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 SEPTEMBER 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 October 31, 2000:
Common Stock - 539,280,106(1)
(1) Includes the 12,000,000 shares held in escrow.
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
Page
----
PART I
<S> <C> <C>
Item 1. Financial Statements................................................................................. 1
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 2000 and 1999........................................ 2
Consolidated Statements of Comprehensive Income -
Three and Nine Months Ended September 30, 2000 and 1999........................................ 3
Consolidated Statements of Financial Condition -
September 30, 2000 and December 31, 1999....................................................... 4
Consolidated Statements of Stockholders' Equity -
Nine Months Ended September 30, 2000 and 1999.................................................. 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 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............................................................................ 12
Review of Financial Condition.................................................................... 17
Asset Quality.................................................................................... 20
Lines of Business................................................................................ 23
Interest Rate Sensitivity........................................................................ 26
Liquidity........................................................................................ 28
Capital Adequacy................................................................................. 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................... 29
PART II
Item 6. Exhibits and Reports on Form 8-K..................................................................... 30
</TABLE>
i
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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
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<TABLE>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans................................................ $2,396,449 $2,126,725 $ 6,855,154 $6,168,599
Available-for-sale ("AFS") securities................ 703,405 644,262 2,098,296 1,829,596
Held-to-maturity ("HTM") securities.................. 325,782 239,199 998,065 744,992
Other interest and dividend income................... 59,305 49,330 199,075 130,069
--------- ---------- ---------- ---------
Total interest income.............................. 3,484,941 3,059,516 10,150,590 8,873,256
INTEREST EXPENSE
Deposits............................................. 844,318 775,800 2,435,241 2,382,121
Borrowings........................................... 1,606,640 1,164,050 4,504,765 3,095,566
----------- ---------- ----------- ----------
Total interest expense............................ 2,450,958 1,939,850 6,940,006 5,477,687
----------- ---------- ----------- ----------
Net interest income............................... 1,033,983 1,119,666 3,210,584 3,395,569
Provision for loan losses........................... 47,565 40,799 132,803 125,356
----------- ---------- ----------- ----------
Net interest income after provision for loan losses 986,418 1,078,867 3,077,781 3,270,213
NONINTEREST INCOME
Depositor and other retail banking fees.............. 256,435 198,360 707,241 543,891
Securities fees and commissions...................... 78,369 70,781 244,458 199,667
Insurance fees and commissions....................... 10,671 10,571 32,986 31,510
Loan servicing income................................ 37,709 23,871 110,112 73,783
Loan related income.................................. 30,086 24,586 83,151 77,992
Gain on sale of loans................................ 55,523 14,642 197,422 81,025
Gain (loss) from securities.......................... 9,318 (9,549) (14,006) (11,900)
Other income......................................... 32,813 36,257 72,867 89,813
----------- ---------- ---------- ----------
Total noninterest income.......................... 510,924 369,519 1,434,231 1,085,781
NONINTEREST EXPENSE
Compensation and benefits............................ 339,061 294,323 1,004,947 898,052
Occupancy and equipment.............................. 145,518 139,237 446,099 411,301
Telecommunications and outsourced
information services.............................. 81,982 70,862 236,268 208,106
Depositor and other retail banking losses............ 27,638 29,594 76,329 77,483
Transaction-related expense.......................... - 12,673 - 73,044
Amortization of goodwill and other intangible assets. 26,866 23,447 80,749 72,082
Foreclosed asset income.............................. (635) (7,043) (5,807) (6,314)
Other expense........................................ 164,325 136,363 465,951 444,193
----------- ---------- ----------- ----------
Total noninterest expense......................... 784,755 699,456 2,304,536 2,177,947
----------- ---------- ----------- ----------
Income before income taxes........................ 712,587 748,930 2,207,476 2,178,047
Income taxes........................................... 260,094 278,950 805,729 811,275
----------- ---------- ----------- ----------
NET INCOME............................................. $ 452,493 $ 469,980 $ 1,401,747 $1,366,772
=========== ========== =========== ==========
Net income attributable to common stock................ $ 452,493 $ 469,980 $ 1,401,747 $1,366,772
=========== ========== =========== ==========
Net income per common share:
Basic................................................ $0.86 $0.83 $2.61 $2.37
Diluted.............................................. 0.86 0.83 2.60 2.37
</TABLE>
See Notes to Consolidated Financial Statements.
2
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ------------------------
2000 1999 2000 1999
------------ ------------ ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Net income.................................................. $452,493 $469,980 $1,401,747 $1,366,772
Other comprehensive income (loss), net of income tax (benefit):
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) during the period, net
of deferred income tax (benefit) of $294,053,
$(126,019), $94,137 and $(436,103)................ 473,235 (192,855) 151,410 (667,396)
Reclassification adjustment for realized (gain) loss
included in net income, net of income tax (benefit)
of $3,354, $(4,099), $(5,751) and $(3,167)....... (5,399) 6,274 9,257 4,847
Amortization of market adjustment for
mortgage-backed securities ("MBS") transferred
from available for sale to held to maturity, net of
deferred income tax of $843, $1,573, $2,552
and $5,960....................................... (1,323) (2,408) (4,008) (9,122)
-------- --------- ---------- ----------
466,513 (188,989) 156,659 (671,671)
Minimum pension liability adjustment................... - (5,033) 3,647 (6,793)
-------- --------- ---------- ----------
Other comprehensive income (loss).......................... 466,513 (194,022) 160,306 (678,464)
-------- -------- ---------- ----------
Comprehensive income....................................... $919,006 $275,958 $1,562,053 $ 688,308
======== ======== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
3
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<TABLE>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- --------------
(in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents....................................................... $ 2,218,333 $ 3,040,167
Trading securities.............................................................. 46,609 34,660
AFS securities, amortized cost of $41,100,452 and $42,564,180:
MBS........................................................................... 39,754,149 40,972,653
Investment securities......................................................... 468,939 411,665
HTM securities, fair value of $17,005,637 and $19,037,435:
MBS........................................................................... 17,138,429 19,263,413
Investment securities......................................................... 136,727 138,052
Loans:
Loans held in portfolio....................................................... 115,054,356 113,745,650
Loans held for sale........................................................... 6,185,789 793,504
Reserve for loan losses....................................................... (1,011,817) (1,041,929)
------------ ------------
Total loans, net of reserve for loan losses................................. 120,228,328 113,497,225
Mortgage servicing rights....................................................... 899,240 643,185
Foreclosed assets............................................................... 156,628 198,961
Premises and equipment.......................................................... 1,544,250 1,558,649
Investment in Federal Home Loan Banks ("FHLBs")................................. 3,195,901 2,916,749
Goodwill and other intangible assets............................................ 1,108,616 1,199,854
Other assets.................................................................... 3,884,001 2,638,397
------------ ------------
Total assets.............................................................. $190,780,150 $186,513,630
============ ============
LIABILITIES
Deposits:
Checking accounts............................................................. $ 14,656,567 $ 13,489,471
Savings accounts and money market deposit accounts ("MMDAs").................. 29,843,865 30,048,378
Time deposit accounts......................................................... 35,952,913 37,591,919
------------ ------------
Total deposits.............................................................. 80,453,345 81,129,768
Federal funds purchased and commercial paper.................................... 3,913,673 866,543
Securities sold under agreements to repurchase
("reverse repurchase agreements")............................................ 30,588,865 30,162,823
Advances from FHLBs............................................................. 56,938,413 57,094,053
Other borrowings................................................................ 6,907,166 6,203,197
Other liabilities............................................................... 2,649,450 2,004,567
------------ ------------
Total liabilities......................................................... 181,450,912 177,460,951
STOCKHOLDERS' EQUITY
Common stock, no par value: 1,600,000,000 shares authorized,
539,082,138 and 571,589,272 shares issued..................................... - -
Capital surplus - common stock.................................................. 1,383,584 2,205,201
Accumulated other comprehensive loss:
Unrealized loss on securities................................................. (510,755) (667,414)
Minimum pension liability adjustment.......................................... (3,383) (7,030)
Retained earnings............................................................... 8,459,792 7,521,922
------------ ------------
Total stockholders' equity................................................ 9,329,238 9,052,679
------------ ------------
Total liabilities and stockholders' equity................................ $190,780,150 $186,513,630
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
4
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<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...................................... 1,401,747 - - 1,401,747
Cash dividends declared on common stock......... (463,877) - - (463,877)
Common stock issued through employee
stock plans, including tax benefit............ 47,322 47,322 - -
Other comprehensive income, net of
related income tax ........................... 160,306 - 160,306 -
Common stock repurchased and retired............ (868,939) (868,939) - -
---------- ---------- --------- ----------
BALANCE, September 30, 2000..................... $9,329,238 $1,383,584 $(514,138) $8,459,792
========== ========== ========= ==========
BALANCE, December 31, 1998...................... $9,344,400 $2,994,653 $ 74,281 $6,275,466
Net income...................................... 1,366,772 - - 1,366,772
Cash dividends declared on common stock......... (420,172) - - (420,172)
Common stock issued through employee
stock plans, including tax benefit............ 49,006 49,006 - -
Other comprehensive loss, net of
related income tax benefit.................... (678,464) - (678,464) -
Common stock repurchased and retired............ (755,562) (755,562) - -
---------- ---------- --------- ----------
BALANCE, September 30, 1999..................... $8,905,980 $2,288,097 $(604,183) $7,222,066
========== ========== ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
5
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<TABLE>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
----------------------------------
2000 1999
------------ -----------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................. $ 1,401,747 $ 1,366,772
Adjustments to reconcile net income to net cash (used) provided by
operating activities:
Provision for loan losses................................................. 132,803 125,356
Gain on sale of loans..................................................... (197,422) (81,025)
Loss from securities...................................................... 14,006 11,900
Depreciation and amortization............................................. 401,370 256,761
Stock dividends from FHLBs................................................ (114,453) (97,598)
Transaction-related expense............................................... - 73,044
(Increase) decrease in trading securities................................. (6,091) 9,665
Origination of loans held for sale........................................ (10,577,586) (3,496,969)
Proceeds from sales of loans held for sale................................ 6,873,302 7,414,583
Increase in other assets.................................................. (515,449) (337,475)
Increase (decrease) in other liabilities.................................. 504,613 (1,096,184)
----------- -----------
Net cash (used) provided by operating activities........................ (2,083,160) 4,148,830
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of AFS securities................................................. (1,036,755) (17,861,797)
Purchases of HTM securities................................................. (1,288) (86,510)
Sales of AFS securities..................................................... 1,967,657 2,146,690
Maturities of AFS securities................................................ 3,428 117,142
Maturities of HTM securities................................................ 2,000 6,903
Principal payments on securities............................................ 6,356,741 10,372,697
Purchases of investment in FHLBs............................................ (180,266) (552,153)
Purchases of loans.......................................................... (4,959,191) (6,339,752)
Proceeds from sales of loans................................................ 13,157,926 31,079
Origination of loans, net of principal payments............................. (14,972,569) (10,736,970)
Proceeds from sales of foreclosed assets.................................... 209,496 275,585
Cash used for Alta Residential Mortgage Trust............................... (21,823) -
Purchases of premises and equipment, net.................................... (179,844) (240,370)
Purchase of Bank Owned Life Insurance....................................... (1,000,000) -
----------- -----------
Net cash used by investing activities................................... (654,488) (22,867,456)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in deposits........................................................ (676,423) (3,867,653)
(Decrease) increase in short-term borrowings................................ (6,521,348) 5,397,253
Proceeds from long-term borrowings.......................................... 25,365,445 12,767,856
Repayments of long-term borrowings.......................................... (14,807,449) (7,524,962)
Proceeds from FHLBs advances................................................ 70,561,183 73,175,271
Repayments of FHLBs advances................................................ (70,717,774) (60,391,387)
Cash dividends paid on common stock......................................... (463,877) (420,172)
Repurchase of common stock.................................................. (868,939) (755,562)
Other capital transactions.................................................. 44,996 48,117
----------- -----------
Net cash provided by financing activities............................... 1,915,814 18,428,761
----------- -----------
Decrease in cash and cash equivalents................................... (821,834) (289,865)
Cash and cash equivalents, beginning of period.......................... 3,040,167 2,756,974
----------- -----------
Cash and cash equivalents, end of period................................ $ 2,218,333 $ 2,467,109
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
6
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<TABLE>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Nine Months Ended
September 30,
-----------------------------------
2000 1999
------------ -----------
(in thousands)
<S> <C> <C>
NONCASH ACTIVITIES
Loans exchanged for MBS..................................................... $3,837,658 $2,335,484
Loans exchanged for trading securities...................................... 2,607 -
Real estate acquired through foreclosure.................................... 194,170 268,596
Loans originated to facilitate the sale of foreclosed assets................ 27,007 45,089
Loans held for sale originated to refinance existing loans.................. 286,640 2,410,717
Loans held in portfolio originated to refinance existing loans.............. 2,460,042 3,306,774
Loans held in portfolio transferred to loans held for sale.................. 1,313,588 -
Trade date purchases not yet settled........................................ 413 -
Trade date sales not yet settled............................................ 50,445 217,814
CASH PAID DURING THE PERIOD FOR
Interest on deposits........................................................ 2,366,950 2,333,109
Interest on borrowings...................................................... 4,619,924 3,093,272
Income taxes................................................................ 35,360 777,449
</TABLE>
See Notes to Consolidated Financial Statements.
7
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: EARNINGS PER SHARE
Earnings per share ("EPS") are presented under two formats: basic EPS and
diluted EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted EPS is
computed by dividing net income by the weighted average number of common shares
outstanding during the period plus the impact of potentially dilutive common
stock equivalents, such as stock options.
Information used to calculate EPS was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------- ------------- ------------- --------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net income....................................... $452,493 $469,980 $1,401,747 $1,366,772
Weighted average shares
-----------------------
Basic weighted average number of common
shares outstanding.......................... 526,896,474 565,360,141 536,966,663 575,777,473
Dilutive effect of potential common shares..... 1,991,650 1,333,556 1,345,219 1,997,716
----------- ----------- ----------- -----------
Diluted weighted average number of common
shares outstanding.......................... 528,888,124 566,693,697 538,311,882 577,775,189
=========== =========== =========== ===========
Net income per common share
---------------------------
Basic ......................................... $0.86 $0.83 $2.61 $2.37
Diluted........................................ 0.86 0.83 2.60 2.37
</TABLE>
NOTE 2: OTHER BORROWINGS
As of both September 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.
8
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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. Changes in
management structure and/or the allocation process may result in changes in
allocations, transfers and assignments. In that case, results for prior periods
would be (and have been) restated to allow comparability.
Financial highlights by lines of business:
THREE MONTHS ENDED SEPTEMBER 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... $619,097 $161,804 $84,844 $ 333 $93,491 $26,849 $986,418
Noninterest income............ 271,233 96,969 10,451 92,492 44,877 (5,098) 510,924
Noninterest expense........... 465,051 146,044 33,189 61,160 68,406 10,905 784,755
Income taxes.................. 152,949 40,535 22,681 12,589 27,441 3,899 260,094
--------- -------- ------- -------- ------- -------- --------
Net income.................... $272,330 $ 72,194 $39,425 $19,076 $42,521 $ 6,947 $452,493
======== ======== ======= ======= ======= ======== ========
SEPTEMBER 30, 2000
--------------------------------------------------------------------------------------
Total assets................... $82,963,243 $50,710,412 $21,315,524 $139,572 $9,810,904 $25,840,495 $190,780,150
=========== =========== =========== ======== ========== =========== ============
</TABLE>
<TABLE>
THREE MONTHS ENDED SEPTEMBER 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... $610,254 $204,787 $94,721 $ 498 $65,585 $103,022 $1,078,867
Noninterest income............ 213,172 56,960 4,110 80,082 7,885 7,310 369,519
Transaction-related expense... 11,664 137 137 (40) - 775 12,673
Noninterest expense........... 450,755 126,388 26,631 52,489 33,888 (3,368) 686,783
Income taxes.................. 133,966 50,182 26,837 10,803 15,271 41,891 278,950
-------- --------- ------- ------- ------- --------- ----------
Net income.................... $227,041 $ 85,040 $45,226 $17,328 $24,311 $ 71,034 $ 469,980
======== ========= ======= ======= ======= ========= ==========
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
=========== =========== =========== ======== ========== =========== ============
</TABLE>
<TABLE>
NINE MONTHS ENDED SEPTEMBER 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... $1,868,972 $555,801 $262,652 $ 505 $256,544 $133,307 $3,077,781
Noninterest income............ 747,912 319,314 23,295 283,822 91,866 (31,978) 1,434,231
Noninterest expense........... 1,370,432 413,243 92,037 185,526 202,784 40,514 2,304,536
Income taxes.................. 449,108 166,435 70,777 39,104 58,353 21,952 805,729
----------- -------- -------- --------- --------- -------- ----------
Net income.................... $ 797,344 $295,437 $123,133 $ 59,697 $ 87,273 $ 38,863 $1,401,747
=========== ======== ======== ========= ========= ======== ==========
</TABLE>
9
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<TABLE>
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 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... $1,809,614 $635,200 $293,977 $ 1,593 $176,589 $353,240 $3,270,213
Noninterest income............ 586,753 199,442 22,988 234,573 21,672 20,353 1,085,781
Transaction-related expense... 54,207 13,868 558 2,156 - 2,255 73,044
Noninterest expense........... 1,353,803 401,696 78,599 149,029 101,871 19,905 2,104,903
Income taxes.................. 366,916 155,593 88,542 32,354 37,359 130,511 811,275
---------- -------- -------- -------- -------- -------- ----------
Net income.................... $ 621,441 $263,485 $149,266 $ 52,627 $ 59,031 $220,922 $1,366,772
========== ======== ======== ======== ======== ======== ==========
</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 adoption of these statements by the Company
is not expected to materially affect the results of operations or financial
condition of the Company.
SFAS No. 140, "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
AND EXTINGUISHMENTS OF LIABILITIES," was issued in September 2000 and replaces
SFAS No. 125 of the same title. This statement revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but carries over most of SFAS No.
125's provisions without reconsideration. This statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001 and is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. The
adoption of this statement by the Company is not expected to materially affect
the results of operations or financial condition of the Company.
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. In addition, WMBFA purchases specialty mortgage finance
loans. We also market annuities and other insurance products, offer full service
securities brokerage operations, and act as the investment advisor to and the
distributor of mutual funds.
On August 21, 2000, Washington Mutual, Inc. announced that the Company
had signed a definitive agreement to acquire Texas-based Bank United Corp.
("Bank United"). The purchase price will be approximately $1.5 billion, which is
expected to create goodwill of approximately $530 million to be amortized over
20 years. Each share of Bank United common stock will be converted into 1.3
shares of Washington Mutual, Inc. common stock. This acquisition, which will be
accounted for as a purchase, is anticipated to close in the first quarter of
2001, subject to the approval of Bank United's shareholders and regulatory
authorities.
On October 2, 2000, Washington Mutual, Inc. announced that the Company had
signed a definitive agreement to acquire the residential mortgage business of
the PNC Financial Services Group for approximately $605 million in cash. In
addition, Washington Mutual, Inc. will pay off approximately $6.5 billion of
intercompany borrowings of PNC's mortgage subsidiaries to their parent company.
On a pro forma basis, the acquisition is expected to create goodwill of
approximately $250 million to be amortized over 20 years. This transaction will
be accounted for as a purchase and is anticipated to close in the first quarter
of 2001, subject to regulatory approval.
One of our business objectives is to expand our capability to generate
loans. Loan originations increased $2.82 billion and $5.29 billion during the
quarter-to-date and year-to-date periods. We have been developing ways of
selling adjustable-rate mortgage ("ARM") loans in the secondary market to
complement our existing strategy of selling fixed-rate loans. In order to
achieve optimum pricing, current ARM production that is not retained in the loan
portfolio will either be sold to investors shortly following origination or
securitized and retained in the available-for-sale ("AFS") securities portfolio
for a period of time, and then sold. This is reflected in the increased balance
of loans held for sale to $6.19 billion at September 30, 2000 from $793.5
million at year-end 1999. This strategy will allow us to manage asset growth
more efficiently and should reduce the volatility of income related to loans
during changing interest rate environments. We expect to be able to increase the
amount of noninterest income relative to net interest income through gains on
sales of loans and loan servicing income.
11
<PAGE>
RESULTS OF OPERATIONS
OVERVIEW. Our net income for the quarter and nine months ended September
30, 2000 was $452.5 million and $1.40 billion, compared with $470.0 million and
$1.37 billion for the same periods in 1999. We had basic and diluted earnings
per share of $0.86 for the third quarter of 2000. For the nine months ended
September 30, 2000, we had basic and diluted earnings per share of $2.61 and
$2.60. We had basic and diluted earnings per share of $0.83 and $2.37 for the
quarter and nine months ended September 30, 1999.
NET INTEREST INCOME. Net interest income declined approximately 8% in the
third quarter of 2000 to $1.03 billion, compared with $1.12 billion in the third
quarter of 1999. The decline in net interest income was due to the decrease in
the net interest spread and margin, partially offset by an increase in average
interest-earning assets. The net interest spread and margin were 2.19% and 2.31%
for third quarter 2000, compared with 2.50% and 2.64% for the same period a year
ago. Net interest income declined approximately 5% during the nine months ended
September 30, 2000 to $3.21 billion from $3.40 billion for the same period a
year ago. This decline was also due to the decrease in the net interest spread
and margin to 2.24% and 2.37% for the nine months ended September 30, 2000 from
2.56% and 2.72% for the nine months ended September 30, 1999.
The compression in the net interest spread and margin was primarily due
to the fact that our liabilities reprice to market rates 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
5.44% in the third quarter of 1999 to 6.70% in the third quarter of 2000 and by
a 125 basis point increase in the federal funds rate from 5.25% in September
1999 to 6.50% in September 2000.
The cost of our interest-bearing liabilities increased 90 basis points to
5.51% for third quarter 2000 from 4.61% for the same period a year ago, driven
primarily by a 113 basis point increase in the cost of borrowings. The cost of
borrowings increased to 6.60% for third quarter 2000, compared with 5.47% for
the same period a year ago. Similarly, the cost of our interest-bearing
liabilities increased 72 basis points to 5.29% for the nine months ended
September 30, 2000 from 4.57% for the same period in 1999 as a result of a 95
basis point increase in the cost of borrowings. For the nine months ended
September 30, 2000, the cost of borrowings was 6.34%, up from 5.39% for the nine
months ended September 30, 1999.
The overall yield on our interest-earning assets increased 59 basis points
during the third quarter of 2000, driven primarily by a 74 basis point increase
in the yield on our loans to 8.09%, compared with 7.35% for the same period in
1999. The rise in the yield on our loan portfolio was the result of adjustments
to variable-rate loans tied to treasury-based indices and the Cost of Funds
Index of the Eleventh District Federal Home Loan Bank ("COFI"). For the same
reasons, there was also a 30 basis point increase in the yield on our
mortgage-backed securities ("MBS") portfolio to 7.00% for the third quarter of
2000, compared with 6.70% for the same period a year ago. Also contributing to
the overall increase in the yield on interest-earning assets during the third
quarter was an 84 basis point increase in the yield on investment securities to
6.46%, compared with 5.62% for the same period in 1999. This increase was due to
a rise in Federal Home Loan Bank ("FHLB") of San Francisco dividend rates from
5.41% for third quarter 1999 to 6.25% for third quarter 2000.
12
<PAGE>
The yield on our interest-earning assets increased 40 basis points during
the nine months ended September 30, 2000 primarily due to a 49 basis point
increase in the yield on our loans to 7.87%, compared with 7.38% for the same
period in 1999. The rise in the yield on loans was the result of adjustments to
variable-rate loans tied to treasury-based indices and COFI. Also contributing
to the increase in the overall yield on our interest-earning assets was a 21
basis point increase in the yield on MBS and a 140 basis point increase in the
yield on investment securities during the nine months ended September 30, 2000.
In addition to the rise in FHLB dividend rates, the nine-month yield on
investment securities was also impacted by a larger than normal dividend from
the FHLB of San Francisco, which contributed approximately six basis points to
the net interest margin for the second quarter.
<TABLE>
Selected average financial balances and the net interest spread and
margin were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
2000 1999 2000 1999
-------------- ------------- -------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Average balances:
Loans.............................................. $118,399,234 $115,584,502 $116,103,819 $111,504,519
MBS................................................ 58,102,264 52,239,151 59,220,582 50,767,461
Investment securities and investment in FHLBs...... 4,398,396 4,101,172 4,397,772 3,799,978
------------ ------------ ------------ ------------
Total interest-earning assets.................... 180,899,894 171,924,825 179,722,173 166,071,958
Deposits........................................... 79,949,510 82,511,343 80,416,800 83,566,677
Borrowings......................................... 96,904,261 84,500,292 94,852,461 76,795,776
------------ ------------ ------------ ------------
Total interest-bearing liabilities............... 176,853,771 167,011,635 175,269,261 160,362,453
Total assets....................................... 188,014,534 177,663,218 186,041,782 171,129,534
Stockholders' equity............................... 8,811,941 8,938,658 8,747,473 9,307,584
Weighted average yield on:
Loans.............................................. 8.09% 7.35% 7.87% 7.38%
MBS................................................ 7.00 6.70 6.90 6.69
Investment securities and investment in FHLBs...... 6.46 5.62 6.98 5.58
Interest-earning assets.......................... 7.70 7.11 7.53 7.13
Weighted average cost of:
Deposits........................................... 4.20 3.73 4.05 3.81
Borrowings......................................... 6.60 5.47 6.34 5.39
Interest-bearing liabilities..................... 5.51 4.61 5.29 4.57
Net interest spread................................ 2.19 2.50 2.24 2.56
Net interest margin................................ 2.31 2.64 2.37 2.72
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.
</TABLE>
13
<PAGE>
<TABLE>
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.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 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...................... $ 52,434 $217,290 $269,724 $261,381 $ 425,174 $ 686,555
MBS........................ 101,382 40,903 142,285 435,353 84,078 519,431
Investment securities and
investment in FHLBs...... 4,380 9,036 13,416 27,536 43,812 71,348
-------- -------- -------- -------- --------- ----------
Total interest income.... 158,196 267,229 425,425 724,270 553,064 1,277,334
Interest expense:
Deposits................... (24,824) 93,342 68,518 (91,451) 144,571 53,120
Borrowings................. 183,955 258,635 442,590 803,488 605,711 1,409,199
-------- -------- -------- -------- --------- ----------
Total interest expense... 159,131 351,977 511,108 712,037 750,282 1,462,319
-------- -------- -------- -------- --------- ----------
Net interest income.... $ (935) $(84,748) $(85,683) $ 12,233 $(197,218) $ (184,985)
======== ======== ======== ======== ========= ==========
</TABLE>
<TABLE>
NONINTEREST INCOME. Noninterest income was $510.9 million and $1.43
billion for the quarter and nine months ended September 30, 2000, compared with
$369.5 million and $1.09 billion for the same periods in 1999.
Noninterest income consisted of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ---------------------------
2000 1999 2000 1999
------------- ------------- ------------ -------------
(in thousands)
<S> <C> <C> <C> <C>
Depositor and other retail banking fees........... $256,435 $198,360 $ 707,241 $ 543,891
Securities fees and commissions................... 78,369 70,781 244,458 199,667
Insurance fees and commissions.................... 10,671 10,571 32,986 31,510
Loan servicing income............................. 37,709 23,871 110,112 73,783
Loan related income............................... 30,086 24,586 83,151 77,992
Gain on sale of loans............................. 55,523 14,642 197,422 81,025
Gain (loss) from securities....................... 9,318 (9,549) (14,006) (11,900)
Other income...................................... 32,813 36,257 72,867 89,813
-------- -------- ---------- ----------
Total noninterest income...................... $510,924 $369,519 $1,434,231 $1,085,781
======== ======== ========== ==========
</TABLE>
Depositor and other retail banking fees of $256.4 million for the third
quarter of 2000 increased 29% from $198.4 million for the same period in 1999.
Depositor and other retail banking fees of $707.2 million for the nine months
ended September 30, 2000 increased 30% from $543.9 million for the same period a
year ago. We collected more overdraft protection, nonsufficient funds, VISA
Interchange, and other fees related to existing checking accounts. In addition,
the number of checking accounts increased by more than 492,000 or 12% over the
past year.
14
<PAGE>
Securities fees and commissions were $78.4 million for the third quarter of
2000, up from $70.8 million for the third quarter of 1999. Securities fees and
commissions increased to $244.5 million for the nine months ended September 30,
2000 from $199.7 million for the nine months ended September 30, 1999. During
the third quarter of 2000, assets under management by our investment management
affiliate grew from $8.09 billion at June 30, 2000 to $8.43 billion at September
30, 2000, compared with a decline from $6.42 billion at June 30, 1999 to $6.33
billion at September 30, 1999. The growth in assets under management contributed
to the majority of the increase in fee income for the quarter and year-to-date
periods.
Loan servicing income increased to $37.7 million for the third quarter of
2000 from $23.9 million for the comparable period in 1999. Loan servicing income
was $110.1 million for the nine months ended September 30, 2000, up from $73.8
million for the same period a year ago. These increases were primarily due to
growth in loans serviced for others as a result of loan sales and
securitizations. The impact of this portfolio growth was partially offset by an
increase in mortgage servicing rights amortization. The weighted average
servicing fee was approximately 39 basis points during 2000 and 1999.
Gain on sale of loans increased by $40.9 million from $14.6 million
during the third quarter of 1999 to $55.5 million during the third quarter of
2000. The gain for the third quarter of 2000 was primarily attributable to the
sale of $2.48 billion of current loan production and $1.35 billion of loans
originated by Long Beach Mortgage. Gain on sale of loans increased by $116.4
million from $81.0 million during the nine months ended September 30, 1999 to
$197.4 million during the nine months ended September 30, 2000. The year-to-date
gain on sale of loans was attributable to the sale of $12.90 billion of seasoned
loans, $4.14 billion of current loan production, and $2.65 billion of loans
originated by Long Beach Mortgage during the nine months ended September 30,
2000. The gains for the quarter and nine months ended September 30, 1999
resulted from sales of $1.44 billion and $7.43 billion of current loan
production.
We recognized a gain from securities of $9.3 million during the third
quarter of 2000, compared with a loss of $9.5 million during the third quarter
of 1999. The third quarter 2000 gain included a $7.0 million gain on the sale of
$296.0 million of securities retained from previous loan securitizations during
the first quarter of 2000. The third quarter 1999 loss was primarily due to
losses of $10.4 million from the sale of MBS. We recognized a loss from
securities of $14.0 million and $11.9 million during the nine months ended
September 30, 2000 and 1999.
15
<PAGE>
<TABLE>
NONINTEREST EXPENSE. Noninterest expense totaled $784.8 million and $2.30
billion for the quarter and nine months ended September 30, 2000, compared with
$699.5 million and $2.18 billion for the same periods in 1999.
Noninterest expense consisted of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Compensation and benefits.................... $339,061 $294,323 $1,004,947 $ 898,052
Occupancy and equipment ..................... 145,518 139,237 446,099 411,301
Telecommunications and outsourced
information services...................... 81,982 70,862 236,268 208,106
Depositor and retail banking losses.......... 27,638 29,594 76,329 77,483
Transaction-related expense.................. - 12,673 - 73,044
Amortization of goodwill and
other intangible assets................... 26,866 23,447 80,749 72,082
Foreclosed asset income...................... (635) (7,043) (5,807) (6,314)
Advertising and promotion.................... 39,015 28,388 101,613 84,121
Postage...................................... 24,566 22,291 72,933 65,675
Professional fees............................ 22,514 14,711 65,412 47,923
Regulatory assessments....................... 7,936 14,621 23,701 44,824
Office supplies.............................. 7,662 7,996 23,890 25,129
Travel and training.......................... 16,605 11,984 46,764 36,901
Proprietary mutual fund expense.............. 7,455 8,137 23,549 21,581
Other expense................................ 38,572 28,235 108,089 118,039
-------- -------- ---------- ----------
Total noninterest expense................ $784,755 $699,456 $2,304,536 $2,177,947
======== ======== ========== ==========
</TABLE>
Compensation and benefits expense increased to $339.1 million for the
third quarter of 2000 from $294.3 million for the same period in 1999.
Compensation and benefits expense was $1.00 billion for the nine months ended
September 30, 2000, up from $898.1 million for the same period a year ago. The
increases during the quarter and nine months ended September 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 $145.5 million for the third quarter
of 2000, compared with $139.2 million for the same period in 1999. Occupancy and
equipment expense was $446.1 million for the nine months ended September 30,
2000, up from $411.3 million for the nine months ended September 30, 1999.
Computer system upgrades caused an increase in depreciation, equipment and
maintenance expense. There was also an increase in depreciation expense during
the quarter and year-to-date periods in 2000 attributable to leasehold
improvements made during 1999 and 2000.
Telecommunications and outsourced information services expense of $82.0
million for the third quarter of 2000 was up from $70.9 million for the
comparable period in 1999. Telecommunications and outsourced information
services expense increased to $236.3 million for the nine months ended September
30, 2000 from $208.1 million for the same period a year ago. The increases
reflected higher use of services resulting from new locations and a rate
increase in a contract with one of our significant third party service
providers, 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 nine months ended September 30, 2000, compared with $12.7
million and $73.0 million for the same periods in 1999. During the quarter and
nine months ended September 30, 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
<PAGE>
Advertising and promotion expense increased to $39.0 million for third
quarter 2000 from $28.4 million for the comparable period in 1999. Advertising
and promotion expense was $101.6 million for the nine months ended September 30,
2000, up from $84.1 million for the nine months ended September 30, 1999. These
increases were primarily due to additional costs associated with campaigns for
various loan and deposit products.
Professional fees were $22.5 million for the third quarter of 2000,
compared with $14.7 million for the same period a year ago. Professional fees
were $65.4 million for the nine months ended September 30, 2000, compared with
$47.9 million for the same period in 1999. These increases were attributable to
various projects designed to streamline our processes and procedures, and to
deliver new products.
Regulatory assessments declined to $7.9 million in the third quarter of
2000 from $14.6 million for the same period in 1999. Regulatory assessments
similarly declined to $23.7 million for the nine months ended September 30, 2000
from $44.8 million for the nine months ended September 30, 1999. The overall
assessment rate for Savings Association Insurance Fund deposits was
significantly reduced in the first quarter of 2000, which caused a corresponding
decrease in regulatory assessments.
TAXATION. Income taxes include federal and applicable state income taxes.
Income taxes of $260.1 million and $805.7 million for the quarter and nine
months ended September 30, 2000 represented an effective tax rate of 36.50%.
Income taxes were $279.0 million and $811.3 million for the quarter and nine
months ended September 30, 1999, which represented an effective tax rate of
37.25%.
REVIEW OF FINANCIAL CONDITION
SECURITIES. Our securities portfolio decreased $3.28 billion or 5% to
$57.54 billion at September 30, 2000 from $60.82 billion at year-end 1999. This
decline was primarily comprised of paydowns of $6.36 billion and sales of $2.04
billion, partially offset by retained loan securitizations of $3.84 billion and
purchases of $1.05 billion.
17
<PAGE>
<TABLE>
LOANS. Total loans at September 30, 2000 were $121.24 billion, up $6.70
billion or 6% from $114.54 billion at December 31, 1999. The activity during the
nine months ended September 30, 2000 consisted of loan originations of $43.60
billion and loan purchases of $4.96 billion, partially offset by loan sales and
securitizations of $23.67 billion, and loan payments of $18.19 billion.
Loans consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- -------------
(in thousands)
<S> <C> <C>
Loans held in portfolio:
Single-family residential ("SFR")................. $ 77,006,763 $ 80,234,426
SFR construction.................................. 1,413,815 1,242,784
Second mortgage and other consumer:
Banking subsidiaries.......................... 7,496,481 6,393,315
Washington Mutual Finance..................... 2,413,898 2,081,030
Specialty mortgage finance........................ 6,187,005 4,105,083
Commercial business............................... 2,075,854 1,451,505
Commercial real estate:
Apartment buildings........................... 15,588,354 15,261,008
Other commercial real estate.................. 2,872,186 2,976,499
------------ ------------
115,054,356 113,745,650
Loans held for sale................................. 6,185,789 793,504
Reserve for loan losses............................. (1,011,817) (1,041,929)
------------ ------------
Total loans, net of reserve for loan losses...... $120,228,328 $113,497,225
============ ============
</TABLE>
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 September 30, 2000, 88% 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 12% of the real
estate loan portfolio at September 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.
<TABLE>
Loan originations and purchases were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
2000 1999 2000 1999
------------- --------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Originated....................................... $15,576,097 $12,760,376 $43,596,769 $38,303,861
Purchased........................................ 2,236,106 3,433,765 4,959,191 6,339,752
----------- ----------- ----------- -----------
$17,812,203 $16,194,141 $48,555,960 $44,643,613
=========== =========== =========== ===========
</TABLE>
Of total loan originations, SFR originations were $11.18 billion for the
third quarter of 2000, compared with $10.00 billion for the same period in 1999.
SFR originations were $31.01 billion for the nine months ended September 30,
2000, compared with $30.67 billion for the comparable period in 1999. In
particular, originations of short-term ARMs (less than one year) increased to
$9.24 billion and $23.76 billion during the quarter and nine months ended
September 30, 2000, compared with $4.36 billion and $9.38 billion for the same
periods a year ago. The increase in short-term ARM originations was attributable
to the higher interest rate environment during the first half of 2000 and
customer preference for short-term ARMs over fixed-rate loans.
18
<PAGE>
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.
Changes in mortgage servicing rights ("MSR") for the quarter and nine
months ended September 30, 2000 were as follows:
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------- -------------------
(in thousands)
<S> <C> <C>
Balance, beginning of period......................... $841,048 $643,185
Additions....................................... 94,177 347,057
Amortization.................................... (35,985) (91,002)
Impairment adjustment........................... - -
-------- --------
Balance, end of period............................... $899,240 $899,240
======== ========
</TABLE>
Changes in the loan servicing portfolio with MSR for the quarter and
nine months ended September 30, 2000 were as follows:
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
---------------------- --------------------
(in thousands)
<S> <C> <C>
Balance, beginning of period......................... $70,500,243 $55,268,239
Additions....................................... 4,721,540 23,790,343
Loan payments and other......................... (2,433,633) (6,270,432)
----------- -----------
Balance, end of period(1)............................ $72,788,150 $72,788,150
=========== ===========
</TABLE>
(1) Balance at September 30, 2000 does not include approximately $7.95 billion
of loans sold or securitized without capitalized MSR.
MSR increased to $899.2 million at September 30, 2000 from $841.0 million
at June 30, 2000 and from $643.2 million at December 31, 1999. The additions to
MSR during the nine months ended September 30, 2000 were primarily due to loan
sales and securitizations. The weighted average servicing fee on the additions
to the loan servicing portfolio was approximately 44 basis points during the
nine months ended September 30, 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 $80.45 billion at September 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 September 30, 2000, compared with 54% at
December 31, 1999. These three products have the benefit of interest-free
funding or 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.
19
<PAGE>
ASSET QUALITY
PROVISION AND RESERVE FOR LOAN LOSSES. We analyze several elements in
determining the level of the provision for loan losses in any given period that
include current economic conditions, asset quality trends, historical loan loss
experience, and plans for problem loan resolution. The results of the analysis
indicated asset quality remained strong during the quarter and nine months ended
September 30, 2000.
Actual loss experience, as measured by net charge offs, decreased
slightly to $42.9 million for the third quarter of 2000 from $43.0 million for
the third quarter of 1999. In addition, net charge offs decreased to $126.3
million for the nine months ended September 30, 2000 from $147.0 million for the
same period in 1999. Net charge offs as a percentage of average loans were 0.14%
for third quarter 2000, compared with 0.15% for third quarter 1999. In addition,
net charge offs as a percentage of average loans were 0.15% for the nine months
ended September 30, 2000, down from 0.18% for the comparable period a year ago.
The provision for loan losses increased to $47.6 million and $132.8
million for the quarter and nine months ended September 30, 2000 from $40.8
million and $125.4 million for the same periods in 1999. These increases were
primarily due to an increase in the amount of specialty mortgage finance, second
mortgage and other consumer and commercial business loans, which typically have
higher expected losses than SFR loans and have been priced accordingly to
compensate for this additional risk.
20
<PAGE>
<TABLE>
In the following table, identified allowances of $2.6 million and $36.6
million were included in the basis of loans sold or securitized during the
quarter and nine months ended September 30, 2000.
Changes in the reserve for loan losses were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period................ $1,009,728 $1,053,589 $1,041,929 $1,067,840
Provision for loan losses................... 47,565 40,799 132,803 125,356
Identified allowance for loans sold or
securitized............................. (2,614) - (36,638) 5,214
Loans charged off:
SFR and SFR construction................ (3,112) (9,909) (15,433) (29,513)
Second mortgage and other consumer:
Banking subsidiaries................ (11,561) (12,186) (32,132) (36,031)
Washington Mutual Finance........... (30,245) (23,506) (85,528) (69,939)
Specialty mortgage finance.............. (750) (122) (2,127) (321)
Commercial business..................... (3,410) (689) (7,852) (4,405)
Commercial real estate:
Apartments......................... (327) (1,250) (2,059) (12,544)
Other commercial real estate....... (440) (2,159) (1,442) (17,668)
----------- ---------- ---------- ----------
(49,845) (49,821) (146,573) (170,421)
Recoveries of loans previously charged off:
SFR and SFR construction................ 309 505 1,252 2,752
Second mortgage and other consumer:
Banking subsidiaries............... 683 966 2,483 2,240
Washington Mutual Finance.......... 4,463 3,810 13,154 11,994
Specialty mortgage finance.............. 21 19 538 75
Commercial business..................... 281 107 897 558
Commercial real estate:
Apartments ........................ 793 720 1,293 3,300
Other commercial real estate....... 433 675 679 2,461
---------- ---------- ---------- ----------
6,983 6,802 20,296 23,380
---------- ---------- ---------- ----------
Net charge offs............................. (42,862) (43,019) (126,277) (147,041)
---------- ---------- ---------- ----------
Balance, end of period...................... $1,011,817 $1,051,369 $1,011,817 $1,051,369
========== ========== ========== ==========
Net charge offs (annualized) as a percentage
of average loans........................ 0.14% 0.15% 0.15% 0.18%
</TABLE>
<TABLE>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
<S> <C> <C>
Total reserve for loan losses as a percentage of:
Nonaccrual loans........................ 121% 126%
Nonperforming assets.................... 102 102
Loans held in portfolio................. 0.88 0.92
</TABLE>
At September 30, 2000, we had $16.73 billion of loans securitized and
retained with recourse, and $4.26 billion of loans securitized and sold with
recourse. At September 30, 2000, the allowance for expected recourse obligations
was $106.1 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 allowance for expected recourse
obligations is included in "other liabilities."
21
<PAGE>
<TABLE>
Changes in the allowance for expected recourse obligations were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period ........................... $106,252 $122,003 $113,089 $144,257
Transfers............................................... - - - (15,000)
Charge offs, net of provision for recourse losses....... (161) (4,974) (6,998) (12,228)
-------- -------- -------- --------
Balance, end of period.................................. $106,091 $117,029 $106,091 $117,029
======== ======== ======== ========
</TABLE>
The total loss coverage represents the reserve for loan losses and
allowance for expected recourse obligations as a percentage of nonaccrual loans.
<TABLE>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
Total loss coverage percentage............................ 134% 140%
</TABLE>
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.
<TABLE>
Nonperforming assets consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(dollars in thousands)
<S> <C> <C>
Nonaccrual loans:
SFR .................................................. $522,174 $ 601,896
SFR construction...................................... 29,552 18,017
Second mortgage and other consumer:
Banking subsidiaries................................ 41,602 43,309
Washington Mutual Finance........................... 62,089 54,817
Specialty mortgage finance............................ 131,332 57,193
Commercial business................................... 14,058 9,826
Commercial real estate:
Apartment buildings................................. 8,610 21,956
Other commercial real estate........................ 27,235 20,011
-------- ----------
836,652 827,025
Foreclosed assets....................................... 156,628 198,961
-------- ----------
$993,280 $1,025,986
======== ==========
Nonperforming assets as a percentage
of total assets................................... 0.52% 0.55%
</TABLE>
22
<PAGE>
Specialty mortgage finance loans on nonaccrual status increased $74.1
million during the nine months ended September 30, 2000 due to the continued
growth and seasoning of this portfolio. This increase was consistent with our
expectations. As this portfolio continues 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 accordingly. The balance of
specialty mortgage finance loans increased to $6.19 billion at the end of third
quarter 2000 from $4.11 billion at year-end 1999.
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.
<TABLE>
CONSUMER BANKING
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -------------------------------
2000 1999 2000 1999
------------- -------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Condensed income statement:
Net interest income after provision for loan losses. $619,097 $610,254 $1,868,972 $1,809,614
Noninterest income.................................. 271,233 213,172 747,912 586,753
Transaction-related expense......................... - 11,664 - 54,207
Noninterest expense................................. 465,051 450,755 1,370,432 1,353,803
Income taxes........................................ 152,949 133,966 449,108 366,916
-------- -------- ---------- ----------
Net income.......................................... $272,330 $227,041 $ 797,344 $ 621,441
======== ======== ========== ==========
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
(in thousands)
Total assets........................................ $82,963,243 $83,713,164
=========== ===========
</TABLE>
The increase in net interest income for the year-to-date period was
primarily due to the increase in the net interest spread and margin in the
consumer banking group. 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, VISA Interchange, and other fees related to existing checking accounts.
Additionally, the number of checking accounts increased by more than 492,000, or
12% over the past year.
23
<PAGE>
<TABLE>
MORTGAGE BANKING
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -------------------------------
2000 1999 2000 1999
------------- -------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Condensed income statement:
Net interest income after provision for loan losses. $161,804 $204,787 $555,801 $635,200
Noninterest income.................................. 96,969 56,960 319,314 199,442
Transaction-related expense......................... - 137 - 13,868
Noninterest expense................................. 146,044 126,388 413,243 401,696
Income taxes........................................ 40,535 50,182 166,435 155,593
-------- -------- -------- --------
Net income.......................................... $ 72,194 $ 85,040 $295,437 $263,485
======== ======== ======== ========
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(in thousands)
Total assets........................................ $50,710,412 $46,373,128
=========== ===========
</TABLE>
The decline in net interest income was primarily due to the compression
of the net interest spread and margin in the mortgage banking group. Noninterest
income increased primarily as a result of increased gain on sale of loans, loan
servicing income, and other income during the quarter and nine months ended
September 30, 2000. The gains during the third quarter of 2000 were generated by
sales of $2.48 billion of current loan production. The year-to-date increase in
gain on sale of loans was attributable to the sale of $12.90 billion of seasoned
loans and $4.14 billion of current loan production during the nine months ended
September 30, 2000. The increase in loan servicing income was primarily due to
growth in loans serviced for others as a result of loan sales and
securitizations. The impact of this portfolio growth was partially offset by an
increase in mortgage servicing rights amortization.
<TABLE>
COMMERCIAL BANKING
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -------------------------------
2000 1999 2000 1999
------------- -------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Condensed income statement:
Net interest income after provision for loan losses. $84,844 $94,721 $262,652 $293,977
Noninterest income.................................. 10,451 4,110 23,295 22,988
Transaction-related expense......................... - 137 - 558
Noninterest expense................................. 33,189 26,631 92,037 78,599
Income taxes........................................ 22,681 26,837 70,777 88,542
------- ------- -------- --------
Net income.......................................... $39,425 $45,226 $123,133 $149,266
======= ======= ======== ========
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(in thousands)
Total assets........................................ $21,315,524 $20,179,900
=========== ===========
</TABLE>
The decline in net interest income during the quarter and year-to-date
periods resulted from the compression of the net interest spread and margin in
the commercial real estate portfolio.
24
<PAGE>
<TABLE>
FINANCIAL SERVICES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -------------------------------
2000 1999 2000 1999
------------- -------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Condensed income statement:
Net interest income after provision for loan losses. $ 333 $ 498 $ 505 $ 1,593
Noninterest income.................................. 92,492 80,082 283,822 234,573
Transaction-related expense......................... - (40) - 2,156
Noninterest expense................................. 61,160 52,489 185,526 149,029
Income taxes........................................ 12,589 10,803 39,104 32,354
------- ------- -------- --------
Net income.......................................... $19,076 $17,328 $ 59,697 $ 52,627
======= ======= ======== ========
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
(in thousands)
Total assets....................................... $139,572 $123,525
======== ========
</TABLE>
Noninterest income was up during the quarter and nine months ended
September 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.
<TABLE>
CONSUMER FINANCE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -------------------------------
2000 1999 2000 1999
------------- -------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Condensed income statement:
Net interest income after provision for loan losses. $93,491 $65,585 $256,544 $176,589
Noninterest income.................................. 44,877 7,885 91,866 21,672
Noninterest expense................................. 68,406 33,888 202,784 101,871
Income taxes........................................ 27,441 15,271 58,353 37,359
------- ------- -------- --------
Net income.......................................... $42,521 $24,311 $ 87,273 $ 59,031
======= ======= ======== ========
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
(in thousands)
Total assets........................................ $9,810,904 $7,370,753
========== ==========
</TABLE>
The increase in net interest income was due to an increase in average
loans for third quarter 2000, compared with third quarter 1999. This increase
was attributable to the growth in loans originated and purchased specialty
mortgage finance loans during the nine months ended September 30, 2000. During
the quarter and nine months ended September 30, 2000, the increase in
noninterest income was primarily due to an increase in gain on sale of loans.
Sales of loans originated by Long Beach Mortgage totaled $1.35 billion and $2.65
billion for the quarter and nine months ended September 30, 2000. The increase
in noninterest expense during the quarter and nine months ended September 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 nine months ended September 30,
1999.
25
<PAGE>
Total assets increased $2.44 billion to $9.81 billion at September 30,
2000 from $7.37 billion at year-end 1999. This increase was primarily due to
purchases of specialty mortgage finance loans, in addition to loans originated
and purchased by Washington Mutual Finance.
<TABLE>
TREASURY/OTHER
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -------------------------------
2000 1999 2000 1999
------------- -------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Condensed income statement:
Net interest income after provision for loan losses. $26,849 $103,022 $133,307 $353,240
Noninterest income.................................. (5,098) 7,310 (31,978) 20,353
Transaction-related expense......................... - 775 - 2,255
Noninterest expense................................. 10,905 (3,368) 40,514 19,905
Income taxes........................................ 3,899 41,891 21,952 130,511
------- -------- -------- --------
Net income.......................................... $ 6,947 $ 71,034 $ 38,863 $220,922
======= ======== ======== ========
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(in thousands)
Total assets...................................... $25,840,495 $28,753,160
=========== ===========
</TABLE>
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.
26
<PAGE>
<TABLE>
SEPTEMBER 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) $ 69,363,926 $11,367,224 $20,078,820 $ 451,016 $101,260,986
Fixed-rate loans (1) 2,373,531 2,851,836 7,351,355 6,541,495 19,118,217
Adjustable-rate securities (1), (2) 28,724,001 3,432,831 5,285,233 125,795 37,567,860
Fixed-rate securities (1) 957,461 2,597,088 9,545,712 11,171,184 24,271,445
Cash and cash equivalents 2,192,049 27,072 - - 2,219,121
------------ ----------- ----------- ----------- ------------
$103,610,968 $20,276,051 $42,261,120 $18,289,490 $184,437,629
============ =========== =========== =========== ============
INTEREST-SENSITIVE LIABILITIES
Noninterest-bearing checking
accounts (3) $ 459,193 $ 1,147,776 $ 3,221,182 $ 3,793,859 $ 8,622,010
Interest-bearing checking accounts,
savings accounts and MMDAs (3) 5,320,011 7,603,212 14,455,975 8,422,910 35,802,108
Time deposit accounts 10,484,851 21,119,406 4,305,422 118,981 36,028,660
Short-term and adjustable-rate
borrowings 73,291,052 10,377,774 - - 83,668,826
Long-term fixed-rate borrowings 1,483,343 6,386,638 3,723,912 3,135,659 14,729,552
Derivatives matched against
liabilities (17,066,550) 14,503,850 4,552,700 (1,990,000) -
------------ ------------ ----------- ----------- ------------
$ 73,971,900 $ 61,138,656 $30,259,191 $13,481,409 $178,851,156
============ ============ =========== =========== ============
Repricing gap $ 29,639,068 $(40,862,605) $12,001,929 $ 4,808,081
============ ============ =========== ===========
Cumulative gap $ 29,639,068 $(11,223,537) $ 778,392 $ 5,586,473
============ ============ =========== ===========
Cumulative gap as a percentage
of total assets 15.54% (5.88)% 0.41% 2.93%
Total assets $190,780,150
============
---------------------
(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>
27
<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 nine months ended September 30,
2000 of $1.40 billion, $222.3 million for noncash items and $3.71 billion of
other net cash outflows from operating activities. Cash flows from investing
activities consisted mainly of proceeds from sales and purchases of securities,
loan and security principal repayments, loan originations and sales of loans.
For the nine months ended September 30, 2000, cash flows from investing
activities included sales, maturities and principal payments on securities
totaling $8.33 billion. Loans originated and purchased for investment were in
excess of repayments and sales by $6.77 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 nine months ended
September 30, 2000, the above mentioned financing activities increased cash and
cash equivalents by $2.33 billion on a net basis. Cash and cash equivalents were
$2.22 billion at September 30, 2000. See "Consolidated Financial Statements -
Consolidated Statements of Cash Flows."
At September 30, 2000, we were in a position to obtain approximately
$31.87 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 $9.33 billion at September 30,
2000, up from $9.05 billion at December 31, 1999. In order to effectively deploy
excess capital, we continued to repurchase our common stock during the first
half of the year. 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. Reflecting the recent
appreciation of our common stock, we did not repurchase any of our outstanding
shares during third quarter 2000. We deployed capital to facilitate balance
sheet growth and retained additional capital in anticipation of completing the
announced acquisitions of Bank United and the residential mortgage business of
the PNC Financial Services Group. The stock repurchases during the first half of
the year were more than offset by the decrease in unrealized loss on AFS
securities to $510.8 million at September 30, 2000 and net income of $1.40
billion for the nine months ended September 30, 2000, which caused a rise in the
ratio of stockholders' equity to total assets to 4.89% at September 30, 2000
from 4.85% at December 31, 1999. The unrealized loss on AFS securities at
December 31, 1999 was $667.4 million.
28
<PAGE>
The regulatory capital ratios of WMBFA, WMB and WMBfsb and the minimum
regulatory requirements to be categorized as well capitalized were as follows:
<TABLE>
SEPTEMBER 30, 2000
----------------------------------------------------------
WELL-CAPITALIZED
WMBFA WMB WMBFSB MINIMUM
------------ ----- ------- ---------
<S> <C> <C> <C> <C>
Capital ratios:
Tier 1 capital to adjusted total assets (leverage).... 5.63% 5.72% 7.23% 5.00%
Tier 1 capital to risk-weighted assets................ 10.09 10.13 11.53 6.00
Total capital to risk-weighted assets................. 11.08 11.23 12.55 10.00
</TABLE>
The total estimated risk-based capital ratio for Washington Mutual, Inc.
was 11.15% at September 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 Board 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 September 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 September 30, 2000.
Our broker-dealer subsidiaries are also subject to capital requirements.
At September 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 nine months ended September 30,
2000 do not have a material impact on our interest rate risk profile.
29
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Index of Exhibits on page 32.
(b) Reports on Form 8-K
During the third quarter of 2000, the Company filed a report on Form
8-K dated July 21, 2000. The report included under Item 7 of Form 8-K a press
release announcing Washington Mutual's second quarter 2000 financial results and
unaudited consolidated financial statements for the quarter ended June 30, 2000.
During the third quarter of 2000, the Company filed a report on Form
8-K dated August 21, 2000. The report included under Item 7 of Form 8-K a slide
presentation to investors and analysts on August 21, 2000 relating to the merger
agreement between Washington Mutual, Inc. and Bank United Corp.
During the third quarter of 2000, the Company also filed a report on
Form 8-K dated August 21, 2000. The report included under Item 7 of Form 8-K a
press release announcing that Washington Mutual signed a definitive agreement to
acquire Bank United Corp. for approximately $1.5 billion.
30
<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 November 13, 2000.
WASHINGTON MUTUAL, INC.
By: /s/ FAY L. CHAPMAN
----------------------------------------------
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 By laws of the Company, as amended (filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000 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.
10.1 364-Day Amended and Restated Credit Agreement by and among the Registrant and Washington Mutual Finance Corporation and
The Chase Manhattan Bank, as Administrative Agent (filed herewith).
27 Financial Data Schedule.
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