<PAGE> 1
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 MARCH 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________
TO ______________:
Commission File Number 1-14667
WASHINGTON MUTUAL, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1653725
(State or other jurisdiction of (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 April 30, 2000:
Common Stock - 547,759,847(1)
(1) Includes the 12,000,000 shares held in escrow.
<PAGE> 2
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<S> <C>
Page
----
PART I
Item 1. Financial Statements............................................ 1
Consolidated Statements of Income -
Three Months Ended March 31,2000 and 1999................... 2
Consolidated Statements of Comprehensive Income -
Three Months Ended March 31, 2000 and 1999.................. 3
Consolidated Statements of Financial Condition -
March 31, 2000 and December 31,1999......................... 4
Consolidated Statements of Stockholders' Equity -
Three Months Ended March 31, 2000 and 1999.................. 5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2000 and 1999.................. 6
Notes to Consolidated Financial Statements.................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results Operations.......................................... 10
General....................................................... 10
Results of Operations......................................... 10
Review of Financial Condition................................. 15
Asset Quality................................................. 16
Lines of Business............................................. 19
Interest Rate Sensitivity..................................... 21
Liquidity..................................................... 22
Capital Adequacy.............................................. 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 24
PART II
Item 6. Exhibits and Reports on Form 8-K................................ 25
</TABLE>
i
<PAGE> 3
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> 4
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
----------- --------
(dollars in thousands,
except per share amounts)
<S> <C> <C>
INTEREST INCOME
Loans........................................... $2,221,191 $2,028,502
Available-for-sale ("AFS") securities........... 692,244 539,012
Held-to-maturity ("HTM") securities............. 339,096 247,377
Other interest and dividend income.............. 51,115 39,227
---------- ----------
Total interest income......................... 3,303,646 2,854,118
INTEREST EXPENSE
Deposits........................................ 787,855 813,627
Borrowings...................................... 1,431,081 913,296
---------- ----------
Total interest expense....................... 2,218,936 1,726,923
---------- ----------
Net interest income.......................... 1,084,710 1,127,195
Provision for loan losses....................... 41,162 41,700
---------- ----------
Net interest income after provision for loan losses 1,043,548 1,085,495
NONINTEREST INCOME
Depositor and other retail banking fees......... 211,033 163,417
Securities fees and commissions................. 82,573 59,522
Insurance fees and commissions.................. 11,479 10,670
Loan servicing income........................... 33,269 26,031
Loan related income............................. 24,021 26,547
Gain on sale of loans........................... 61,228 38,362
Gain (loss) from securities..................... (21,566) (2,693)
Other income.................................... 21,027 30,288
---------- ----------
Total noninterest income...................... 423,064 352,144
NONINTEREST EXPENSE
Compensation and benefits....................... 330,406 301,609
Occupancy and equipment......................... 152,501 134,904
Telecommunications and outsourced information services 76,927 70,064
Depositor and other retail banking losses....... 25,522 25,247
Transaction-related expense..................... - 23,802
Amortization of goodwill and other intangible assets 26,746 25,373
Foreclosed asset (income) expense.............. (1,395) 3,794
Other expense................................... 133,871 145,074
---------- ----------
Total noninterest expense..................... 744,578 729,867
---------- ----------
Income before income taxes.................... 722,034 707,772
Income taxes...................................... 263,542 263,654
---------- ----------
NET INCOME........................................ $ 458,492 $ 444,118
========== ==========
Net income attributable to common stock........... $ 458,492 $ 444,118
========== ==========
Net income per common share:
Basic........................................... $0.83 $0.76
Diluted......................................... 0.83 0.76
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 5
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
-------- --------
(in thousands)
<S> <C> <C>
Net income.................................................. $458,492 $444,118
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 $146,395 and $39,981.......... (221,672) (61,187)
Reclassification adjustment for realized loss (gain) included in
net income, net of income tax (benefit) of $(8,275) and $837 12,527 (1,280)
Amortization of market adjustment for mortgage-backed
securities ("MBS") transferred from available for sale to held
to maturity, net of deferred income tax of $882 and $2,480 (1,280) (3,795)
--------- --------
(210,425) (66,262)
Minimum pension liability adjustment...................... 3,648 (1,760)
-------- --------
Other comprehensive loss..................................... (206,777) (68,022)
-------- --------
Comprehensive income......................................... $251,715 $376,096
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 6
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................. $ 2,818,015 $ 3,040,167
Trading securities........................................ 35,320 34,660
AFS securities, amortized cost of $42,664,879 and $42,564,180:
MBS..................................................... 40,704,634 40,972,653
Investment securities................................... 444,394 411,665
HTM securities, fair value of $18,234,782 and $19,037,435:
MBS..................................................... 18,596,688 19,263,413
Investment securities................................... 138,014 138,052
Loans:
Loans held in portfolio................................. 110,859,979 113,745,650
Loans held for sale..................................... 362,202 793,504
Reserve for loan losses................................. (1,025,244) (1,041,929)
------------ ------------
Total loans........................................... 110,196,937 113,497,225
Mortgage servicing rights................................. 767,596 643,185
Foreclosed assets......................................... 190,030 198,961
Premises and equipment.................................... 1,541,906 1,558,649
Investment in Federal Home Loan Banks ("FHLBs")........... 3,091,918 2,916,749
Goodwill and other intangible assets...................... 1,165,221 1,199,854
Other assets.............................................. 8,914,545 2,638,397
------------- ------------
Total assets........................................ $188,605,218 $186,513,630
============ ============
LIABILITIES
Deposits:
Checking accounts...................................... $ 15,553,923 $ 13,489,471
Savings accounts and money market deposit accounts ("MMDAs") 29,702,330 30,048,378
Time deposit accounts.................................. 37,256,706 37,591,919
------------ ------------
Total deposits........................................ 82,512,959 81,129,768
Federal funds purchased and commercial paper.............. 2,410,693 866,543
Securities sold under agreements to repurchase
("reverse repurchase agreements")...................... 28,467,663 30,162,823
Advances from FHLBs....................................... 57,853,022 57,094,053
Other borrowings.......................................... 6,832,067 6,203,197
Other liabilities......................................... 1,823,241 2,004,567
------------ ------------
Total liabilities................................... 179,899,645 177,460,951
STOCKHOLDERS' EQUITY
Common stock, no par value: 1,600,000,000 shares authorized -
552,626,483 and 571,589,272 shares issued............... - -
Capital surplus - common stock............................ 1,760,242 2,205,201
Accumulated other comprehensive loss:
Unrealized loss on securities............................ (877,839) (667,414)
Minimum pension liability adjustment..................... (3,382) (7,030)
Retained earnings......................................... 7,826,552 7,521,922
------------ ------------
Total stockholders' equity.......................... 8,705,573 9,052,679
------------ ------------
Total liabilities and stockholders' equity.......... $188,605,218 $186,513,630
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 7
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
CAPITAL ACCUMULATED
SURPLUS- OTHER
COMMON COMPREHENSIVE RETAINED
TOTAL STOCK INCOME 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....................... 458,492 - - 458,492
Cash dividends declared on common stock (153,862) - - (153,862)
Common stock issued through employee
stock plans, including tax benefit 19,904 19,904 - -
Other comprehensive loss, net of
related income tax benefit..... (206,777) - (206,777) -
Common stock repurchased and retired (464,863) (464,863) - -
---------- ---------- --------- ----------
BALANCE, March 31, 2000.......... $8,705,573 $1,760,242 $(881,221) $7,826,552
========== ========== ========= ==========
BALANCE, December 31, 1998....... $9,344,400 $2,994,653 $ 74,281 $6,275,466
Net income....................... 444,118 - - 444,118
Cash dividends declared on common stock (132,236) - - (132,236)
Common stock issued through employee
stock plans, including tax benefit 21,266 21,266 - -
Other comprehensive loss, net of
related income tax benefit..... (68,022) - (68,022) -
---------- ---------- --------- ----------
BALANCE, March 31, 1999.......... $9,609,526 $3,015,919 $ 6,259 $6,587,348
========== ========== ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 8
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
---------- ---------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................$ 458,492 $ 444,118
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................ 41,162 41,700
Gain on sale of loans............................... (61,228) (38,362)
Loss from securities.................................. 21,566 2,693
Depreciation and amortization........................ 119,294 89,125
Stock dividends from FHLBs.......................... (41,870) (28,555)
Transaction-related expense.......................... - 23,802
Decrease in trading securities....................... 2,567 9,655
Origination of loans held for sale................... (1,251,645) (1,539,803)
Sales of loans held for sale......................... 1,658,338 3,541,833
(Increase) decrease in other assets.................. (812,793) 52,528
Decrease in other liabilities...................... (42,450) (22,336)
------------ ------------
Net cash provided by operating activities.......... 91,433 2,576,398
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of AFS securities.......................... (40,492) (12,320,686)
Purchases of HTM securities........................... - (5,989)
Sales of AFS securities................................ 117,629 1,283,970
Maturities of AFS securities........................... 3,428 29,100
Principal payments on securities....................... 2,007,405 3,684,364
Purchases of Investment in FHLBs....................... (135,051) (153,685)
Purchases of loans..................................... (704,347) (1,300,807)
Sales of loans......................................... 1,889,464 9,681
Origination of loans, net of principal payments........ (5,342,875) (2,333,956)
Sales of foreclosed assets............................. 72,672 78,933
Cash used for Alta..................................... (21,823) -
Purchases of premises and equipment, net............... (40,642) (70,029)
------------ ------------
Net cash used by investing activities.............. (2,194,632) (11,099,104)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits........................ 1,383,191 (1,312,515)
Decrease in short-term borrowings..................... (4,697,263) (586,887)
Proceeds from long-term borrowings.................... 8,681,219 8,042,744
Repayments of long-term borrowings..................... (3,644,809) (1,384,668)
Proceeds from FHLBs advances........................... 21,118,794 28,232,168
Repayments of FHLBs advances........................... (20,359,820) (25,205,331)
Cash dividends paid on common stock.................... (153,862) (132,236)
Repurchase of common stock............................. (464,863) -
Other capital transactions............................. 18,460 20,377
------------ ------------
Net cash provided by financing activities........ 1,881,047 7,673,652
-------------- ------------
Decrease in cash and cash equivalents. ........... (222,152) (849,054)
Cash and cash equivalents, beginning of period... 3,040,167 2,756,974
------------ ------------
Cash and cash equivalents, end of period.......... $ 2,818,015 $ 1,907,920
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE> 9
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
---------- ----------
(in thousands)
<S> <C> <C>
NONCASH ACTIVITIES
Loans exchanged for MBS................................ $1,954,652 $1,805,534
Real estate acquired through foreclosure............... 74,938 102,248
Loans originated to facilitate the sale of foreclosed assets 11,197 10,928
Loans held for sale originated to refinance existing loans 64,616 1,353,378
Loans held in portfolio originated to refinance existing loans 824,778 1,028,605
Trade date purchases not yet settled................... - 3,433,853
Trade date sales not yet settled....................... 5,467,690 106,861
Trade date borrowings not yet settled.................. 500,000 -
Transfer of reserves................................... 16,930 5,214
CASH PAID DURING THE PERIOD FOR
Interest on deposits................................... 731,349 743,948
Interest on borrowings................................. 1,591,746 990,125
Income taxes........................................... 817 136,364
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE> 10
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 potential dilutive common shares, such as stock
options.
Information used to calculate EPS was as follows:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
------------ --------
(dollars in thousands,
except per share amounts)
<TABLE>
<S> <C> <C>
Net income................................... $458,492 $444,118
Weighted average shares
- -----------------------
Basic weighted average number of common
shares outstanding...................... 551,787,125 581,939,740
Dilutive effect of potential common shares. 871,533 2,640,443
------------ -----------
Diluted weighted average number of common
shares outstanding...................... 552,658,658 584,580,183
=========== ============
Net income per common share
- ---------------------------
Basic and diluted.......................... $0.83 $0.76
</TABLE>
Options to purchase an additional 13,201,323 shares of common stock, with
an exercise price ranging from $24.30 per share to $49.69 per share, were
outstanding at March 31, 2000, but were not included in the computation of
diluted EPS because their exercise prices were greater than the average market
price of the common stock during the period.
Additionally, as part of the business combination with Keystone Holdings,
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, 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 March 31, 2000, the conditions were
not met, and, therefore, the shares were not included in the above computations.
NOTE 2: OTHER BORROWINGS
As of both March 31, 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 March 2000, the Company issued subordinated debt securities totaling
$500.0 million and bearing a fixed rate of 8.25%. The notes are due on April 1,
2010.
8
<PAGE> 11
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:
<TABLE>
THREE MONTHS ENDED MARCH 31, 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 $613,693 $200,838 $89,826 $ 83 $80,337 $58,771 $1,043,548
Noninterest income...... 224,141 90,962 4,709 95,352 30,970 (23,070) 423,064
Noninterest expense..... 449,255 133,439 29,059 59,986 63,180 9,659 744,578
Income taxes............ 139,736 56,925 23,806 14,195 19,476 9,404 263,542
-------- -------- ------- ------- ------- ------- ----------
Net income.............. $248,843 $101,436 $41,670 $21,254 $28,651 $16,638 $ 458,492
======== ======== ======= ======= ======= ======= ==========
March 31, 2000
-------------------------------------------------------------------------------
Total assets............ $85,162,463 $48,061,516 $20,472,871 $148,215 $7,163,327 $27,596,826 $188,605,218
=========== =========== =========== ======== ========== =========== ============
THREE MONTHS ENDED MARCH 31, 1999
--------------------------------------------------------------------------
CONSUMER MORTGAGE COMMERCIAL FINANCIAL CONSUMER TREASURY/
BANKING BANKING BANKING SERVICES FINANCE OTHER TOTAL
-------- -------- ---------- --------- -------- --------- -------
(in thousands)
Condensed income statement:
Net interest income after
provision for loan losses $597,397 $214,138 $101,187 $ 594 $54,163 $118,016 $1,085,495
Noninterest income... 180,065 74,136 8,024 70,830 6,679 12,410 352,144
Transaction-related expense 17,551 4,378 138 1,474 - 261 23,802
Noninterest expense..... 447,295 141,146 25,833 46,044 34,748 10,999 706,065
Income taxes............ 116,109 53,025 30,980 9,066 10,154 44,320 263,654
-------- -------- -------- ------- -------- -------- ----------
Net income.............. $196,507 $ 89,725 $ 52,260 $14,840 $15,940 $ 74,846 $ 444,118
======== ======== ======== ======= ======= ======== ==========
March 31, 1999
-------------------------------------------------------------------------------
Total assets............ $87,006,907 $32,634,021 $19,271,811 $119,913 $3,168,651 $32,093,749 $174,295,052
=========== =========== =========== ======== ========== =========== ============
</TABLE>
NOTE 4: OTHER ASSETS
At March 31, 2000, the Company had $5.97 billion of trade date
receivables relating to sales of loans and securities which had not yet
settled, which were a component of "Other assets." The Company had no trade
date receivables at year-end 1999.
9
<PAGE> 12
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.
In connection with one of our current performance goals, to decrease the
proportion of single-family residential ("SFR") loans on our balance sheet, we
sold approximately $9.00 billion of SFR loans and mortgage-backed securities
("MBS") during the first quarter. We intend to use the proceeds from these
sales to reduce our wholesale borrowings and fund our expanded share repurchase
program.
RESULTS OF OPERATIONS
OVERVIEW. Our net income for first quarter 2000 was $458.5 million,
compared with $444.1 million for the same period a year ago. We had basic and
diluted earnings per share of $0.83 in first quarter 2000 and $0.76 in first
quarter 1999.
NET INTEREST INCOME. Despite an increase in average interest-earning
assets to $180.46 billion for first quarter 2000 from $158.66 billion in the
same period a year ago, net interest income declined approximately 4% for the
first quarter of 2000 to $1.08 billion, compared with $1.13 billion in the
first quarter of 1999. The decline in net interest income was due to the drop in
the net interest spread and margin. The net interest spread and margin were
2.25% and 2.38% for first quarter 2000, compared with 2.60% and 2.79% for
the same period a year ago.
The compression in the net interest spread and margin is primarily due to
the fact that our liabilities reprice 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 5.01% in the
first quarter of 1999 to 6.10% in the first quarter of 2000 and by an aggregate
125 basis point increase in the federal funds rate.
10
<PAGE> 13
The cost of our interest-bearing liabilities increased 48 basis points to
5.08% for first quarter 2000 from 4.60% for the same period a year ago, driven
primarily by a 64 basis point increase in the cost of wholesale borrowings. The
cost of wholesale borrowings increased to 6.08% for first quarter 2000, compared
with 5.44% for the same period a year ago. The rise in wholesale borrowing
rates was partially mitigated by the cost of deposits, which remained unchanged
from first quarter 1999. The overall yield on our interest-earning assets
increased 13 basis points, driven primarily by a 21 basis point increase in the
yield on loans to 7.64% for first quarter 2000, compared with 7.43% for the same
period in 1999.
Selected average financial balances and the net interest spread and
margin were as follows:
<TABLE>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
---------- ------------
(dollars in thousands)
<S> <C> <C>
Average balances:
Loans..................................... $116,289,707 $109,289,268
MBS....................................... 60,046,653 45,765,022
Investment securities and Investment in FHLBs 4,120,524 3,606,580
------------ ------------
Total interest-earning assets........... 180,456,884 158,660,870
Deposits.................................. 80,967,950 84,289,648
Borrowings................................ 94,727,478 68,015,000
------------ ------------
Total interest-bearing liabilities.... 175,695,428 152,304,648
Total assets............................. 186,376,917 164,220,074
Stockholders' equity...................... 8,885,473 9,488,284
Weighted average yield on:
Loans..................................... 7.64% 7.43%
MBS....................................... 6.81 6.78
Investment securities and Investment in FHLBs 5.88 5.56
Interest-earning assets................. 7.33 7.20
Weighted average cost of:
Deposits.................................. 3.91 3.91
Borrowings................................ 6.08 5.44
Interest-bearing liabilities............ 5.08 4.60
Net interest spread....................... 2.25 2.60
Net interest margin....................... 2.38 2.79
</TABLE>
The net interest spread is the difference between our 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.
11
<PAGE> 14
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.
<TABLE>
THREE MONTHS ENDED MARCH 31,
2000 VS. 1999
----------------------------------------
INCREASE/(DECREASE) DUE TO
----------------------------------------
VOLUME RATE TOTAL CHANGE
--------- -------- -------------
(in thousands)
<S> <C> <C> <C>
Interest income:
Loans........................................ $134,713 $ 57,976 $192,689
MBS.......................................... 243,150 3,008 246,158
Investment securities and Investment in FHLBs 7,653 3,028 10,681
-------- -------- --------
Total interest income...................... 385,516 64,012 449,528
Interest expense:
Deposits..................................... (25,578) (194) (25,772)
Borrowings................................... 399,463 118,322 517,785
-------- -------- --------
Total interest expense..................... 373,885 118,128 492,013
-------- -------- --------
Net interest income...................... $ 11,631 $(54,116) $(42,485)
======== ======== ========
</TABLE>
NONINTEREST INCOME. Noninterest income was $423.1 million for the quarter
ended March 31, 2000, compared with $352.1 million for the same period in 1999.
Noninterest income consisted of the following:
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
----------- ---------
(in thousands)
<TABLE>
<S> <C> <C>
Depositor and other retail banking fees...... $211,033 $163,417
Securities fees and commissions.............. 82,573 59,522
Insurance fees and commissions............... 11,479 10,670
Loan servicing income........................ 33,269 26,031
Loan related income.......................... 24,021 26,547
Gain on sale of loans........................ 61,228 38,362
Gain (loss) from securities.................. (21,566) (2,693)
Other income................................. 21,027 30,288
---------- ----------
Total noninterest income................. $423,064 $352,144
======== ========
</TABLE>
Depositor and other retail banking fees of $211.0 million for the quarter
ended March 31, 2000 increased 29% from $163.4 million for the same period in
1999. 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 427,000 or 11% to 4,428,225 at March 31, 2000.
Securities fees and commissions were $82.6 million for the first quarter
of 2000, up from $59.5 million for the first quarter of 1999. During the first
quarter of 2000, there were higher sales of investment products and additional
growth of assets under management by our investment management affiliate from
$6.03 billion at March 31, 1999 to $8.16 billion at March 31, 2000.
12
<PAGE> 15
Loan servicing income increased to $33.3 million for the quarter ended
March 31, 2000 from $26.0 million for the comparable period in 1999. The
ncrease of $7.3 million in loan servicing income was primarily due to growth in
loans serviced for others as a result of securitizations and portfolio sales.
The impact of this portfolio growth was partially offset by a 4.62 basis point
decline in the average servicing fee rate. The decline in the average servicing
fee rate was primarily due to lower servicing rates received from new
securitizations and portfolio sales, and by paydowns of existing loans with
higher servicing rates. Since the majority of the loan securitizations occurred
in March 2000, the impact on loan servicing income will not be fully realized
until second quarter 2000.
Loan servicing income was $33.3 million for the first quarter of 2000,
compared with $38.5 million for the fourth quarter of 1999. Fourth quarter
loan servicing income included a $4.3 million impairment recovery.
Gain on sale of loans during the first quarter of 2000 was $61.2 million,
up from $38.4 million for the same period in 1999. The increase was primarily
due to a gain from the sale of $5.08 billion of adjustable-rate loans during the
first quarter of 2000. During the quarter, we also recognized gains from the
sale of loans originated by Long Beach Mortgage, which sells most of its loan
production in the secondary market. Total sales of loans held for sale were
$1.75 billion in first quarter 2000, compared with $3.55 billion in first
quarter 1999.
Losses from securities were $21.6 million during the first quarter of
2000, compared with $2.7 million during the first quarter of 1999. The losses
incurred during first quarter 2000 were primarily the result of a loss of $19.4
million on the sale of available-for-sale ("AFS"), private issue MBS, as an
additional part of our balance sheet remixing strategy.
Other income declined to $21.0 million for the quarter ended March 31,
2000 from $30.3 million for the same period a year ago. Other income in the
first quarter of 1999 included a $7.1 million gain on the sale of the former
Coast Federal Bank, Federal Savings Bank headquarters property.
13
<PAGE> 16
NONINTEREST EXPENSE. Noninterest expense totaled $744.6 million for the
quarter ended March 31, 2000, compared with $729.9 million for the same period
in 1999.
Noninterest expense consisted of the following:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
---------- --------
(in thousands)
<TABLE>
<S> <C> <C>
Compensation and benefits................. $330,406 $301,609
Occupancy and equipment .................. 152,501 134,904
Telecommunications and outsourced
information services................... 76,927 70,064
Depositor and retail banking losses....... 25,522 25,247
Transaction-related expense............... - 23,802
Amortization of goodwill and other
intangible assets...................... 26,746 25,373
Foreclosed asset (income) expense......... (1,395) 3,794
Advertising and promotion................. 20,761 26,850
Postage................................... 23,515 22,051
Professional fees......................... 20,538 16,217
Regulatory assessments.................... 8,019 15,363
Office supplies........................... 8,779 7,848
Travel and training....................... 14,603 11,978
Proprietary mutual fund expense........... 7,837 7,591
Other expense............................. 29,819 37,176
-------- --------
Total noninterest expense............. $744,578 $729,867
======== ========
</TABLE>
Compensation and benefits expense increased to $330.4 million for the
quarter ended March 31, 2000 from $301.6 million for the same period in 1999.
The acquisition of Long Beach Mortgage in October 1999 contributed approximately
$14.0 million of compensation and benefits expense in the first quarter of 2000.
In addition to the acquisition of Long Beach Mortgage, we have been increasing
staffing levels to accommodate our growth in new markets, expansion of existing
business lines, and the introduction of new products.
Occupancy and equipment expense was $152.5 million for the first quarter
of 2000, compared with $134.9 million for the same period in 1999. Computer
system upgrades caused an increase in depreciation, equipment and maintenance
expense.
Telecommunications and outsourced information services expense of $76.9
million for the first quarter of 2000 was up from $70.1 million for the same
period in 1999. The increase reflects higher use of services resulting from
increased staffing levels, 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. ("Ahmanson") in the
fourth quarter of 1999. Therefore, there were no transaction-related expenses
incurred in the quarter ended March 31, 2000, compared with $23.8 million for
the same period in 1999. During the first quarter 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.
14
<PAGE> 17
TAXATION. Income taxes include federal and applicable state income taxes
and payments in lieu of taxes. Income taxes of $263.5 million for the first
quarter of 2000 represented an effective tax rate of 36.50%. Income taxes were
$263.7 million for the first quarter of 1999, which represented an effective tax
rate of 37.25%.
REVIEW OF FINANCIAL CONDITION
ASSETS. At March 31, 2000, our assets were $188.61 billion, an increase
of 1% from $186.51 billion at December 31, 1999. In spite of a decline in
loans and securities, assets were higher at the end of the first quarter due to
$5.97 billion of trade date receivables in "Other assets." See "Notes to
Consolidated Financial Statements - Note 4: Other Assets."
SECURITIES. Our securities portfolio decreased by $901.4 million to $59.92
billion during the quarter ended March 31, 2000. This decline was due to sales,
paydowns, and additional unrealized losses on the AFS investment portfolio
in excess of the amount of loans securitized and retained. There were no
purchases of MBS during first quarter 2000.
LOANS. Total loans at March 31, 2000 were $111.22 billion, down from
$114.54 billion at December 31, 1999. This decline in loan balances was
primarily the result of loan sales and loan securitizations of $10.66 billion,
and loan payments of $5.40 billion, offset by originations of new loans of
$12.16 billion and purchases of $704.3 million.
Our current ARM products are tied to Treasury-based indices. Due to the
repayment of portfolio loans indexed to the Cost of Funds Index of the Eleventh
District Federal Home Loan Bank ("COFI") and the securitization and sale of
COFI-based loans, the percentage of portfolio loans indexed to Treasury averages
is increasing. At March 31, 2000, 88% of real estate loans were adjustable
rate, of which 58% were indexed to U.S. Treasury indices, 35% were indexed to
COFI, and 7% to other indices. The remaining 12% of the real estate loan
portfolio at March 31, 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.
Total loan originations increased slightly in the first quarter of 2000 to
$12.16 billion from $11.88 billion in the first quarter of 1999. SFR
originations were $8.50 billion for first quarter 2000, compared with $9.67
billion for the same period in 1999. Originations of second mortgage and other
consumer, specialty mortgage finance, commercial business, commercial real
estate and residential construction loans totaled $3.67 billion for the most
recent quarter, up from $2.21 billion in the first quarter of 1999. Due to the
higher interest rate environment during first quarter 2000, compared with the
same period a year ago, SFR adjustable-rate originations increased to $7.77
billion during the first quarter of 2000 from $5.17 billion during the first
quarter of 1999, whereas SFR fixed-rate originations declined to $732.4 million
during the first quarter of 2000 from $4.50 billion for the same period in 1999.
During the first quarter of 2000, loan sales of $8.71 billion included
$6.84 billion of seasoned SFR loans which were securitized and sold, $657.6
million of current production SFR loans, $1.09 billion of loans originated by
Long Beach Mortgage and $123.6 million of student loans.
15
<PAGE> 18
Changes in first quarter 2000 and fourth quarter 1999 mortgage servicing
rights ("MSR") were as follows:
THREE MONTHS ENDED
----------------------------
MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
(in thousands)
<TABLE>
<S> <C> <C>
Balance, beginning of period................ $643,185 $489,037
Additions................................... 150,453 169,844
Amortization................................ (26,041) (19,977)
Impairment recovery......................... - 4,281
-------- --------
Balance, end of period...................... $767,597 $643,185
======== ========
</TABLE>
MSR increased to $767.6 million at March 31, 2000 from $643.2 million at
December 31, 1999. The additions to MSR during the first quarter of 2000 and
fourth quarter of 1999 were primarily due to loan sales and loan
securitizations. Amortization during the first quarter of 2000 included the full
effect of the fourth quarter 1999 securitizations. The impact of the first
quarter 2000 loan sales and loan securitizations on amortization will not be
fully realized until second quarter 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 to fund
our asset growth. Deposits increased to $82.51 billion at March 31, 2000 from
$81.13 billion at year-end 1999. Our strategy is to increase the ratio of
transaction accounts to total deposits. As a result of this strategy, savings
accounts, MMDAs and checking accounts have increased as a percentage of total
deposits to 55% at March 31, 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 increased by $1.24 billion to $95.56
billion at March 31, 2000, compared with year-end 1999. The increase was
primarily due to our use of wholesale borrowings as an alternative to retail
deposits as a funding source for asset growth. Due to relative pricing
advantages, we generally used advances from FHLBs and reverse repurchase
agreements as our primary funding vehicles.
In addition, on March 30, 2000, we issued $500.0 million of non-callable,
8.25% subordinated notes due April 1, 2010.
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, nonaccrual asset
trends, historical loan loss experience, and plans for problem loan
administration and resolution. The results of the analysis indicated continued
improvement in asset quality during the first quarter of 2000.
Nonaccrual loans decreased to $789.3 million at March 31, 2000 from
$827.0 million at December 31, 1999 and $895.9 million at March 31, 1999.
Actual loss experience, as measured by net charge offs, decreased to $40.9
million for the first quarter of 2000 from $44.8 million for the fourth
quarter of 1999 and $45.0 million for the first quarter of 1999. Net charge
offs as a percentage of average loans were 0.14% for first quarter 2000,
down from 0.15% for fourth quarter 1999 and 0.16% for first quarter 1999.
16
<PAGE> 19
At March 31, 2000, we had specific reserves totaling $42.6 million,
compared with $81.6 million at December 31, 1999 and $129.0 million at March
31, 1999. Reserves specified for the apartment building and commercial real
estate loan portfolios have declined by 44% since year-end 1999 and by 70%
since March 31, 1999 and now total $33.3 million at March 31, 2000. The
decline from March 31, 1999 to March 31, 2000 was primarily due to California
economic growth and the recovery of commercial real estate markets
nationwide, which resulted in significant improvement in the quality of
these portfolios. The result was a reduction in the level of nonaccrual loans
in these portfolios.
In the following table, the transfer of $16.9 million from the reserve for
loan losses during the first quarter of 2000 related to loans securitized or
loans sold. The amount transferred reduced the basis of the loans that were
securitized. The transfer of $5.2 million to the reserve for loan losses during
the first quarter of 1999 related to loans securitized and/or sold as well as
merger-related adjustments to conform Home Savings' policies to our policies.
Changes in the reserve for loan losses were as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
----------- ----------
(dollars in thousands)
<TABLE>
<S> <C> <C>
Balance, beginning of period.............. $1,041,929 $1,067,840
Provision for loan losses................. 41,162 41,700
Transfers of reserves..................... (16,930) 5,214
Loans charged off:
SFR and SFR construction................ (6,767) (11,080)
Second mortgage and other consumer...... (37,753) (37,178)
Specialty mortgage finance.............. (588) (56)
Commercial business..................... (780) (2,455)
Commercial real estate.................. (1,557) (3,925)
---------- ----------
(47,445) (54,694)
Recoveries of loans previously charged off:
SFR and SFR construction................ 148 2,096
Second mortgage and other consumer...... 5,165 4,633
Specialty mortgage finance.............. 509 28
Commercial business..................... 230 228
Commercial real estate ................. 476 2,674
---------- ----------
6,528 9,659
---------- ----------
Net charge offs........................... (40,917) (45,035)
---------- ----------
Balance, end of period.................... $1,025,244 $1,069,719
========== ==========
Net charge offs as a percentage of average loans 0.14% 0.16%
MARCH 31, DECEMBER 31,
2000 1999
---------- -----------
Total reserve for loan losses as a percentage of:
Nonaccrual loans........................ 130% 126%
Nonperforming assets.................... 105 102
Total loans
(exclusive of the reserve for loan losses) 0.92 0.91
</TABLE>
At March 31, 2000, we had $17.39 billion of loans securitized and retained
with recourse, and $4.51 billion of loans securitized and sold with recourse. At
March 31, 2000, the liability for this recourse was $109.5 million. When we
securitize loans with recourse, we typically retain the exposure for potential
losses on the loans underlying these securities and, as a result, have
established a recourse
17
<PAGE> 20
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."
Changes in the recourse liability were as follows:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
--------- --------
(in thousands)
<TABLE>
<S> <C> <C>
Balance, beginning of period ................ $113,089 $144,257
Transfer to reserve for loan losses.......... - (15,000)
Charge offs, net of provision for recourse losses (3,548) (1,291)
-------- --------
Balance, end of period....................... $109,541 $127,966
======== ========
</TABLE>
The total loss coverage represents the reserve for loan losses and
recourse liability as a percentage of nonaccrual loans.
MARCH 31, DECEMBER 31,
2000 1999
---------- -----------
<TABLE>
<S> <C> <C>
Total loss coverage percentage 144% 140%
</TABLE>
NONPERFORMING ASSETS. Assets considered to be nonperforming include
nonaccrual loans and foreclosed assets. When loans securitized or 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:
MARCH 31, DECEMBER 31,
2000 1999
----------- ----------
(dollars in thousands)
<TABLE>
<S> <C> <C>
Nonaccrual loans:
SFR ........................................ $574,070 $ 601,896
SFR construction............................ 10,632 18,017
Second mortgage and other consumer.......... 91,469 98,126
Specialty mortgage finance.................. 65,883 57,193
Commercial business......................... 15,571 9,826
Commercial real estate...................... 31,648 41,967
-------- ----------
789,273 827,025
Foreclosed assets............................. 190,030 198,961
-------- ----------
$979,303 $1,025,986
======== ==========
Nonperforming assets as a percentage of total assets 0.52% 0.55%
</TABLE>
18
<PAGE> 21
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. MBS and whole loans that we purchase
(other than specialty mortgage finance loans) are allocated to treasury.
<TABLE>
CONSUMER BANKING MORTGAGE BANKING COMMERCIAL BANKING FINANCIAL SERVICES
--------------------------------------------------------------------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
--------- --------- --------- ---------
2000 1999 2000 1999 2000 1999 2000 1999
--------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONDENSED INCOME STATEMENT
Net interest income after
provision for loan losses $613,693 $597,397 $200,838 $214,138 $89,826 $101,187 $ 83 $ 594
Noninterest income 224,141 180,065 90,962 74,136 4,709 8,024 95,352 70,830
Transaction-related expense - 17,551 - 4,378 - 138 - 1,474
Noninterest expense 449,255 447,295 133,439 141,146 29,059 25,833 59,986 46,044
Income taxes 139,736 116,109 56,925 53,025 23,806 30,980 14,195 9,066
-------- -------- -------- -------- ------- ------- ------- -------
Net income $248,843 $196,507 $101,436 $ 89,725 $41,670 $52,260 $21,254 $14,840
======== ======== ======== ========= ======= ======= ======= =======
Total assets $85,162,463 $87,006,907 $48,061,516 $32,634,021 $20,472,871 $19,271,811 $148,215 $119,913
=========== =========== =========== =========== =========== =========== ======== ========
CONSUMER FINANCE TREASURY/OTHER TOTAL
--------------------------------------------------------------------
MARCH 31, MARCH 31, MARCH 31,
--------- --------- ---------
2000 1999 2000 1999 2000 1999
--------------------------------------------------------------------
(in thousands)
CONDENSED INCOME STATEMENT
Net interest income after
provision for loan losses $80,337 $54,163 $58,771 $118,016 $1,043,548 $1,085,495
Noninterest income 30,970 6,679 (23,070) 12,410 423,064 352,144
Transaction-related expense - - - 261 - 23,802
Noninterest expense 63,180 34,748 9,659 10,999 744,578 706,065
Income taxes 19,476 10,154 9,404 44,320 263,542 263,654
------- ------- ------- ------- --------- ---------
Net income $28,651 $15,940 $16,638 $74,846 $ 458,492 $ 444,118
======= ======= ======= ======= ========= =========
Total assets $7,163,327 $3,168,651 $27,596,826 $32,093,749 $188,605,218 $174,295,052
========== ========== =========== =========== ============ ============
</TABLE>
On a consolidated basis, net income for first quarter 2000 was $458.5
million, compared with $444.1 million for the same period a year ago. In
addition, there were no transaction-related expenses incurred during the
quarter ended March 31, 2000. We are constantly analyzing our line of business
performance and developing better ways to measure profitability.
CONSUMER BANKING
Net income for the first quarter of 2000 was $248.8 million, an increase
of $52.3 million from $196.5 million for the first quarter of 1999. This
increase was primarily due to an increase of $44.1 million in noninterest
income, a decline of $17.6 million in transaction-related expense and an
increase of $16.3 million in interest income after provision for loan losses.
Noninterest income rose by $44.1 million as a result of an increase in depositor
and other retail banking fees. The consumer banking group collected more debit
card, ATM, overdraft protection, nonsufficient funds and other fees related to
checking accounts.
19
<PAGE> 22
MORTGAGE BANKING
Net income for the first quarter of 2000 was $101.4 million, an increase
of $11.7 million from $89.7 million for the first quarter of 1999. This increase
was comprised of an increase of $16.8 million in noninterest income and a
decrease in noninterest expense of $7.7 million, partially offset by a
decrease in net interest income after provision for loan losses of $13.3
million. Noninterest income increased as a result of increased gain on sale of
loans sold during the first quarter of 2000 and increased loan servicing income
from loans sold during the fourth quarter of 1999. The decline in net interest
income was primarily due to the compression of the net interest spread and
margin. The cost of borrowings responded more quickly than the yield on assets
to the rise in short-term interest rates during the first quarter of 2000.
Total assets increased by approximately 47% from March 31, 1999 to March 31,
2000 due to more loans securitized and retained.
COMMERCIAL BANKING
Net income for the first quarter of 2000 was $41.7 million, a decrease of
$10.6 million from $52.3 million for the first quarter of 1999. This decrease
was primarily due to a decline of $11.4 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 decline was
partially offset by an increase in net interest income for our Western Bank
division due to a $457.7 million increase in average loans over first quarter
1999, while maintaining a comparable net interest margin.
FINANCIAL SERVICES
Net income for the first quarter of 2000 was $21.3 million, an increase of
$6.5 million from $14.8 million for the first quarter of 1999. Noninterest
income was up during the first quarter of 2000 as a result of an increase in
securities fees and commissions. During the first quarter of 2000, 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
commissions expense related to a greater number of licensed sales employees
and the growth in the business.
CONSUMER FINANCE
Net income for the first quarter of 2000 was $28.7 million, an increase of
$12.8 million from $15.9 million for the first quarter of 1999. The increase
was attributable to increases of $26.2 million in net interest income after
provision for loan losses and $24.3 million in noninterest income, partially
offset by increases of $28.4 million in noninterest expense. The increase in
net interest income was due to an increase in average loans for the quarter
ended March 31, 2000. This increase was attributable to the growth in loans
originated and purchases of specialty mortgage finance loans. The increase in
noninterest income was primarily due to the growth in insurance fees and
commissions and gain on sale of loans. 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 first quarter 1999
results.
TREASURY/OTHER
The net loss of $23.1 million in noninterest income during the first
quarter of 2000 represented a net loss on the sale of securities, compared
with the net gain of $12.4 million during the first quarter of
20
<PAGE> 23
1999. The changes in net interest income were attributable to the treasury
group's function of managing our investments and interest rate risk.
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.
21
<PAGE> 24
<TABLE>
MARCH 31, 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) $52,825,586 $20,389,070 $19,419,365 $ 565,906 $ 93,199,927
Fixed-rate loans (1) 1,752,044 2,726,319 6,974,734 6,191,545 17,644,642
Adjustable-rate securities (1),(2) 27,395,939 3,935,882 6,774,836 - 38,106,657
Fixed-rate securities (1) 963,135 2,660,386 10,246,873 12,767,539 26,637,933
Cash and cash equivalents 2,818,015 - - - 2,818,015
----------- ----------- ----------- ----------- ------------
$85,754,719 $29,711,657 $43,415,808 $19,524,990 $178,407,174
=========== =========== =========== =========== ============
INTEREST-SENSITIVE LIABILITIES
Noninterest-bearing checking
accounts (3) $ 460,402 $ 1,127,014 $ 3,220,877 $ 3,775,057 $ 8,583,350
Interest-bearing checking accounts,
savings accounts and MMDAs (3) 4,182,671 7,381,448 15,375,593 9,733,191 36,672,903
Time deposit accounts 11,667,179 20,284,814 5,241,941 61,672 37,255,606
Short-term and adjustable-rate
borrowings 76,396,251 3,513,000 - - 79,909,251
Fixed-rate borrowings 1,034,299 4,520,157 6,959,042 3,174,138 15,687,636
Derivatives matched against
liabilities (19,689,050) 8,784,600 11,914,450 (1,010,000) -
----------- ------------ ----------- ----------- ------------
$74,051,752 $ 45,611,033 $42,711,903 $15,734,058 $178,108,746
=========== ============ =========== =========== ============
Repricing gap $11,702,967 $(15,899,376) $ 703,905 $ 3,790,932
=========== ============ =========== ===========
Cumulative gap $11,702,967 $ (4,196,409) $(3,492,504) $ 298,428
=========== ============ =========== ===========
Cumulative gap as a percentage
of assets 6.21% (2.22)% (1.85)% 0.16%
Total assets $188,605,218
============
- ---------------------
(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>
LIQUIDITY
Liquidity management focuses on the need to meet both short-term funding
requirements and long-term growth objectives. Our long-term growth objectives
are to attract and retain stable consumer deposit relationships and to maintain
stable sources of wholesale funds. Because the low interest rate environment of
recent years has inhibited growth of consumer deposits, we have supported our
growth through business combinations with other financial institutions and by
increasing our use of wholesale borrowings. If we are not be able to increase
deposits either internally or through acquisitions, our ability to grow would be
dependent upon, and to a certain extent limited by, our borrowing capacity.
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
22
<PAGE> 25
categories. Cash flows fromoperating activities included net income for the
first quarter of 2000 of $458.5 million, $60.9 million for noncash items and
$427.9 million of other net cash inflows from operating activities. Cash flows
from investing activities consisted mainly of both proceeds from and purchases
of securities, and loan principal repayments and loan originations. For the
quarter ended March 31, 2000, cash flows from investing activities included
sales, maturities and principal payments on securities totaling $2.13 billion.
Loans originated and purchased for investment were in excess of repayments and
sales by $4.16 billion, and $40.5 million was used for the purchase of
securities. Cash flows from financing activities consisted of the net change in
our deposit accounts and short-term borrowings, the proceeds and repayments from
both long-term reverse repurchase agreements and FHLB advances, the issuance of
long-term debt, and the repurchase of our common stock. For the first quarter
of 2000, the above mentioned financing activities increased cash and cash
equivalents by $2.02 billion on a net basis. Cash and cash equivalents were
$2.82 billion at March 31, 2000. See "Consolidated Financial Statements -
Consolidated Statements of Cash Flows."
At March 31, 2000, we were in a position to obtain approximately $25.87
billion in additional borrowings primarily through the use of collateralized
borrowings and deposits of public funds using unpledged MBS and other wholesale
borrowing sources.
CAPITAL ADEQUACY
Our capital (stockholders' equity) was $8.71 billion at March 31, 2000,
down from $9.05 billion at December 31, 1999. In order to effectively deploy
excess capital, we continue to repurchase our common stock. In April 2000, we
announced that our Board of Directors approved an expanded share repurchase
program to acquire, from time to time, up to 55 million additional shares of
Washington Mutual, Inc.'s common stock. Since April 20, 1999, the inception of
the repurchase program, we have repurchased a total of 51.3 million shares.
During the first quarter of 2000, we repurchased 19.8 million shares of common
stock at an average price of $23.42. These stock repurchases, the unrealized
loss on AFS securities of $877.8 million and the growth in assets were the
primary factors in a decline of the ratio of stockholders' equity to assets to
4.62% at March 31, 2000 from 4.85% at December 31, 1999. The unrealized loss
on AFS securities at December 31, 1999 was $667.4 million. Excluding the
unrealized loss from AFS securities, the ratio of stockholders' equity to assets
would have been 5.04% at March 31, 2000, compared with 5.18% at year-end 1999.
The regulatory capital ratios of WMBFA, WMB and WMBfsb and the minimum
regulatory requirements to be categorized as well capitalized were as follows:
<TABLE>
MARCH 31, 2000
---------------------------------------------
WELL-CAPITALIZED
WMBFA WMB WMBfsb MINIMUM
----- --- ------ --------
<S> <C> <C> <C> <C>
Capital ratios:
Tier 1 capital to adjusted total assets (leverage) 5.51% 5.73% 7.71% 5.00%
Tier 1 capital to risk-weighted assets...... 10.19 10.46 12.74 6.00
Total capital to risk-weighted assets....... 11.35 11.36 13.81 10.00
</TABLE>
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 March 31, 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 March 31, 2000.
23
<PAGE> 26
Our broker-dealer subsidiaries are also subject to capital requirements.
At March 31, 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 fourth quarter of 1999 and first
quarter of 2000 do not have a material impact on our interest rate risk profile.
24
<PAGE> 27
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See Index of Exhibits on page 27.
(b) Reports on Form 8-K
During the first quarter of 2000, the Company filed a report on
Form 8-K dated January 20, 2000. The report included under Item 7 of Form 8-K a
press release announcing Washington Mutual's fourth quarter 1999 financial
results and audited consolidated financial statements for the quarter and year
ended December 31, 1999.
25
<PAGE> 28
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 May 12, 2000.
WASHINGTON MUTUAL, INC.
By: /s/ FAY L. CHAPMAN
--------------------------------------
Fay L. Chapman
Senior Executive Vice President
By: /s/ RICHARD M. LEVY
--------------------------------------
Richard M. Levy
Senior Vice President and Controller
(Principal Accounting Officer)
26
<PAGE> 29
WASHINGTON MUTUAL, INC.
INDEX OF EXHIBITS
<TABLE>
Exhibit No.
- -----------
<S> <C>
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 Bylaws of the Company, as amended (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).
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.*
- -----------
* Filed electronically with the Securities and Exchange Commission.
</TABLE>
27
<PAGE> 30
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-Q OF
WASHINGTON MUTUAL, INC. FOR THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,511,001
<INT-BEARING-DEPOSITS> 307,014
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 35,320
<INVESTMENTS-HELD-FOR-SALE> 41,149,028
<INVESTMENTS-CARRYING> 18,734,702
<INVESTMENTS-MARKET> 18,234,782
<LOANS> 111,222,181
<ALLOWANCE> 1,025,244
<TOTAL-ASSETS> 188,605,218
<DEPOSITS> 82,512,959
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,823,241
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 8,705,573
<TOTAL-LIABILITIES-AND-EQUITY> 188,605,218
<INTEREST-LOAN> 2,221,191
<INTEREST-INVEST> 1,031,340
<INTEREST-OTHER> 51,115
<INTEREST-TOTAL> 3,303,646
<INTEREST-DEPOSIT> 787,855
<INTEREST-EXPENSE> 2,218,936
<INTEREST-INCOME-NET> 1,084,710
<LOAN-LOSSES> 41,162
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 744,578
<INCOME-PRETAX> 722,034
<INCOME-PRE-EXTRAORDINARY> 458,492
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 458,492
<EPS-BASIC> 0.83
<EPS-DILUTED> 0.83
<YIELD-ACTUAL> 2.38
<LOANS-NON> 789,273
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,041,929
<CHARGE-OFFS> 47,445
<RECOVERIES> 6,528
<ALLOWANCE-CLOSE> 1,025,244
<ALLOWANCE-DOMESTIC> 42,550
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 982,694
</TABLE>
