UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _______________ TO ________________.
COMMISSION FILE NUMBER 1-14667
WASHINGTON MUTUAL, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1653725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1201 THIRD AVENUE, SEATTLE, WASHINGTON 98101
(Address of principal executive offices) (Zip Code)
(206) 461-2000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
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 [ ]
The number of shares outstanding of the issuer's classes of common stock as
of July 31, 2000:
Common Stock - 538,875,903(1)
(1) Includes the 12,000,000 shares held in escrow.
<PAGE>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
Page
----
PART I
<S> <C> <C>
Item 1. Financial Statements...................................................................... 1
Consolidated Statements of Income -
Three and Six Months Ended June 30, 2000 and 1999.................................... 2
Consolidated Statements of Comprehensive Income -
Three and Six Months Ended June 30, 2000 and 1999.................................... 3
Consolidated Statements of Financial Condition -
June 30, 2000 and December 31, 1999.................................................. 4
Consolidated Statements of Stockholders' Equity -
Six Months Ended June 30, 2000 and 1999.............................................. 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and 1999.............................................. 6
Notes to Consolidated Financial Statements............................................. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 11
General................................................................................ 11
Results of Operations.................................................................. 11
Review of Financial Condition.......................................................... 18
Asset Quality.......................................................................... 20
Lines of Business...................................................................... 23
Interest Rate Sensitivity.............................................................. 27
Liquidity.............................................................................. 29
Capital Adequacy....................................................................... 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 30
PART II
Item 4. Submission of Matters to a Vote of Security Holders....................................... 31
Item 6. Exhibits and Reports on Form 8-K.......................................................... 32
</TABLE>
i
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
In the opinion of management, the accompanying consolidated statements of
financial condition and related interim consolidated statements of income,
comprehensive income, stockholders' equity and cash flows reflect all
adjustments (which include reclassifications and normal recurring adjustments)
that are necessary for a fair presentation in conformity with generally accepted
accounting principles ("GAAP"). The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect amounts reported in the financial statements. Changes in these estimates
and assumptions are considered reasonably possible and may have a material
impact on the financial statements.
Certain reclassifications have been made to the 1999 financial statements
to conform to the 2000 presentation. All significant intercompany transactions
and balances have been eliminated.
The information included in this Form 10-Q should be read in conjunction
with Washington Mutual, Inc.'s 1999 Annual Report on Form 10-K to the Securities
and Exchange Commission. Interim results are not necessarily indicative of
results for a full year. When we refer to "we" or "Washington Mutual" or the
"Company" in this Form 10-Q, we mean Washington Mutual, Inc. and its
consolidated subsidiaries.
1
<PAGE>
<TABLE>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------- --------- -----------------------
2000 1999 2000 1999
----------- ----------- --------- -----------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans ................................... $2,237,514 $2,013,372 $4,458,705 $4,041,874
Available-for-sale ("AFS") securities ... 702,647 646,322 1,394,891 1,185,334
Held-to-maturity ("HTM") securities ..... 333,187 258,416 672,283 505,793
Other interest and dividend income ...... 88,655 41,512 139,770 80,739
-----------------------------------------------------
Total interest income ................... 3,362,003 2,959,622 6,665,649 5,813,740
INTEREST EXPENSE
Deposits ................................ 803,068 792,694 1,590,923 1,606,321
Borrowings .............................. 1,467,044 1,018,220 2,898,125 1,931,516
------------------------------------------------------
Total interest expense .................. 2,270,112 1,810,914 4,489,048 3,537,837
------------------------------------------------------
Net interest income ..................... 1,091,891 1,148,708 2,176,601 2,275,903
Provision for loan losses ............... 44,076 42,857 85,238 84,557
------------------------------------------------------
Net interest income after
provision for loan losses ............. 1,047,815 1,105,851 2,091,363 2,191,346
NONINTEREST INCOME
Depositor and other retail banking fees.. 239,773 182,114 450,806 345,531
Securities fees and commissions ......... 83,516 69,364 166,089 128,886
Insurance fees and commissions .......... 10,836 10,269 22,315 20,939
Loan servicing income ................... 39,134 23,881 72,403 49,912
Loan related income ..................... 29,044 26,859 53,065 53,406
Gain on sale of loans ................... 80,671 28,021 141,899 66,383
Gain (loss) from securities ............. (1,758) 342 (23,324) (2,351)
Other income ............................ 19,027 23,268 40,054 53,556
------------------------------------------------------
Total noninterest income ................ 500,243 364,118 923,307 716,262
NONINTEREST EXPENSE
Compensation and benefits ............... 335,480 302,120 665,886 603,729
Occupancy and equipment ................. 148,080 137,160 300,581 272,064
Telecommunications and outsourced
information services .................. 77,359 67,180 154,286 137,244
Depositor and other retail banking losses 23,169 22,642 48,691 47,889
Transaction-related expense ............. - 36,569 - 60,371
Amortization of goodwill and other
intangible assets ..................... 27,137 23,262 53,883 48,635
Foreclosed asset (income) expense ....... (3,777) 1,956 (5,172) 5,750
Other expense ........................... 167,755 157,735 301,626 302,809
------------------------------------------------------
Total noninterest expense ............... 775,203 748,624 1,519,781 1,478,491
------------------------------------------------------
Income before income taxes .............. 772,855 721,345 1,494,889 1,429,117
Income taxes ............................ 282,093 268,671 545,635 532,325
------------------------------------------------------
NET INCOME .............................. $ 490,762 $ 452,674 $ 949,254 $ 896,792
======================================================
Net income attributable to common stock.. $ 490,762 $ 452,674 $ 949,254 $ 896,792
======================================================
Net income per common share:
Basic ................................... $0.92 $0.78 $1.75 $1.54
Diluted ................................. 0.92 0.78 1.75 1.54
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
<TABLE>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------
2000 1999 2000 1999
--------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Net income ........................................... $490,762 $452,674 $949,254 $896,792
Other comprehensive loss, net of income tax benefit:
Unrealized loss on securities:
Unrealized holding loss during the period, net
of deferred income tax benefit of $62,044,
$270,105, $199,917 and $310,087 .................. (99,890) (413,361) (321,825) (474,546)
Reclassification adjustment for realized loss (gain)
included in net income, net of income tax (benefit)
of $(1,134), $96, $(9,106) and $932 .............. 1,825 (146) 14,656 (1,427)
Amortization of market adjustment for
mortgage-backed securities ("MBS")
transferred from available for sale
to held to maturity, net of deferred
income tax of $868, $1,904, $1,709
and $4,384 ....................................... (1,364) (2,913) (2,685) (6,709)
-------- -------- -------- --------
(99,429) (416,420) (309,854) (482,682)
Minimum pension liability adjustment ............... (1) - 3,647 (1,760)
-------- -------- -------- --------
Other comprehensive loss ............................. (99,430) (416,420) (306,207) (484,442)
-------- -------- -------- --------
Comprehensive income ................................. $391,332 $ 36,254 $643,047 $412,350
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
<TABLE>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents ...................................... $ 2,810,397 $ 3,040,167
Trading securities ............................................. 35,737 34,660
AFS securities, amortized cost of $42,287,418 and $42,564,180:
MBS ........................................................... 40,193,874 40,972,653
Investment securities ......................................... 450,087 411,665
HTM securities, fair value of $17,503,570 and $19,037,435:
MBS ........................................................... 17,888,680 19,263,413
Investment securities ......................................... 137,414 138,052
Loans:
Loans held in portfolio ....................................... 112,918,396 113,745,650
Loans held for sale ........................................... 1,746,486 793,504
Reserve for loan losses ....................................... (1,009,728) (1,041,929)
------------ ------------
Total loans, net of reserve for loan losses .................. 113,655,154 113,497,225
Mortgage servicing rights ...................................... 841,048 643,185
Foreclosed assets .............................................. 172,091 198,961
Premises and equipment ......................................... 1,539,702 1,558,649
Investment in Federal Home Loan Banks ("FHLBs") ................ 3,151,187 2,916,749
Goodwill and other intangible assets ........................... 1,134,406 1,199,854
Other assets ................................................... 3,677,413 2,638,397
------------ ------------
Total assets ................................................. $185,687,190 $186,513,630
============ ============
LIABILITIES
Deposits:
Checking accounts.............................................. $ 15,021,583 $ 13,489,471
Savings accounts and money market deposit accounts ("MMDAs")... 29,358,141 30,048,378
Time deposit accounts ......................................... 36,216,624 37,591,919
------------ -------------
Total deposits ............................................... 80,596,348 81,129,768
Federal funds purchased and commercial paper ................... 1,491,998 866,543
Securities sold under agreements to repurchase
("reverse repurchase agreements") ............................ 26,745,734 30,162,823
Advances from FHLBs ............................................ 59,324,779 57,094,053
Other borrowings ............................................... 6,780,208 6,203,197
Other liabilities .............................................. 2,196,358 2,004,567
------------ ------------
Total liabilities ............................................ 177,135,425 177,460,951
STOCKHOLDERS' EQUITY
Common stock, no par value: 1,600,000,000 shares authorized -
538,780,421 and 571,589,272 shares issued ..................... - -
Capital surplus - common stock ................................. 1,368,976 2,205,201
Accumulated other comprehensive loss:
Unrealized loss on securities ................................. (977,268) (667,414)
Minimum pension liability adjustment .......................... (3,383) (7,030)
Retained earnings .............................................. 8,163,440 7,521,922
------------ ------------
Total stockholders' equity ................................... 8,551,765 9,052,679
------------ ------------
Total liabilities and stockholders' equity ................... $185,687,190 $186,513,630
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
<TABLE>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
CAPITAL ACCUMULATED
SURPLUS- OTHER
COMMON COMPREHENSIVE RETAINED
TOTAL STOCK LOSS EARNINGS
----------- ---------- ------------ -----------
(in thousands)
<S> <C> <C> <C> <C>
BALANCE, December 31, 1999 ............. $9,052,679 $2,205,201 $(674,444) $7,521,922
Net income ............................. 949,254 - - 949,254
Cash dividends declared on common stock. (307,736) - - (307,736)
Common stock issued through employee
stock plans, including tax benefit .... 32,714 32,714 - -
Other comprehensive loss, net of
related income tax benefit ............ (306,207) - (306,207) -
Common stock repurchased and retired ... (868,939) (868,939) - -
---------- ---------- ---------- ----------
BALANCE, June 30, 2000 ................. $8,551,765 $1,368,976 $(980,651) $8,163,440
========== ========== ========== ==========
BALANCE, December 31, 1998 ............. $9,344,400 $2,994,653 $ 74,281 $6,275,466
Net income ............................. 896,792 - - 896,792
Cash dividends declared on common stock. (275,008) - - (275,008)
Common stock issued through employee
stock plans, including tax benefit .... 37,813 37,813 - -
Other comprehensive loss, net of
related income tax benefit ............ (484,442) - (484,442) -
Common stock repurchased and retired ... (457,993) (457,993) - -
---------- ---------- --------- ----------
BALANCE, June 30, 1999 ................. $9,061,562 $2,574,473 $(410,161) $6,897,250
========== ========== ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
<TABLE>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
---------- ---------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................................................... $ 949,254 $ 896,792
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ...................................................... 85,238 84,557
Gain on sale of loans .......................................................... (141,899) (66,383)
Loss from securities ........................................................... 23,324 2,351
Depreciation and amortization .................................................. 306,263 160,031
Stock dividends from FHLBs ..................................................... (114,453) (61,300)
Transaction-related expense .................................................... - 60,371
Decrease in trading securities ................................................. 2,003 9,658
Origination of loans held for sale.............................................. (3,761,054) (2,768,851)
Sales of loans held for sale.................................................... 2,797,138 5,976,890
Increase in other assets........................................................ (1,013,214) (323,036)
Increase (decrease) in other liabilities ....................................... 343,387 (1,334,810)
----------- ----------
Net cash (used) provided by operating activities .............................. (524,013) 2,636,270
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of AFS securities ..................................................... (46,710) (16,572,405)
Purchases of HTM securities ..................................................... (1,285) (86,510)
Sales of AFS securities ......................................................... 504,234 1,930,570
Maturities of AFS securities .................................................... 2,779 128,269
Maturities of HTM securities .................................................... 2,000 2,408
Principal payments on securities................................................. 4,092,337 7,009,769
Purchases of investment in FHLBs ................................................ (135,552) (335,502)
Purchases of loans............................................................... (2,796,305) (2,905,987)
Sales of loans................................................................... 13,026,626 25,215
Origination of loans, net of principal payments.................................. (12,557,081) (5,473,844)
Sales of foreclosed assets ...................................................... 141,019 189,896
Cash used for Alta .............................................................. (21,823) -
Purchases of premises and equipment, net ........................................ (113,605) (206,789)
---------- -----------
Net cash provided (used) by investing activities .............................. 2,096,634 (16,294,910)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in deposits ............................................................ (533,420) (2,366,827)
(Decrease) increase in short-term borrowings..................................... (5,347,664) 3,220,314
Proceeds from long-term borrowings............................................... 14,516,556 9,928,623
Repayments of long-term borrowings............................................... (11,523,939) (3,952,890)
Proceeds from FHLBs advances..................................................... 43,346,733 54,883,808
Repayments of FHLBs advances..................................................... (41,116,251) (48,408,331)
Cash dividends paid on common stock ............................................. (307,736) (275,008)
Repurchase of common stock ...................................................... (868,939) (457,993)
Other capital transactions ...................................................... 32,269 36,924
----------- -----------
Net cash (used) provided by financing activities .............................. (1,802,391) 12,608,620
----------- -----------
Decrease in cash and cash equivalents ......................................... (229,770) (1,050,020)
Cash and cash equivalents, beginning of period ................................ 3,040,167 2,756,974
----------- -----------
Cash and cash equivalents, end of period....................................... $ 2,810,397 $ 1,706,954
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
<TABLE>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------
2000 1999
-------- --------
(in thousands)
<S> <C> <C>
NONCASH ACTIVITIES
Loans exchanged for MBS ...................................... $3,012,795 $2,335,484
Loans exchanged for trading securities ....................... 2,607 -
Real estate acquired through foreclosure ..................... 135,756 197,818
Loans originated to facilitate the sale of foreclosed assets . 21,607 28,973
Loans held for sale originated to refinance existing loans ... 100,047 2,216,823
Loans held in portfolio originated to refinance existing loans 834,477 2,210,116
Trade date purchases not yet settled ......................... - 673,793
CASH PAID DURING THE PERIOD FOR
Interest on deposits.......................................... 1,539,223 1,551,258
Interest on borrowings........................................ 3,134,895 2,007,509
Income taxes ................................................. 4,642 473,518
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE>
<TABLE>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: EARNINGS PER SHARE ("EPS")
Earnings per share ("EPS") are presented under two formats: earnings per
share and diluted earnings per share. Earnings per share are computed by
dividing net income by the weighted average number of common shares outstanding
during the period. Diluted earnings per share are computed by dividing net
income by the weighted average number of common shares outstanding during the
period plus the impact of potentially dilutive common shares, such as stock
options.
Information used to calculate EPS was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -----------------------
2000 1999 2000 1999
--------- --------- ------- --------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net income .................................. $490,762 $452,674 $949,254 $896,792
Weighted average shares
-----------------------
Basic weighted average number of common
shares outstanding ....................... 532,327,052 580,214,730 542,057,088 581,072,470
Dilutive effect of potential common shares.. 1,172,475 2,179,938 1,022,004 2,387,996
----------- ----------- ----------- -----------
Diluted weighted average number of common
shares outstanding ....................... 533,499,527 582,394,668 543,079,092 583,460,466
=========== =========== =========== ===========
Net income per common share
---------------------------
Basic and diluted .......................... $0.92 $0.78 $1.75 $1.54
</TABLE>
Options to purchase an additional 9,225,578 shares of common stock, with an
exercise price ranging from $28.42 per share to $49.69 per share, were
outstanding at June 30, 2000, but were not included in the computation of
diluted EPS because their exercise prices were greater than the average market
price of our common stock during the quarter ended June 30, 2000.
Additionally, as part of the business combination with Keystone Holdings,
Inc., parent company of American Savings Bank, F.A., 12 million shares of common
stock, with an assigned value of $27.74 per share, are held in an escrow for the
benefit of the general and limited partners of Keystone Holdings, Inc., the
Federal Savings and Loan Insurance Corporation Resolution Fund and their
transferees. The conditions under which these shares can be released from escrow
are related to the outcome of certain litigation and not based on earnings or
market price. At June 30, 2000, the conditions were not met, and, therefore, the
shares were not included in the above computations.
NOTE 2: OTHER BORROWINGS
As of both June 30, 2000 and December 31, 1999, other borrowings included
Company-obligated mandatorily redeemable capital securities of the Company's
subsidiary trusts holding solely $950.0 million aggregate liquidation amount of
subordinated deferrable interest debentures of the Company.
In June 2000, through one of its subsidiaries, the Company issued a senior
debt obligation totaling $450.0 million and bearing a fixed rate of 8.25%. The
note is due on June 15, 2005.
8
<PAGE>
<TABLE>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3: LINES OF BUSINESS
Washington Mutual is managed along five major lines of business: consumer
banking, mortgage banking, commercial banking, financial services, and consumer
finance. The treasury group, although not considered a line of business, is
responsible for the management of investments and interest rate risk.
Financial highlights by lines of business:
THREE MONTHS ENDED JUNE 30, 2000
---------------------------------------------------------------------------------------------------
CONSUMER MORTGAGE COMMERCIAL FINANCIAL CONSUMER TREASURY/
BANKING BANKING BANKING SERVICES FINANCE OTHER TOTAL
--------- --------- --------- --------- --------- ------------ ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Condensed income statement:
Net interest income after
provision for loan losses $636,183 $193,159 $87,982 $ 89 $82,716 $47,686 $1,047,815
Noninterest income ...... 252,538 131,383 8,135 95,979 16,019 (3,811) 500,243
Noninterest expense ..... 456,126 133,761 29,789 64,380 71,198 19,949 775,203
Income taxes ............ 156,422 68,975 24,291 12,320 11,436 8,649 282,093
-------- --------- -------- ------- ------- ------- ----------
Net income .............. $276,173 $121,806 $42,037 $19,368 $16,101 $15,277 $ 490,762
======== ========= ======== ======= ======= ======= ==========
JUNE 30, 2000
------------------------------------------------------------------------------------------------------
Total assets ............ $83,142,652 $45,182,102 $20,926,385 $149,544 $9,061,127 $27,225,380 $185,687,190
=========== =========== =========== ======== ========== =========== ============
</TABLE>
<TABLE>
THREE MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------------------------------------------------------
CONSUMER MORTGAGE COMMERCIAL FINANCIAL CONSUMER TREASURY/
BANKING BANKING BANKING SERVICES FINANCE OTHER TOTAL
---------- ------------ ------------ ------------ ---------- --------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Condensed income statement:
Net interest income after
provision for loan losses $601,962 $216,275 $98,069 $ 501 $56,840 $132,204 $1,105,851
Noninterest income ........ 193,515 68,347 10,854 83,661 7,107 634 364,118
Transaction-related expense 24,992 9,352 283 722 - 1,220 36,569
Noninterest expense ....... 455,752 134,162 26,135 50,496 33,235 12,275 712,055
Income taxes .............. 116,841 52,386 30,726 12,485 11,934 44,299 268,671
-------- -------- ------- ------- -------- -------- ----------
Net income ................ $197,892 $ 88,722 $51,779 $20,459 $ 18,778 $ 75,044 $ 452,674
======== ======== ======= ======= ======== ======== ==========
</TABLE>
<TABLE>
DECEMBER 31, 1999
------------------------------------------------------------------------------------------------------
Total assets .............. $83,713,164 $46,373,128 $20,179,900 $123,525 $7,370,753 $28,753,160 $186,513,630
=========== =========== =========== ======== ========== =========== ============
SIX MONTHS ENDED JUNE 30, 2000
------------------------------------------------------------------------------------------------------
CONSUMER MORTGAGE COMMERCIAL FINANCIAL CONSUMER TREASURY/
BANKING BANKING BANKING SERVICES FINANCE OTHER TOTAL
--------- ------------ ---------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Condensed income statement:
Net interest income after
provision for loan losses $1,249,875 $393,997 $177,808 $ 172 $163,053 $106,458 $2,091,363
Noninterest income ...... 476,679 222,345 12,844 191,330 46,989 (26,880) 923,307
Noninterest expense ..... 905,381 267,199 58,848 124,366 134,378 29,609 1,519,781
Income taxes ............ 296,159 125,900 48,096 26,515 30,912 18,053 545,635
---------- --------- -------- -------- -------- -------- ----------
Net income .............. $ 525,014 $223,243 $ 83,708 $ 40,621 $ 44,752 $ 31,916 $ 949,254
========== ========= ======== ======== ======== ======== ==========
</TABLE>
9
<PAGE>
<TABLE>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999
------------------------------------------------------------------------------------------------------
CONSUMER MORTGAGE COMMERCIAL FINANCIAL CONSUMER TREASURY/
BANKING BANKING BANKING SERVICES FINANCE OTHER TOTAL
---------- --------- ---------- ---------- --------- ---------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Condensed income statement:
Net interest income after
provision for loan losses $1,199,360 $430,414 $199,256 $ 1,095 $111,004 $250,217 $2,191,346
Noninterest income ....... 373,580 142,482 18,878 154,491 13,786 13,045 716,262
Transaction-related expense 42,543 13,730 421 2,196 - 1,481 60,371
Noninterest expense ....... 903,047 275,309 51,968 96,540 67,984 23,272 1,418,120
Income taxes .............. 232,949 105,411 61,706 21,551 22,088 88,620 532,325
---------- -------- -------- -------- -------- -------- ----------
Net income ................ $ 394,401 $178,446 $104,039 $ 35,299 $ 34,718 $149,889 $ 896,792
========== ======== ======== ======== ======== ======== ==========
</TABLE>
NOTE 4: RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities," was issued
in June 2000 and amends the accounting and reporting standards of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," for certain
derivative instruments and hedging activities. These amendments include the
application of the normal purchases and sales exception in SFAS No. 133, and
redefinition of hedged risk. SFAS No. 138 also amends SFAS No. 133 for decisions
made by the Financial Accounting Standards Board relating to the Derivatives
Implementation Group process. SFAS No. 138 will be adopted concurrently with
SFAS No. 133 on January 1, 2001. The impact of these statements cannot be
currently estimated and will be dependent upon the fair value, nature and
purpose of the derivative instruments held by the Company as of December 31,
2000.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section contains forward-looking statements, which are not
historical facts and pertain to our future operating results. These
forward-looking statements are within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in this report that are not historical
facts. When used in this report, the words "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions are generally
intended to identify forward-looking statements. These forward-looking
statements are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond our
control. In addition, these forward-looking statements are subject to
assumptions with respect to future business strategies and decisions that are
subject to change. Actual results may differ materially from the results
discussed in these forward-looking statements for the reasons, among others,
discussed under the heading "Business-Risk Factors" in our 1999 Annual Report on
Form 10-K to the Securities and Exchange Commission, which are incorporated
herein by reference.
GENERAL
Washington Mutual, Inc. is a financial services company committed to
serving consumers and small to mid-sized businesses. Our banking subsidiaries,
Washington Mutual Bank, FA ("WMBFA"), Washington Mutual Bank ("WMB") and
Washington Mutual Bank fsb ("WMBfsb"), accept deposits from the general public,
make residential loans, consumer loans, and limited types of commercial real
estate loans (primarily loans secured by multi-family properties), and engage in
certain commercial banking activities. Our consumer finance operations provide
direct installment loans and related credit insurance services and purchase
retail installment contracts. We originate, purchase, sell and service specialty
mortgage finance loans through our subsidiaries, Washington Mutual Finance and
Long Beach Mortgage. We also market annuities and other insurance products,
offer full service securities brokerage, and act as the investment advisor to
and the distributor of mutual funds.
We securitized or sold approximately $7.12 billion of seasoned residential
loans during the second quarter. We retained approximately $1.06 billion of the
securities from these transactions. This is in addition to the $8.69 billion of
seasoned loans that we securitized or sold during the first quarter. We retained
approximately $1.95 billion of the securities from these transactions. We
continue our policy of selling primarily all of our fixed-rate single-family
residential ("SFR") originations, as well as the specialty mortgage finance
loans originated by our subsidiary Long Beach Mortgage. Our level of sales of
specialty mortgage finance loans during the second quarter was below prior
quarter levels in anticipation of receiving a better execution price during the
subsequent period. We used the proceeds from the sales of our seasoned loans
primarily to reduce our wholesale borrowings and to repurchase shares of our
common stock.
RESULTS OF OPERATIONS
OVERVIEW. Our net income for the quarter and six months ended June 30, 2000
was $490.8 million and $949.3 million, compared with $452.7 million and $896.8
million for the same periods in 1999. We had basic and diluted earnings per
share of $0.92 and $1.75 for the quarter and six months ended June 30, 2000, and
$0.78 and $1.54 for the quarter and six months ended June 30, 1999.
NET INTEREST INCOME. Despite an increase in our average interest-earning
assets to $177.80 billion for second quarter 2000 from $167.43 billion for the
same period a year ago, net interest income declined approximately 5% in the
second quarter of 2000 to $1.09 billion, compared with $1.15 billion in the
second quarter of 1999. The decline in net interest income was due to the
decrease in the net interest spread and margin. The net interest spread and
margin were 2.30% and 2.43% for second quarter 2000, compared with 2.58% and
2.74% for the same period a year ago. Net interest income declined approximately
4% during the six months ended June 30, 2000 to $2.18 billion from $2.28 billion
for the same period a year ago. This decline was also due to the decrease in the
net interest spread and margin to 2.27% and 2.41% for the first half of 2000
from 2.60% and 2.76% for the first half of 1999.
11
The compression in the net interest spread and margin was primarily due to
the fact that our liabilities reprice to market more quickly than our assets.
Interest rates have risen rapidly over the past year, as evidenced by an
increase in the average three-month London Interbank Offered Rate ("LIBOR") from
5.06% in the second quarter of 1999 to 6.61% in the second quarter of 2000 and
by a 175 basis point increase in the federal funds rate from 4.75% in June 1999
to 6.50% in June 2000.
The cost of our interest-bearing liabilities increased 78 basis points to
5.27% for second quarter 2000 from 4.49% for the same period a year ago, driven
primarily by a 109 basis point increase in the cost of borrowings. The cost of
borrowings increased to 6.35% for second quarter 2000, compared with 5.26% for
the same period a year ago. Similarly, the cost of our interest-bearing
liabilities increased 63 basis points to 5.17% for the first six months of 2000
from 4.54% for the same period in 1999 as a result of an 87 basis point increase
in the cost of borrowings. For the six months ended June 30, 2000, the cost of
borrowings was 6.21%, up from 5.34% for the six months ended June 30, 1999.
The overall yield on our interest-earning assets increased 50 basis points
during the second quarter of 2000, driven primarily by a 52 basis point increase
in the yield on our loans to 7.88%, compared with 7.36% for the same period in
1999. The rise in the yield on our loan portfolio was in response to increases
in treasury-based indices and the Cost of Funds Index of the Eleventh District
Federal Home Loan Bank ("COFI"). There was also a 29 basis point increase in the
yield on our mortgage-backed securities ("MBS") portfolio to 6.90%, compared
with 6.61%. Also contributing to the overall increase in the yield on
interest-earning assets during the second quarter was a 289 basis point increase
in the yield on investment securities to 8.43%, compared with 5.54% for the same
period in 1999. The majority of this increase was due to special dividends from
the Federal Home Loan Bank ("FHLB") of San Francisco, which contributed
approximately six basis points to the net interest margin for the quarter.
The yield on our interest-earning assets increased 30 basis points during
the first half of 2000 primarily due to a 36 basis point increase in the yield
on our loans to 7.76%, compared with 7.40% for the same period in 1999. The rise
in the yield on loans was attributable to increases in treasury-based indices
and COFI. Also contributing to the increase in the overall yield on our
interest-earning assets was a 17 basis point increase in the yield on MBS and a
169 basis point increase in the yield on investment securities during the first
six months of 2000.
12
<PAGE>
<TABLE>
Selected average financial balances and the net interest spread and margin
were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ---------------------------
2000 1999 2000 1999
---------- --------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Average balances:
Loans ....................................... $113,597,564 $109,523,390 $114,943,499 $109,400,323
MBS ......................................... 59,525,121 54,227,044 59,785,887 50,019,420
Investment securities and investment in FHLBs 4,674,386 3,681,555 4,397,455 3,646,188
------------ ------------ ------------ -----------
Total interest-earning assets .............. 177,797,071 167,431,989 179,126,841 163,065,931
Deposits ..................................... 80,338,406 83,920,105 80,653,178 84,103,172
Borrowings ................................... 92,903,373 77,666,546 93,815,288 72,861,536
------------ ------------ ------------ -----------
Total interest-bearing liabilities ......... 173,241,779 161,586,651 174,468,466 156,964,708
Total assets ................................ 183,712,586 173,205,859 185,044,732 168,748,350
Stockholders' equity ........................ 8,544,297 9,509,791 8,714,885 9,483,253
Weighted average yield on:
Loans ....................................... 7.88% 7.36% 7.76% 7.40%
MBS ......................................... 6.90 6.61 6.85 6.68
Investment securities and investment in FHLBs 8.43 5.54 7.24 5.55
Interest-earning assets .................... 7.57 7.07 7.44 7.14
Weighted average cost of:
Deposits .................................... 4.02 3.79 3.97 3.85
Borrowings .................................. 6.35 5.26 6.21 5.34
Interest-bearing liabilities ............... 5.27 4.49 5.17 4.54
Net interest spread ......................... 2.30 2.58 2.27 2.60
Net interest margin ......................... 2.43 2.74 2.41 2.76
The net interest spread is the difference between the weighted average
yield on our interest-earning assets and the weighted average cost of our
interest-bearing liabilities. The net interest margin measures our annualized
net interest income as a percentage of average interest-earning assets.
13
</TABLE>
<PAGE>
The dollar amounts of interest income and interest expense fluctuate
depending upon changes in amounts (volume) and upon changes in interest rates of
our interest-earning assets and interest-bearing liabilities. The following
table details changes attributable to (i) changes in volume (changes in average
outstanding balances multiplied by the prior period's rate) and (ii) changes in
rate (changes in average interest rate multiplied by the prior period's volume).
Changes in rate/volume (changes in rate times the change in volume) were
allocated proportionately to the changes in volume and the changes in rate.
<PAGE>
<TABLE>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 VS. 1999 2000 VS. 1999
---------------------------------- -----------------------------------
INCREASE/(DECREASE) DUE TO INCREASE/(DECREASE) DUE TO
---------------------------------- -----------------------------------
VOLUME RATE TOTAL CHANGE VOLUME RATE TOTAL CHANGE
---------------------------------- -----------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans ..................... $ 76,776 $147,366 $224,142 $211,744 $ 205,087 $416,831
MBS ....................... 90,255 40,639 130,894 333,937 43,113 377,050
Investment securities and
investment in FHLBs ...... 16,136 31,209 47,345 23,434 34,594 58,028
------- ------- ------- ------- -------- -------
Total interest income .... 183,167 219,214 402,381 569,115 282,794 851,909
Interest expense:
Deposits .................. (35,701) 46,075 10,374 (64,951) 49,553 (15,398)
Borrowings ................ 217,932 230,892 448,824 617,743 348,866 966,609
-------- -------- -------- -------- --------- --------
Total interest expense ... 182,231 276,967 459,198 552,792 398,419 951,211
-------- -------- -------- -------- --------- --------
Net interest income ..... $ 936 $(57,753) $(56,817) $ 16,323 $(115,625) $(99,302)
======== ======== ======== ======== ========= ========
</TABLE>
<TABLE>
NONINTEREST INCOME. Noninterest income was $500.2 million and $923.3
million for the quarter and six months ended June 30, 2000, compared with $364.1
million and $716.3 million for the same periods in 1999.
Noninterest income consisted of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2000 1999 2000 1999
--------- --------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Depositor and other retail banking fees. $239,773 $182,114 $450,806 $345,531
Securities fees and commissions ........ 83,516 69,364 166,089 128,886
Insurance fees and commissions ......... 10,836 10,269 22,315 20,939
Loan servicing income .................. 39,134 23,881 72,403 49,912
Loan related income .................... 29,044 26,859 53,065 53,406
Gain on sale of loans .................. 80,671 28,021 141,899 66,383
Gain (loss) from securities ............ (1,758) 342 (23,324) (2,351)
Other income ........................... 19,027 23,268 40,054 53,556
-------- -------- -------- --------
Total noninterest income ............... $500,243 $364,118 $923,307 $716,262
======== ======== ======== ========
</TABLE>
<PAGE>
Depositor and other retail banking fees of $239.8 million for the second
quarter of 2000 increased 32% from $182.1 million for the same period in 1999.
Depositor and other retail banking fees of $450.8 million for the first six
months of 2000 increased 30% from $345.5 million for the same period a year ago.
We collected more debit card, ATM, overdraft protection, nonsufficient funds and
other fees related to checking accounts. The number of checking accounts
increased by over 482,000 or 12% to 4,561,235 at June 30, 2000 from 4,079,171 a
year ago.
14
Securities fees and commissions were $83.5 million for the second quarter
of 2000, up from $69.4 million for the second quarter of 1999. Securities fees
and commissions increased to $166.1 million for the first half of 2000 from
$128.9 million for the first half of 1999. During the quarter and six months
ended June 30, 2000, there were higher sales of investment products and
additional growth of assets under management by our investment management
affiliate from $6.42 billion at June 30, 1999 to $8.09 billion at June 30, 2000.
Loan servicing income increased to $39.1 million for the second quarter of
2000 from $23.9 million for the comparable period in 1999. Loan servicing income
was $72.4 million for the six months ended June 30, 2000, up from $49.9 million
for the same period a year ago. These increases were primarily due to growth in
loans serviced for others as a result of securitizations and loan sales. The
impact of this portfolio growth was partially offset by an increase in the
mortgage servicing rights amortization.
Gain on sale of loans increased by $52.7 million from $28.0 million during
the second quarter of 1999 to $80.7 million during the second quarter of 2000.
This increase was primarily attributable to the sale of $3.91 billion of
seasoned adjustable-rate mortgages("ARMs") and $2.15 billion of securities
created through the securitization of seasoned ARMs during the second quarter of
2000. Gain on sale of loans increased by $75.5 million from $66.4 million during
the first six months of 1999 to $141.9 million during the first six months of
2000. This increase was primarily attributable to the sale of seasoned loans and
securities during the second quarter and the sale of $1.71 billion of seasoned
SFR loans and $5.03 billion of securities created through the securitization of
seasoned ARMs during the first quarter of 2000.
15
<PAGE>
<TABLE>
NONINTEREST EXPENSE. Noninterest expense totaled $775.2 million and $1.52
billion for the quarter and six months ended June 30, 2000, compared with $748.6
million and $1.48 billion for the same periods in 1999.
Noninterest expense consisted of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2000 1999 2000 1999
--------- --------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Compensation and benefits .......... $335,480 $302,120 $ 665,886 $ 603,729
Occupancy and equipment ............ 148,080 137,160 300,581 272,064
Telecommunications and outsourced
information services .............. 77,359 67,180 154,286 137,244
Depositor and retail banking losses. 23,169 22,642 48,691 47,889
Transaction-related expense ........ - 36,569 - 60,371
Amortization of goodwill and
other intangible assets ........... 27,137 23,262 53,883 48,635
Foreclosed asset (income) expense .. (3,777) 1,956 (5,172) 5,750
Advertising and promotion .......... 41,837 28,883 62,598 55,733
Postage ............................ 24,852 21,333 48,367 43,384
Professional fees .................. 22,360 16,995 42,898 33,212
Regulatory assessments ............. 7,746 14,840 15,765 30,203
Office supplies .................... 7,449 9,285 16,228 17,133
Travel and training ................ 15,556 12,940 30,159 24,918
Proprietary mutual fund expense .... 8,257 5,854 16,094 13,444
Other expense ...................... 39,698 47,605 69,517 84,782
-------- -------- ---------- ----------
Total noninterest expense......... $775,203 $748,624 $1,519,781 $1,478,491
======== ======== ========== ==========
</TABLE>
Compensation and benefits expense increased to $335.5 million for the
second quarter of 2000 from $302.1 million for the same period in 1999.
Compensation and benefits expense was $665.9 million for the first half of 2000,
up from $603.7 million for the same period a year ago. The increases during the
quarter and six months ended June 30, 2000 were primarily due to the acquisition
of Long Beach Mortgage in October 1999, increased commission expense due to the
higher volume of securities transactions and loan originations, and benefits
expense.
Occupancy and equipment expense was $148.1 million for the second quarter
of 2000, compared with $137.2 million for the same period in 1999. Occupancy and
equipment expense was $300.6 million for the six months ended June 30, 2000, up
from $272.1 million for the six months ended June 30, 1999. Computer system
upgrades caused an increase in depreciation, equipment and maintenance expense.
Telecommunications and outsourced information services expense of $77.4
million for the second quarter of 2000 was up from $67.2 million for the
comparable period in 1999. Telecommunications and outsourced information
services expense increased to $154.3 million for the first six months of 2000
from $137.2 million for the same period a year ago. The increase reflects higher
use of services resulting from new locations and a rate increase in our contract
with IBM Global Services, effective January 1, 2000.
We completed the integration of H. F. Ahmanson & Co. in the fourth quarter
of 1999. Therefore, there were no transaction-related expenses incurred in the
quarter and six months ended June 30, 2000, compared with $36.6 million and
$60.4 million for the same periods in 1999. During the second quarter and first
six months of 1999, we incurred costs associated with contract and temporary
employment services, severance, facilities and equipment impairment as well as
other costs that were expensed as incurred.
16
Advertising and promotion expense increased to $41.8 million for second
quarter 2000 from $28.9 million for the comparable period in 1999. Advertising
and promotion expense was $62.6 million for the first half of 2000, up from
$55.7 million for the first half of 1999. These increases were primarily due to
additional costs associated with campaigns for various loan and deposit
products.
Regulatory assessments declined to $7.7 million in second quarter 2000 from
$14.8 million for the same period in 1999. Regulatory assessments were also down
to $15.8 million for the first half of 2000 from $30.2 million for the first
half of 1999. The overall assessment rate for Savings Association Insurance Fund
deposits was significantly reduced in first quarter 2000, which caused a
corresponding decrease in regulatory assessments.
TAXATION. Income taxes include federal and applicable state income taxes
and payments in lieu of taxes. Income taxes of $282.1 million and $545.6 million
for the quarter and six months ended June 30, 2000 represented an effective tax
rate of 36.50%. Income taxes were $268.7 million and $532.3 million for the
quarter and six months ended June 30, 1999, which represented an effective tax
rate of 37.25%.
17
<PAGE>
REVIEW OF FINANCIAL CONDITION
ASSETS. Our assets declined to $185.69 billion at June 30, 2000 from
$186.51 billion at December 31, 1999.
SECURITIES. Our securities portfolio decreased by $2.11 billion to $58.71
billion during the six months ended June 30, 2000. This decline was due to
paydowns, sales, and additional unrealized losses on the AFS investment
portfolio in excess of the amount of MBS added to the portfolio. There were no
purchases of MBS during the first half of 2000.
LOANS. Total loans at June 30, 2000 were $114.66 billion, up slightly from
$114.54 billion at December 31, 1999. Due to loan sales and securitizations,
loan balances have remained relatively constant. The activity during the first
half of 2000 consisted of originations of new loans of $28.02 billion and
purchases of $2.80 billion, offset by loan sales and securitizations of $19.19
billion, and loan payments of $11.51 billion.
Our current ARM products are primarily tied to treasury-based indices. The
percentage of portfolio loans indexed to treasury averages is increasing due to
the securitization and sale of COFI-based loans and the repayment of portfolio
loans indexed to COFI. At June 30, 2000, 87% of real estate loans were
adjustable rate, of which 66% were indexed to U.S. Treasury indices, 27% were
indexed to COFI, and 7% to other indices. The remaining 13% of the real estate
loan portfolio at June 30, 2000 were fixed rate. At December 31, 1999, 85% of
real estate loans were adjustable rate, of which 52% were indexed to U.S.
Treasury indices, 42% were indexed to COFI, and 6% to other indices. The
remaining 15% of the year-end 1999 real estate loan portfolio were fixed rate.
Loan originations and purchases were as follows:
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ----------------------
2000 1999 2000 1999
--------- ---------- --------- ----------
(in millions)
<S> <C> <C> <C> <C>
Originated....................... $15,855.9 $13,663.5 $28,020.7 $25,543.5
Purchased........................ 2,092.0 1,801.6 2,796.3 3,102.4
--------- --------- --------- ---------
$17,947.9 $15,465.1 $30,817.0 $28,645.9
========= ========= ========= =========
</TABLE>
Of total loan originations, SFR originations were $11.33 billion for the
second quarter of 2000, compared with $11.00 billion for the same period in
1999. SFR originations were $19.83 billion for the first half of 2000, compared
with $20.67 billion for the first half of 1999. Due to the higher interest rate
environment and customer preference for short-term ARMs over fixed-rate loans,
originations of short-term ARMs increased to $8.81 billion and $14.52 billion
during the quarter and six months ended June 30, 2000, compared with $2.94
billion and $5.02 billion for the same periods a year ago.
The increase in loans purchased during the second quarter of 2000 was
primarily due to purchases through our correspondent channels. The decline in
loans purchased during the first six months of 2000 was primarily due to a
reduction in purchased specialty mortgage finance loans.
SERVICING OF LOANS. Servicing rights are capitalized and amortized in
proportion to, and over the period of, estimated future net servicing income. In
order to determine the fair value of servicing rights, we use a valuation model
that calculates the present value of expected cash flows. Key assumptions used
in the valuation model include discount rates, prepayment speeds, and base
servicing costs, which are reviewed quarterly. Prepayment speeds are determined
from market sources for fixed-rate mortgages with similar coupons and a
combination of internal historical data and market reports for ARMs. In
addition, we use inflation rates, ancillary income per loan and default rates.
18
Changes in mortgage servicing rights ("MSR") for the quarter and six months
ended June 30, 2000 were as follows:
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
------------------ -----------------
(in thousands)
<S> <C> <C>
Balance, beginning of period........ $767,596 $643,185
Additions...................... 102,428 252,880
Amortization................... (28,976) (55,017)
Impairment adjustment.......... - -
-------- --------
Balance, end of period.............. $841,048 $841,048
======== ========
</TABLE>
Changes in the loan servicing portfolio with MSR for the quarter and six
months ended June 30, 2000 were as follows:
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
------------------ -----------------
(in thousands)
<S> <C> <C>
Balance, beginning of period........ $64,272,993 $55,268,239
Additions...................... 8,431,858 19,057,277
Loan payments and other........ (2,204,608) (3,825,273)
----------- -----------
Balance, end of period(1)........... $70,500,243 $70,500,243
=========== ===========
</TABLE>
(1) Balance at June 30, 2000 does not include approximately $8.26 billion of
loans sold or securitized without capitalized MSR.
MSR increased to $841.0 million at June 30, 2000 from $767.6 million at
March 31, 2000 and from $643.2 million at December 31, 1999. The additions to
MSR during the first and second quarters of 2000 were primarily due to loan
sales and securitizations. The weighted average servicing fee was approximately
39 basis points for the first half of 2000.
LIABILITIES. We primarily use customer deposits and wholesale borrowings to
fund our loans and investments. Due to increased market competition for customer
deposits, we have increasingly relied on wholesale borrowings. Deposits declined
slightly to $80.60 billion at June 30, 2000 from $81.13 billion at year-end
1999. Savings accounts, MMDAs and checking accounts have increased as a
percentage of total deposits to 55% at June 30, 2000, compared with 54% at
December 31, 1999. These three products have the benefit of lower interest
costs, compared with time deposit accounts. Even though transaction accounts are
more liquid, we consider them to be the core relationship with our customers. In
the aggregate, we view these core accounts to be a more stable source of
long-term funding than time deposits.
Our wholesale borrowing portfolio decreased slightly to $87.56 billion at
June 30, 2000, compared with $88.12 billion at year-end 1999. Due to relative
pricing advantages, we generally used advances from FHLBs and reverse repurchase
agreements as our primary funding vehicles.
19
<PAGE>
ASSET QUALITY
PROVISION AND RESERVE FOR LOAN LOSSES. We analyze several important
elements in determining the level of the provision for loan losses in any given
period, such as current and historical economic conditions, asset quality
trends, historical loan loss experience, and plans for problem loan
administration and resolution. The results of the analysis indicated asset
quality remained strong during the second quarter and first half of 2000.
Nonaccrual loans decreased to $801.5 million at June 30, 2000 from $827.0
million at December 31, 1999 and $820.4 million at June 30, 1999. Actual loss
experience, as measured by net charge offs, decreased to $42.5 million for the
second quarter of 2000 from $59.0 million for the second quarter of 1999. In
addition, net charge offs decreased to $83.4 million for the six months ended
June 30, 2000 from $104.0 million for the same period in 1999. Included in the
1999 periods were charge offs of $17.8 million in previously established
specific reserves on four commercial real estate properties that were obtained
through acquisitions. Excluding these charge offs, net charge offs would have
increased slightly by $1.3 million for the second quarter and would have
declined $2.8 million for the six-month period. Net charge offs as a percentage
of average loans were 0.15% for second quarter 2000, down from 0.22% for second
quarter 1999. In addition, net charge offs as a percentage of average loans were
0.15% for the first half of 2000, compared with 0.19% for the comparable period
a year ago.
The provision for loan losses increased to $44.1 million and $85.2 million
for the quarter and six months ended June 30, 2000 from $42.9 million and $84.6
million for the same periods in 1999. These increases were primarily due to an
increase in the amount of specialty mortgage finance and commercial business
loans, which typically have higher loss factors than SFR loans. During the
second quarter and first half of 2000, we also originated more second mortgage
and other consumer loans, which also typically have higher loss factors.
In the following table, identified allowances of $17.1 million and $34.0
million were included in the basis of loans sold and securitized during the
quarter and six months ended June 30, 2000.
20
<PAGE>
Changes in the reserve for loan losses were as follows:
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
2000 1999 2000 1999
--------- --------- --------- -------
(dollars in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period .............. $1,025,244 $1,069,719 $1,041,929 $1,067,840
Provision for loan losses ................. 44,076 42,857 85,238 84,557
Identified allowance for loans sold or
securitized ............................. (17,094) - (34,024) 5,214
Loans charged off:
SFR and SFR construction ................ (5,554) (8,524) (12,321) (19,604)
Second mortgage and other consumer:
Banking subsidiaries .................. (9,923) (10,419) (20,570) (23,852)
Washington Mutual Finance ............. (28,178) (22,681) (55,284) (46,426)
Specialty mortgage finance .............. (788) (143) (1,376) (199)
Commercial business ..................... (3,663) (1,261) (4,443) (3,716)
Commercial real estate:
Apartments ............................ (563) (10,165) (1,732) (11,294)
Other commercial real estate .......... (615) (12,713) (1,003) (15,509)
-------- -------- -------- --------
(49,284) (65,906) (96,729) (120,600)
Recoveries of loans previously charged off:
SFR and SFR construction ................ 796 152 944 2,248
Second mortgage and other consumer:
Banking subsidiaries .................. 1,027 721 1,799 1,279
Washington Mutual Finance ............. 4,300 4,103 8,693 8,178
Specialty mortgage finance .............. 8 28 517 56
Commercial business ..................... 385 223 615 451
Commercial real estate:
Apartments ............................ 24 - 500 2,580
Other commercial real estate .......... 246 1,692 246 1,786
---------- ---------- ---------- ----------
6,786 6,919 13,314 16,578
---------- ---------- ---------- ----------
Net charge offs ........................... (42,498) (58,987) (83,415) (104,022)
---------- ---------- ---------- ----------
Balance, end of period .................... $1,009,728 $1,053,589 $1,009,728 $1,053,589
========== ========== ========== ==========
Net charge offs (annualized) as a percentage
of average loans....................... 0.15% 0.22% 0.15% 0.19%
</TABLE>
<TABLE>
JUNE 30, DECEMBER 31,
2000 1999
-------- -----------
<S> <C> <C>
Total reserve for loan losses as a percentage of:
Nonaccrual loans....................... 126% 126%
Nonperforming assets................... 104 102
Total loans
(exclusive of the reserve for loan losses) 0.88 0.91
</TABLE>
At June 30, 2000, we had $16.70 billion of loans securitized and retained
with recourse, and $4.43 billion of loans securitized and sold with recourse. At
June 30, 2000, the liability for these recourse obligations was $106.3 million.
When we securitize or sell loans with recourse, we retain the exposure for
potential losses and, as a result, have established a recourse obligation.
Because the loans underlying these securities are similar to the loans in our
loan portfolio, we estimate our recourse obligation on these securities in a
manner similar to the method we use for establishing the reserve for loan losses
on our loan portfolio. The liability for this recourse obligation is included in
"other liabilities."
21
<PAGE>
Changes in the recourse liability were as follows:
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------------
2000 1999 2000 1999
------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period .................... $109,541 $127,966 $113,089 $144,257
Transfers ....................................... - - - (15,000)
Charge offs, net of provision for recourse losses (3,289) (5,963) (6,837) (7,254)
-------- -------- -------- --------
Balance, end of period .......................... $106,252 $122,003 $106,252 $122,003
======== ======== ======== ========
</TABLE>
The total loss coverage represents the reserve for loan losses and recourse
liability as a percentage of nonaccrual loans.
JUNE 30, DECEMBER 31,
2000 1999
-------- -----------
Total loss coverage percentage......... 139% 140%
NONPERFORMING ASSETS. Assets considered to be nonperforming include
nonaccrual loans and foreclosed assets. When securitized loans or loans sold
with recourse become nonperforming, we repurchase them and include them in
nonaccrual loans. Management's classification of a loan as nonaccrual does not
necessarily indicate that the principal of the loan is uncollectible in whole or
in part. Loans are generally placed on nonaccrual status when they are four
payments or more past due.
Nonperforming assets consisted of the following:
JUNE 30, DECEMBER 31,
2000 1999
--------- -----------
(dollars in thousands)
Nonaccrual loans:
SFR ................................. $527,888 $ 601,896
SFR construction..................... 17,734 18,017
Second mortgage and other consumer:
Banking subsidiaries............. 38,121 43,309
Washington Mutual Finance........ 61,211 54,817
Specialty mortgage finance........... 104,169 57,193
Commercial business.................. 15,716 9,826
Commercial real estate:
Apartment buildings.............. 14,534 21,956
Other commercial real estate..... 22,180 20,011
-------- ----------
801,553 827,025
Foreclosed assets...................... 172,091 198,961
-------- ----------
$973,644 $1,025,986
======== ==========
Nonperforming assets as a percentage
of total assets.................. 0.52% 0.55%
22
<PAGE>
Specialty mortgage finance loans on nonaccrual status increased by $47.0
million during the first half of 2000 as a result of increasing loan purchases
and originations. These portfolios were unseasoned loans and the amount of such
loans that has become nonperforming was within our expectations. As these
portfolios continue to season and as we add more specialty mortgage finance
loans to our portfolio, the balance of nonperforming assets related to these
loans is anticipated to increase. The increase in commercial business loans on
nonaccrual status of $5.9 million was primarily related to two
agricultural-related loans. Management closely monitors the performance of the
loans in these portfolios.
LINES OF BUSINESS
We are managed along five major lines of business: consumer banking,
mortgage banking, commercial banking, financial services, and consumer finance.
Although we do not consider the treasury group to be a line of business, it
manages investments and interest rate risk.
CONSUMER BANKING
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands)
Condensed income statement:
Net interest income after
provision for loan losses...... $636,183 $601,962 $1,249,875 $1,199,360
Noninterest income............... 252,538 193,515 476,679 373,580
Transaction-related expense...... - 24,992 - 42,543
Noninterest expense.............. 456,126 455,752 905,381 903,047
Income taxes..................... 156,422 116,841 296,159 232,949
-------- -------- ---------- ----------
Net income....................... $276,173 $197,892 $ 525,014 $ 394,401
======== ======== ========== ==========
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(in thousands)
Total assets.....................$83,142,652 $83,713,164
=========== ===========
Net income for the second quarter of 2000 was $276.2 million, an increase
of $78.3 million from $197.9 million for the second quarter of 1999. Net income
for the six months ended June 30, 2000 was $525.0 million, an increase of $130.6
million from $394.4 million for the six months ended June 30, 1999. The increase
during the quarter was primarily due to an increase of $59.0 million in
noninterest income, a decline of $25.0 million in transaction-related expense
and an increase of $34.2 million in net interest income after provision for loan
losses. The increase during the six-month period was primarily due to an
increase of $103.1 million in noninterest income, a decline of $42.5 million in
transaction-related expense and an increase of $50.5 million in net interest
income after provision for loan losses. The rise in noninterest income resulted
from an increase in depositor and other retail banking fees. This increase was
due to the consumer banking group collecting more overdraft protection,
nonsufficient funds and other fees related to checking accounts on an increased
number of deposit accounts. The number of checking accounts increased by over
482,000 or 12% to 4,561,235 at June 30, 2000 from 4,079,171 a year ago.
The increase in net interest income after provision for loan losses was
primarily due to the increase in the net interest spread and margin. The yield
on SFR loans for the consumer banking group responded more quickly than the cost
of deposits to the rise in short-term interest rates during the quarter and six
months ended June 30, 2000.
23
<PAGE>
MORTGAGE BANKING
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands)
Condensed income statement:
Net interest income after
provision for loan losses...... $193,159 $216,275 $393,997 $430,414
Noninterest income............... 131,383 68,347 222,345 142,482
Transaction-related expense...... - 9,352 - 13,730
Noninterest expense.............. 133,761 134,162 267,199 275,309
Income taxes..................... 68,975 52,386 125,900 105,411
-------- -------- -------- --------
Net income....................... $121,806 $ 88,722 $223,243 $178,446
======== ======== ======== ========
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(in thousands)
Total assets.....................$45,182,102 $46,373,128
=========== ===========
Net income for the second quarter of 2000 was $121.8 million, an increase
of $33.1 million from $88.7 million for the second quarter of 1999. Net income
for the first six months of 2000 was $223.2 million, an increase of $44.8
million from $178.4 million for the same period in 1999. The increase during the
quarter was primarily due to an increase of $63.0 million in noninterest income,
partially offset by a decrease in net interest income after provision for loan
losses of $23.1 million. The increase during the six-month period was primarily
due to an increase of $79.9 million in noninterest income, partially offset by a
decrease in net interest income after provision for loan losses of $36.4
million.
Noninterest income increased primarily as a result of increased gain on
sale of loans during the quarter and six months ended June 30, 2000. The gains
during the second quarter of 2000 were generated by sales of $3.91 billion of
seasoned ARMs and $2.15 billion of securities created through the securitization
of seasoned ARMs. The increase in gain on sale of loans during the first half of
2000 was primarily attributable to the sale of seasoned loans and securities
during the second quarter and the sale of $1.71 billion of seasoned SFR loans
and $5.03 billion of securities created through the securitization of seasoned
ARMs during the first quarter of 2000. The decline in net interest income was
primarily due to the compression of the net interest spread and margin. The cost
of borrowings for the mortgage banking group responded more quickly than the
yield on ARMs to the rise in short-term interest rates during the quarter and
six months ended June 30, 2000.
24
<PAGE>
COMMERCIAL BANKING
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ----------
(in thousands)
Condensed income statement:
Net interest income after
provision for loan losses........ $87,982 $98,069 $177,808 $199,256
Noninterest income................. 8,135 10,854 12,844 18,878
Transaction-related expense........ - 283 - 421
Noninterest expense................ 29,789 26,135 58,848 51,968
Income taxes....................... 24,291 30,726 48,096 61,706
------- ------- -------- --------
Net income......................... $42,037 $51,779 $ 83,708 $104,039
======= ======= ======== ========
June 30, December 31,
2000 1999
-------- ------------
(in thousands)
Total assets.......................$20,926,385 $20,179,900
=========== ===========
Net income for the second quarter of 2000 was $42.0 million, a decrease of
$9.8 million from $51.8 million for the second quarter of 1999. Net income for
the first half of 2000 was $83.7 million, a decrease of $20.3 million from
$104.0 million for the comparable period in 1999. The decrease during the
quarter was primarily due to a decline of $10.1 million in net interest income
after provision for loan losses, resulting from the compression of the net
interest spread and margin in the commercial real estate portfolio where the
repricing indices for the majority of the portfolio responded more slowly to the
rise in short-term interest rates than the cost of borrowings. The decrease
during the six-month period was primarily due to a decline of $21.4 million in
net interest income after provision for loan losses for the reasons discussed
above.
FINANCIAL SERVICES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands)
Condensed income statement:
Net interest income after
provision for loan losses........ $ 89 $ 501 $ 172 $ 1,095
Noninterest income................. 95,979 83,661 191,330 154,491
Transaction-related expense........ - 722 - 2,196
Noninterest expense................ 64,380 50,496 124,366 96,540
Income taxes....................... 12,320 12,485 26,515 21,551
------- ------- -------- --------
Net income......................... $19,368 $20,459 $ 40,621 $ 35,299
======= ======= ======== ========
June 30, December 31,
2000 1999
-------- -----------
(in thousands)
Total assets....................... $149,544 $123,525
======== ========
Net income for the second quarter of 2000 was $19.4 million, a decrease of
$1.1 million from $20.5 million for the second quarter of 1999. Net income for
the first six months of 2000 was $40.6 million, an increase of $5.3 million from
$35.3 million for the same period a year ago. Noninterest income was up during
the quarter and six months ended June 30, 2000 as a result of an increase in
securities fees and commissions. During these periods, there were higher sales
of investment products and growth of assets under management. The increase in
noninterest expense was primarily due to an increase in commission expense
related to a higher volume of securities transactions.
25
<PAGE>
CONSUMER FINANCE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands)
Condensed income statement:
Net interest income after
provision for loan losses........ $82,716 $56,840 $163,053 $111,004
Noninterest income................. 16,019 7,107 46,989 13,786
Noninterest expense................ 71,198 33,235 134,378 67,984
Income taxes....................... 11,436 11,934 30,912 22,088
------- ------- -------- --------
Net income......................... $16,101 $18,778 $ 44,752 $ 34,718
======= ======= ======== ========
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
(in thousands)
Total assets.......................$9,061,127 $7,370,753
========== ==========
Net income for the second quarter of 2000 was $16.1 million, a decrease of
$2.7 million from $18.8 million for the second quarter of 1999. Net income for
the six months ended June 30, 2000 was $44.8 million, an increase of $10.1
million from $34.7 million for the six months ended June 30, 1999. The decrease
for the quarter was attributable to an increase of $38.0 million in noninterest
expense, partially offset by increases of $25.9 million in net interest income
after provision for loan losses and $8.9 million in noninterest income. The
increase for the six-month period was attributable to increases of $52.0 million
in net interest income after provision for loan losses and $33.2 million in
noninterest income, partially offset by an increase of $66.4 million in
noninterest expense.
The increase in net interest income was due to an increase in average loans
for second quarter 2000, compared with second quarter 1999. This increase was
attributable to the growth in loans originated and purchased specialty mortgage
finance loans. During the first quarter of 2000, the increase in noninterest
income was primarily due to an increase in gain on sale of loans. Our level of
sales of specialty mortgage finance loans during the second quarter was below
prior quarter levels in anticipation of receiving a better execution price
during the subsequent period. Accordingly, gain on sale of loans was less during
the second quarter, but included an increase in loan-related income. The
increase in noninterest expense during the quarter and six months ended June 30,
2000 was primarily due to Long Beach Mortgage operating expenses. Washington
Mutual acquired Long Beach Mortgage on October 1, 1999. Since the transaction
was accounted for as a purchase, Long Beach Mortgage operations were not
included in the results for the quarter and six months ended June 30, 1999.
Total assets increased by $1.69 billion to $9.06 billion at June 30, 2000
from $7.37 billion at year-end 1999. Total assets increased by $5.10 billion
from $3.96 billion at June 30, 1999. These increases were primarily due to loans
originated by Long Beach Mortgage and purchases of specialty mortgage finance
loans.
26
<PAGE>
TREASURY/OTHER
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- -------
(in thousands)
Condensed income statement:
Net interest income after
provision for loan losses....... $47,686 $132,204 $106,458 $250,217
Noninterest income................ (3,811) 634 (26,880) 13,045
Transaction-related expense....... - 1,220 - 1,481
Noninterest expense............... 19,949 12,275 29,609 23,272
Income taxes...................... 8,649 44,299 18,053 88,620
------- -------- -------- --------
Net income........................ $15,277 $ 75,044 $ 31,916 $149,889
======= ======== ======== ========
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(in thousands)
Total assets......................$27,225,380 $28,753,160
=========== ===========
INTEREST RATE SENSITIVITY
Our long-run profitability depends not only on the success of the services
we offer to our customers and the credit quality of our loans and securities,
but also the extent to which our earnings are not negatively affected by changes
in interest rates. We engage in a comprehensive asset and liability management
program that attempts to reduce the risk of significant decreases in net
interest income caused by interest rate changes without unduly penalizing
current earnings. As part of this strategy, we actively manage the amounts and
maturities of our assets and liabilities.
A conventional view of interest rate sensitivity for savings institutions
is the gap report, which indicates the difference between assets maturing or
repricing within a period and total liabilities maturing or repricing within the
same period. In assigning assets to maturity and repricing categories, we take
into consideration expected prepayment speeds rather than contractual
maturities. The balances reflect actual amortization of principal and do not
take into consideration reinvestment of cash. Principal prepayments are the
amounts of principal reduction over and above normal amortization. We have used
prepayment assumptions based on market estimates and past experience with our
current portfolio. Since our non-maturity deposits are not contractually subject
to repricing, they have been allocated based on expected decay rates. Non-rate
sensitive items such as the reserve for loan losses and deferred loan fees/costs
are not included in the table. The balance of fixed-rate loans held for sale is
included in the 0-3 months category.
27
<PAGE>
<TABLE>
JUNE 30, 2000
-------------------------------------------------------------------------------------
PROJECTED REPRICING
-------------------------------------------------------------------------------------
0-3 MONTHS 4-12 MONTHS 1-5 YEARS THEREAFTER TOTAL
---------- ----------- --------- ---------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS
Adjustable-rate loans (1) $56,104,874 $ 18,725,050 $19,330,764 $ 781,241 $ 94,941,929
Fixed-rate loans (1) 2,124,656 2,871,939 7,553,017 6,757,441 19,307,053
Adjustable-rate
securities (1), (2) 28,067,622 2,732,334 7,449,336 127,169 38,376,461
Fixed-rate securities (1) 917,760 2,487,024 9,521,061 12,401,089 25,326,934
Cash and cash equivalents 2,787,472 23,901 - - 2,811,373
----------- ------------ ----------- ----------- ------------
$90,002,384 $ 26,840,248 $43,854,178 $20,066,940 $180,763,750
=========== ============ =========== =========== ============
INTEREST-SENSITIVE LIABILITIES
Noninterest-bearing
checking accounts (3) $ 467,324 $ 1,158,246 $ 3,264,915 $ 3,790,451 $ 8,680,936
Interest-bearing checking accounts,
savings accounts and MMDAs (3) 3,904,855 7,708,930 14,910,037 9,174,966 35,698,788
Time deposit accounts 7,620,701 23,083,564 5,467,378 44,119 36,215,762
Short-term and
adjustable-rate borrowings 77,408,671 2,093,130 - - 79,501,801
Long-term fixed-rate
borrowings 2,015,854 6,847,819 2,758,701 3,257,223 14,879,597
Derivatives matched
against liabilities (18,210,050) 12,549,100 7,650,950 (1,990,000) -
----------- ------------ ----------- ----------- ------------
$73,207,355 $ 53,440,789 $34,051,981 $14,276,759 $174,976,884
=========== ============ =========== =========== ============
Repricing gap $16,795,029 $(26,600,541) $ 9,802,197 $ 5,790,181
============ ============ =========== ===========
Cumulative gap $16,795,029 $ (9,805,512) $ (3,315) $ 5,786,866
============ ============ =========== ===========
Cumulative gap as a
percentage of total assets 9.04% (5.28)% 0% 3.12%
Total assets $185,687,190
============
---------------------
(1) Based on scheduled maturity or scheduled repricing and estimated prepayments of
principal.
(2) Includes investment in FHLBs.
(3) Based on experience and anticipated decay rates of checking, savings, and
money market deposit accounts.
</TABLE>
28
<PAGE>
LIQUIDITY
Liquidity management focuses on the need to meet both short-term funding
requirements and long-term growth objectives. Our long-term growth objectives
are to attract and retain stable consumer deposit relationships and to maintain
stable sources of wholesale funds. Because the interest rate environment of
recent years has inhibited growth of consumer deposits, we have supported our
growth through business combinations with other financial institutions and by
increasing our use of wholesale borrowings.
We monitor our ability to meet short-term cash requirements using
guidelines established by our Board of Directors. These guidelines ensure that
short-term secured borrowing capacity is sufficient to satisfy unanticipated
cash needs.
As presented in the Consolidated Statements of Cash Flows, the sources of
liquidity vary between the comparable periods. The statement of cash flows
includes operating, investing and financing categories. Cash flows from
operating activities included net income for the six months ended June 30, 2000
of $949.3 million, $135.1 million for noncash items and $1.61 billion of other
net cash outflows from operating activities. Cash flows from investing
activities consisted mainly of both proceeds from sales and purchases of
securities, and loan principal repayments and loan originations. For the six
months ended June 30, 2000, cash flows from investing activities included sales,
maturities and principal payments on securities totaling $4.60 billion. Loans
originated and purchased for investment were in excess of repayments and sales
by $2.33 billion. Cash flows from financing activities consisted of the net
change in our deposit accounts and short-term borrowings, the proceeds from and
repayments of long-term borrowings and FHLBs advances, and the repurchase of
our common stock. For the six months ended June 30, 2000, the above mentioned
financing activities decreased cash and cash equivalents by $1.53 billion on a
net basis. Cash and cash equivalents were $2.81 billion at June 30, 2000. See
"Consolidated Financial Statements - Consolidated Statements of Cash Flows."
At June 30, 2000, we were in a position to obtain approximately $38.18
billion in additional borrowings primarily through the use of collateralized
borrowings and deposits of public funds using unpledged MBS and other wholesale
borrowing sources.
29
<PAGE>
CAPITAL ADEQUACY
Our capital (stockholders' equity) was $8.55 billion at June 30, 2000, down
from $9.05 billion at December 31, 1999. In order to effectively deploy excess
capital, we continue to repurchase our common stock. Since April 20, 1999, the
inception of the repurchase program, we have repurchased a total of 66.3 million
shares as part of our previously announced purchase programs totaling 111.3
million shares. During the second quarter of 2000, we repurchased 15.0 million
shares of common stock at an average price of $26.94. These stock repurchases
and the $309.9 million increase in the unrealized loss on AFS securities to
$977.3 million were the primary factors in a decline of the ratio of
stockholders' equity to assets to 4.61% at June 30, 2000 from 4.85% at December
31, 1999. The unrealized loss on AFS securities at December 31, 1999 was $667.4
million.
The regulatory capital ratios of WMBFA, WMB and WMBfsb and the minimum
regulatory requirements to be categorized as well capitalized were as follows:
<TABLE>
JUNE 30, 2000
----------------------------------------
WELL-CAPITALIZED
WMBFA WMB WMBFSB MINIMUM
----- --- ------ -------
<S> <C> <C> <C> <C>
Capital ratios:
Tier 1 capital to adjusted total assets (leverage). 5.55% 5.71% 7.37% 5.00%
Tier 1 capital to risk-weighted assets............. 9.94 10.00 12.26 6.00
Total capital to risk-weighted assets.............. 11.02 10.88 13.25 10.00
</TABLE>
The total estimated risk-based capital for Washington Mutual, Inc. was
11.29% at June 30, 2000. This ratio is an estimate of what Washington Mutual,
Inc.'s total risk-based capital would be if it were a bank holding company that
complies with Federal Reserve capital requirements.
In addition, Washington Mutual Finance's industrial bank, First Community
Industrial Bank, met all Federal Deposit Insurance Corporation requirements to
be categorized as well capitalized at June 30, 2000.
Our federal savings bank subsidiaries are also required by Office of Thrift
Supervision regulations to maintain tangible capital of at least 1.50% of
assets. WMBFA and WMBfsb both satisfied this requirement at June 30, 2000.
Our broker-dealer subsidiaries are also subject to capital requirements. At
June 30, 2000, both of our securities subsidiaries were in compliance with their
applicable capital requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe that there have not been any material changes in quantitative
and qualitative information about market risk since year-end 1999. In
particular, the loan securitizations during the six months ended June 30, 2000
do not have a material impact on our interest rate risk profile.
30
<PAGE>
PART II
<TABLE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Washington Mutual, Inc. held its annual meeting of shareholders on April 18, 2000. A
brief description of each matter voted on and the results of the shareholder voting are set
forth below:
VOTES VOTES ABSTENTIONS/
FOR AGAINST NON-VOTES
--- ------- ---------
<S> <C> <C> <C> <C>
1. The election of seven directors set forth below:
Mary E. Pugh (term ending 2002) 475,705,556 - 8,053,153
Douglas P. Beighle (term ending 2003) 478,110,751 - 5,647,958
J. Taylor Crandall (term ending 2003) 378,200,343 - 105,558,366
Kerry K. Killinger (term ending 2003) 477,168,167 - 6,590,542
Michael K. Murphy (term ending 2003) 478,236,149 - 5,522,560
Elizabeth A. Sanders (term ending 2003) 478,242,695 - 5,516,014
Willis B. Wood, Jr. (term ending 2003) 475,676,821 - 8,081,888
2. Amendment to Washington Mutual's 1994
Stock Option Plan. 413,446,797 66,821,304 78,059,093
3. Amendment to Washington Mutual's Bonus
and Incentive Plan for Executive Officers
and Senior Management. 453,263,442 26,730,642 78,333,110
4. Amendment to Washington Mutual's
Restricted Stock Plan. 461,887,049 18,246,821 78,193,324
5. Ratification of the appointment of
Deloitte & Touche LLP as the Company's
Independent Auditors. 480,758,466 1,105,037 76,463,691
6. Amendment to the Nomination of Board Candidates. 31,513,293 357,252,761 169,561,140
7. Amendment to the Hiring of Proxy
Advisory Firm by Shareholder vote. 16,943,326 370,248,208 171,135,660
</TABLE>
31
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Index of Exhibits on page 34.
(b) Reports on Form 8-K
During the second quarter of 2000, the Company filed a report on Form 8-K
dated April 21, 2000. The report included under Item 7 of Form 8-K a press
release announcing Washington Mutual's first quarter 2000 financial results and
unaudited consolidated financial statements for the quarter ended March 31,
2000.
During the second quarter of 2000, the Company filed a report on Form 8-K
dated April 4, 2000. The report included under Item 7 of Form 8-K an
Underwriting Agreement dated March 30, 2000 between the Registrant and Goldman,
Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan
Stanley & Co. Incorporated for the Company to issue subordinated debt securities
totaling $500.0 million and bearing a fixed rate of 8.25%. The notes are due on
April 1, 2010.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 11, 2000.
WASHINGTON MUTUAL, INC.
By: /s/ FAY L. CHAPMAN
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Fay L. Chapman
Senior Executive Vice President and
General Counsel
By: /s/ RICHARD M. LEVY
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Richard M. Levy
Senior Vice President and Controller
(Principal Accounting Officer)
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WASHINGTON MUTUAL, INC.
INDEX OF EXHIBITS
Exhibit No.
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3.1 Restated Articles of Incorporation of the Company, as amended (the "Articles") (filed
as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 and incorporated herein by reference. File No. 0-25188).
3.2 Restated bylaws of the Company, as amended.
4.1 Rights Agreement, dated October 16, 1990 (filed as an exhibit to the Company's
Current Report on Form 8-K dated November 29, 1994 and incorporated herein by
reference. File No. 0-25188).
4.2 Amendment No. 1 to Rights Agreement, dated October 31, 1994 (filed as an exhibit to
the Company's Current Report on Form 8-K dated November 29, 1994 and incorporated
herein by reference. File No. 0-25188).
4.3 Supplement to Rights Agreement, dated November 29, 1994 (filed as an exhibit to the
Company's current report on Form 8-K dated November 29, 1994 and incorporated herein
by reference. File No. 0-25188).
4.4 The registrant agrees to furnish the Securities and Exchange Commission,
upon request, with copies of all instruments defining the rights of
holders of long-term debt of Washington Mutual and its consolidated
subsidiaries.
27 Financial Data Schedule.
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