10-Q 1 0001.txt FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000 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. WASHINGTON MUTUAL, INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000 TABLE OF CONTENTS Page ---- PART I 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
i 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 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) 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
See Notes to Consolidated Financial Statements. 2 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) 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 ======== ======== ========== ==========
See Notes to Consolidated Financial Statements. 3 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- -------------- (in thousands) 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 ============ ============
See Notes to Consolidated Financial Statements. 4 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) CAPITAL ACCUMULATED SURPLUS- OTHER COMMON COMPREHENSIVE RETAINED TOTAL STOCK LOSS EARNINGS ------------- ----------- ----------------- ----------- (in thousands) 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 ========== ========== ========= ==========
See Notes to Consolidated Financial Statements. 5 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30, ---------------------------------- 2000 1999 ------------ ----------- (in thousands) 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 =========== ===========
See Notes to Consolidated Financial Statements. 6 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED) Nine Months Ended September 30, ----------------------------------- 2000 1999 ------------ ----------- (in thousands) 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
See Notes to Consolidated Financial Statements. 7 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) 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
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 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) 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 =========== =========== =========== ======== ========== =========== ============
THREE MONTHS ENDED SEPTEMBER 30, 1999 ------------------------------------------------------------------------------------ CONSUMER MORTGAGE COMMERCIAL FINANCIAL CONSUMER TREASURY/ BANKING BANKING BANKING SERVICES FINANCE OTHER TOTAL ---------- -------- ---------- ---------- --------- ---------- ---------- (in thousands) Condensed income statement: Net interest income after provision for loan losses... $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 =========== =========== =========== ======== ========== =========== ============
NINE MONTHS ENDED SEPTEMBER 30, 2000 ----------------------------------------------------------------------------------- CONSUMER MORTGAGE COMMERCIAL FINANCIAL CONSUMER TREASURY/ BANKING BANKING BANKING SERVICES FINANCE OTHER TOTAL ---------- -------- ---------- ---------- ------------ --------- ---------- (in thousands) Condensed income statement: Net interest income after provision for loan losses... $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 =========== ======== ======== ========= ========= ======== ==========
9 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) 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 ========== ======== ======== ======== ======== ======== ==========
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 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 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 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. 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) 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.
13 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) 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) ======== ======== ======== ======== ========= ==========
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) 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 ======== ======== ========== ==========
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 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 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) 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 ======== ======== ========== ==========
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 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 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) 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 ============ ============
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. Loan originations and purchases were as follows: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------ ------------------------------- 2000 1999 2000 1999 ------------- --------------- ------------- -------------- (in thousands) 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 =========== =========== =========== ===========
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 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: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2000 SEPTEMBER 30, 2000 ------------------- ------------------- (in thousands) 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 ======== ========
Changes in the loan servicing portfolio with MSR for the quarter and nine months ended September 30, 2000 were as follows: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2000 SEPTEMBER 30, 2000 ---------------------- -------------------- (in thousands) 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 =========== ===========
(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 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 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) 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%
SEPTEMBER 30, DECEMBER 31, 2000 1999 -------------- ------------- 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
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 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) 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 ======== ======== ======== ========
The total loss coverage represents the reserve for loan losses and allowance for expected recourse obligations as a percentage of nonaccrual loans. SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------- Total loss coverage percentage............................ 134% 140%
NONPERFORMING ASSETS. Assets considered to be nonperforming include nonaccrual loans and foreclosed assets. When securitized loans or loans sold with recourse become nonperforming, we repurchase them and include them in nonaccrual loans. Management's classification of a loan as nonaccrual does not necessarily indicate that the principal of the loan is uncollectible in whole or in part. Nonperforming assets consisted of the following: SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ (dollars in thousands) 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%
22 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. CONSUMER BANKING THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ------------------------------- 2000 1999 2000 1999 ------------- -------------- ------------- -------------- (in thousands) 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 =========== ===========
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 MORTGAGE BANKING THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ------------------------------- 2000 1999 2000 1999 ------------- -------------- ------------- -------------- (in thousands) 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 =========== ===========
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. COMMERCIAL BANKING THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ------------------------------- 2000 1999 2000 1999 ------------- -------------- ------------- -------------- (in thousands) 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 =========== ===========
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 FINANCIAL SERVICES THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ------------------------------- 2000 1999 2000 1999 ------------- -------------- ------------- -------------- (in thousands) 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 ======== ========
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. CONSUMER FINANCE THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ------------------------------- 2000 1999 2000 1999 ------------- -------------- ------------- -------------- (in thousands) 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 ========== ==========
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 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. TREASURY/OTHER THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- ------------------------------- 2000 1999 2000 1999 ------------- -------------- ------------- -------------- (in thousands) 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 =========== ===========
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 SEPTEMBER 30, 2000 ---------------------------------------------------------------------------------------- PROJECTED REPRICING ---------------------------------------------------------------------------------------- 0-3 MONTHS 4-12 MONTHS 1-5 YEARS THEREAFTER TOTAL ----------- ------------ ---------- ---------- ------ (dollars in thousands) 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.
27 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 The regulatory capital ratios of WMBFA, WMB and WMBfsb and the minimum regulatory requirements to be categorized as well capitalized were as follows: SEPTEMBER 30, 2000 ---------------------------------------------------------- WELL-CAPITALIZED WMBFA WMB WMBFSB MINIMUM ------------ ----- ------- --------- 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
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 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 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 ---------------------------------------------- Richard M. Levy SENIOR VICE PRESIDENT AND CONTROLLER (PRINCIPAL ACCOUNTING OFFICER) 31 WASHINGTON MUTUAL, INC. INDEX OF EXHIBITS Exhibit No. ----------- 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.
32