFR loans (excluding SFR construction loans)
increased during 2000, fueled particularly by originations of short-term ARMs,
which reprice primarily on a monthly basis according to the index (e.g., MTA,
11th District monthly weighted average cost of funds index ("COFI")) to which
the
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ARMs are tied. The increase in short-term ARM originations was attributable to
the higher interest rate environment during the first half of 2000 and the
resulting customer preference for short-term ARMs over fixed-rate loans.
We generally sell the fixed-rate SFR loans we originate. Most of the
fixed-rate conforming mortgage loans are sold to Fannie Mae. In addition, we
securitize loans that are also sold to Fannie Mae. We use our own underwriting
standards and origination system to originate loans.
We occasionally securitize loans through Fannie Mae and Freddie Mac under
programs in which they have recourse against us as the servicer of the loans
("Recourse MBS"). These securitizations primarily involve ARMs. They generally
are less costly and sometimes require less documentation than securitizations
without recourse ("Non-Recourse MBS"). We can either sell Recourse MBS in the
secondary market or use them to collateralize borrowings and to meet regulatory
liquidity requirements. We have retained the majority of Recourse MBS in our
portfolio.
The Home Loans Group has also been developing ways of selling ARM loans in
the secondary market to complement our existing strategy of selling fixed-rate
loans. Selling ARM loans in the secondary market will allow us to manage asset
growth more efficiently and should reduce the volatility of income related to
loans during changing interest rate environments. To achieve optimum pricing,
current ARM production that is not retained in the loan portfolio will either be
sold to investors shortly following origination or securitized and retained in
the available-for-sale securities portfolio for a period of time, and then sold
as Non-Recourse MBS. We expect to be able to increase the amount of noninterest
income relative to net interest income through gains on sales of loans and MBS
as well as loan servicing income.
Through Long Beach Mortgage, we are engaged in the business of originating,
purchasing and selling specialty mortgage loans. Long Beach Mortgage originates
loans primarily through wholesale channels of production. Long Beach Mortgage's
nationwide network of independent mortgage loan brokers generates loans in all
50 states and the District of Columbia. In 2000, none of Long Beach Mortgage's
wholesale brokers was responsible for more than 1% of Long Beach Mortgage's
wholesale originations during the year. Long Beach Mortgage maintains a close
working relationship with brokers through its sales force of approximately 280
account executives located in 59 offices.
Long Beach Mortgage has followed a strategy of selling or securitizing and
selling substantially all of its loan originations in the secondary market. Long
Beach Mortgage has historically sold its entire economic interest in the loan
except for the related servicing rights, which it has generally retained. In
2000, Long Beach Mortgage began securitizing and selling its production while
retaining rights to residual cash flows in the securities created.
The Home Loans Group also purchases loan portfolios with risk
characteristics similar to those of loans originated by Long Beach Mortgage.
Because these portfolios, as well as those of Long Beach Mortgage, tend to have
higher credit risk, they generally provide higher yields than the prime mortgage
loans made by our banking subsidiaries and WMHLI. Our typical borrowers within
these portfolios would generally not qualify for a loan from our banking
subsidiaries due to their credit history, higher debt-to-income ratio or other
factors. While we screen these portfolios for unacceptable credit risk, these
loans, by their nature, bear more credit risk than is found in prime mortgage
loans or in agency MBS. Accordingly, we expect that loan charge offs on these
portfolios will be higher over time than on our other mortgage portfolios.
In addition to SFR mortgage loans, the Home Loans Group also offers
construction financing on SFR properties. We make custom construction loans to
the intended occupant of a house to finance the house's construction. We
typically combine construction phase financing with permanent financing of the
completed home.
All loans originated are subject to the same nondiscriminatory underwriting
standards. All loans are subject to underwriting review and approval by various
levels of our personnel, depending on the size and characteristics of the loan.
We require title insurance on all first liens on real property securing loans.
We also require our borrowers to maintain property and casualty insurance in an
amount at least equal to the total of
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our loan amount plus all prior liens on the property or the replacement cost of
the property, whichever is less. We perform re-underwriting and appraisal review
on some of the loans acquired from our correspondents.
Washington Mutual Insurance Services, Inc. is an insurance agency that
supports the mortgage lending process by offering fire, homeowners, flood,
earthquake and other property and casualty insurance products to borrowers. In
addition, the agency offers mortgage life insurance, accidental death and
dismemberment, term, whole life, and other life insurance products to existing
mortgage and deposit customers. The Washington Mutual Insurance Services, Inc.
website, wamuins.com, was launched in October 2000, providing information,
quotes, and buying capabilities over the internet.
SPECIALTY FINANCE GROUP
The Specialty Finance Group conducts operations through WMBFA, WMB, WMBfsb,
and Washington Mutual Finance. An array of commercial products are offered to
our customers through our group, all under the Washington Mutual brand name.
Additionally, consumer finance products are offered through Washington Mutual
Finance.
The Specialty Finance Group provides industry specialty financing for the
following business sectors: syndicated finance, asset-based finance, and
franchise finance. In each of these areas, we have developed specialized
expertise that allows us to serve our markets efficiently while at the same time
ensuring high credit quality from a diverse group of customers.
The merger with Bank United Corp. complements our plans to grow our
commercial business portfolio and extends our market presence into some of the
nation's most attractive geographic markets, including Texas. Like our existing
business, Bank United Corp. offers a full line of commercial products and
services to businesses across the nation. Lending programs added as a result of
the merger with Bank United Corp. include mortgage banker finance, and energy
and healthcare lending.
The Specialty Finance Group provides real estate secured financing for
commercial and multi-family real estate lending and residential builder
construction. As a result of the merger with Bank United Corp., the Group also
provides non-real estate secured lending activities, as previously mentioned. In
addition, the Specialty Finance Group provides loan servicing for these lending
activities.
Commercial and multi-family real estate loans are offered to property
owners and developers through 19 Washington Mutual commercial real estate
offices in Washington, Oregon, Utah, Colorado, and California. The payment
experience on loans secured by income-producing properties usually depends on
the successful operations of the real estate projects that secure the loans and,
thus, may be subject to adverse conditions in the real estate market or in the
economy, particularly the interest rate environment. Commercial real estate
values tend to be cyclical and, while commercial real estate values trended
upward in many parts of the country in 2000, we closely monitor the commercial
real estate environment to determine the appropriate level of our activity in
this area. In commercial real estate lending, we consider the project's
location, marketability, and overall attractiveness. Current underwriting
guidelines for commercial real estate loans require an economic analysis of each
property with regard to the annual revenue and expenses, debt service coverage,
and fair value to determine the maximum loan amount. Before we make a commercial
real estate loan, various levels of approvals must be obtained depending on the
size and characteristics of the loan.
Residential builder construction provides loans to borrowers who are in the
business of acquiring land and building homes for resale. Each builder loan is
made on a property-by-property basis and generally matures one to three years
from origination. Proper consideration is given to the higher risk inherent in
these transactions as each loan is underwritten. During 2000, substantially all
of our SFR builder construction loans were made in Washington, Oregon, Utah,
Florida, and California. The addition of Bank United Corp.'s residential builder
construction business qualifies us as one of the largest builder construction
lenders in the nation and diversifies our geographic market presence.
Mortgage banker finance provides small- and medium-sized mortgage and
consumer finance companies with credit facilities, including secured lines of
credit, securities purchased under agreements to resell and
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working capital credit lines. Mortgage banker finance also offers cash
management, document custody, and deposit services to its customers.
Washington Mutual Finance currently operates 533 branches in 25 states,
primarily in the southeastern United States, Texas and California. Washington
Mutual Finance originates and services consumer installment loans and real
estate secured loans. These loans, which are generally held in the loan
portfolio, are primarily for personal, family or household purposes. These loans
typically have original terms ranging from 12 to 360 months. In 2000,
originations had an average original term of 74 months. Of the originations (in
dollars) in 2000, 70% were unsecured or secured by luxury goods, automobiles or
other personal property, and 30% were secured by real estate. Additionally,
Washington Mutual Finance acquires installment contracts from local retail
establishments, usually without recourse to the originating merchant. These
contracts are typically written with original terms of three to 60 months,
averaging 28 months in 2000.
The loans made by Washington Mutual Finance generally have a higher yield
than the prime mortgage loans made by our banking subsidiaries, because these
loans tend to have higher credit risk. Our typical consumer finance borrower
would generally not qualify for a loan from our banking subsidiaries due to
their credit history, high debt-to-income ratio or other factors.
TREASURY DIVISION
The primary responsibilities of our treasury division are:
- interest rate risk management,
- liquidity management,
- investing activities,
- borrowing activities, and
- capital management.
Interest Rate Risk Management
We actively manage the amounts and maturities of our assets and liabilities
to mitigate repricing and prepayment risks. We sell fixed-rate loans, since they
are difficult to match in duration to liabilities because of prepayment risk and
longer maturities. To further mitigate repricing risk, prepayment risk, and to a
lesser extent cap risk, we use derivative instruments, such as interest rate
exchange agreements and interest rate cap agreements. See "Management of
Interest Rate Risk and Derivative Activities." We do not attempt to hedge lag or
basis risk because the impacts of these risks are usually short-lived and the
cost of hedging is high.
To monitor the sensitivity of earnings to interest rate changes, we conduct
financial modeling of the balance sheet and earnings under a variety of interest
rate scenarios. This modeling does require significant assumptions about loan
prepayment rates, loan origination volumes and liability funding sources. While
these assumptions may ultimately differ from actual results, these simulations
are helpful for measuring interest rate sensitivity. We monitor interest rate
sensitivity and attempt to reduce the risk of a significant decrease in net
interest income caused by a change in interest rates. We also monitor the impact
of interest rate changes on our net portfolio value.
Liquidity Management
Our liquidity policy is to maintain sufficient liquidity above daily
funding needs to protect against unforeseen liquidity demands. We manage
liquidity primarily through the securitization of mortgage loans and through
various sources of borrowings, including securities sold under agreements to
repurchase ("repurchase agreements"), Federal Home Loan Bank ("FHLB") advances,
and other secured and unsecured sources of funds.
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Investing Activities
We manage the Company's purchased investment securities, which are
primarily comprised of agency MBS and investment grade private MBS. During 2000,
our purchases of MBS declined, since the MBS had acceptable, but lower returns
than loans originated by us and held in our portfolio or securitized and
retained.
Borrowing Activities
To keep pace with asset growth in recent years, we have increasingly relied
on wholesale borrowings to fund asset growth. Borrowings include repurchase
agreements, the purchase of federal funds, the issuance of capital notes and
other types of debt securities, the issuance of commercial paper, and funds
obtained as advances from the FHLBs of Seattle and San Francisco. We also have
access to the Federal Reserve Bank's discount window.
We actively engage in repurchase agreements with authorized broker-dealers
and major customers, selling U.S. Government debt securities and MBS under
agreements to repurchase them at a future date.
WMB and WMBfsb are members of the FHLB of Seattle, and WMBFA is a member of
the FHLB of San Francisco. As members, each company maintains a credit line that
is a percentage of its total regulatory assets, subject to collateralization
requirements. Each institution obtaining FHLB advances is required to enter into
a written agreement with the lending FHLB under which the borrowing institution
is primarily and unconditionally obligated to repay such advances and all other
amounts owed to the lending FHLB. All advances must be fully secured by eligible
collateral. Eligible collateral includes all stock owned of the FHLBs, deposits
with the FHLBs, and certain mortgages or deeds of trust and securities of the
U.S. Government and its agencies.
Our depository institutions accept deposits, primarily time deposit
accounts, from political subdivisions and public agencies. We consider these
deposits to be a borrowing source rather than a customer relationship and,
hence, they are managed by the treasury division.
Other funding activities include the issuance of commercial paper by WMI
and Washington Mutual Finance. We have commercial paper facilities backed by
combined credit facilities from a syndicate of banks. We also issue senior and
subordinated debt at WMI and WMBFA, and senior notes at Washington Mutual
Finance.
Capital Management
In order to deploy accumulated capital, we repurchased our common stock
during the first half of 2000. From April 20, 1999, the inception of the
repurchase program, through June 30, 2000, we repurchased a total of 66.3
million shares as part of our previously announced purchase programs. We did not
repurchase any shares during the last half of 2000. During this time, capital
was accumulated to facilitate balance sheet growth and accommodate the
acquisitions of Bank United Corp. and the mortgage operations of The PNC
Financial Services Group, Inc. Our capital management strategy also focuses on
the risk-based capital and leverage ratios of our principal banking
subsidiaries.
EMPLOYEES
Our number of full-time equivalent employees ("FTE") at December 31, 2000
was 28,798, a slight increase from 28,509 at December 31, 1999. During the
previous year, the number of FTE also increased slightly from 27,957 at December
31, 1998, primarily as a result of approximately 1,000 employees added in the
acquisition of Long Beach Mortgage. We believe that we have been successful in
attracting quality employees and that our employee relations are good.
COMPETITIVE ENVIRONMENT
We operate in a highly competitive environment. The activities of our three
major lines of business (Banking and Financial Services, Home Loans and
Insurance Services, and Specialty Finance) are subject to
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significant competition in attracting and retaining deposits and making loans as
well as in providing other financial services in all of our market areas.
Competition focuses on customer services, interest rates on loans and deposits,
lending limits and customer convenience, such as product lines offered and the
accessibility of services.
Our most direct competition for deposits has historically come from savings
institutions, credit unions and commercial banks doing business in our primary
market areas of California, Washington, Oregon, Florida, Texas and Utah. Enacted
in 1999, the Gramm-Leach-Bliley ("GLB") Act does not increase our authority to
affiliate, but it does benefit our competitors, as discussed below. See
"Business -- Regulation and Supervision." As with all banking organizations, we
have also experienced competition from nonbanking sources, including mutual
funds, corporate and governmental debt securities and other investment
alternatives offered within and outside of our primary market areas.
Our most direct competition for loans has traditionally come from other
savings institutions, national mortgage companies, insurance companies,
commercial banks and government-sponsored enterprises ("GSEs"). In addition to
the provisions of the GLB Act, technological advances and heightened e-commerce
activities have also increased accessibility to services without physical
presence, which has intensified competition among banking as well as nonbanking
companies in offering financial products and services. Although our competitors'
activities may make it a bigger challenge for us to achieve our financial goals,
we are continuously reassessing our overall competitive edge to attract more
customers for our products and services.
With the changes in technology and increased competition from banking as
well as from nonbanking entities, the traditional environment in which we have
operated in the past has been transformed into a fiercely dynamic and
competitive environment. Although we are faced with increased competitive
pressures, we remain adaptable to these changes by continuously reviewing and
redefining the ways in which we do our business and, as a result, we remain a
strong market force in our core areas.
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, we have made and will make forward-looking statements.
Our Form 10-K and other documents that we file with the Securities and Exchange
Commission have forward-looking statements. In addition, our senior management
may make forward-looking statements orally to analysts, investors, the media,
and others. Forward-looking statements can be identified by the fact that they
do not relate strictly to historical or current facts. They often include words,
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," or words of similar meaning, or future or conditional verbs, such
as "will," "would," "should," "could," or "may."
Forward-looking statements provide our expectations or predictions of
future conditions, events or results. They are not guarantees of future
performance. By their nature, forward-looking statements are subject to risks
and uncertainties. These statements speak only as of the date they are made. We
do not undertake to update forward-looking statements to reflect the impact of
circumstances or events that arise after the date the forward-looking statements
were made. There are a number of factors, many of which are beyond our control,
that could cause actual conditions, events or results to differ significantly
from those described in the forward-looking statements.
Some of these factors are described below.
Business and Economic Conditions
Our business and earnings are sensitive to general business and economic
conditions. These conditions include short-term and long-term interest rates,
inflation, monetary supply, fluctuations in both debt and equity capital
markets, the strength of the U.S. economy, and the local economies in which we
conduct business. If any of these conditions worsen, our business and earnings
could be adversely affected. For example, if interest rates continue to decline,
this could increase loan prepayments, which could lead to a decline in the value
of our mortgage servicing rights. An economic downturn or rising interest rate
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environment could decrease the demand for loans and increase the number of
customers who become delinquent or default on their loans. An increase in
delinquencies or defaults could result in a higher level of charge offs and
provision for loan and lease losses, which could adversely affect our earnings.
Higher interest rates would also increase our cost of interest-bearing
liabilities, which could outpace the increase in the yield on interest-earning
assets and lead to a reduction in the net interest margin.
Diversification of Assets
We have reduced the percentage of SFR loans and MBS in our portfolio and
increased the percentage of consumer loans, commercial business loans and
specialty mortgage finance loans. Although these loans generally provide a
higher yield than our SFR loans and MBS, they also carry more credit risk. To
the extent that we need to increase our provision for loan and lease losses as a
result of these loans, our earnings could be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") -- Provision and Allowance for Loan and Lease Losses" in
this Form 10-K for more specific discussion.
Concentration of Operations in California
At December 31, 2000, 52% of our loan portfolio and 71% of our deposits
were concentrated in California. As a result, our results of operations and
financial condition are particularly subject to the conditions in the
single-family and multi-family residential markets in California. If economic
conditions generally, or in California in particular, worsen or if the market
for residential real estate declines, we may experience greater delinquencies,
which may result in decreased net income and decreased collateral values on our
existing portfolio. We also may not be able to originate the volume or type of
loans or achieve the level of deposits that we currently anticipate.
The forward-looking statements contained within MD&A assume that the
California economy and real estate market will remain healthy. Worsening of
economic conditions or a significant decline in real estate values in California
could have a materially adverse effect on our results of operations and
financial condition.
Competition
We face significant competition both in attracting and retaining deposits
and in making loans in all of our markets. As with all banking organizations, we
have also experienced competition from nonbanking sources, including mutual
funds and securities brokerage companies. We expect increased competition in the
financial services industry as a result of recent legislation that removes many
of the restrictions on affiliations among banks, insurance companies, and
securities firms. Our most direct competition for loans comes from other savings
institutions, national mortgage companies, insurance companies, commercial
banks, and government-sponsored enterprises ("GSEs"), such as Fannie Mae and
Freddie Mac. Competition from such sources could increase in the future and
could adversely affect our ability to achieve our financial goals. In addition,
competitive factors, such as the lower cost structure of less-regulated
originators and the influence of the GSEs in establishing rates, heavily
influence our lending activities.
Fiscal and Monetary Policies
Our business and earnings are significantly affected by the fiscal and
monetary policies of the federal government and its agencies. We are
particularly affected by the policies of the Federal Reserve Board, which
regulates the supply of money and credit in the United States. The Federal
Reserve Board's policies directly and indirectly influence the yield on our
interest-earning assets and the cost of our interest-bearing liabilities.
Changes in those policies are beyond our control and difficult to predict.
Mergers and Acquisitions
We expand our business, in part, by acquiring other financial institutions
or a portion of their business. We continue to explore opportunities to acquire
other financial institutions that will complement and enhance our key
strategies. A number of factors related to past and future acquisitions could
adversely affect our
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business and earnings. In addition, our acquisitions are often subject to
regulatory approval. The failure to receive required regulatory approvals within
the time frame or on the conditions expected by management could also adversely
affect our business and earnings.
BUSINESS COMBINATIONS
Most of our growth since 1988 has occurred as a result of business
combinations. The following table summarizes our business combinations since
1988:
ACQUISITION NAME DATE ACQUIRED LOANS DEPOSITS ASSETS
---------------- -------------- ------- -------- -------
(DOLLARS IN MILLIONS)
Columbia Federal Savings Bank and Shoreline Savings
Bank............................................. April 29, 1988 $ 551 $ 555 $ 753
Old Stone Bank(1).................................. June 1, 1990 230 293 294
Frontier Federal Savings Association(2)............ June 30, 1990 -- 96 --
Williamsburg Federal Savings Bank(2)............... Sept. 14, 1990 -- 4 --
Vancouver Federal Savings Bank..................... July 31, 1991 200 253 261
CrossLand Savings, FSB(2).......................... Nov. 8, 1991 -- 185 --
Sound Savings and Loan Association................. Jan. 1, 1992 17 21 24
World Savings and Loan Association(2).............. March 6, 1992 -- 38 --
Great Northwest Bank............................... April 1, 1992 603 586 710
Pioneer Savings Bank............................... March 1, 1993 625 660 927
Pacific First Bank, A Federal Savings Bank......... April 9, 1993 3,771 3,832 5,861
Far West Federal Savings Bank(2)................... April 15, 1994 -- 42 --
Summit Savings Bank................................ Nov. 14, 1994 128 169 188
Olympus Bank, a Federal Savings Bank............... April 28, 1995 238 279 391
Enterprise Bank.................................... Aug. 31, 1995 93 139 154
Western Bank....................................... Jan. 31, 1996 501 696 776
Utah Federal Savings Bank.......................... Nov. 30, 1996 89 107 122
American Savings Bank, F.A. ....................... Dec. 20, 1996 14,563 12,815 21,894
United Western Financial Group..................... Jan. 15, 1997 273 300 404
Great Western Financial Corporation................ July 1, 1997 32,448 27,785 43,770
H.F. Ahmanson & Company(3)......................... Oct. 1, 1998 33,939 33,975 50,355
Industrial Bank.................................... Dec. 31, 1998 11 26 27
Long Beach Financial Corporation................... Oct. 1, 1999 415 -- 821
Alta Residential Mortgage Trust.................... Feb. 1, 2000 156 -- 158
Mortgage operations of The PNC Financial Services
Group, Inc.(1)................................... Jan. 31, 2001 3,290 -- 7,363
Bank United Corp................................... Feb. 9, 2001 15,095 7,673 18,286
- ---------------
(1) This was an acquisition of selected assets and/or liabilities.
(2) The acquisition was of branches and deposits only. The only assets acquired
were branch facilities or loans collateralized by acquired savings deposits.
(3) Includes loans, deposits and assets acquired by Ahmanson from Coast.
TAXATION
General
For federal income tax purposes, we report income and expenses using the
accrual method of accounting on a calendar year basis. We are subject to federal
income tax under existing provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), in generally the same manner as other corporations.
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Tax Bad Debt Reserve Recapture
The Small Business Job Protection Act of 1996 (the "Job Protection Act")
requires that qualified thrift institutions, such as WMBFA, WMB and WMBfsb,
generally recapture for federal income tax purposes that portion of the balance
of their tax bad debt reserves that exceeds the December 31, 1987 balance, with
certain adjustments. Such recaptured amounts generally are to be taken into
ordinary income ratably over a six-year period beginning in 1997. Accordingly,
we have paid or will have to pay approximately an additional $4 million (based
upon current federal income tax rates) each year of the six-year period in
federal income taxes due to the Job Protection Act.
State Income Taxation
The states of California, Oregon, Florida, Texas, Utah and Idaho, as well
as many other states in which we do business, impose corporate income taxes on
companies doing business in those states.
The state of Washington does not currently have a corporate income tax.
Washington imposes on businesses a business and occupation tax based on a
percentage of gross receipts. Currently, the tax does not apply to interest
received on loans secured by first mortgages or deeds of trust on residential
properties. However, it is possible that legislation might be introduced in the
future that would repeal or limit this exemption.
Assistance Agreement
As a result of the acquisition of ASB in 1996, we are party to an agreement
(the "Assistance Agreement") with a predecessor of the Federal Savings & Loan
Insurance Corporation Resolution Fund (the "FRF"). The Assistance Agreement
provides, in part, for the payment to the FRF over time of 75% of most of the
federal tax savings and 19.5% of most of the California tax savings (in each
case computed in accordance with specific provisions contained in the Assistance
Agreement) attributable to the utilization of certain tax loss carryforwards of
New West Federal Savings and Loan Association. The provision for such payments
is reflected in the financial statements as "Income Taxes." See "Notes to
Consolidated Financial Statements -- Note 12: Income Taxes."
ENVIRONMENTAL REGULATION
Our business and properties are subject to federal and state laws and
regulations governing environmental matters, including the regulation of
hazardous substances and wastes. For example, under the federal Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and similar
state laws, owners and operators of contaminated properties may be liable for
the costs of cleaning up hazardous substances without regard to whether such
persons actually caused the contamination. Such laws may affect us both as an
owner of properties used in or held for our business, and as a secured lender of
property that is found to contain hazardous substances or wastes.
Further, although CERCLA exempts holders of security interests, the
exemption may not be available if a secured party engages in the management of
its borrower or the collateral property in a manner deemed beyond the protection
of the secured party's interest. Recent federal and state legislation, as well
as guidance issued by the United States Environmental Protection Agency and a
number of court decisions, have provided assurance to lenders regarding the
activities they may undertake and remain within CERCLA's secured party
exemption. However, these assurances are not absolute and generally will not
protect a lender or fiduciary that participates or otherwise involves itself in
the management of its borrower, particularly in foreclosure proceedings. As a
result, CERCLA and similar state statutes may influence our decision whether to
foreclose on property that is found to be contaminated. Our general policy is to
obtain an environmental assessment prior to foreclosure of commercial property.
The existence of hazardous substances or wastes on such property may cause us to
elect not to foreclose on the property, thereby limiting, and in some instances
precluding, our realization on such loans.
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REGULATION AND SUPERVISION
References in this section to applicable statutes and regulations are brief
summaries only. You should consult the statutes and regulations for a full
understanding of the details of their operation.
General
As a savings and loan holding company, WMI is subject to regulation by the
Office of Thrift Supervision ("OTS"). WMBFA and WMBfsb are federal savings
associations and are subject to extensive regulation and examination by the OTS,
which is their primary federal regulator. Their deposit accounts are insured by
the Federal Deposit Insurance Corporation ("FDIC"), through the Savings
Association Insurance Fund (the "SAIF") and, to a lesser extent, in the case of
WMBFA, the Bank Insurance Fund (the "BIF"). The FDIC also has some authority to
regulate WMBFA and WMBfsb. WMB is subject to regulation and supervision by the
Director of Financial Institutions of the State of Washington ("State
Director"). The FDIC insures the deposit accounts of WMB through both the BIF
and the SAIF. The FDIC examines and regulates WMB and other state-chartered
banks that are not members of the Federal Reserve System ("FDIC-regulated
banks"). Federal and state laws and regulations govern, among other things,
investment powers, deposit activities, borrowings, maintenance of guaranty funds
and retained earnings.
PRIMARY
FEDERAL
ENTITY CHARTER REGULATOR STATE REGULATOR INSURANCE FUND(S)
------ ---------- --------- ----------------- -----------------
WMI............................ State (WA) OTS n.a. n.a.
WMBFA.......................... Federal OTS None SAIF, BIF
WMB............................ State (WA) FDIC WA State Director BIF, SAIF
WMBfsb......................... Federal OTS None SAIF
State and federal laws govern our consumer finance subsidiaries. Federal
laws apply to various aspects of their lending practices. State laws establish
applicable licensing requirements, provide for periodic examinations and
establish maximum finance charges on credit extensions.
On November 12, 1999, the GLB Act was signed into law. The GLB Act
significantly reforms various aspects of the financial services business and
includes provisions which:
- establish a new framework under which bank holding companies and banks
(subject to numerous restrictions) can own securities firms, insurance
companies and other financial companies;
- generally subject banks to the same securities regulation as other
providers of securities products;
- prohibit new unitary savings and loan holding companies from engaging in
nonfinancial activities or affiliating with nonfinancial entities;
- provide consumers with new protections regarding the transfer and use of
their nonpublic personal information by financial institutions; and
- change the FHLB system in numerous ways, which are described in more
detail below.
The provisions permitting full affiliations between bank holding companies
or banks and other financial companies do not increase our authority to
affiliate. As a unitary savings and loan holding company, we were generally
permitted to have such affiliations prior to the enactment of the GLB Act. It is
expected, however, that these provisions will benefit our competitors.
The provisions subjecting banks to securities regulation are not expected
to significantly affect us since primarily all of our securities business is
conducted through securities subsidiaries that are already subject to such
regulation. Some new provisions restricting or regulating ownership of insurance
companies by banks apply also to savings institutions, and may hinder WMBFA,
WMBfsb or WMB from acquiring certain insurance companies.
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The prohibition on the ability of new unitary savings and loan holding
companies to engage in nonfinancial activities or affiliating with nonfinancial
entities generally applies only to savings and loan holding companies that were
not, or had not submitted an application to become, savings and loan holding
companies as of May 4, 1999. Since we were treated as a unitary savings and loan
holding company prior to that date, the GLB Act will not prohibit us from
engaging in nonfinancial activities or acquiring nonfinancial subsidiaries.
However, the GLB Act generally restricts any nonfinancial entity from acquiring
us unless such nonfinancial entity was, or had submitted an application to
become, a savings and loan holding company as of May 4, 1999.
Management does not believe that complying with the new consumer privacy
provision will have a significant impact on our business.
Changes to the FHLB system in the GLB Act included a change in the manner
of calculating the Resolution Funding Corporation ("REFCORP") obligations
payable by the FHLBs; a broadening of purposes for which FHLB advances may be
used; and removal of the requirement that federal savings associations be FHLB
members. Previously, the aggregate amount of the annual REFCORP obligation paid
by all FHLBs was $300 million. The GLB Act imposes an annual obligation equal to
20% of the net earnings of the FHLBs. This change will result in a greater
obligation in years when FHLBs have high income levels, thereby reducing the
return on members' investments. With the broadening in the purpose for which
FHLB advances can be used, our borrowing costs may rise as demand for advances
increases.
Holding Company Regulation
WMI is a multiple savings and loan holding company, as defined by federal
law, because it owns three savings associations: WMB, WMBFA and WMBfsb. WMB is a
state-chartered savings bank that has elected to be treated as a savings
association for purposes of the federal savings and loan holding company law.
WMI is regulated as a unitary savings and loan holding company because WMBFA and
WMBfsb are deemed to have been acquired in supervisory transactions. Therefore,
certain restrictions under federal law on the activities and investments of
multiple savings and loan holding companies do not apply to WMI. These
restrictions will apply to WMI if WMB, WMBFA or WMBfsb fails to be a qualified
thrift lender ("QTL"). By this we mean generally that:
- at least 65% of a specified asset base must consist of: loans to small
businesses, credit card loans, educational loans, or certain assets
related to domestic residential real estate, including residential
mortgage loans and mortgage securities; or
- at least 60% of total assets must consist of cash, United States
government or government agency debt or equity securities, fixed assets,
or loans secured by: deposits, real property used for residential,
educational, church, welfare or health purposes, or real property in
certain urban renewal areas.
WMB, WMBFA and WMBfsb are currently in compliance with QTL standards.
Failure to remain a QTL would restrict the ability of WMBFA, WMBfsb or WMB to
obtain advances from the FHLB. Failure to remain a QTL also would restrict the
ability of WMBFA or WMBfsb to establish new branches and pay dividends.
Acquisitions by Savings and Loan Holding Companies. Neither WMI nor any
other person may acquire control of a savings institution or a savings and loan
holding company without the prior approval of the OTS, or, if the acquirer is an
individual, the OTS' lack of disapproval. In either case, the public must have
an opportunity to comment on the proposed acquisition, and the OTS must complete
an application review. Without prior approval from the OTS, WMI may not acquire
more than 5% of the voting stock of any savings institution that is not one of
its subsidiaries.
Annual Reporting; Examinations. Under the Home Owners' Loan Act ("HOLA")
and OTS regulations WMI, as a savings and loan holding company, must file
periodic reports with the OTS. In addition, WMI must comply with OTS record
keeping requirements.
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WMI is subject to holding company examination by the OTS. The OTS may take
enforcement action if the activities of a savings and loan holding company
constitute a serious risk to the financial safety, soundness or stability of a
subsidiary savings association.
Commonly Controlled Depository Institutions; Affiliate
Transactions. Depository institutions are "commonly controlled" if they are
controlled by the same holding company or if one depository institution controls
another depository institution. WMI controls WMB, WMBFA and WMBfsb. The FDIC has
authority to require FDIC-insured banks and savings associations to reimburse
the FDIC for losses it incurs in connection either with the default of a
"commonly controlled" depository institution or with the FDIC's provision of
assistance to such an institution.
WMB, WMBFA and WMBfsb, as holding company subsidiaries that are depository
institutions, are subject to both qualitative and quantitative limitations on
the transactions they conduct with WMI and its other subsidiaries.
Capital Adequacy. WMI is not currently subject to any regulatory capital
requirements, but each of its subsidiary depository institutions is subject to
various capital requirements. See "Regulation and Supervision-Capital
Requirements." The OTS has proposed a regulation which would require savings and
loan holding companies to give prior notice to the OTS of certain transactions
which could affect capital and which would also set forth the circumstances
under which the OTS would, on a case-by-case basis, review a holding company's
capital adequacy and, when necessary, require additional capital.
Subsidiary Savings Institution Regulation
As federally-chartered savings associations, WMBFA and WMBfsb are subject
to regulation and supervision by the OTS. As a state-chartered savings bank, WMB
is subject to regulation and supervision by the State Director and the FDIC.
Federal Regulation and Supervision of WMBFA and WMBfsb. Federal statutes
empower federal savings institutions, such as WMBFA and WMBfsb, to conduct,
subject to various conditions and limitations, business activities that include:
- accepting deposits and paying interest on them;
- making loans on residential and other real estate;
- making a limited amount of consumer loans;
- making a limited amount of commercial loans;
- investing in corporate obligations, government debt securities, and other
securities;
- offering various trust and banking services to their customers; and
- owning subsidiaries that invest in real estate and carry on certain other
activities.
OTS regulations further delineate such institutions' investment and lending
powers. Federal savings institutions generally may not invest in
noninvestment-grade debt securities, nor may they generally make equity
investments, other than investments in service corporations.
State Regulation and Supervision. Washington State statutes empower savings
banks, such as WMB, to conduct, subject to various conditions and limitations,
business activities that include:
- accepting deposits and paying interest on them;
- making loans on or investing in residential and other real estate;
- making consumer loans;
- making commercial loans;
- investing in corporate obligations, government debt securities, and other
securities;
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- offering various trust and banking services to their customers; and
- owning subsidiaries that engage in a wide variety of activities.
Under state law, savings banks in Washington also generally have all of the
powers that federal mutual savings banks have under federal laws and
regulations.
Federal Prohibitions on Exercise of State Bank Powers. Federal law
prohibits banks, such as WMB, and their subsidiaries from exercising certain
powers that were granted by state law to make investments or carry on activities
as principal (i.e., for their own account) unless either (i) national banks have
power under federal law to make such investments or carry on such activities, or
(ii) the bank and such investments or activities meet certain requirements
established by federal law and the FDIC.
Federal Restrictions on Transactions with Affiliates. All banks and savings
institutions are subject to affiliate and insider transaction rules applicable
to member banks of the Federal Reserve System set forth in Sections 23A, 23B,
22(g) and 22(h) of the Federal Reserve Act, as well as such additional
limitations as the institution's primary federal regulator may adopt. These
provisions prohibit or limit a savings institution from extending credit to, or
entering into certain transactions with, affiliates, principal stockholders,
directors and executive officers of the savings institution and its affiliates.
For these purposes, the term "affiliate" generally includes a holding company
such as WMI and any company under common control with the savings institution.
In addition, the federal law governing unitary savings and loan holding
companies flatly prohibits WMB, WMBFA or WMBfsb from making any loan to any
affiliate whose activity is not permitted for a subsidiary of a bank holding
company. This law also prohibits WMB, WMBFA or WMBfsb from making any equity
investment in any affiliate that is not its subsidiary. We currently are in
material compliance with all these provisions.
Restrictions on Subsidiary Savings Institution Capital Distributions. WMI's
principal sources of funds are cash dividends paid to it by its banking and
other subsidiaries, investment income and borrowings. Federal and state law
limits the ability of a depository institution, such as WMB, WMBFA or WMBfsb, to
pay dividends or make other capital distributions.
Washington state law prohibits WMB from declaring or paying a dividend
greater than its retained earnings if doing so would cause its net worth to be
reduced below (i) the amount required for the protection of preconversion
depositors or (ii) the net worth requirements, if any, imposed by the State
Director.
OTS regulations limit the ability of savings associations such as WMBFA and
WMBfsb to pay dividends and make other capital distributions. Associations (such
as WMBFA and WMBfsb) that are subsidiaries of a savings and loan holding company
must file a notice with the OTS at least 30 days before the proposed declaration
of a dividend or approval of the proposed capital distribution by its board of
directors. In addition, a savings association must obtain prior approval from
the OTS if it fails to meet certain regulatory conditions, if, after giving
effect to the proposed distribution, the association's capital distributions in
a calendar year would exceed its year-to-date net income plus retained net
income for the preceding two years or the association would not be at least
adequately capitalized or if the distribution would violate a statute,
regulation, regulatory agreement or a regulatory condition to which the
association is subject.
FDIC Insurance
The FDIC insures the deposits of each of our banking subsidiaries to the
applicable maximum in each institution. The FDIC administers two separate
deposit insurance funds, the BIF and the SAIF. The BIF is a deposit insurance
fund for commercial banks and some state-chartered savings banks. The SAIF is a
deposit insurance fund for most savings associations. WMB is a member of the
BIF, but a portion of its deposits is insured through the SAIF. WMBFA and WMBfsb
are members of the SAIF, but a portion of WMBFA's deposits is insured through
the BIF. WMB and WMBFA are subject to payment of assessments ratably to both
funds.
The FDIC has established a risk-based system for setting deposit insurance
assessments. Under the risk-based assessment system, an institution's insurance
assessments vary according to the level of capital the
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institution holds and the degree to which it is the subject of supervisory
concern. In addition, regardless of the potential risk to the insurance fund,
federal law requires the FDIC to establish assessment rates that will maintain
each insurance fund's ratio of reserves to insured deposits at $1.25 per $100.
Both funds currently meet this reserve ratio. During 2000, the assessment rate
for both SAIF and BIF deposits ranged from zero to 0.27% of covered deposits.
WMB and WMBFA qualified for the lowest rate on their BIF deposits in 2000, and
WMB, WMBFA and WMBfsb qualified for the lowest rate on their SAIF deposits in
2000. Accordingly, none of these institutions paid any deposit insurance
assessments in 2000.
In addition to deposit insurance assessments, the FDIC is authorized to
collect assessments against insured deposits to be paid to the Financing
Corporation ("FICO") to service FICO debt incurred in the 1980s. The FICO
assessment rate is adjusted quarterly.
Before 2000, the FICO assessment rate for SAIF-insured deposits was five
times higher than the rate for BIF-insured deposits. The average annual
assessment rate in 1999 was 5.925 cents per $100 of SAIF-insured deposits and
1.185 cents per $100 of BIF-insured deposits. Beginning in 2000, SAIF- and
BIF-insured deposits were assessed at the same rate by FICO. For the year 2000,
the average annual rate was 2.07 cents per $100 of insured deposits. Because we
have substantially more SAIF-insured deposits than BIF-insured deposits, this
change resulted in an overall reduction of the amount of our FICO assessments.
Capital Requirements
Each of our subsidiary depository institutions is subject to various
capital requirements. WMB is subject to FDIC capital requirements, while WMBFA
and WMBfsb are subject to OTS capital requirements.
WMB. FDIC regulations recognize two types or tiers of capital: core ("Tier
1") capital and supplementary ("Tier 2") capital. Tier 1 capital generally
includes common stockholders' equity and noncumulative perpetual preferred stock
less most intangible assets. Tier 2 capital, which is limited to 100% of Tier 1
capital, includes such items as qualifying general loan loss reserves,
cumulative perpetual preferred stock, mandatory convertible debt, term
subordinated debt and limited life preferred stock; however, the amount of term
subordinated debt and intermediate term preferred stock that may be included in
Tier 2 capital is limited to 50% of Tier 1 capital.
The FDIC uses a combination of risk-based guidelines and leverage ratios to
evaluate capital adequacy. Under the risk-based capital guidelines, different
categories of assets are assigned different risk weights, based generally on the
perceived credit risk of the asset. For example, U.S. Treasury Bills and GNMA
securities are placed in the 0% risk category, FNMA and FHLMC MBS are placed in
the 20% risk category, loans secured by SFR properties and certain private issue
MBS are generally placed in the 50% risk category, and commercial real estate
and consumer loans are generally placed in the 100% risk category. These risk
weights are multiplied by corresponding asset balances to determine a
risk-weighted asset base. Certain off-balance sheet items are added to the
risk-weighted asset base by converting them to a balance sheet equivalent and
assigning them the appropriate risk weight in one of four categories.
Under FDIC guidelines, the ratio of total capital (Tier 1 capital plus Tier
2 capital) to risk-weighted assets must be at least 8.00%, and the ratio of Tier
1 capital to risk-weighted assets must be at least 4.00%.
In addition to the risk-based capital guidelines, the FDIC uses a leverage
ratio to evaluate a bank's capital adequacy. Most banks are required to maintain
a minimum leverage ratio of Tier 1 capital to average assets of 4.00%. The FDIC
retains the right to require a particular institution to maintain a higher
capital level based on the institution's particular risk profile.
The FDIC may consider other factors that may affect a bank's financial
condition. These factors may include interest rate risk exposure, liquidity,
funding and market risks, the quality and level of earnings, concentration of
credit risk, risks arising from nontraditional activities, loan and investment
quality, the effectiveness of loan and investment policies, and management's
ability to monitor and control financial operating risks.
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The following table sets forth the current regulatory requirement for
capital ratios for FDIC regulated banks as compared with our capital ratios at
December 31, 2000:
TIER 1 CAPITAL TO
AVERAGE ASSETS TIER 1 CAPITAL TO TOTAL CAPITAL TO
(FDIC LEVERAGE RATIO) RISK-WEIGHTED ASSETS RISK-WEIGHTED ASSETS
--------------------- -------------------- --------------------
Regulatory Minimum......... 4.00%(1) 4.00% 8.00%
WMB's Actual............... 5.83 10.15 11.24
- ---------------
(1) The minimum leverage ratio guideline is 3% for financial institutions that
do not anticipate significant growth and that have well-diversified risk,
excellent asset quality, high liquidity, good earnings, effective management
and monitoring of market risk and, in general, are considered top-rate,
strong banking organizations.
WMBFA and WMBfsb. The OTS requires savings associations, such as WMBFA and
WMBfsb, to meet each of three separate capital adequacy standards:
- a core capital leverage requirement,
- a tangible capital requirement, and
- a risk-based capital requirement.
For a limited time, core capital may include certain amounts of qualifying
supervisory goodwill.
OTS regulations incorporate a risk-based capital requirement that is
designed to be no less stringent than the capital standard applicable to
national banks. It is modeled in many respects on, but not identical to, the
risk-based capital requirements adopted by the FDIC. Associations whose exposure
to interest-rate risk is deemed to be above normal will be required to deduct a
portion of such exposure in calculating their risk-based capital. The OTS may
establish, on a case-by-case basis, individual minimum capital requirements for
a savings association that vary from the requirements that otherwise would apply
under the OTS capital regulations. The OTS has not established such individual
minimum capital requirements for WMBFA or WMBfsb.
The following table sets forth the current regulatory requirement for
capital ratios for savings associations as compared with our capital ratios at
December 31, 2000:
TIER 1 CAPITAL
TO ADJUSTED
TOTAL ASSETS TANGIBLE CAPITAL TIER 1 CAPITAL TO TOTAL CAPITAL TO
(OTS TO TANGIBLE RISK-WEIGHTED RISK-WEIGHTED
LEVERAGE RATIO) ASSETS ASSETS ASSETS
--------------- ---------------- ----------------- ----------------
Regulatory Minimum...... 4.00%(1) 1.50% 4.00% 8.00%
WMBFA's Actual.......... 5.81 5.81 10.40 11.36
WMBfsb's Actual......... 6.97 6.97 11.14 12.10
- ---------------
(1) The minimum leverage ratio guideline is 3% for financial institutions that
do not anticipate significant growth and that have well-diversified risk,
excellent asset quality, high liquidity, good earnings, effective management
and monitoring of market risk and, in general, are considered top-rate,
strong banking organizations.
FDICIA Requirements
FDICIA created a statutory framework that increased the importance of
meeting applicable capital requirements. FDICIA established five capital
categories:
- well-capitalized,
- adequately capitalized,
- undercapitalized,
- significantly undercapitalized, and
- critically undercapitalized.
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An institution's category depends upon where its capital levels are in
relation to relevant capital measures, which include a risk-based capital
measure, a leverage ratio capital measure, and certain other factors. The
federal banking agencies (including the FDIC and the OTS) have adopted
regulations that implement this statutory framework. Under these regulations, an
institution is treated as well-capitalized if its ratio of total capital to
risk-weighted assets is 10.00% or more, its ratio of core capital to
risk-weighted assets is 6.00% or more, its leverage ratio is 5.00% or more, and
it is not subject to any federal supervisory order or directive to meet a
specific capital level. In order to be adequately capitalized, an institution
must have a total risk-based capital ratio of not less than 8.00%, a Tier 1
risk-based capital ratio of not less than 4.00%, and a leverage ratio of not
less than 4.00%. Any institution that is neither well capitalized nor adequately
capitalized will be considered undercapitalized.
Federal law requires that the federal banking agencies' risk-based capital
guidelines take into account various factors including interest rate risk,
concentration of credit risk, risks associated with nontraditional activities,
and the actual performance and expected risk of loss of multi-family mortgages.
In 1994, the federal banking agencies jointly revised their capital standards to
specify that concentration of credit and nontraditional activities are among the
factors that the agencies will consider in evaluating capital adequacy. In that
year, the OTS and FDIC amended their risk-based capital standards with respect
to the risk weighting of loans made to finance the purchase or construction of
multi-family residences. The OTS adopted final regulations adding an interest
rate risk component to the risk-based capital requirements for savings
associations (such as WMBFA and WMBfsb), although implementation of the
regulation has been delayed. Management believes that the effect of including
such an interest rate risk component in the calculation of risk-adjusted capital
will not cause WMBFA or WMBfsb to cease to be well capitalized. In June 1996,
the FDIC and certain other federal banking agencies (not including the OTS)
issued a joint policy statement providing guidance on prudent interest rate risk
management principles. The agencies stated that they would evaluate the banks'
interest rate risk on a case-by-case basis, and would not adopt a standardized
measure or establish an explicit minimum capital charge for interest rate risk.
Other FDIC and OTS Regulations and Examination Authority
The FDIC has adopted regulations to protect the deposit insurance funds and
depositors, including regulations governing the deposit insurance of various
forms of accounts. The FDIC also has adopted numerous regulations to protect the
safety and soundness of FDIC-regulated banks. These regulations cover a wide
range of subjects including financial reporting, change in bank control,
affiliations with securities firms and capital requirements. In certain
instances, these regulations restrict the exercise of powers granted by state
law.
An FDIC regulation and a joint FDIC/OTS policy statement place a number of
restrictions on the activities of WMB's and WMBFA's securities affiliates and on
such affiliates' transactions with WMB, WMBFA and WMBfsb. These restrictions
include requirements that such affiliates follow practices and procedures to
distinguish them from WMB, WMBFA and WMBfsb and that such affiliates give
customers notice from time to time of their separate corporate status and of the
distinction between insured deposits and uninsured nondeposit products.
FDICIA imposes supervisory standards requiring periodic OTS or FDIC
examinations, independent audits, uniform accounting and management standards,
and prompt corrective action for problem institutions. As a result of FDICIA,
depository institutions and their affiliates are subject to federal standards
governing asset growth, interest rate exposure, executive compensation, and many
other areas of depository institution operations. FDICIA contains numerous other
provisions, including reporting requirements and revised regulatory standards
for, among other things, real estate lending.
The FDIC may sanction any FDIC-regulated bank that does not operate in
accordance with FDIC regulations, policies and directives. Proceedings may be
instituted against any FDIC-regulated bank, or any institution-affiliated party,
such as a trustee, director, officer, employee, agent, or controlling person of
the bank, who engages in unsafe and unsound practices, including violations of
applicable laws and regulations. The FDIC may revalue assets of an institution,
based upon appraisals, and may require the establishment of
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specific reserves in amounts equal to the difference between such revaluation
and the book value of the assets. The State Director has similar authority under
Washington state law, and the OTS has similar authority under HOLA. The FDIC has
additional authority to terminate insurance of accounts, after notice and
hearing, upon a finding that the insured institution is or has engaged in any
unsafe or unsound practice that has not been corrected, is operating in an
unsafe or unsound condition, or has violated any applicable law, regulation,
rule, or order of or condition imposed by the FDIC.
Federal law and regulations require that WMBFA and WMBfsb maintain liquid
assets in excess of a specified limit. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity."
Federal regulation of depository institutions is intended for the
protection of depositors (and the BIF and the SAIF), and not for the protection
of stockholders or other creditors. In addition, a provision in the Omnibus
Budget Reconciliation Act of 1993 ("Budget Act") requires that in any
liquidation or other resolution of any FDIC-insured depository institution,
claims for administrative expenses of the receiver and for deposits in U.S.
branches (including claims of the FDIC as subrogee of the insured institution)
shall have priority over the claims of general unsecured creditors.
Federal Reserve Regulation
Under Federal Reserve Board regulations, WMB, WMBFA and WMBfsb are each
required to maintain a reserve against their transaction accounts (primarily
interest-bearing and noninterest-bearing checking accounts). Because reserves
must generally be maintained in cash or in noninterest-bearing accounts, the
effect of the reserve requirements is to increase an institution's cost of
funds. These regulations generally require that WMB, WMBFA and WMBfsb each
maintain reserves against net transaction accounts in the amount of 3% on
amounts of $44.3 million or less, plus 10% on amounts in excess of $44.3
million. Institutions may designate and exempt $5.0 million of certain
reservable liabilities from these reserve requirements. These amounts and
percentages are subject to adjustment by the Federal Reserve Board. A savings
bank, like other depository institutions maintaining reservable accounts, may
borrow from the Federal Reserve Bank discount window, but the Federal Reserve
Board's regulations require the savings bank to exhaust other reasonable
alternative sources before borrowing from the Federal Reserve Bank.
Numerous other regulations promulgated by the Federal Reserve Board affect
the business operations of our banking subsidiaries. These include regulations
relating to equal credit opportunity, electronic fund transfers, collection of
checks, truth in lending, truth in savings and availability of funds.
Federal Home Loan Bank System
The FHLB System was created in 1932 and consists of twelve regional FHLBs.
The FHLBs are federally chartered but privately owned institutions created by
Congress. The Federal Housing Finance Board ("Finance Board") is an agency of
the federal government and is generally responsible for regulating the FHLB
System. Each FHLB is owned by its member institutions. The primary purpose of
the FHLBs is to provide funding to their members for making housing loans as
well as for affordable housing and community development lending. FHLBs are
generally able to make advances to their member institutions at interest rates
that are lower than could otherwise be obtained by such institutions.
Under current rules, an FHLB member is generally required to purchase FHLB
stock in an amount equal to at least 5% of the aggregate outstanding advances
made by the FHLB to the member. The GLB Act and new regulations adopted by the
Finance Board in December 2000 require a new capital structure for the FHLBs.
The new capital structure will contain risk-based and leverage capital
requirements similar to those currently in place for depository institutions.
Each FHLB must submit a capital structure plan to the Finance Board for approval
within 270 days of the publication of the new regulations.
Generally, an institution is eligible to be a member of the FHLB for the
district where the member's principal place of business is located. WMBFA, whose
home office is Stockton, California, is a member of the San Francisco FHLB; WMB,
whose head office is in Seattle, is a member of the Seattle FHLB, as is
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WMBfsb, whose home office is in Salt Lake City. Prior to its merger with WMBFA,
Bank United was a member of the Dallas FHLB. Under Finance Board regulations,
Bank United membership terminated when it merged into WMBFA. The Federal Home
Loan Bank Act provides, however, for membership of the FHLB adjoining the
district in which an institution is located if membership is demanded by
convenience and approved by the Finance Board. WMBFA has applied to become a
member of the Dallas FHLB. The Dallas FHLB has approved the application
contingent upon the approval of the Finance Board.
Community Reinvestment Act
The Community Reinvestment Act ("CRA") requires financial institutions
regulated by the federal financial supervisory agencies to ascertain and help
meet the credit needs of their delineated communities, including low- to
moderate-income neighborhoods within those communities, while maintaining safe
and sound banking practices. The regulatory agency assigns one of four possible
ratings to an institution's CRA performance and is required to make public an
institution's rating and written evaluation. The four possible ratings of
meeting community credit needs are outstanding, satisfactory, needs to improve,
and substantial noncompliance. In 1999, WMBFA and WMBfsb each received an
"outstanding" CRA rating from the OTS, and WMB received an "outstanding" CRA
rating from the FDIC. These ratings reflect our commitment to meeting the credit
needs of the communities we serve.
Under regulations that apply to all CRA performance evaluations after July
1, 1997, many factors play a role in assessing a financial institution's CRA
performance. The institution's regulator must consider its financial capacity
and size, legal impediments, local economic conditions and demographics,
including the competitive environment in which it operates. The evaluation does
not rely on absolute standards, and the institutions are not required to perform
specific activities or to provide specific amounts or types of credit. We
maintain a CRA file available for public viewing, as well as an annual CRA
highlights document. These documents describe our credit programs and services,
community outreach activities, public comments and other efforts to meet
community credit needs.
In May 1998, we announced a ten-year $120 billion community commitment to
all areas in which we conduct business. The commitment replaced prior ones made
by us and the companies we acquired.
The $120 billion commitment targets single-family, small business and
consumer, and multi-family lending, and community investment at the following
levels:
- Single-family lending -- $81.6 billion in affordable housing loans to
minority racial and ethnic borrowers, borrowers in low- to
moderate-income ("LMI") census tracts, and borrowers earning less than
80% of median income. Of this amount, $30 billion is specifically
targeted to LMI borrowers.
- Small business and consumer lending -- $25 billion in loans to small
businesses and LMI consumers, including:
- Consumer loans and lines of credit to borrowers with low-to
moderate-incomes and in LMI census tracts, and
- Small businesses, with an emphasis on loans and lines of credit of
$50,000 or less and loans to people of color, women and disabled
persons.
- Multi-family lending -- $12.1 billion for multi-family structures,
including (among others) apartment and manufactured home park
developments, in LMI census tracts or serving families earning less than
80% of median income.
- Community investment -- $1.3 billion in investments and loans for
community development. This commitment area includes low-income housing
initiatives, tax-exempt housing revenue bonds, minority financial
institutions and community banks and financial institutions targeting
minority racial and ethnic communities or other community needs.
In addition to these goals and objectives, we made a commitment (along with
pledges in other areas, like diversity) to philanthropically support the
communities in which we conduct our business. Towards that end
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we "will strive to return" to our neighborhoods the greater of 2% of our pre-tax
earnings or 3% of our after-tax earnings plus 10% of any net recovery from the
resolution of Ahmanson's goodwill litigation against the U.S. government. This
corporate support is returned through grants, sponsorships, loans at below
market rates, in-kind donations, paid employee volunteer time, and other
financial support of our efforts to develop our communities.
As of December 31, 2000, we exceeded our 2000 targets for lending in LMI
neighborhoods and underserved market areas in the second year of our $120
billion, ten-year commitment in loans and investments.
Recent and Proposed Legislation and Regulation
The GLB Act is summarized in "Regulation and Supervision -- General." The
new capital structure for FHLBs is summarized in "Regulation and
Supervision -- Federal Home Loan Bank System."
In February 1999, the OTS proposed a regulation that could affect WMI's
treatment as a unitary savings and loan holding company. If a holding company
owns more than one savings association, it is a multiple savings and loan
holding company ("SLHC"); if it owns only one savings association, it is a
unitary SLHC. HOLA generally restricts multiple SLHCs and their non-association
subsidiaries to traditional savings association activities and services and to
activities permitted bank holding companies. These restrictions do not apply to
unitary SLHCs. In addition, these restrictions do not apply to a multiple SLHC
if all, or all but one, of its subsidiary savings associations were acquired in
transactions involving a sale or transfer from an ailing or failing institution.
Such savings associations are sometimes referred to as "supervisory"
acquisitions, and a multiple SLHC is sometimes referred to as an "exempt"
multiple SLHC if all, or all but one, of its subsidiary associations are
supervisory acquisitions. The OTS proposal stated that, under certain
circumstances, an exempt multiple SLHC could lose its exempt status if it or one
of its supervisory subsidiary associations is involved in a merger. This
proposal has been withdrawn by the OTS. The OTS may, however, issue the same or
a similar proposal in the future.
WMI has had the status of an exempt multiple SLHC because two of its three
subsidiary associations -- WMBFA and WMBfsb -- have been deemed supervisory
acquisitions. However, both WMBFA and WMBfsb, as well as WMI, have been involved
in subsequent merger transactions. Accordingly, it is possible that, if the
proposed regulation or a similar regulation were adopted, the OTS could assert
that WMI is not an exempt multiple SLHC. If that were to occur, WMI would have
to merge its subsidiary associations or discontinue activities, including real
estate development activities not permitted to multiple SLHCs.
The OTS and other banking regulators proposed revisions to their capital
rules concerning the treatment of residual interests in asset securitizations
and other transfers of financial assets. Generally, the proposed rule would
require that risk-based capital be held in an amount equal to the amount of
residual interests retained on an institution's balance sheet and would limit
the amount of residual interests that may be included in Tier 1 capital.
The OTS has proposed a regulation which would require certain SLHCs to
notify the OTS before engaging in or committing to engage in a limited set of
debt transactions, transactions that reduce capital, some asset acquisitions,
and other transactions. In addition, while the regulation does not propose
capital requirements applicable to all SLHCs, the OTS is considering whether to
adopt a rule setting forth the circumstances in which it would review, on a
case-by-case basis, the capital adequacy of an SLHC and, when necessary, require
additional capital.
In January 2001, the four federal banking agencies jointly issued expanded
examination and supervision guidance relating to subprime lending activities. In
the guidance, "subprime" lending generally refers to programs that target
borrowers with weakened credit histories or lower repayment capacity. The
guidance principally applies to institutions with subprime lending programs with
an aggregate credit exposure equal to or greater than 25 percent of an
institution's Tier 1 capital. Such institutions would be subject to more
stringent risk management standards and, in many cases, additional capital
requirements. As a starting point, the guidance generally expects that such an
institution would hold capital against subprime portfolios in an
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amount that is one and one half to three times greater than the amount
appropriate for similar types of non-subprime assets.
The guidance is primarily directed at insured depository institutions.
WMBFA currently holds specialty mortgage finance loans in excess of 25 percent
of its Tier 1 capital and could be adversely affected by the application of the
guidance. A significant portion of these loans and the consumer finance loans
originated by Washington Mutual Finance may be considered subprime loans under
the guidance. While WMI, Long Beach Mortgage and Washington Mutual Finance are
not currently subject to any specific capital requirements imposed by the
federal banking agencies, the OTS does have certain examination authority over
WMI in its capacity as an SLHC and, accordingly, WMI and its nonbanking
subsidiaries could also be adversely affected by the guidance. Management is
currently analyzing the impact of the guidance on the conduct of its business.
In December 2000, the Federal Reserve Board published proposed regulations
which would implement the Home Ownership and Equity Protection Act ("HOEPA").
HOEPA, which was enacted in 1994, imposes additional disclosure requirements
and certain substantive limitations on certain mortgage loans with rates or fees
above specified levels. The proposed regulations would lower the rate levels
that trigger the application of HOEPA and would include additional fees in the
calculation of the fee amount that triggers HOEPA. The loans Washington Mutual
currently makes are generally below the rate and fee levels that trigger HOEPA.
However, if the changes to the rate levels and the calculation of fee amounts in
the proposed regulation are adopted, more of the loans we currently offer would
be subject to HOEPA.
Regulation of Nonbanking Affiliates
As broker-dealers registered with the Securities and Exchange Commission
and as members of the National Association of Securities Dealers, Inc. ("NASD"),
WM Financial Services and our mutual fund distributor subsidiary are subject to
various regulations and restrictions imposed by those entities, as well as by
various state authorities. As our registered investment advisor, WM Advisors is
subject to various federal and state securities regulations and restrictions.
The NASD has adopted rules concerning NASD member operations conducted in
branches of depository institutions. The NASD requirements are substantially
similar to the policy statements governing the activities of our securities
affiliates previously issued by the various banking regulators.
Our consumer finance subsidiaries are subject to various federal and state
laws and regulations, including those relating to truth-in-lending, equal credit
opportunity, fair credit reporting, real estate settlement procedures, debt
collection practices and usury. The subsidiaries are subject to various state
licensing and examination requirements.
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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................... 51 Chairman of the Board of Directors, 1983
President and
Chief Executive Officer
Fay L. Chapman....................... 54 Senior Executive Vice President and General 1997
Counsel
Craig S. Davis....................... 49 President, Home Loans and Insurance Services 1996
Group
William W. Ehrlich................... 34 Executive Vice President, Corporate 1993
Relations
Steven P. Freimuth................... 44 Senior Executive Vice President, Corporate 1988
Services
William A. Longbrake................. 57 Vice Chair and Chief Financial Officer 1996
Deanna W. Oppenheimer................ 42 President, Banking and Financial Services 1985
Group
Craig E. Tall........................ 55 Vice Chair, Corporate Development and 1985
Specialty
Finance Group
S. Liane Wilson...................... 58 Vice Chair, Corporate Technology 1985
Robert H. Miles...................... 44 Senior Vice President and Controller 1999
Mr. Killinger is Chairman, President and Chief Executive Officer of
Washington Mutual. He was named President and director in 1988, Chief Executive
Officer in 1990 and Chairman in 1991. Mr. Killinger joined Washington Mutual as
an Executive Vice President of WMB in 1983.
Ms. Chapman has been Senior Executive Vice President and General Counsel
since 1999. She became Executive Vice President, General Counsel and a member of
the Executive Committee in 1997. Prior to joining Washington Mutual, Ms. Chapman
was a partner with Foster Pepper & Shefelman PLLC, a Seattle, Washington law
firm, since 1979.
Mr. Davis is President, Home Loans and Insurance Services Group. He is
responsible for single family lending and insurance services. Mr. Davis became
Executive Vice President and a member of the Executive Committee in January
1997. Prior to joining Washington Mutual, he was Director of Mortgage
Originations of American Savings Bank, F.A. from 1993 through 1996 and served as
President of ASB Financial Services, Inc. from 1989 to 1993.
Mr. Ehrlich has been Executive Vice President, Corporate Relations and a
member of the Executive Committee since 1999. He is responsible for overseeing
the Company's corporate public relations, employee communications, government
relations and investor relations. Mr. Ehrlich became Assistant Vice President of
Corporate Communications in 1994 and Senior Vice President in 1998. He joined
Washington Mutual as a public relations consultant in 1990 and then rejoined the
Company in 1993 as a coordinator in the Mergers and Acquisitions Department.
Mr. Freimuth has been Senior Executive Vice President, Corporate Services
since 1999. He is responsible for a variety of central corporate support areas,
including human resources and credit oversight. Mr. Freimuth became Senior Vice
President in 1991 and Executive Vice President and a member of the Executive
Committee in 1997. Mr. Freimuth joined WMB as a Vice President in 1988.
Mr. Longbrake has been Vice Chair and Chief Financial Officer since 1999.
He is responsible for corporate finance. Mr. Longbrake rejoined Washington
Mutual as Executive Vice President and Chief Financial Officer and a member of
the Executive Committee in October 1996. From March of 1995 through September of
1996, he served as Deputy to the Chairman for Finance and Chief Financial
Officer of the FDIC.
Mr. Miles has been Senior Vice President and Controller since January 2001.
He serves as Washington Mutual's principal accounting officer. Mr. Miles joined
the Company as Senior Vice President and Corporate
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Tax Manager in June 1999. Prior to joining the Company, Mr. Miles was Director,
Domestic Taxes of BankBoston, N.A.
Ms. Oppenheimer is President, Banking and Financial Services Group. She is
responsible for consumer banking, financial services and business banking. Ms.
Oppenheimer became Executive Vice President in 1993 and has been a member of the
Executive Committee since its formation in 1990. She has been an officer of the
Company since 1985.
Mr. Tall is Vice Chair, Corporate Development and Specialty Finance Group.
He is responsible for mergers and acquisitions, commercial real estate,
specialty commercial lending, and the consumer finance subsidiaries. Mr. Tall
became Executive Vice President in 1987 and Vice Chair in 1999. He has been a
member of the Executive Committee since its formation in 1990.
Ms. Wilson has been Vice Chair, Corporate Technology since 1999. She is
responsible for corporate information technology. Ms. Wilson became an Executive
Vice President in 1988 and has been a member of the Executive Committee since
its formation in 1990. Ms. Wilson joined WMB in 1985 as Senior Vice President of
Information Technology.
ITEM 2. PROPERTIES
As of December 31, 2000, our banking subsidiaries conducted business in 42
states through 1,053 consumer financial centers, 71 Western Bank branches, 10 WM
Business Bank offices in California, 183 home loan centers and 23 wholesale loan
centers. Consumer finance operations were conducted in over 590 locations in 38
states.
The administration offices that we owned or leased were as follows:
APPROXIMATE TERMINATION OR
LOCATION LEASED/OWNED SQUARE FOOTAGE RENEWAL DATE(1)
-------- ------------ -------------- ---------------
1201 3rd Ave., Seattle, WA....................... Leased 289,000 2007
1191 2nd Ave., Seattle, WA....................... Leased 115,000 2006
1101 2nd Ave., Seattle, WA....................... Leased 75,000 2006
999 3rd Ave., Seattle, WA........................ Leased 43,000 2004
1111 3rd Ave., Seattle, WA....................... Leased 161,000 2004
1301 5th Ave., Seattle, WA....................... Leased 59,000 2008
1401 2nd Ave., Seattle, WA....................... Leased 85,000 2009
1501 4th Ave., Seattle, WA....................... Leased 50,000 2004
2520 & 2530 223rd St. SE, Bothell, WA............ Leased 110,000 2008
188 106th Ave. NE, Bellevue, WA.................. Leased 39,000 2002
17875/77 Van Karman, Irvine, CA.................. Owned 156,000 n.a.
3351 Michaelson Dr., Irvine, CA.................. Leased 47,000 2004
Stockton, CA(2).................................. Owned 252,000 n.a.
Chatsworth, CA(2)................................ Owned 327,000 n.a.
Chatsworth, CA(2)................................ Leased 644,000 2003 - 2015
1000 Wilshire Blvd., Los Angeles, CA............. Leased 19,000 2002
1100 Town & Country Rd., Orange, CA.............. Leased 73,000 2001 - 2002
8900 Grand Oak Circle, Tampa, FL................. Owned 71,000 n.a.
3405 McLemore Dr., Pensacola, FL................. Leased 50,000 2004
- ---------------
(1) The Company has options to renew leases at most locations.
(2) Multiple locations.
ITEM 3. LEGAL PROCEEDINGS
We have certain litigation and negotiations in progress resulting from
activities arising from normal operations. In the opinion of management, none of
these matters is likely to have a materially adverse effect on our results of
operations or financial condition.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of
2000.
PART II
ITEM 5. MARKET FOR OUR COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Our common stock trades on The New York Stock Exchange under the symbol WM.
Prior to December 9, 1998, our common stock traded on The Nasdaq Stock Market
under the symbol WAMU. As of March 2, 2001, there were 583,802,776 shares issued
and outstanding held by 35,207 shareholders of record. The closing price of our
common stock on March 2, 2001 was $51.10 per share.
Common Stock
The high and low common stock prices by quarter were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------ ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
Fourth quarter.......................... $55.88 $37.88 $35.94 $25.13
Third quarter........................... 40.56 30.19 36.63 27.94
Second quarter.......................... 32.63 24.63 41.94 34.63
First quarter........................... 27.00 21.81 45.25 38.44
The cash dividends declared by quarter were as follows:
YEAR ENDED
DECEMBER 31,
----------------
2000 1999
------ ------
Fourth quarter............................................. $0.300 $0.260
Third quarter.............................................. 0.290 0.250
Second quarter............................................. 0.280 0.240
First quarter.............................................. 0.270 0.230
Preferred Stock
At December 31, 2000, we had no preferred stock outstanding.
Payment of Dividends and Policy
Payment of future dividends is subject to declaration by the Board of
Directors. Factors considered in determining the size of dividends are the
amount and stability of profits, adequacy of capitalization, and expected asset
and deposit growth of our subsidiaries. Our dividend policy is also dependent on
the ability of WMB, WMBFA and WMBfsb to pay dividends to their respective parent
company, which is influenced by legal, regulatory and economic restrictions. See
"Business -- Regulation and Supervision -- Restrictions on Subsidiary Savings
Institution Dividends."
Our retained earnings at December 31, 2000 included a pre-1988 thrift bad
debt reserve for tax purposes of $2.01 billion for which no federal income taxes
have been provided. In the future, if the thrift bad debt reserve is used for
any purpose other than to absorb bad debt losses, or if any of the banking
subsidiaries no longer qualifies as a bank, we will incur a federal income tax
liability, at the then prevailing corporate tax rate, to the extent of such
subsidiaries' pre-1988 thrift bad debt reserve. As a result, our ability to pay
dividends in excess of current earnings may be limited.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data for
Washington Mutual and is derived from and should be read in conjunction with the
Consolidated Financial Statements of Washington Mutual and the Notes thereto,
which are included in this Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA
Interest income............. $ 13,783 $ 12,062 $ 11,221 $ 10,203 $ 9,892
Interest expense............ 9,472 7,610 6,929 6,287 6,027
Net interest income......... 4,311 4,452 4,292 3,916 3,865
Provision for loan and lease
losses.................... 185 167 162 247 498
Noninterest income.......... 1,984 1,509 1,507 980 819
Noninterest expense......... 3,126 2,910 3,268 3,111 3,595
Income before income
taxes..................... 2,984 2,884 2,369 1,538 591
Net income.................. 1,899 1,817 1,487 885 375
Net income attributable to
common stock.............. 1,899 1,817 1,471 830 292
Net income per common share:
Basic..................... 3.55 3.17 2.61 1.56 0.55
Diluted................... 3.54 3.16 2.56 1.52 0.54
Average diluted common
shares used to calculate
earnings per share........ 536,463,063 574,553,031 578,562,305 556,759,023 539,058,104
Cash dividends paid per
common share:
Pre-business
combinations(1)........ $ 1.14 $ 0.98 $ 0.82 $ 0.71 $ 0.60
Post-business
combinations(2)........ 1.14 0.98 0.73 0.66 0.65
Common stock dividend payout
ratio(2).................. 32.95% 31.40% 29.32% 40.61% 94.12%
Return on average assets.... 1.01 1.04 0.96 0.63 0.28
Return on average
stockholders' equity...... 21.15 19.66 16.62 11.73 4.70
Return on average common
stockholders' equity...... 21.15 19.66 16.67 11.95 3.95
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DECEMBER 31,
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