-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RnzbM6plV+/DRGtLWl7R68Zi44zeW6SUOYCW/brWJx9AexwY9+fXfT+/WyFzWzys 8a1rmX2JgKedlt99tlnO4A== 0000933136-01-500005.txt : 20010515 0000933136-01-500005.hdr.sgml : 20010515 ACCESSION NUMBER: 0000933136-01-500005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASHINGTON MUTUAL INC CENTRAL INDEX KEY: 0000933136 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 911653725 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14667 FILM NUMBER: 1633897 BUSINESS ADDRESS: STREET 1: 1201 THIRD AVE STREET 2: STE 1500 CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 2064612000 MAIL ADDRESS: STREET 1: 1201 THIRD AVE STREET 2: SUITE 1500 CITY: SEATTLE STATE: WA ZIP: 98101 10-Q 1 wmi-1q2001_10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________: COMMISSION FILE NUMBER 1-14667 WASHINGTON MUTUAL, INC. (Exact name of registrant as specified in its charter) WASHINGTON 91-1653725 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1201 THIRD AVENUE, SEATTLE, WASHINGTON 98101 (Address of principal executive offices) (Zip Code) (206) 461-2000 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the issuer's classes of common stock as of April 30, 2001: Common Stock - 585,085,849 (1) (1) Includes the 12,000,000 shares held in escrow. Does not reflect the 3-for-2 stock split that will occur on May 15, 2001. WASHINGTON MUTUAL, INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001 TABLE OF CONTENTS Page ---- PART I Item 1. Financial Statements............................................................................................. 1 Consolidated Statements of Income - Three Months Ended March 31, 2001 and 2000................................................................. 1 Consolidated Statements of Financial Condition - March 31, 2001 and December 31, 2000....................................................................... 2 Consolidated Statements of Stockholders' Equity and Comprehensive Income - Three Months Ended March 31, 2001 and 2000................................................................. 3 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2001 and 2000................................................................. 4 Notes to Consolidated Financial Statements................................................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 15 Summary Financial Data....................................................................................... 15 General...................................................................................................... 15 Results of Operations........................................................................................ 16 Review of Financial Condition................................................................................ 21 Asset Quality................................................................................................ 25 Operating Segments........................................................................................... 28 Market Risk Management....................................................................................... 29 Liquidity.................................................................................................... 32 Capital Adequacy............................................................................................. 32 PART II Item 6. Exhibits and Reports on Form 8-K................................................................................. 33 i
PART I ITEM 1. FINANCIAL STATEMENTS WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED MARCH 31, -------------------------------------- 2001 2000 ------------- ----------- (in millions, except per share amounts) INTEREST INCOME Loans......................................................................... $2,811 $2,221 Available-for-sale securities................................................. 1,032 692 Held-to-maturity securities................................................... - 339 Other interest and dividend income............................................ 71 52 ------ ------ Total interest income....................................................... 3,914 3,304 INTEREST EXPENSE Deposits...................................................................... 887 788 Borrowings.................................................................... 1,668 1,431 ------ ------ Total interest expense..................................................... 2,555 2,219 ------ ------ Net interest income........................................................ 1,359 1,085 Provision for loan and lease losses.......................................... 82 41 ------ ------ Net interest income after provision for loan and lease losses.............. 1,277 1,044 NONINTEREST INCOME Depositor and other retail banking fees....................................... 279 211 Securities fees and commissions............................................... 72 83 Insurance fees and commissions................................................ 12 12 Loan servicing income (expense)............................................... (7) 33 Loan related income........................................................... 56 24 Gain from mortgage loans...................................................... 187 61 Gain (loss) from securities................................................... 70 (22) Other income.................................................................. 81 21 ------ ------ Total noninterest income.................................................... 750 423 NONINTEREST EXPENSE Compensation and benefits..................................................... 416 330 Occupancy and equipment....................................................... 184 153 Telecommunications and outsourced information services........................ 106 77 Depositor and other retail banking losses..................................... 30 26 Amortization of goodwill and other intangible assets.......................... 36 27 Other expense................................................................. 241 132 ------ ------ Total noninterest expense................................................... 1,013 745 ------ ------ Income before income taxes.................................................. 1,014 722 Income taxes.................................................................... 373 264 ------ ------ NET INCOME...................................................................... $ 641 $ 458 ====== ====== NET INCOME ATTRIBUTABLE TO COMMON STOCK......................................... $ 640 $ 458 ====== ====== Net income per common share: Basic......................................................................... $1.16 $0.83 Diluted....................................................................... 1.15 0.83 Dividends declared per common share............................................. 0.31 0.27 Basic weighted average common shares outstanding................................ 551.4 551.8 Diluted weighted average common shares outstanding.............................. 558.1 552.7 1
See Notes to Consolidated Financial Statements. WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) MARCH 31, DECEMBER 31, 2001 2000 -------------- -------------- (dollars in millions) ASSETS Cash and cash equivalents..................................................................... $ 2,963 $ 2,622 Available-for-sale securities, total amortized cost of $55,332 and $42,288: Encumbered.................................................................................. 32,150 23,576 Unencumbered................................................................................ 23,532 18,583 -------- -------- 55,682 42,159 Held-to-maturity securities, total fair value of zero and $16,486: Encumbered.................................................................................. - 9,566 Unencumbered................................................................................ - 6,999 -------- -------- - 16,565 Loans held for sale........................................................................... 13,850 3,404 Loans held in portfolio....................................................................... 132,460 119,626 Allowance for loan and lease losses......................................................... (1,158) (1,014) -------- -------- Total loans held in portfolio, net of allowance for loan and lease losses................. 131,302 118,612 Mortgage servicing rights ("MSR")............................................................. 3,456 1,017 Investment in Federal Home Loan Banks ("FHLBs")............................................... 3,707 3,260 Goodwill and other intangible assets.......................................................... 2,192 1,084 Other assets.................................................................................. 6,773 5,993 -------- -------- Total assets............................................................................ $219,925 $194,716 ======== ======== LIABILITIES Deposits: Noninterest-bearing deposits................................................................ $ 13,527 $ 8,755 Interest-bearing deposits................................................................... 79,808 70,819 -------- -------- Total deposits............................................................................ 93,335 79,574 Federal funds purchased and commercial paper.................................................. 4,030 4,115 Securities sold under agreements to repurchase................................................ 29,514 29,756 Advances from FHLBs........................................................................... 66,780 57,855 Other borrowings.............................................................................. 10,318 9,930 Other liabilities............................................................................. 3,612 3,320 -------- -------- Total liabilities....................................................................... 207,589 184,550 STOCKHOLDERS' EQUITY Common stock, no par value: 1,600,000,000 shares authorized, 584,753,927 and 539,855,720 shares issued and outstanding................................... - - Capital surplus - common stock................................................................ 2,898 1,425 Accumulated other comprehensive income (loss): Unrealized gain (loss) on securities and hedging instruments................................ 175 (51) Minimum pension liability adjustment........................................................ (4) (3) Retained earnings............................................................................. 9,267 8,795 -------- -------- Total stockholders' equity.............................................................. 12,336 10,166 -------- -------- Total liabilities and stockholders' equity.............................................. $219,925 $194,716 ======== ======== See Notes to Consolidated Financial Statements. 2
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (UNAUDITED) CAPITAL ACCUMULATED NUMBER SURPLUS- OTHER OF COMMON COMPREHENSIVE RETAINED SHARES TOTAL STOCK INCOME (LOSS) EARNINGS ---------- -------- --------- --------------- ----------- (in millions) BALANCE, December 31, 1999.................................. 571.6 $ 9,053 $2,205 $ (674) $7,522 Comprehensive income: Net income.............................................. - 458 - - 458 Other comprehensive income (loss), net of tax: Net unrealized loss from securities arising during the period, net of reclassification adjustments... - (211) - (211) - Minimum pension liability adjustment................ - 4 - 4 - ------ Total comprehensive income..................... 251 Cash dividends declared on common stock..................... - (153) - - (153) Common stock repurchased and retired........................ (19.8) (465) (465) - - Common stock issued through employee stock plans, including tax benefit........................ 0.8 20 20 - - ----- ------- ------ ------ ------ BALANCE, March 31, 2000..................................... 552.6 $ 8,706 $1,760 $ (881) $7,827 ===== ======= ====== ====== ====== BALANCE, December 31, 2000.................................. 539.9 $10,166 $1,425 $ (54) $8,795 Comprehensive income: Net income.............................................. - 641 - - 641 Other comprehensive income (loss), net of tax: Net unrealized gain from securities arising during the period, net of reclassification adjustments - 288 - 288 - Net unrealized loss on cash flow hedging instruments............................ - (62) - (62) - Minimum pension liability adjustment.............. - (1) - (1) - ------ Total comprehensive income................... 866 Cash dividends declared on common stock..................... - (168) - - (168) Cash dividends declared on preferred stock.................. - (1) - - (1) Common stock issued to acquire Bank United Corp............. 42.6 1,389 1,389 - - Common stock issued through employee stock plans, including tax benefit........................ 2.3 84 84 - - ----- ------- ------ ------ ------ BALANCE, March 31, 2001..................................... 584.8 $12,336 $2,898 $ 171 $9,267 ===== ======= ====== ====== ====== See Notes to Consolidated Financial Statements. 3
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31, --------------------------- 2001 2000 ----------- ------------- (in millions) CASH FLOWS FROM OPERATING ACTIVITIES Net income ............................................................................. $ 641 $ 458 Adjustments to reconcile net income to net cash (used) provided by operating activities: Provision for loan and lease losses .................................................. 82 41 Gain from mortgage loans ............................................................. (187) (61) (Gain) loss from securities .......................................................... (70) 22 Depreciation and amortization ........................................................ 257 119 Stock dividends from FHLBs ........................................................... - (42) Origination of loans held for sale ................................................... (13,948) (1,252) Proceeds from sales of loans held for sale ........................................... 9,694 1,658 Decrease (increase) in other assets .................................................. 2,961 (809) Decrease in other liabilities ........................................................ (639) (42) -------- -------- Net cash (used) provided by operating activities ................................... (1,209) 92 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of securities ................................................................ (8,296) (40) Sales of originated mortgage-backed securities ("MBS") ................................. 3,087 - Sales and maturities of other available-for-sale securities ............................ 7,765 121 Principal payments on securities ....................................................... 1,994 2,007 Purchases of investment in FHLBs ....................................................... - (135) Purchases of loans ..................................................................... (3,972) (891) Proceeds from sales of loans ........................................................... 12 1,889 Origination of loans, net of principal payments ........................................ 1,805 (5,156) Proceeds from sales of foreclosed assets ............................................... 60 73 Net cash used for acquisitions ......................................................... (6,175) (22) Purchases of premises and equipment, net ............................................... (192) (41) -------- ------- Net cash used by investing activities .............................................. (3,912) (2,195) CASH FLOWS FROM FINANCING ACTIVITIES Increase in deposits ................................................................... 5,662 1,383 Increase (decrease) in short-term borrowings ........................................... 7,535 (4,697) Proceeds from long-term borrowings ..................................................... 1,830 8,681 Repayments of long-term borrowings ..................................................... (10,785) (3,645) Proceeds from FHLBs advances ........................................................... 24,066 21,119 Repayments of FHLBs advances ........................................................... (22,751) (20,360) Cash dividends paid on preferred and common stock ...................................... (169) (153) Repurchase of common stock ............................................................. - (465) Other .................................................................................. 74 18 -------- -------- Net cash provided by financing activities .......................................... 5,462 1,881 -------- -------- Increase (decrease) in cash and cash equivalents ................................... 341 (222) Cash and cash equivalents, beginning of period ..................................... 2,622 3,040 -------- -------- Cash and cash equivalents, end of period ........................................... $ 2,963 $ 2,818 ======== ========
See Notes to Consolidated Financial Statements. 4 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED) THREE MONTHS ENDED MARCH 31, ------------------------------- 2001 2000 -------------- ----------- (in millions) NONCASH ACTIVITIES Loans exchanged for MBS................................................................... $ 545 $1,955 Real estate acquired through foreclosure.................................................. 93 75 Loans originated to facilitate the sale of foreclosed assets.............................. 3 11 CASH PAID DURING THE PERIOD FOR Interest on deposits...................................................................... 803 731 Interest on borrowings.................................................................... 1,775 1,592 Income taxes.............................................................................. 126 1
See Notes to Consolidated Financial Statements. 5 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1: BUSINESS COMBINATIONS On January 31, 2001, Washington Mutual, Inc. acquired the mortgage operations of The PNC Financial Services Group, Inc. for approximately $7 billion in cash, which included repayment of intercompany borrowings to their former parent company. This acquisition was accounted for as a purchase and resulted in the initial recognition of goodwill of approximately $200 million, which is being amortized over 20 years. The principal subsidiaries acquired in that transaction were renamed Washington Mutual Home Loans, Inc. and Washington Mutual Mortgage Securities Corp. The final purchase price has not yet been determined. The values assigned to assets received and liabilities assumed are subject to change, which would also result in adjustments to the amount of goodwill recorded. On February 9, 2001, Washington Mutual, Inc. acquired Texas-based Bank United Corp. This acquisition was accounted for as a purchase and resulted in the initial recognition of goodwill and other intangible assets of approximately $950 million, which are being amortized over periods ranging from seven to 20 years. The Company issued 42.6 million shares of its common stock to acquire Bank United Corp. Each share of Bank United Corp. common stock was converted into 1.3 shares of Washington Mutual, Inc. common stock. The initial allocation of the purchase price to specific assets and liabilities was based on estimates that are in the process of being finalized. Changes to these estimates would result in adjustments to the amount of goodwill recorded. On April 2, 2001, Washington Mutual announced that it has agreed to acquire Fleet Mortgage Corp., a unit of FleetBoston Financial Corp., and certain other mortgage lending operations of Fleet National Bank. The transaction has been approved by the Boards of Directors of both companies, and is anticipated to close in the second quarter of 2001, subject to regulatory notifications and customary closing conditions. NOTE 2: 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 (after deducting dividends on preferred stock) by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (after deducting dividends on preferred stock) by the weighted average number of common shares outstanding during the period, plus dilutive potential common shares, such as stock options. 6 Information used to calculate EPS was as follows: Three Months Ended March 31, ------------------------------- 2001 2000 ------------- ------------ (in millions, except per share amounts) Net income attributable to common stock................................. $640 $458 Weighted average shares ----------------------- Weighted average number of common shares outstanding................................................. 551.4 551.8 Dilutive effect of potential common shares............................ 6.7 0.9 ----- ----- Diluted weighted average number of common shares outstanding................................................. 558.1 552.7 ===== ===== Net income per common share --------------------------- Basic................................................................. $1.16 $0.83 Diluted............................................................... 1.15 0.83
Options to purchase an additional 6.9 million shares of common stock, with an exercise price ranging from $50.13 per share to $52.49 per share, were outstanding at March 31, 2001, but were not included in the computation of diluted EPS because their inclusion would have had an antidilutive effect. Additionally, as part of the business combination with Keystone Holdings, Inc. (parent of American Savings Bank, F.A.), 12 million shares of common stock, with an assigned value of $27.74 per share, are held in escrow for the benefit of the general and limited partners of Keystone Holdings, the Federal Savings and Loan Insurance Corporation Resolution Fund and their transferees. The conditions under which these shares can be released from escrow are related to the outcome of certain litigation and not based on future earnings or market prices. At March 31, 2001, the conditions were not met, and, therefore, the shares were not included in the above computations. On April 17, 2001, the Company's Board of Directors declared a 3-for-2 stock split which will be paid in the form of a 50 percent stock dividend. The stock split is payable on May 15, 2001 to shareholders of record as of April 30, 2001. 7 The following table presents the computation of EPS, giving effect to the stock split: THREE MONTHS ENDED MARCH 31, ---------------------------------------- 2001 2000 ------------------ ------------------ (in millions, except per share amounts) Net income attributable to common stock................................. $640 $458 Weighted average shares ----------------------- Weighted average number of common shares outstanding................................................. 827.1 827.7 Dilutive effect of potential common shares............................ 10.0 1.3 ----- ----- Diluted weighted average number of common shares outstanding................................................. 837.1 829.0 ===== ===== Net income per common share --------------------------- Basic................................................................. $0.77 $0.55 Diluted............................................................... 0.76 0.55
8 NOTE 3: MORTGAGE BANKING ACTIVITIES Changes in the loan servicing portfolio with MSR were as follows: THREE MONTHS ENDED MARCH 31, ----------------------------------------- 2001 2000 ------------------ ------------------ (in millions) Balance, beginning of period............................................ $ 79,335 $55,268 Additions through acquisitions.......................................... 123,742 - Additions............................................................... 19,005 10,637 Loan payments and other.................................................. (9,832) (1,621) -------- ------- Balance, end of period.................................................. $212,250 $64,284 ======== =======
Changes in the balance of MSR were as follows: THREE MONTHS ENDED MARCH 31, ----------------------------------------- 2001 2000 ------------------ ------------------ (in millions) Balance, beginning of period............................................ $1,017 $643 Additions through acquisitions.......................................... 2,143 - Additions............................................................... 483 151 Amortization............................................................ (124) (26) Impairment adjustment................................................... (63) - ------ ---- Balance, end of period(1)............................................... $3,456 $768 ====== ==== ---------------- (1) At March 31, 2001 and 2000, aggregate MSR fair value was $3.60 billion and $919 million.
9 Changes in the valuation allowance for impairment of MSR were as follows: THREE MONTHS ENDED MARCH 31, ---------------------------------------- 2001 2000 ------------------ ----------------- (in millions) Balance, beginning of period............................................ $12 $4 Net change.............................................................. 63 - --- -- Balance, end of period................................................... $75 $4 === ==
NOTE 4: RECENTLY ADOPTED ACCOUNTING STANDARD On January 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard obligates the Company to record all derivatives at fair value and permits the Company to designate derivative instruments as being used to hedge changes in fair value or changes in cash flows. Changes in the fair value of derivatives that offset changes in cash flows of a hedged item are recorded initially in other comprehensive income. Amounts recorded in other comprehensive income are subsequently reclassified into earnings during the same period the hedged item affects earnings. If a derivative qualifies as a fair value hedge, then changes in the fair value of the hedging derivative are recorded in earnings and are offset by changes in fair value attributable to the hedged risk of the hedged item. Any portion of the changes in the fair value of derivatives designated as a hedge that is deemed ineffective is recorded in earnings along with changes in the fair value of derivatives with no hedge designation. 10 The initial application of SFAS No. 133 did not have a significant impact on earnings and other comprehensive income and had the following impact on the Company's assets and liabilities as of January 1, 2001 (in millions): Increase in fair value of derivatives classified as assets .... $ 151 Increase in fair value of derivatives classified as liabilities 66 Increase in the book value of hedged borrowings ............... 129 Increase in the book value of MSR ............................. 126 Increase in available-for-sale securities ..................... 14,651 Increase in other assets ...................................... 1,788 Decrease in held-to-maturity securities ....................... (16,565) The adoption of SFAS No. 133 resulted in the recognition of derivative-related assets, derivative-related liabilities, and an increase in the book value of hedged borrowings. A portion of the reclassification of the Company's held-to-maturity MBS portfolio to available for sale was allocated to MSR representing retained interests from securitizations of loans that the Company had completed after January 1, 1996 and for which no MSR had been previously capitalized. MSR are capitalized for all securitizations of loans occurring after January 1, 1996 that are either sold or retained in the available-for-sale securities portfolio. COMPANY'S USE OF DERIVATIVES HEDGES OF BORROWINGS The derivatives used by the Company include interest rate swaps and caps, which change the interest rate characteristics of certain assets and liabilities. Similarly, the Company uses swaptions to change the interest rate characteristics of certain anticipated transactions. Interest rate swaps where the Company receives a fixed rate of interest are typically designated as fair value hedges against fixed-rate liabilities. Interest rate swaps where the Company pays a fixed rate of interest and interest rate caps are typically designated as cash flow hedges against variable-rate liabilities. Interest rate swaptions, in which the Company has an option to engage in an interest rate swap, are designated as cash flow hedges of anticipated issuances of debt. HEDGES OF PREPAYMENT RISK The Company's variable-rate MBS, loans held in portfolio and MSR expose the Company to prepayment risk in a declining interest rate environment. In order to mitigate that risk, the Company enters into interest rate floors. These derivative contracts can exist on a stand-alone basis or can be embedded within financial instruments, such as borrowings. Certain floors that are embedded in borrowings are not required to be accounted for as derivatives under SFAS No. 133. Changes in the fair value of floors that are not embedded in borrowings are recognized in earnings. COMMITMENTS TO ORIGINATE LOANS The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on loans that are intended to be sold are considered to be derivatives and are therefore recorded at fair value with changes in fair value recorded in earnings. For purposes of determining their fair value, the Company performs a net present value analysis of the anticipated cash flows associated with the rate lock commitments. Included in the net present value analysis are anticipated cash flows associated with the retained servicing of the loans. Rate lock commitments expose the Company to interest rate risk. The Company manages this risk by acquiring forward sales contracts, purchased put options and purchased call options. 11 HEDGES OF LOANS HELD FOR SALE Loans held for sale expose the Company to interest rate risk. The Company manages the interest rate risk associated with loans held for sale by entering into forward sales agreements. Certain of these forward sales agreements are accounted for as fair value hedges of loans held for sale. In these cases, the change in fair value of the hedged loans held for sale is recorded in earnings. EFFECT ON FIRST QUARTER OPERATIONS As of March 31, 2001, the Company had $62 million (net of tax) of deferred losses related to cash flow hedges in other comprehensive income. The Company estimates that during the next 12 months, $54 million (net of tax) will be recognized in earnings as a result of payments on interest rate swaps. The maximum elapsed time before the occurrence of the anticipated transactions that the Company is hedging is two years. The Company has not discontinued any derivative instruments due to a change in the probability of a forecasted transaction or a firm commitment. The change in the time value of interest rate caps recognized in earnings was immaterial for the quarter ended March 31, 2001. This amount was excluded from the assessment of hedge effectiveness. Ineffectiveness of certain interest rate swaps designated as cash flow hedges recognized in earnings during the period was not significant. The ineffective portion of fair value hedges recognized in earnings resulted in a pretax loss of $1 million for the quarter ended March 31, 2001. At March 31, 2001, the Company had recorded an asset of approximately $130 million, representing the estimated value associated with the servicing of loans that had not yet been sold. This amount was included in gain from mortgage loans for the quarter ended March 31, 2001. The Financial Accounting Standards Board is currently considering whether the value associated with servicing rights should, in fact, be recognized in earnings before the related loans are sold. The outcome of this deliberation would not impact the ultimate amount of gain that is recognized, but it would affect the timing of the gain recognition. Also included in gain from mortgage loans for the quarter ended March 31, 2001 was a $28 million loss related to changes in fair value of other derivatives. Consequently, SFAS No. 133 had the net impact of increasing the gain from mortgage loans by $102 million for the quarter ended March 31, 2001. NOTE 5: OPERATING SEGMENTS Effective January 1, 2001, the Company realigned its lines of business. In connection with this realignment, we identified three major operating segments for the purpose of management reporting: Banking and Financial Services, Home Loans and Insurance Services and Specialty Finance. The Company also enhanced its segment reporting process methodologies. These methodologies are based on the Company's management accounting process, which assigns balance sheet and income statement items to each responsible operating segment. Unlike financial accounting, there is no comprehensive, authoritative guidance for management accounting equivalent to generally accepted accounting principles. The management accounting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The Company's operating segments are defined by product type and customer segments. New methodologies that are now applied to the measurement of segment profitability include: (1) a funds transfer pricing system, which allocates net interest income between funds users and funds providers; (2) the calculation of the provision for loan and lease losses that is based on management's current assessment of the long-term, normalized net charge off ratio for loan products within each segment; and (3) the utilization of an activity-based costing approach to measure allocations of operating expenses between the segments. Historical periods have been restated to conform to this new presentation. 12 Our Banking and Financial Services Group ("Banking & FS") offers a comprehensive line of consumer and business financial products and services to individuals and small and middle market businesses. In addition to traditional banking products, Banking & FS offers investment management, securities brokerage services and annuity products through our subsidiaries and affiliates. The group's services are provided to over five million consumer and business households and are offered through multiple delivery channels, including branches, business banking centers, ATMs, the internet and 24-hour telephone banking centers. The Home Loans and Insurance Services Group ("Home Loans Group") originates, purchases, and services the Company's single-family residential ("SFR") mortgage assets. These mortgage assets may either be retained in the Company's loan portfolio, or sold or securitized through secondary market channels. Our products are made available to consumers through various distribution channels, which include retail home loan centers, wholesale home loan centers, financial centers and the internet. The Home Loans Group also includes the activities of Washington Mutual Insurance Services, Inc., an insurance agency that supports the mortgage lending process, as well as the insurance needs of all consumers doing business with us. The Specialty Finance Group conducts operations through the Company's banking subsidiaries and Washington Mutual Finance Corporation ("Washington Mutual Finance"). This group offers an array of commercial products, all under the Washington Mutual brand name and consumer finance products through Washington Mutual Finance. Syndicated, asset-based, franchise, and mortgage banker financing are also part of the specialty lending activities conducted by this group. The Specialty Finance Group also provides real estate secured financing for commercial and multi-family properties and residential builder construction finance. Loans made by Washington Mutual Finance generally provide higher yields than the prime mortgage loans made by our banking subsidiaries, because these loans tend to have higher credit risk. Washington Mutual Finance's typical customer would generally not qualify for a loan from our banking subsidiaries due to their credit history, high debt-to-income ratio or other factors. Corporate Support/Other includes treasury activities, which involve the management of interest rate risk, liquidity, capital and the Company's borrowings and purchased investment securities portfolios. The residual effects of unallocated services provided by support groups, the net impact of transfer pricing loan and deposit balances, the difference between the normalized provision for the operating segments and the Company's provision for loan and lease losses, and the elimination of inter-segment noninterest income and noninterest expense are also included in this category. 13 Financial highlights by operating segment were as follows: THREE MONTHS ENDED MARCH 31, 2001 --------------------------------------------------------------------------------------------- BANKING AND HOME LOANS AND SPECIALTY CORPORATE SUPPORT/ FINANCIAL SERVICES INSURANCE SERVICES FINANCE OTHER TOTAL ------------------ ------------------ --------- ------------------ ---------- (in millions) Condensed income statement: Net interest income.................. $545 $417 $222 $175 $1,359 Provision for loan and lease losses.. 21 31 44 (14) 82 Noninterest income................... 384 308 16 42 750 Noninterest expense.................. 556 235 62 160 1,013 Income taxes......................... 134 174 50 15 373 ----- ----- ------ ----- ------- Net income........................... $218 $285 $ 82 $ 56 $ 641 ==== ==== ===== ===== ======= Total average assets................ $14,488 $142,785 $27,388 $ 28,103 $212,764 Total average liabilities........... 83,816 4,529 2,070 110,893 201,308 THREE MONTHS ENDED MARCH 31, 2000 --------------------------------------------------------------------------------------------- BANKING AND HOME LOANS AND SPECIALTY CORPORATE SUPPORT/ FINANCIAL SERVICES INSURANCE SERVICES FINANCE OTHER TOTAL ------------------ ------------------ --------- ----------------- -------- (in millions) Condensed income statement: Net interest income.................. $489 $393 $175 $ 28 $1,085 Provision for loan and lease losses.. 15 23 35 (32) 41 Noninterest income................... 319 117 9 (22) 423 Noninterest expense.................. 480 134 48 83 745 Income taxes......................... 119 134 38 (27) 264 ---- ---- ---- ---- ------ Net income........................... $194 $219 $ 63 $(18) $ 458 ==== ==== ==== ==== ====== Total average assets................ $11,256 $122,989 $21,789 $30,343 $186,377 Total average liabilities........... 80,624 175 387 96,306 177,492
14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY FINANCIAL DATA THREE MONTHS ENDED MARCH 31, ---------------------------- 2001 2000 --------- -------- (dollars in millions, except per share amounts) Net income ............................................. $641 $458 Net income per diluted common share .................... $1.15 $0.83 Return on average assets ............................... 1.21% 0.98% Return on average common equity ........................ 22.34 20.64 Efficiency ratio, excluding amortization of goodwill and other intangible assets ............................. 46.33 47.61 Efficiency ratio, including amortization of goodwill and other intangible assets ............................. 48.04 49.38
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," or words of similar meaning, or future or conditional verbs, such as "will," "would," "should," "could," or "may" 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 due to the following factors, among others: changes in business and economic conditions; failure to diversify assets; concentration of operations in California; competition; changes in fiscal and monetary policies; and the effects of mergers and acquisitions. GENERAL Washington Mutual, Inc. is a financial services company committed to serving consumers and small to mid-sized businesses. 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. Our principal banking subsidiaries, Washington Mutual Bank, FA ("WMBFA"), Washington Mutual Bank ("WMB") and Washington Mutual Bank fsb ("WMBfsb"), accept deposits from the general public, originate, purchase, service and sell residential loans, make consumer loans and commercial real estate loans (primarily loans secured by multi-family properties), and engage in certain commercial banking activities such as providing credit facilities, cash management, and deposit services. 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 other principal subsidiaries, Washington Mutual Finance Corporation ("Washington Mutual Finance") and Long Beach Mortgage Company ("Long Beach Mortgage"). We also market annuities and other insurance products, offer full service securities brokerage, and act as the investment advisor to and the distributor of mutual funds. 15 The acquisitions of Bank United Corp. and the former mortgage operations of The PNC Financial Services Group, Inc., which created Washington Mutual Home Loans, Inc. ("WMHLI"), added approximately $26.34 billion in assets during the first quarter, which contributed significantly to the growth in our mortgage banking business. Accordingly, these acquisitions resulted in significant increases in our mortgage servicing rights ("MSR") and loan servicing portfolios. The balance of MSR increased 240% and the loan servicing portfolio with MSR increased 168% during the first quarter of 2001. Variances in values reported on the Statements of Income and the Statements of Financial Condition between first quarter 2001 and 2000 were partially attributable to the results from the mortgage operations of The PNC Financial Services Group, Inc. and from Bank United Corp. (the "Acquired Companies"), which were acquired on January 31, 2001 and February 9, 2001, respectively. Both acquisitions were accounted for as purchase transactions; therefore, the results of those operations were not included in the prior periods. Additionally, on April 2, 2001, we announced the signing of an agreement to acquire Fleet Mortgage Corp., which will further enhance our mortgage servicing and origination capabilities. Falling long-term interest rates contributed to an increase in refinancing activity during the quarter. The rate on a 10-year U.S. Government note averaged 5.04% for first quarter 2001, compared with 6.46% for the same period in 2000. In particular, the volume of fixed-rate, single-family residential ("SFR") loans rose to $10.42 billion during the first quarter of 2001, compared with $739 million for the comparable period a year ago. Fixed-rate SFR refinances were $6.29 billion during the most recent quarter, compared with $201 million during the first quarter of 2000. In addition to certain adjustable-rate mortgages ("ARMs"), substantially all of our fixed-rate loan originations are immediately designated as salable. Total loans grew $23.28 billion, of which $10.45 billion were in loans held for sale. An important part of our strategy is to reduce our exposure to changes in interest rates by increasing our percentage of noninterest income. During the first quarter of 2001, noninterest income represented 36% of total revenue (net interest income and noninterest income), compared with 28% for the same period in 2000, as a result of higher gains from mortgage loans and gains from the sale of previously securitized loans, and increased depositor and other retail banking fees. The increase in gains from mortgage loans for the first quarter of 2001 primarily reflected a significant increase in fixed-rate SFR loan volume due to refinancing activity and the addition of WMHLI's fixed-rate origination business, and the impact of adopting Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." During the quarter, we also recognized $49 million in gains from the sale of previously securitized loans. RESULTS OF OPERATIONS OVERVIEW. Our net income for the first quarter of 2001 was $641 million, compared with $458 million for the same period a year ago. We had diluted earnings per share of $1.15 in the first quarter of 2001. For the first quarter of 2000, we had diluted earnings per share of $0.83. NET INTEREST INCOME. Net interest income was $1.36 billion in the first quarter of 2001, compared with $1.09 billion in the first quarter of 2000. The net interest margin was 2.65% in the first quarter of 2001, compared with 2.38% in the first quarter of 2000. The increase in net interest income was primarily due to an increase in interest-earning assets, which was largely the result of the acquisition of the Acquired Companies. Additionally, since our liabilities generally reprice to market rates more quickly than our assets, the net interest margin benefited from the "snap back" effect on our adjustable-rate mortgage loan portfolio from the rate increases that occurred during the first half of 2000. Accordingly, the overall yield on our loan portfolio rose to 8.22% in the first quarter of 2001, compared with 7.64% in the first quarter of 2000. 16 With the 50-basis point rate reduction by the Federal Reserve on April 18, 2001, we anticipate further improvement in the net interest margin due to expected reductions in wholesale borrowing rates. Refer to "Market Risk Management" for further discussion of our management of interest rate risk. Certain average balances, together with the total dollar amounts of interest income and expense and the weighted average interest rates, were as follows: THREE MONTHS ENDED MARCH 31, --------------------------------------------------------------- 2001 2000 ---------------------------- ------------------------ INTEREST INTEREST AVERAGE INCOME OR AVERAGE INCOME OR BALANCE RATE EXPENSE BALANCE RATE EXPENSE -------- ---- --------- ------- ---- --------- (dollars in millions) ASSETS Loans(1)............................................. $136,857 8.22% $2,811 $ 116,290 7.64% $2,221 MBS.................................................. 53,909 7.10 957 60,047 6.81 1,022 Investment securities and other...................... 9,552 6.14 146 4,120 5.88 61 ------- ------ -------- ------ Total interest-earning assets............. 200,318 7.82 3,914 180,457 7.33 3,304 Other assets......................................... 12,446 5,920 -------- -------- Total assets.............................. $212,764 $186,377 ======== ======== LIABILITIES Deposits: Checking accounts................................ $ 17,108 0.69 29 $ 13,515 0.56 19 Savings accounts and money market deposit accounts ("MMDAs")............................ 34,929 4.08 351 29,854 3.81 282 Time deposit accounts............................ 35,609 5.77 507 37,599 5.20 487 -------- ----- -------- ------ Total deposits............................. 87,646 4.10 887 80,968 3.91 788 Borrowings: Securities sold under agreements to repurchase ("repurchase agreements")................. 31,043 6.02 461 28,836 5.93 425 Advances from Federal Home Loan Banks ("FHLBs")................................. 63,747 6.08 956 57,411 5.98 854 Federal funds purchased and commercial paper..... 5,094 5.84 73 2,270 5.92 33 Other............................................ 10,370 6.98 178 6,210 7.69 119 -------- ----- -------- ------ Total borrowings........................... 110,254 6.14 1,668 94,727 6.08 1,431 -------- ----- -------- ------ Total interest-bearing liabilities........ 197,900 5.23 2,555 175,695 5.08 2,219 Other liabilities.................................... 3,408 ----- 1,797 -------- -------- Total liabilities......................... 201,308 177,492 STOCKHOLDERS' EQUITY................................. 11,456 8,885 -------- -------- Total liabilities and stockholders' equity........... $212,764 $186,377 ======== ======== Net interest spread and net interest income.......... 2.59 $1,359 2.25 $1,085 ====== ====== Net interest margin.................................. 2.65 2.38 - --------------- (1) Nonaccrual loans were included in the average loan amounts outstanding.
The net interest spread is the difference between our weighted average yield on our interest-earning assets and the weighted average cost of our interest-bearing liabilities. The net interest margin measures our annualized net interest income as a percentage of average interest-earning assets. 17 NONINTEREST INCOME. Noninterest income was $750 million for the quarter ended March 31, 2001, compared with $423 million for the same period in 2000. Noninterest income consisted of the following: THREE MONTHS ENDED MARCH 31, --------------------------------- 2001 2000 --------------- --------------- (in millions) Depositor and other retail banking fees.............................................. $279 $211 Securities fees and commissions...................................................... 72 83 Insurance fees and commissions....................................................... 12 12 Loan servicing income................................................................ 199 65 Amortization of MSR.................................................................. (124) (26) Impairment of MSR.................................................................... (63) - Other loan servicing expense......................................................... (19) (6) ---- ---- Net loan servicing income (expense)............................................ (7) 33 SFR mortgage related income.......................................................... 48 23 Other loan related income............................................................ 8 1 ---- ---- Loan related income............................................................ 56 24 Gain from mortgage loans: Realized....................................................................... 85 61 Unrealized..................................................................... 102 - ---- ---- Total gain from mortgage loans........................................... 187 61 Gain from sale of originated MBS..................................................... 49 - Gain (loss) from sale of other available-for-sale securities......................... 21 (22) ---- ---- Gain (loss) from securities.................................................... 70 (22) Other income......................................................................... 81 21 ---- ---- Total noninterest income....................................................... $750 $423 ==== ====
Depositor and other retail banking fees of $279 million for the quarter ended March 31, 2001 increased 32% from $211 million for the same period in 2000. The increase in the first quarter of 2001 was primarily due to collecting more nonsufficient funds and other fees that resulted from an increased number of checking accounts. The number of checking accounts increased by more than 811,000 or 18% over the past year. This increase included 271,183 checking accounts acquired from Bank United Corp. Securities fees and commissions were $72 million for the first quarter of 2001, down from $83 million for the first quarter of 2000. This decrease was due to lower sales of investment products, largely a result of the weakening stock market. We incurred net loan servicing expense of $7 million during the first quarter of 2001, compared with loan servicing income of $33 million during the first quarter of 2000. During first quarter 2001, prepayment speeds on mortgage loans increased due to a decline in interest rates. This was the primary cause of the $98 million increase in MSR amortization and the recognition of a $63 million MSR impairment. We offset this impairment by selling investment securities at a gain of $70 million during the first quarter of 2001. In order to manage the risk associated with the potential decrease in the market value of MSR in a declining interest rate environment, we purchase fixed-rate investments and embedded interest rate floors that tend to increase in value when interest rates decline. Refer to "Market Risk Management" for further discussion. 18 Loan related income was $56 million for the first quarter of 2001, up from $24 million for the same period in 2000. During the first quarter of 2001, loan prepayment fees increased as a result of the declining interest rate environment. In addition, the acquisition of the Acquired Companies contributed to the increase in loan related income. Gain from mortgage loans during the first quarter of 2001 was $187 million, up from $61 million for the same period in 2000. The increase reflects the addition of the Acquired Companies, a substantial increase in fixed-rate SFR loan volume due to refinancing activity, and the impact of the adoption of SFAS No. 133. The first quarter 2001 gain included realized gains of $85 million and unrealized gains of $102 million. We recorded realized gains of $58 million from the sale of $9.31 billion of current loan production and $27 million from the sale of $740 million of loans originated by Long Beach Mortgage. Our adoption of SFAS No. 133 accelerated recognition of $102 million in gains, which represented the estimated gain of $130 million associated with the servicing rights of loans that had not yet been sold, reduced by a $28 million loss related to changes in the fair value of other derivatives related to mortgage production activities. The majority of these loans will be sold during the second quarter. The Financial Accounting Standards Board ("FASB") is currently considering whether the value associated with servicing rights should be recognized in earnings before the related loans are sold. The outcome of this deliberation would not impact the ultimate amount of gain that is recognized, but it would affect the timing of the gain recognition. We anticipate that loan volume and refinancing activity will remain high during the second quarter, based on the current levels of long-term interest rates. We expect that gains from mortgage loans will decrease during the second half of the year, assuming that long-term interest rates do not decline further. Gain from securities was $70 million during the first quarter of 2001, compared with a $22 million loss from securities during the first quarter of 2000. During first quarter 2001, we recognized gains of $49 million from the sale of securities retained from previous loan securitizations and $21 million from the sale of purchased available-for-sale securities. Other income increased to $81 million for the quarter ended March 31, 2001 from $21 million for the same period a year ago. During the first quarter of 2001, we recognized a gain of $27 million on the receipt of Concord EFS, Inc. ("Concord") stock as a result of the Star Systems, Inc. sale to Concord. We committed to donate the Concord stock to the Washington Mutual Foundation; therefore, there is a similar increase in "other expense." Other income in first quarter 2001 also included $17 million of income from Bank Owned Life Insurance and $8 million of income from our new reinsurance programs. 19 NONINTEREST EXPENSE. Noninterest expense totaled $1.01 billion for the quarter ended March 31, 2001, compared with $745 million for the same period in 2000. Noninterest expense consisted of the following: THREE MONTHS ENDED MARCH 31, ----------------------------------- 2001 2000 ---------------- -------------- (in millions) Compensation and benefits................................... $ 416 $330 Occupancy and equipment .................................... 184 153 Telecommunications and outsourced information services..................................... 106 77 Depositor and other retail banking losses................... 30 26 Amortization of goodwill and other intangible assets........................................ 36 27 Advertising and promotion................................... 32 21 Postage..................................................... 29 24 Professional fees........................................... 37 21 Regulatory assessments...................................... 9 8 Office supplies............................................. 9 9 Travel and training......................................... 21 15 Other expense............................................... 104 34 ------ ---- Total noninterest expense............................... $1,013 $745 ====== ====
Compensation and benefits expense increased to $416 million for the quarter ended March 31, 2001 from $330 million for the same period in 2000. This increase was primarily due to the acquisition of the Acquired Companies. In addition, employee base compensation and employee benefits expense increased due to additional staff to support our expanding operations. Occupancy and equipment expense was $184 million for the first quarter of 2001, compared with $153 million for the same period in 2000. This increase resulted from higher rent expense related to existing and new properties, increases in maintenance and depreciation expense, and the acquisition of the Acquired Companies. Telecommunications and outsourced information services expense of $106 million for the first quarter of 2001 was up from $77 million for the same period in 2000. The increase during the first quarter of 2001 included rate increases, effective the beginning of the year, with a third party service provider, increased use of data processing, and the acquisition of the Acquired Companies. Amortization of goodwill and other intangible assets was $36 million in the first quarter of 2001, compared with $27 million for the comparable period in 2000. The increase was due to the acquisition of the Acquired Companies. The FASB has issued a proposed rule that would eliminate the amortization of goodwill relating to past and future acquisitions and instead subject it to an impairment assessment. The rule is expected to be finalized prior to the end of the second quarter and will apply to accounting periods that commence immediately following its issuance. If we were to adopt the rule as it is currently proposed, our goodwill amortization would be reduced by approximately $134 million on an annual basis. Approximately $35 million in other intangible assets ($25 million after tax) would continue to be amortized annually. 20 Advertising and promotion expense increased to $32 million during the quarter ended March 31, 2001 from $21 million for the same period in 2000. The increase was related to the acquisition of the Acquired Companies as well as additional costs associated with campaigns for various loan and deposit products. Professional fees for the first quarter of 2001 were $37 million, compared with $21 million for the first quarter of 2000. The increase was attributable to various consulting projects designed to streamline our processes and procedures, and to develop and deliver new products. Other expense increased to $104 million in the first quarter of 2001 from $34 million in the first quarter of 2000. The increase was due, in part, to the commitment to donate the Concord investment to the Washington Mutual Foundation. The increase in other expense during first quarter 2001 was also comprised of increases in loan expenses and other outside services. The higher loan expenses were attributable to an overall increase in loan originations and purchases. REVIEW OF FINANCIAL CONDITION ASSETS. At March 31, 2001, our assets were $219.93 billion, an increase of 13% from $194.72 billion at December 31, 2000. The acquisition of the Acquired Companies added $26.34 billion in assets during the first quarter. However, we expect our assets to experience a small decline during the second quarter (without the effect of additional acquisitions) as a result of the surge in refinancing activity during the first quarter of 2001. SECURITIES. Our securities portfolio declined $3.04 billion to $55.68 billion at March 31, 2001 from $58.72 billion at December 31, 2000. With the adoption of SFAS No. 133, we reclassified our held-to-maturity securities to available for sale. With all securities classified as available for sale, we will have flexibility to sell these securities in future periods. Securities consisted of the following: MARCH 31, DECEMBER 31, 2001 2000 -------------- --------------- (in millions) Available-for-sale securities, total amortized cost of $55,332 and $42,288: MBS............................................................. $46,483 $40,349 Other investment securities..................................... 9,199 1,810 ------- ------- $55,682 $42,159 ======= ======= Held-to-maturity securities, total fair value of $16,486 at December 31, 2000: MBS............................................................. $ - $16,428 Other investment securities..................................... - 137 ------- ------- $ - $16,565 ======= =======
At March 31, 2001, 63% of MBS were adjustable rate. Of the 63% indexed to an adjustable rate, 58% were indexed to the 11th District monthly weighted average cost of funds index ("COFI"), 25% to U.S. Treasury indices, and 17% to other indices. The remaining 37% of MBS were fixed rate. LOANS. Total loans (including loans held for sale) at March 31, 2001 were $146.31 billion, up from $123.03 billion at December 31, 2000. The Acquired Companies added $18.34 billion to our loan portfolio at the time of the acquisitions, of which $6.01 billion was in loans held for sale. The growth in loan volume (originations and purchases) to $24.38 billion during the first quarter of 2001, compared with $13.06 billion during the first quarter of 2000, contributed to the slight internal growth of loans held in portfolio as most of the originated and purchased ARMs were retained to offset prepayment activity. As a result of declining interest rates, fixed-rate SFR loans increased by $7.99 billion to $20.83 billion at March 31, 2001 from $12.84 billion at December 31, 2000, the majority of which is classified as loans held for sale. Also contributing to the increase in loans was the continued growth in second mortgage and other consumer, specialty mortgage finance, and commercial business and real estate loans. 21 We anticipate a slight decrease in outstanding loan balances by the end of the second quarter due to continued high prepayment rates. Loans held in portfolio consisted of the following: MARCH 31, DECEMBER 31, 2001 2000 ----------------- --------------- (in millions) SFR........................................................ $ 83,534 $ 80,181 Specialty mortgage finance................................. 7,399 6,783 -------- ------- Total SFR loans....................................... 90,933 86,964 SFR construction........................................... 3,000 1,431 Second mortgage and other consumer: Banking subsidiaries................................... 9,226 7,992 Washington Mutual Finance.............................. 2,568 2,486 Commercial business........................................ 4,863 2,274 Commercial real estate: Apartment buildings.................................... 17,090 15,657 Other commercial real estate........................... 4,780 2,822 -------- -------- 132,460 119,626 Allowance for loan and lease losses.......................... (1,158) (1,014) -------- -------- Total loans held in portfolio, net of allowance for loan and lease losses..................... $131,302 $118,612 ======== ========
We have shifted our SFR ARM product types from a COFI concentration to Treasury-based, which reduces our interest rate risk, because Treasury-based loans have repricing frequencies that more closely match the repricing of our borrowings. This shift was achieved, in part, through the securitization and sale of COFI-based loans and paydowns of portfolio loans indexed to COFI. 22 Loan volume (originations and purchases) was as follows: THREE MONTHS ENDED MARCH 31, ------------------------------------ 2001 2000 --------------- ---------------- (in millions) SFR: ARMs....................................................... $ 7,375 $7,970 Fixed rate................................................. 10,418 739 Specialty mortgage finance................................. 2,138 1,509 ------- ------- Total SFR loan volume................................... 19,931 10,218 SFR construction............................................. 1,197 428 Second mortgage and other consumer: Banking subsidiaries....................................... 1,335 896 Washington Mutual Finance.................................. 501 513 Commercial business.......................................... 756 446 Commercial real estate: Apartment buildings........................................ 480 472 Other commercial real estate............................... 180 83 ------- ------- Total loan volume....................................... $24,380 $13,056 ======= ======= Loan volume by channel was as follows: THREE MONTHS ENDED MARCH 31, ------------------------------------ 2001 2000 --------------- ---------------- (in millions) Originated................................................... $20,408 $12,165 Purchased/Correspondent...................................... 3,972 891 ------- ------- $24,380 $13,056 ======= =======
Total loan originations increased 68% to $20.41 billion in the first quarter of 2001 from $12.17 billion in the first quarter of 2000. SFR originations were $15.03 billion for first quarter 2001, compared with $8.50 billion for the same period in 2000. Originations of second mortgage and other consumer, commercial business, commercial real estate and SFR construction loans totaled $4.31 billion for the most recent quarter, up from $2.74 billion in the first quarter of 2000 primarily due to the acquisition of Bank United Corp. Increasing originations in these higher margin loan categories continues to be part of our strategy to remix the balance sheet over time. SFR fixed-rate loan originations increased to $7.98 billion during the first quarter of 2001 from $732 million during the first quarter of 2000. Similarly, refinances of fixed-rate SFR loans increased to $6.29 billion in the most recent quarter from $201 million for the first quarter of 2000. SFR ARM originations declined slightly to $7.06 billion during the first quarter of 2001 from $7.77 billion for the same period in 2000. The increase in originations of fixed-rate loans in the first quarter of 2001 was attributable to the lower interest rate environment, which reflected customers' preferences for fixed-rate loans over ARMs. Loan applications increased beginning in the second half of the first quarter of 2001 and we expect this level of lending activity to continue for the immediate future. Accordingly, we expect that loan volume will remain high during the second quarter, but will lessen as refinancing activity diminishes. Once the refinancing activity has diminished, we anticipate a higher volume of new, fixed-rate loans on an ongoing basis than in the past due to our recent acquisitions. 23 We purchased $3.97 billion of loans in the first quarter of 2001, compared with $891 million in the same period in 2000. The increased purchases in first quarter 2001 were primarily due to the acquisition of the mortgage operations of The PNC Financial Services Group, Inc., which added $1.93 billion in correspondent loans. Purchases of specialty mortgage finance loans were $955 million for the first quarter of 2001, compared with $584 million for the first quarter of 2000. DEPOSITS. Deposits increased to $93.34 billion at March 31, 2001 from $79.57 billion at December 31, 2000. From the Acquired Companies, we added $7.71 billion in retail deposits and $1.47 billion in custodial deposits related to loan servicing activities. Our goal is to increase the ratio of transaction accounts to total deposits. As a result, checking accounts, savings accounts, and MMDAs have increased to 62% at March 31, 2001, compared with 57% at year-end 2000. These three products have the benefit of lower interest costs, compared with time deposit accounts. Both the increase in deposits and the shift towards transaction deposits have had a beneficial effect on our cost of funds and net interest margin. In addition, at March 31, 2001, deposits funded 42.4% of total assets, compared with 40.9% at year-end 2000. Even though transaction accounts are more liquid, we consider them to be the core relationship with our customers. We view these transaction accounts to be a more stable source of long-term funding than time deposits. Deposits consisted of the following: MARCH 31, DECEMBER 31, 2001 2000 ------------- ---------- (in millions) Checking accounts: Noninterest-bearing ...................................... $13,042 $ 8,575 Interest-bearing ......................................... 6,195 5,925 ------- ------- 19,237 14,500 Savings accounts.............................................. 7,146 5,436 MMDAs......................................................... 31,646 25,220 Time deposit accounts......................................... 35,306 34,418 ------- ------- $93,335 $79,574 ======= =======
BORROWINGS. Our borrowings primarily take the form of repurchase agreements and advances from the FHLBs of Seattle and San Francisco. The exact mix at any given time is dependent upon the market pricing of the individual borrowing sources. Our wholesale borrowing portfolio increased by $8.60 billion to $100.32 billion at March 31, 2001, compared with year-end 2000. These increases in funding were used primarily to support asset growth. 24 ASSET QUALITY NONPERFORMING ASSETS. Assets considered to be nonperforming include nonaccrual loans and foreclosed assets. When loans securitized or sold with recourse become nonperforming, we include them in nonaccrual loans. Management's classification of a loan as nonaccrual does not necessarily indicate that the principal of the loan is uncollectible in whole or in part. Loans are generally placed on nonaccrual status when they are four payments or more past due or when the timely collection of the principal of the loan, in whole or in part, is not expected. Nonperforming assets consisted of the following: MARCH 31, DECEMBER 31, 2001 2000 ------------- ------------ (dollars in millions) Nonaccrual loans: SFR............................................................. $ 678 $ 529 Specialty mortgage finance...................................... 262 179 ------ ------ Total SFR nonaccrual loans.................................. 940 708 SFR construction ............................................... 31 18 Second mortgage and other consumer: Banking subsidiaries........................................ 46 51 Washington Mutual Finance................................... 66 66 Commercial business............................................. 58 12 Commercial real estate: Apartment buildings........................................ 20 10 Other commercial real estate............................... 110 21 ------ ------ 1,271 886 Foreclosed assets................................................. 184 153 ------ ------ $1,455 $1,039 ====== ====== Nonperforming assets as a percentage of total assets 0.66% 0.53%
Nonaccrual loans increased to $1.27 billion at March 31, 2001 from $886 million at December 31, 2000. Of the increase in nonaccrual loans and foreclosed assets during the first quarter of 2001, $253 million and $25 million, respectively, were the result of the acquisition of the Acquired Companies. These loans were concentrated in the SFR, commercial business, and commercial real estate categories. The majority of the remaining increase of $132 million in nonaccrual loans was comprised of an $83 million increase in the specialty mortgage finance category. In light of the slowing economy, we continue to closely monitor residential home markets and, in particular, the California and Pacific Northwest markets with respect to price trends on home sales and length of time on the market. Two assisted living loans totaling approximately $90 million that were acquired from Bank United Corp. were placed on nonaccrual status. Both of these loans are secured by assisted living properties located throughout the United States. We continue to closely monitor loans in the nationally syndicated loan portfolio, as well as the small business sector of the portfolio. In addition, we are limiting new loan originations in higher risk categories and are applying our lending standards and guidelines to the loan portfolios acquired from Bank United Corp. Our underwriting standards are generally more restrictive than those previously used by Bank United Corp. 25 As a result of the increase in nonaccrual loans during the first quarter of 2001, the ratio of the allowance for loan and lease losses to total nonaccrual loans declined from 114% at December 31, 2000 to 91% at March 31, 2001. This ratio is subject to significant fluctuations from period to period due to such factors as the mix of loan types in the portfolio, the economic prospects of our borrowers and, in the case of secured loans, the value and marketability of collateral. Consequently, this ratio, taken alone and without taking into account numerous additional factors, is not a reliable indicator of the adequacy of the allowance for loan and lease losses. The methodologies we use to determine the allowance for loan and lease losses are discussed below and in our 2000 Annual Report on Form 10-K. PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES. With the growth in total loans and nonaccrual loans, we increased the first quarter 2001 provision for loan and lease losses to $82 million, an amount that is above the $58 million in net charge offs and prior quarters' provision levels. In light of the slowing economy, we anticipate that the provision will continue to exceed net charge offs in coming quarters. Net charge offs as a percentage of average loans were 0.17% for first quarter 2001, up from 0.16% for fourth quarter 2000 and 0.14% for first quarter 2000. We analyze several important elements in determining the allowance for loan and lease losses in any given period, such as current and historical economic conditions, nonaccrual asset trends, historical loan loss experience, and plans for problem loan administration and resolution. In addition to the analysis performed on more homogeneous portfolios, such as our SFR products, we evaluate the adequacy of non-homogeneous type loans, such as commercial business and commercial real estate loans, on an individual basis. The review conducted for the first quarter of 2001 concluded that allowance coverage was adequate based on these analyses. 26 Changes in the allowance for loan and lease losses were as follows: THREE MONTHS ENDED MARCH 31, ------------------------------- 2001 2000 ------------- ---------- (dollars in millions) Balance, beginning of period.................................... $1,014 $1,042 Identified allowance for loans sold or securitized.............. - (17) Allowance acquired through business combinations................ 120 - Provision for loan and lease losses............................. 82 41 ------ ----- 1,216 1,066 Loans charged off: SFR........................................................... (6) (7) Specialty mortgage finance.................................... (7) (1) ------ ------ Total SFR charge offs..................................... (13) (8) Second mortgage and other consumer: Banking subsidiaries...................................... (12) (11) Washington Mutual Finance................................. (33) (27) Commercial business........................................... (4) (1) Commercial real estate: Apartment buildings...................................... - (1) Other commercial real estate............................. (3) - ------ ------ Total charge offs............................... (65) (48) Recoveries of loans previously charged off: SFR........................................................... 1 - Specialty mortgage finance.................................... - 1 ------ ------ Total SFR recoveries............................ 1 1 Second mortgage and other consumer: Banking subsidiaries.................................... 1 1 Washington Mutual Finance............................... 5 4 Commercial real estate: Apartment buildings.................................... - 1 ------ ------ Total recoveries.............................. 7 7 ------ ------ Net charge offs........................................ (58) (41) ------ ------ Balance, end of period........................................... $1,158 $1,025 ====== ====== Net charge offs as a percentage of average loans................. 0.17% 0.14% Allowance as a percentage of total loans held in portfolio ...... 0.87 0.92
At March 31, 2001, we had $15.01 billion of loans securitized and retained with recourse, and $6.00 billion of loans securitized and sold with recourse. We record an allowance for recourse obligations to cover inherent losses on loans securitized and retained in our MBS portfolio for which we retain the credit risk, and to cover estimated losses on loans and MBS sold to third parties for which a recourse obligation exists. A regular review is performed to determine the adequacy of the allowance for recourse obligations. As of March 31, 2001, the allowance for recourse obligations totaled $106 million, compared with $104 million at year-end 2000. 27 OPERATING SEGMENTS Effective January 1, 2001, we realigned our operating segments and enhanced our segment reporting process methodologies. Historical periods have been restated to conform to the new alignment and methodologies. We are now managed along three major operating segments: Banking and Financial Services, Home Loans and Insurance Services, and Specialty Finance. BANKING AND FINANCIAL SERVICES Net income for the first quarter of 2001 increased to $218 million, an increase of $24 million or 12% over the first quarter of 2000. Net interest income increased by $56 million, or 11%, due to growth in consumer loan and deposit balances. Noninterest income increased by $65 million, or 20%, reflecting increased depositor and other retail banking fees and increased loan related income, partially offset by a decrease in securities fees and commissions. Depositor and other retail banking fees increased by more than 30%, while the number of accounts increased 18%, including 271,183 accounts acquired from Bank United Corp. Noninterest expense increased $76 million, or 16%, principally reflecting increases in the cost of information technology, human resource services and facilities. The acquisition of Bank United Corp. also contributed to the increase. HOME LOANS AND INSURANCE SERVICES Net income for the first quarter of 2001 was $285 million, an increase of $66 million from $219 million for the first quarter of 2000. This increase included increases of $191 million in noninterest income and $24 million of net interest income, partially offset by a $101 million increase in noninterest expense. Noninterest income increased as a result of increased gain from mortgage loans, including the impact of adopting SFAS No. 133 during the first quarter of 2001, and increased gain from originated MBS. Total average assets increased by approximately 16% from March 31, 2000 to March 31, 2001 due to the acquisition of the Acquired Companies, along with an increase in loans originated and retained. The recent acquisitions expanded the Home Loan and Insurance Services Group's retail origination presence into the Northeast and complemented the wholesale operations nationwide. The acquisitions accelerated the execution of the Group's strategy to expand the correspondent lending channel by providing a nationwide network of lenders. In addition, the acquisitions provided geographic diversification of the loan servicing portfolio, expanded the Group's loan servicing operations into the Midwest, and increased the customer base the Group services. SPECIALTY FINANCE Net income for the first quarter of 2001 was $82 million, an increase of $19 million or 30% over the same period in the prior year. Net interest income increased by $47 million or 27% to $222 million for the first quarter of 2001. The increase in net interest income reflected the growth in average receivables outstanding through acquisitions and internally generated loan production. Noninterest expense increased by $14 million or 29% during the first quarter of 2001, as compared with the same period in the prior year. This increase was attributable to the expansion of the Group's lending capabilities from the recent acquisitions and additional administrative support in the commercial lending business as a result of our emphasis to strengthen our market position in this area. 28 MARKET RISK MANAGEMENT Market risk is defined as the sensitivity of income and capital from changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates or prices. The primary market risk to which we are exposed is interest rate risk. The majority of our interest rate risk arises from the instruments, positions and transactions entered into for purposes other than trading. They include loans, MSR, securities, deposits, borrowings, long-term debt and derivative financial instruments used for asset and liability management. To analyze interest rate risk, we project net interest income based on parallel and non-parallel changes in the yield curve. The results of these analyses are used as part of an overall framework for asset and liability management. The table below indicates the sensitivity of pretax net interest income to interest rate movements. The comparative scenarios assume that interest rates rise or fall in even quarterly increments over the next twelve months for a total increase or decrease of 200 basis points. The interest rate scenarios are used for analytical purposes and do not necessarily represent management's view of future market movements. Our net interest income sensitivity profile as of March 31, 2001 and December 31, 2000 is stated below: GRADUAL CHANGE IN RATES ---------------------------------- -200bp +200bp ------ ------ Net interest income change for the one-year period beginning: April 1, 2001............................................................... 11.3% (12.7)% January 1, 2001 ............................................................ 11.0% (12.4)%
Our net interest income at risk position has not changed significantly quarter over quarter. Assumptions are made in modeling the sensitivity of net interest income. The simulation model captures expected prepayment behavior under changing interest rate environments. Additionally, the model captures the impact of interest rate caps and floors on adjustable-rate products. Assumptions regarding interest rate and balance behavior of non-maturity deposits reflect management's best estimate of future behavior. Sensitivity of new loan volume to market interest rate levels is included as well. We analyze additional interest rate scenarios, including more extreme rising and falling rate environments, to support interest rate risk management. These additional scenarios also address the risk exposure in time periods beyond the twelve months captured in this net interest income sensitivity analysis. Typically, net interest income sensitivity in a rising interest rate environment is not as pronounced in these longer time periods as lagging assets reprice to current market levels and balance sheet growth begins to offset a lower net interest margin. In addition, yields on new loan production gradually replace the comparatively lower yields of the more seasoned portion of the portfolio. Asset and liability management is governed by policies reviewed and approved annually by our Board of Directors (the "Board"). The Board has delegated the responsibility to oversee the administration of these policies to the Directors' Loan and Investment Committee, and the responsibility for the management of these policies has been delegated to the Corporate Finance Committee ("CFC"). Within guidelines set by the CFC, 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. The major source of our interest rate risk occurs when assets and liabilities reprice or mature at different times or frequencies as market interest rates change. We actively manage the amounts and maturities of our assets and liabilities. A key component of this strategy is the origination and retention of short-term and adjustable-rate assets and the origination and sale of fixed-rate loans. Short-term and adjustable-rate assets have repricing characteristics that more closely match the repricing characteristics of our liabilities. In addition to selling fixed-rate loans, we also sell adjustable-rate loans with three- to five-year initial fixed interest rates. We have also established additional balance sheet flexibility and diversity by designating some monthly option ARMs as held for sale. 29 Our net interest margin generally expands in falling interest rate environments and contracts in a rising interest rate environment as our deposits and borrowings tend to reprice faster than our mortgage loans and securities. A falling interest rate environment typically results in faster prepayments and a shift to more fixed-rate loan production. Most of the fixed-rate production is sold in the secondary market, resulting in the potential for balance sheet shrinkage. Despite the potential for balance sheet shrinkage, net interest income tends to increase in falling interest rate environments due to the enhanced net interest margin. Management intends to reduce the volatility of the net interest margin by remixing the balance sheet through the sale of fixed- and adjustable-rate loans, as discussed above, and through the purchase of specialty mortgage finance loans and origination of consumer and commercial loans. We purchased $955 million in specialty mortgage finance loans during the quarter while the acquisition of Bank United Corp. contributed $6.93 billion of commercial loans to our portfolio. These commercial loans should assist in mitigating our exposure to margin compression during periods of rising interest rates, since they generally reprice to market rates more quickly than our home mortgage products. Specialty mortgage finance, consumer and commercial loans also have the benefit of yielding higher margins, compared with our traditional home mortgage products, and have more predictable and stable prepayment rates. Management closely monitors the performance of these loans, since this strategy increases our credit risk. We are also striving to increase the proportion of our transaction accounts to total deposits and the proportion of noninterest income to total revenue to mitigate our exposure to adverse changes in interest rates. In particular, noninterest-bearing checking accounts are not sensitive to interest rate fluctuations and provide a growing source of noninterest income. In managing the risk of timing differences in the repricing of assets and liabilities, our interest-earning assets are matched with interest-bearing liabilities that have similar repricing characteristics. For example, our fixed-rate loans are matched with long-term deposits and borrowings, and our ARMs are matched with short-term deposits and borrowings. Periodically, mismatches are identified and managed by adjusting the repricing characteristics of our interest-bearing liabilities with derivatives, such as interest rate caps and swaps, and swaptions. Management, in conjunction with the Board, has established strict policies and guidelines for the use of derivative instruments. These instruments are not intended to be used as techniques to generate earnings by speculating on the movements in interest rates. We held interest rate swaps, interest rate caps and swaptions with notional values of $19.74 billion at March 31, 2001. The interest rate caps, swaps and swaptions are designed to provide an additional layer of protection should interest rates on deposits and borrowings rise. Through the use of these instruments, management attempts to offset increases in interest expense related to these deposits and borrowings and effectively lengthen the repricing period. Thus, we have a degree of interest rate protection when interest rates increase, because these instruments provide a mechanism for repricing the deposits and borrowings to interest rate levels that are generally on pace with current market rates. There can be no assurance that these agreements will provide us with protection in all scenarios or to the full extent of our exposure. 30 The impairment in the value of MSR is another significant source of interest rate risk as borrowers may prepay a mortgage loan at any time, sometimes without penalty. As a result, our mortgage-based assets are subject to prepayment risk. This risk generally increases in a declining interest rate environment as prepayments on our mortgage-based assets tend to move inversely with mortgage rates. Increases in prepayments shorten the expected life of MSR, decreasing its economic value and creating impairment. The current asset/liability structure of the balance sheet acts, to some extent, as a natural hedge of MSR. Net interest income generally increases in a declining interest rate environment, providing an offset for MSR impairment. We have purchased embedded interest rate floors and investment securities to supplement the natural balance sheet hedge of MSR. The embedded interest rate floors provide a benefit when the specified interest rate index drops below certain levels (strike rate). The amount of the cash flows is based on the difference between the strike rate and the index rate multiplied by the notional amount. As of March 31, 2001, $13.20 billion of interest rate floors have been embedded within certain borrowings, although $5.60 billion of the embedded derivatives do not become effective until the second quarter of 2001 and beyond. The market value of the embedded interest rate floors and the investment securities appreciate as interest rates decline, offsetting the impact of MSR impairment and prepayments. The appreciation of these embedded floors resulted in unrealized gains of approximately $390 million as of March 31, 2001, which were available to hedge our MSR. We also hedge the risks associated with the mortgage pipeline. The mortgage pipeline consists of fixed- and adjustable-rate SFR loans, which will be sold in the secondary market. The risk with the mortgage pipeline is that interest rates might rise between the time the customer locks in the interest rate on the loan and the time the loan is sold. This period is usually 30 to 60 days. To hedge this risk, we execute forward sales agreements and option contracts. A forward sales agreement protects us in a rising interest rate environment, since the sales price and delivery date have already been established. A forward sales agreement, however, is different from an option contract in that we are obligated to deliver the loan to the third party on the agreed upon future date. As a result, if the loans do not fund, we may not have the necessary assets to meet the commitment. Therefore, we would be required to purchase other assets, at current market prices, to satisfy the forward sales agreement. To mitigate this risk, we use fallout factors, which represent the percentage of loans that are not expected to close, when calculating the amount of forward sales agreements to execute. One additional risk that arises from our borrowing (including repurchase agreements) and derivative activities is counterparty risk. These activities generally involve an exchange of obligations with another financial institution, referred to in such transactions as a "counterparty." If a counterparty were to default, we could be exposed to a financial loss. In order to minimize the risk, all counterparties are evaluated for financial strength on at least an annual basis. Exposure limits are then established for each counterparty. Our primary focus is to deal with well-established, reputable and financially strong firms. 31 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. 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. These guidelines ensure that short-term secured borrowing capacity is sufficient to satisfy unanticipated cash needs. On April 20, 2001, we established a $15 billion Global Bank Note Program (the "Program") for our two most significant banking subsidiaries, WMBFA and WMB. The Program will facilitate issuance of both senior and subordinated debt in the United States and the international capital markets on both a syndicated and non-syndicated basis and in a variety of currencies and structures. On April 30, 2001, we sold $1 billion of Trust Preferred Income Equity Redeemable Securities SM ("PIERS SM") to qualified institutional buyers. The offering consisted of a unit comprised of a trust preferred security and a warrant to purchase Washington Mutual common stock. On May 11, 2001, we sold an additional $150 million of the PIERS SM pursuant to the underwriters' overallotment option. The proceeds from both the Program and the PIERS SM will be used for general corporate purposes, which may include funding future acquisitions. CAPITAL ADEQUACY The regulatory capital ratios of WMBFA, WMB and WMBfsb and the minimum regulatory requirements to be categorized as well capitalized were as follows: MARCH 31, 2001 ---------------------------------------------------------- WELL-CAPITALIZED WMBFA WMB WMBFSB MINIMUM ----- --- ------ ----------------- Tier 1 capital to adjusted total assets (leverage)............. 5.63% 5.83% 7.19% 5.00% Tier 1 capital to risk-weighted assets......................... 9.19 9.97 10.92 6.00 Total risk-based capital to risk-weighted assets............... 10.19 11.06 12.18 10.00
Our federal savings bank subsidiaries are also required by Office of Thrift Supervision regulations to maintain tangible capital of at least 1.50% of assets. WMBFA and WMBfsb both satisfied this requirement at March 31, 2001. Our broker-dealer subsidiaries are also subject to capital requirements. At March 31, 2001, both of our securities subsidiaries were in compliance with their applicable capital requirements. 32 PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits See Index of Exhibits on page 35. (b) Reports on Form 8-K The Company filed a report on Form 8-K dated January 8, 2001. The report included under Item 5 of Form 8-K a press release announcing that the Board of Directors of the Company declared a dividend distribution of one preferred share purchase right for each outstanding share of common stock of the Corporation. The Company filed a report on Form 8-K dated January 17, 2001. The report included under Item 7 of Form 8-K an Amendment No. 1 to Agreement and Plan of Merger dated as of January 5, 2001 between Washington Mutual, Inc. and Bank United Corp. The Company filed a report on Form 8-K dated January 18, 2001. The report included under Item 7 of Form 8-K a press release announcing Washington Mutual's fourth quarter 2000 financial results and unaudited consolidated financial statements for the quarter and year ended December 31, 2000. The Company filed a report on Form 8-K dated January 22, 2001. The report included under Item 9 of Form 8-K a slide presentation provided at a corporate conference on January 22, 2001. The Company filed a report on Form 8-K/A dated January 23, 2001. The report included under Item 9 of From 8-K/A an amended slide presentation provided at a corporate conference on January 22, 2001. 33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 14, 2001. WASHINGTON MUTUAL, INC. By: /s/ FAY L. CHAPMAN ------------------------------------- Fay L. Chapman Senior Executive Vice President By: /s/ ROBERT H. MILES ------------------------------------- Robert H. Miles Senior Vice President and Controller (Principal Accounting Officer) 34 WASHINGTON MUTUAL, INC. INDEX OF EXHIBITS Exhibit No. - ----------- 3.1 Restated Articles of Incorporation of the Company, as amended (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. File No. 0-25188). 3.2 Articles of Amendment to the Amended and Restated Articles of Incorporation of Washington Mutual, Inc. creating a class of preferred stock, Series RP (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. File No. 001-14667). 3.3 Articles of Amendment to the Amended and Restated Articles of Incorporation of Washington Mutual, Inc. creating a class of preferred stock, Series H (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. File No. 001-14667). 3.4 Restated Bylaws of the Company (filed herewith). 4.1 Rights Agreement dated December 20, 2000 between the Company and Mellon Investor Services, L.L.C. (incorporated by reference to the Company's Current Report on Form 8-K filed January 8, 2001. File No. 0-25188). 4.2 The registrant will furnish upon request copies of all instruments defining the rights of holders of long-term debt instruments of registrant and its consolidated subsidiaries. 10.1 Second Amendment to the Washington Mutual 1994 Stock Option Plan As Amended and Restated as of February 15, 2000 (filed herewith). 10.2 Washington Mutual Equity Incentive Plan As Amended and Restated as of January 16, 2001 (filed herewith). 10.3 Washington Mutual, Inc. Deferred Compensation Plan for Directors and Certain Highly Compensated Employees Amended and Restated Effective April 17, 2001 (filed herewith).
35 EX-3.(II) 2 restated-bylaw_wmi.txt RESTATED BYLAWS OF WASHINGTON MUTUAL,INC. EXHIBIT 3.4 RESTATED BYLAWS OF WASHINGTON MUTUAL, INC. ARTICLE I OFFICES The principal office and place of business of the corporation in the state of Washington shall be located at 1201 Third Avenue, Seattle, Washington 98101. The corporation may have such other offices within or without the state of Washington as the board of directors may designate or the business of the corporation may require from time to time. ARTICLE II NUMBER OF DIRECTORS The board of directors of this corporation shall consist of up to eighteen (18) directors. ARTICLE III SHAREHOLDERS Section 3.1. Annual Meeting. The annual meeting of the shareholders shall be held on the third Tuesday in the month of April in each year, beginning with the year 1995, at 10:00 a.m., or at such other date or time as may be determined by the board of directors, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the day fixed for the annual meeting shall be a legal holiday in the state of Washington, the meeting shall be held on the next succeeding business day. If the election of directors is not held on the day designated herein for any annual meeting of the shareholders or at any adjournment thereof, the board of directors shall cause the election to be held at a meeting of the shareholders as soon thereafter as may be convenient. Section 3.2. Special Meetings. Special meetings of the shareholders for any purpose or purposes unless otherwise prescribed by statute may be called by the Chairman, by the board of directors, or by the written request of any director or holders of at least twenty-five percent (25%) of the votes entitled to be cast on each issue to be considered at the special meeting. Section 3.3. Place of Meetings. Meetings of the shareholders shall be held at either the principal office of the corporation or at such other place within or without the state of Washington as the person or persons calling the meeting may designate. Section 3.4. Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors may fix in advance a date as the record date for any such determination of shareholders, which date in any case shall not be more than seventy (70) days and, in the case of a meeting of shareholders, not less than 20 days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend or distribution, the day before the first notice of a meeting is dispatched to shareholders or the date on which the resolution of the board of directors authorizing such dividend or distribution is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to notice of or to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof unless the board of directors fixes a new record date, which it must do if the meeting is adjourned to a date more than one hundred twenty (120) days after the date fixed for the original meeting. The record date for determining shareholders entitled to take action without a meeting is the date the first shareholder signs the consent in lieu of meeting. Section 3.5. Voting Lists. At least ten (10) days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for shares of the corporation shall prepare an alphabetical list of all its shareholders on the record date who are entitled to vote at the meeting or any adjournment thereof, arranged by voting group, and within each voting group by class or series of shares, with the address of and the number of shares held by each, which record for a period of ten (10) days prior to the meeting shall be kept on file at the principal office of the corporation or at a place identified in the meeting notice in the city where the meeting will be held. Such record shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder, shareholder's agent or shareholder's attorney at any time during the meeting or any adjournment thereof. Failure to comply with the requirements of this bylaw shall not affect the validity of any action taken at the meeting. Section 3.6. Notice of Meetings. Written or printed notice stating the date, time and place of a meeting of shareholders and, in the case of a special meeting of shareholders, the purpose or purposes for which the meeting is called, shall be given by the person or persons calling the meeting or by the Secretary at the direction of such person or persons to each shareholder of record entitled to vote at such meeting (unless required by law to send notice to all shareholders regardless of whether or not such shareholders are entitled to vote), not less than ten (10) days and not more than sixty (60) days before the meeting, except that notice of a meeting to act on an amendment to the articles of incorporation, a plan of merger or share exchange, a proposed sale, lease, exchange or other disposition of all or substantially all of the assets of the corporation other than in the usual course of business, or the dissolution of the corporation shall be given not less than twenty (20) days and not more than sixty (60) days before the meeting. Written notice may be transmitted by: Mail, private carrier or personal delivery; telegraph or teletype; or telephone, wire or wireless equipment which transmits a facsimile of the notice. Such notice shall be effective upon dispatch if sent to the shareholder's address, telephone number, or other number appearing on the records of the corporation. If an annual or special shareholders' meeting is adjourned to a different date, time or place, notice need not be given of the new date, time or place if the new date, time or place is announced at the meeting before adjournment unless a new record date is or must be fixed. If a new record date for the adjourned meeting is or must be fixed, however, notice of the adjourned meeting must be given to persons who are shareholders as of the new record date. Section 3.7. Waiver of Notice. A shareholder may waive any notice required to be given under the provisions of these bylaws, the articles of incorporation or by applicable law, whether before or after the date and time stated therein. A valid waiver is created by any of the following three methods: (a) in writing signed by the shareholder entitled to the notice and delivered to the corporation for inclusion in its corporate records; (b) by attendance at the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting; or (c) by failure to object at the time of presentation of a matter not within the purpose or purposes described in the meeting notice. Section 3.8. Manner of Acting; Proxies. A shareholder may vote either in person or by proxy. A shareholder may vote by proxy by means of a proxy appointment form which is executed in writing by the shareholder, his agent, or by his duly authorized attorney-in-fact. All proxy appointment forms shall be filed with the secretary of the corporation before or at the commencement of meetings. No unrevoked proxy appointment form shall be valid after eleven (11) months from the date of its execution unless otherwise expressly provided in the appointment form. No proxy appointment may be effectively revoked until notice in writing of such revocation has been given to the secretary of the corporation by the shareholder appointing the proxy. Section 3.9. Quorum. At any meeting of the shareholders, a majority in interest of all the shares entitled to vote on a matter by the voting group, represented in person or by proxy by shareholders of record, shall constitute a quorum of that voting group for action on that matter. If less than a majority is represented, a majority of those represented may adjourn the meeting to such time and place as they may determine, without further notice, except as set forth in Section 3.6. Once a share is represented at a meeting, other than to object to holding the meeting or transacting business, it is deemed to be present for purposes of a quorum for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be fixed for the adjourned meeting. At such reconvened meeting, any business may be transacted which might have been transacted at the adjourned meeting. If a quorum exists, action on a matter is approved by a voting group if the votes cast within the voting group favoring the action exceed the votes cast within the voting group opposing the action, unless the question is one upon which a different vote is required by express provision of law or of the articles of incorporation or of these bylaws. Section 3.10. Voting of Shares. Each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except as may be otherwise provided in the articles of incorporation. Section 3.11. Voting for Directors. In the election of directors every shareholder of record entitled to vote at the election shall have the right to vote in person the number of shares owned by him for as many persons as there are directors to be elected and for whose election he has a right to vote. Shareholders entitled to vote at any election of directors shall have no right to cumulate votes. In any election of directors the candidates elected are those receiving the largest numbers of votes cast by the shares entitled to vote in the election, up to the number of directors to be elected by such shares. Section 3.12. Voting of Shares by Certain Holders. 3.12.1. Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the board of directors of such corporation may determine. A certified copy of a resolution adopted by such directors shall be conclusive as to their determination. 3.12.2. Shares held by a personal representative, administrator, executor, guardian or conservator may be voted by such administrator, executor, guardian or conservator, without a transfer of such shares into the name of such personal representative, administrator, executor, guardian or conservator. Shares standing in the name of a trustee may be voted by such trustee, but no trustee shall be entitled to vote shares held in trust without a transfer of such shares into the name of the trustee. 3.12.3. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by the receiver without the transfer thereof into his name if authority so to do is contained in an appropriate order of the court by which such receiver was appointed. 3.12.4. If shares are held jointly by three or more fiduciaries, the will of the majority of the fiduciaries shall control the manner of voting or appointment of a proxy, unless the instrument or order appointing such fiduciaries otherwise directs. 3.12.5. Unless the pledge agreement expressly provides otherwise, a shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. 3.12.6. Shares held by another corporation shall not be voted at any meeting or counted in determining the total number of outstanding shares entitled to vote at any given time if a majority of the shares entitled to vote for the election of directors of such other corporation is held by this corporation. 3.12.7. On and after the date on which written notice of redemption of redeemable shares has been dispatched to the holders thereof and a sum sufficient to redeem such shares has been deposited with a bank or trust company with irrevocable instruction and authority to pay the redemption price to the holders thereof upon surrender of certificates therefor, such shares shall not be entitled to vote on any matter and shall be deemed to be not outstanding shares. Section 3.13. Notice of Nomination. Nominations for the election of directors and proposals for any new business to be taken up at any annual or special meeting of shareholders may be made by the board of directors of the corporation or by any shareholder of the corporation entitled to vote generally in the election of directors. In order for a shareholder of the corporation to make any such nomination or proposal at any annual meeting, the shareholder's nomination or proposal must be in writing and received at the Executive Offices of the corporation by the Secretary of the corporation not less than 120 days in advance of the date corresponding to the date in the previous year on which the corporation's proxy statement was released to security holders in connection with the previous year's annual meeting of security holders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date of the previous year's annual meeting, a proposal shall be received by the corporation in accordance with the method set forth hereafter for proposals or nominations in advance of a special meeting of shareholders. In order for a shareholder of the corporation to make any nomination or proposal to be taken up at a special meeting of shareholders, the shareholder's nomination or proposal must be in writing and received at the Executive Offices of the corporation by the Secretary of the corporation not less than 45 days nor more than 75 days prior to any such meeting. Each such notice given by a shareholder with respect to nominations for the election of directors shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, and (iii) the number of shares of stock of the corporation which are beneficially owned by each such nominee. Section 3.14. Action Without a Meeting. Any action permitted or required to be taken at a meeting of the shareholders may be taken without a meeting if one or more consents in writing setting forth the action so taken shall be signed by all the shareholders. ARTICLE IV. BOARD OF DIRECTORS Section 4.1. General Powers. The business and affairs of the corporation shall be managed by its board of directors. Section 4.2. Number, Tenure and Qualification. The number of directors set forth in Article II of these bylaws may be increased or decreased from time to time by amendment to or in the manner provided in these bylaws. No decrease, however, shall have the effect of shortening the term of any incumbent director unless such director resigns or is removed in accordance with the provisions of these bylaws. The directors shall be classified and shall hold such terms as set forth in the articles of incorporation. In all cases, directors shall serve until their successors are duly elected and qualified or until their earlier resignation, removal from office or death. Directors need not be residents of the state of Washington or shareholders of the corporation. Section 4.3. Annual and Other Regular Meetings. Regular meetings of the board shall be held at two-thirty o'clock, or an earlier hour in the discretion of the Chairman or the President, on the third Tuesday of the months of January, February, April, June, July, September, October, and December unless such day is a legal holiday, in which case the meeting shall be held on the first business day thereafter, or unless such meeting has been canceled by the Chairman or the President upon giving notice to the members of the board at least three calendar days before the date on which such meeting is scheduled. The date of any regular meeting may be changed to such other date within the month as shall be determined by the Chairman or the President, or in the absence of the Chairman or the President, by any three members of the Board, provided notice of the time and place of such meeting is given as provided in Section 4.4. In each year, the regular meeting on the day of the Annual Meeting of Shareholders shall be known as the Annual Meeting of the Board. Section 4.4. Special Meetings. Special meetings of the board of directors may be called by the board of directors, the chairman of the board, or the president. The notice of a special meeting of the board of directors shall state the date and time and, if the meeting is not exclusively telephonic, the place of the meeting. Unless otherwise required by law, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. Notice shall be given by the person or persons authorized to call such meeting, or by the secretary at the direction of the person or persons authorized to call such meeting. The notice may be oral or written. If the notice is orally communicated in person or by telephone to the director or to the director's personal secretary or is sent by electronic mail, telephone or wireless equipment, which transmits a facsimile of the notice to the director's electronic mail designation or telephone number appearing on the records of the corporation, the notice of a meeting shall be timely if sent no later than twenty-four (24) hours prior to the time set for such meeting. If the notice is sent by courier to the director's address appearing on the records of the corporation, the notice of a meeting shall be timely if sent no later than three (3) full days prior to the time set for such meeting. If the notice is sent by mail to the director's address appearing on the records of the corporation, the notice of a meeting shall be timely if sent no later than five (5) full days prior to the time set for such meeting. Section 4.5 Waiver of Notice. Any director may waive notice of any meeting at any time. Whenever any notice is required to be given to any director of the corporation pursuant to applicable law, a waiver thereof in writing signed by the director, entitled to notice, shall be deemed equivalent to the giving of notice. The attendance of a director at a meeting shall constitute a waiver of notice of the meeting except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully convened. A director waives objection to consideration of a particular matter at a meeting that is not within the purpose or purposes described in the meeting notice, unless the director objects to considering the matter when it is presented. Section 4.6. Quorum. A majority of the number of directors specified in or fixed in accordance with these bylaws shall constitute a quorum for the transaction of any business at any meeting of directors. If less than a majority shall attend a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice, and a quorum present at such adjourned meeting may transact business. Section 4.7. Manner of Acting. If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the board of directors. Section 4.8. Participation by Conference Telephone. Directors may participate in a regular or special meeting of the board by, or conduct the meeting through the use of, any means of communication by which all directors participating can hear each other during the meeting and participation by such means shall constitute presence in person at the meeting. Section 4.9. Presumption of Assent. A director who is present at a meeting of the board of directors at which action is taken shall be presumed to have assented to the action taken unless such director's dissent shall be entered in the minutes of the meeting or unless such director shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the corporation immediately after adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. Section 4.10. Action by Board Without a Meeting. Any action permitted or required to be taken at a meeting of the board of directors may be taken without a meeting if one or more written consents setting forth the action so taken, shall be signed, either before or after the action taken, by all the directors. Action taken by written consent is effective when the last director signs the consent, unless the consent specifies a later effective date. Section 4.11. Audit Committee. The board of directors, at any regular meeting of the Board, shall elect from their number an Audit Committee of not less than three members, none of whom shall be employed by the corporation. At least annually the Board of Directors shall determine that each Committee member has the independence and other qualifications set forth in the Charter of the Audit Committee as approved by the Board, and in any supplemental statements that the Board may adopt with regard to the composition of the Committee. The Audit Committee shall have the authorities and responsibilities and shall perform the functions specified in the Charter of the Audit Committee, as approved by the Board, and in any supplemental statement that the Board may adopt with regard to the functions of the Committee. Section 4.12 Compensation and Stock Option Committee. The board of directors at any regular meeting of the board, shall elect from their number a Compensation and Stock Option Committee which committee shall have not less than three members, none of whom shall be employed by the corporation. The Compensation and Stock Option Committee shall serve as the Option Committee pursuant to the stock option plans of the corporation, and shall have oversight of the administration of officer or employee compensation plans that are sponsored or otherwise established by the corporation, including but not limited to the corporation's retirement plans and other plans that are subject to the Employees Retirement Income Security Act of 1974 and non-qualified compensation plans for highly compensated employees ("NQHC Plans"). The Committee shall have the authority to adopt, subject to ratification by the Board, all NQHC Plans and amendments of such plans, and shall have all the authority of the Board to adopt and amend all other compensation plans for officers and employees. The Committee shall recommend to the Board the compensation of the President and Chief Executive Officer of the corporation, shall establish the salaries of all other officers who are in Salary Level 5 or higher and shall have oversight of the determination of the compensation of other officers and employees of the corporation. The Compensation and Stock Option Committee shall adopt, amend and monitor the administration of policies that govern the compensation of officers and employees, or relate to equal employment opportunities or affirmative action. Section 4.13. Director's Loan and Investment Committee. At any regular meeting of the board, the Chairman of the Board, with the approval of the board of directors shall appoint from the members of the board a Directors' Loan & Investment Committee. The Committee shall consist of the Chairman and President (if he is a member of the board) of the corporation and certain other members of the board, a majority of whom shall not be officers of the corporation. The Chairman of the Board shall appoint a chairman who is not an officer of the corporation. The Committee Chairman shall coordinate with the corporation's staff in the preparation of reports for the Committee and the Board. The Committee shall have oversight of the officers of the corporation who are responsible for the investments of the corporation and for managing the sale, exchange and other disposition of investments including those that may be made or purchased under the statutes relating to prudent investments. Its power shall include, but not be limited to oversight of all investments and dispositions, and all purchases of real estate and the other disposition of all property, real or personal, tangible or intangible, acquired by the corporation in satisfaction of debts owing to it or otherwise (except the corporation premises or other real property acquired for use by the corporation). In connection with the monitoring of the corporation's return on investments in subsidiaries and other corporations, the Committee shall also have oversight of the officers of the corporation who are responsible for such investments. The Committee shall have authority to oversee the administration of the policies that govern the corporation's investments (collectively, the "Investment Policies"). The Committee shall have all the authority of the board of directors to amend the Investment Policies following initial approval by the Board. Section 4.14. Corporate Relations Committee. The Chairman, with the approval of the board of directors, may appoint from among the members of the board of the corporation, a Corporate Relations Committee which shall consist of no fewer than two Directors and shall monitor the performance of voluntary commitments that the corporation has made to support its communities, and the contributions by the corporation to the Washington Mutual Foundation. Section 4.15. Corporate Development Committee. The Chairman, with the approval of the board of directors, shall appoint from among the members of the board a Corporate Development Committee which shall consist of the Chairman of the Board and not less than two other directors. The Corporate Development Committee shall exercise all the authority of the Board: (A) with regard to the authorization of negotiations and approval of the terms of offers and agreements and of investments relating to mergers and acquisitions not involving a change of control of the corporation; provided, that further action of the board of directors shall be required for submission to shareholders of a plan of merger or consolidation; and (B) with regard to approval of the final terms, rights, designations and preferences of stock to be issued by the corporation, provided, that prior action of the board of directors shall be required to specify the maximum number or value of the shares to be issued. Section 4.16. Other Board Committees. The Board of Directors may by resolution designate from among its members such other committees as the Board in its discretion may determine, each of which must have two or more members. To the extent provided in such resolutions, each such committee shall have and may exercise the authority of the board of directors, except as limited by applicable law. The designation of any such committee and the delegation thereto of authority shall not relieve the Board of Directors, or any members thereof, of any responsibility imposed by law. In addition, the Chairman of the Board, with the approval of the Board of Directors, may appoint from among the members of the Board such committees as he deems appropriate. Section 4.17. Committee Procedures. Except as provided in the bylaws or in specific resolutions of the Board of Directors, the committees of the Board shall be governed by the same rules regarding meetings, action without meetings, notice, waiver of notice, and quorum and voting requirements as applied to the Board of Directors. Section 4.18. Resignation. Any director may resign at any time by delivering written notice to the chairman of the board, the president, the secretary, or the registered office of the corporation, or by giving oral notice at any meeting of the directors or shareholders. Any such resignation shall take effect at any subsequent time specified therein, or if the time is not specified, upon delivery thereof and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 4.19. Removal. At a meeting of the shareholders called expressly for that purpose, any director or the entire board of directors may be removed from office, with cause, by a vote of the holders of a majority of the shares then entitled to vote at an election of the director or directors whose removal is sought. If the board of directors or any one or more directors is so removed, new directors may be elected at this same meeting. Section 4.20. Vacancies. A vacancy on the board of directors may occur by the resignation, removal or death of an existing director, or by reason of increasing the number of directors on the board of directors as provided in these bylaws. Except as may be limited by the articles of incorporation, any vacancy occurring in the board of directors may be filled by the affirmative vote of four-fifths of the remaining directors though less than a quorum. A director elected to fill a vacancy shall be elected for a term of office continuing only until the next election of directors by shareholders. If the vacant office was held by a director elected by holders of one or more authorized classes or series of shares, only the holders of those classes or series of shares are entitled to vote to fill the vacancy. Section 4.21. Compensation. By resolution of the board of directors, the directors may be paid a fixed sum plus their expenses, if any, for attendance at meetings of the board of directors or committee thereof, or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Section 4.22 Chairman of the Board. The Chairman shall preside at meetings of the board of directors. In the absence of the Chairman and the Chief Executive Officer, the directors present may select someone from their number to preside. The Chairman shall be ex-officio a member of all committees, except the Audit Committee and the Compensation and Stock Option Committee. The Chairman shall perform such other duties as may be assigned by the board of directors. ARTICLE V OFFICERS Section 5.1. Ranks and Terms in Office. The officers of the corporation shall be a Chief Executive Officer, a Chairman, a President of the Corporation, a General Auditor, a Controller, and such Vice Chairmen, Group Presidents, Senior Executive Vice Presidents, Executive Vice Presidents, Senior Vice Presidents, First Vice Presidents or Vice Presidents as the board of directors may designate and elect, or such other officers as the board of directors may designate and elect or the Chief Executive Officer may designate and appoint. Officers shall serve until the termination of their employment or their earlier removal from service as officers. Any officer may be removed, with or without cause, by the board of directors, but such removal shall be without prejudice to the contractual rights, if any, of the person so removed. Any officer who has been elected by the board of directors may be suspended with or without pay by the Chief Executive Officer, and any other officer may be removed or suspended with or without pay by the Chief Executive Officer, but such removal or suspension shall be without prejudice to the contractual rights, if any, of the person so removed or suspended. The termination of any officer's employment shall constitute removal of such person from office, effective as of the date of termination of employment. Section 5.2. Chief Executive Officer. The Chief Executive Officer of the corporation shall have direct supervision and management of its affairs and the general powers and duties of supervision and management usually vested in the Chief Executive officer of a corporation, subject to the Bylaws and policies of the corporation. The Chief Executive Officer shall be ex-officio a member of all committees except the Audit Committee and the Compensation and Stock Option Committee. The Chief Executive Officer shall perform such other duties as may be assigned by the board of directors. In the absence of the Chief Executive Officer, his duties shall be assumed by the President of the Corporation, and in their absence such duties shall be assumed by a person designated by the Chief Executive Officer or the board of directors. Section 5.3. Chairman. The Chairman shall preside over all meetings of the board of directors. The Chairman shall preside over all meetings of the shareholders, which duty shall include the authority to adjourn such meetings. The Chairman shall perform such other duties as may be assigned by the board of directors or the Chief Executive Officer, or as may be set forth in the policies and procedural directives of the corporation. In the event of the Chairman's incapacity, the Chairman's duties shall be assumed by the Chief Executive Officer or, in the event of the Chief Executive Officer's incapacity, the duties of the Chairman shall be assumed by the President of the Corporation, and in their absence such duties shall be assumed by a person designated by the board of directors. Section 5.4. President of the Corporation. The President of the Corporation shall perform such duties as may be assigned by the Chief Executive Officer or the board of directors, or as may be set forth in the policies and procedural directives of the corporation. Section 5.5. General Auditor. The General Auditor shall supervise and maintain continuous audit control of the assets and liabilities of the corporation. He shall be responsible only to the board of directors in coordination with the Chief Executive officer. He shall perform such other duties as may be assigned to him by the Chief Executive Officer or the President of the Corporation from time to time, only to the extent that such other duties do not compromise the independence of audit control. Section 5.6. Controller. The Controller shall be the chief accounting officer of the corporation and shall have supervisory control and direction of the general accounting, accounting procedure, budgeting and general bookkeeping, and shall be the custodian of the general accounting books, records, forms and papers. He shall also perform such other duties as may be assigned from time to time by the Chief Executive Officer, the President of the Corporation, a Vice Chairman, a Group President, a Senior Executive Vice President or an Executive Vice President, or as may be set forth in the policies and procedural directives of the corporation, only to the extent that such other duties do not compromise the independence of audit control. Section 5.7. Vice Chairmen, Group Presidents, Senior Executive Vice Presidents, Executive Vice Presidents. Any Vice Chairmen, Group Presidents, Senior Executive Vice Presidents, Executive Vice Presidents shall perform such duties as may be assigned from time to time by the Chief Executive Officer or the President of the Corporation, or as may be set forth in the policies and procedural directives of the corporation. Section 5.8. Senior Vice Presidents, First Vice Presidents and Vice Presidents. Senior Vice Presidents, First Vice Presidents and Vice Presidents shall perform such duties as may be assigned from time to time by the Chief Executive Officer, the President of the Corporation, a Vice Chairmen, a Group President, a Senior Executive Vice President or a Executive Vice President, or as may be set forth in the policies and procedural directives of the corporation. Section 5.9. Secretary and Assistant Secretary. The Secretary shall keep the minutes of all meetings of the board of directors and of the shareholders. He shall give such notices to the directors as may be required by law or by these Bylaws. He shall have the custody of the corporate seal, if any, and the contracts, papers and documents belonging to the corporation. He shall also perform such other duties as may be assigned from time to time by the Chief Executive Officer, the President of the Corporation, a Vice Chairman, a Group President, a Senior Executive Vice President or an Executive Vice President, or as may be set forth in the policies and procedural directives of the corporation. In the absence of the Secretary, the powers and duties of the Secretary shall devolve upon an Assistant Secretary or such person as shall be designated by the Chief Executive Officer. Section 5.10. Combining Offices. An officer who holds one office may, with or without resigning from such existing office, be elected by the board of directors to hold, in addition to such existing office, the office of Chairman, Vice Chairman, Group President Senior Executive Vice President, Senior Vice President, First Vice President or Vice President. An officer who holds one office may, with or without resigning from such existing office, be appointed by the Chief Executive Officer to hold, in addition to such existing office, another office other than the office of Chairman, Vice Chairman, Group President Senior Executive Vice President, Senior Vice President, First Vice President or Vice President. Section 5.11. Other Officers. The other Officers shall perform such duties as may be assigned by the Chief Executive Officer, the President of the Corporation, a Vice Chairman, a Group President, a Senior Executive Vice President or an Executive Vice President, or as may be set forth in the policies and procedural directives of the corporation. The Chief Executive Officer may designate such functional titles to an officer, as the Chief Executive Officer deems appropriate from time to time. Section 5.12. Official Bonds. The corporation may be indemnified in the event of the dishonest conduct or unfaithful performance of an officer, employee, or agent by a corporate fidelity bond, the premiums for which may be paid by the corporation. Section 5.13. Execution of Contracts and Other Documents. The Chief Executive Officer, the President of the Corporation, or any Vice Chairman, Group President, or Senior Executive Vice President may from time to time designate the officers, employees or agents of the corporation who shall have authority to sign deeds, contracts, satisfactions, releases, and assignments of mortgages, and all other documents or instruments in writing to be made or executed by the corporation. Section 5.14. Resignation. Any officer may resign at any time by delivering written notice to the Chief Executive Officer, the President, the Secretary or the board of directors, or by giving oral notice at any meeting of the board. Any such resignation shall take effect at any subsequent time specified therein, or if the time is not specified, upon delivery thereof and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 5.15. Compensation of Officers and Employees. The board of directors shall fix compensation of officers and may fix compensation of other employees from time to time. No officer shall be prevented from receiving a salary by reason of the fact that such officer is also a director of the corporation. Section 5.16. Voting of Shares Held by Corporation. Shares of another corporation held by this corporation may be voted in person or by proxy by the Chief Executive Officer, by the President of the Corporation, by a Vice Chairman, by a Group President, by a Senior Executive Vice President, by an Executive Vice President, or by a Senior Vice President. ARTICLE VI SHARES Section 6.1. Certificates for Shares. The shares of the corporation may be represented by certificates in such form as prescribed by the board of directors. Signatures of the corporate officers on the certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent, or registered by a registrar, other than the corporation itself or an employee of the corporation. All certificates shall be consecutively numbered or otherwise identified. All certificates shall bear such legend or legends as prescribed by the board of directors or these bylaws. Section 6.2. Issuance of Shares. Shares of the corporation shall be issued only when authorized by the board of directors, which authorization shall include the consideration to be received for each share. Section 6.3. Beneficial Ownership. Except as otherwise permitted by these bylaws, the person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. The board of directors may adopt by resolution a procedure whereby a shareholder of the corporation may certify in writing to the corporation that all or a portion of the shares registered in the name of such shareholder are held for the account of a specified person or persons. Upon receipt by the corporation of a certification complying with such procedure, the persons specified in the certification shall be deemed, for the purpose or purposes set forth in the certification, to be the holders of record of the number of shares specified in place of the shareholder making the certification. Section 6.4. Transfer of Shares. Transfer of shares of the corporation shall be made only on the stock transfer books of the corporation by the holder of record thereof or by his legal representative who shall furnish proper evidence of authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the secretary of the corporation, on surrender for cancellation of the certificate for the shares. All certificates surrendered to the corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled. Section 6.5. Lost or Destroyed Certificates. In the case of a lost, destroyed or mutilated certificate, a new certificate may be issued therefor upon such terms and indemnity to the corporation as the board of directors may prescribe. Section 6.6. Stock Transfer Records. The stock transfer books shall be kept at the principal office of the corporation or at the office of the corporation's transfer agent or registrar. The name and address of the person to whom the shares represented by any certificate, together with the class, number of shares and date of issue, shall be entered on the stock transfer books of the corporation. Except as provided in these bylaws, the person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. ARTICLE VII SEAL This corporation need not have a corporate seal. If the directors adopt a corporate seal, the seal of the corporation shall be circular in form and consist of the name of the corporation, the state and year of incorporation, and the words "Corporate Seal." ARTICLE VIII INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENT Section 8.1. Director's Right To Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any actual or threatened action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a director of the corporation or, being or having been such a director, he or she is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director or in any other capacity while serving as a director, shall be indemnified and held harmless by the corporation against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) actually and reasonably incurred or suffered by such person in connection therewith; provided, however, that (a) the corporation shall not indemnify any person from or on account of any acts or omissions of such person finally adjudged to be intentional misconduct or knowing violation of the law of such person, or from conduct of the person in violation of RCW 23B.08.310, or from or on account of any transaction with respect to which it is finally adjudged that such person personally received a benefit in money, property, or services to which such person was not legally entitled, and (b) except as provided in subsection 8.3 with respect to proceedings seeking to enforce rights to indemnification, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the board of directors of the corporation. Such indemnification shall continue as to a person who has ceased to be a director and shall inure to the benefit of his or her heirs, executors and administrators. If the Washington Business Corporation Act is amended to authorize further indemnification of directors, then directors of the corporation shall be indemnified to the fullest extent permitted by the Washington Business Corporation Act, as so amended. Section 8.2. Director's Burden of Proof and Procedure For Payment. (a) The claimant shall be presumed to be entitled to indemnification under this Article upon submission of a written claim (and, in an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition, where the undertaking in (b) below has been tendered to the corporation) and thereafter the corporation shall have the burden of proof to overcome the presumption that the claimant is so entitled. (b) The right to indemnification shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that the payment of such expenses in advance of the final disposition of a proceeding shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director, to repay all amounts so advanced if it shall ultimately be determined that such director is not entitled to be indemnified under this Article or otherwise. Section 8.3. Right of Claimant to Bring Suit. If a claim under this Article is not paid in full by the corporation within sixty (60) days after a written claim has been received by the corporation, except in the case of a claim for expenses incurred in defending a proceeding in advance of its final disposition, in which case the applicable period shall be twenty (20) days, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, to the extent successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. Neither the failure of the corporation (including its board of directors, its shareholders or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of or reimbursement or advancement of expenses to the claimant is proper in the circumstances nor an actual determination by the corporation (including its board of directors, its shareholders or independent legal counsel) that the claimant is not entitled to indemnification or to the reimbursement or advancement of expenses shall be a defense to the action or create a presumption that the claimant is not so entitled. Section 8.4. Nonexclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, Bylaws, agreement, vote of shareholders or disinterested directors or otherwise. Section 8.5. Insurance, Contracts and Funding. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Washington Business Corporation Act. The corporation may, without any shareholder action, enter into contracts with such director or officer in furtherance of the provisions of this Article and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Article. Section 8.6. Indemnification of Officers, Employees and Agents of the Corporation. (a) The corporation may, by action of its board of directors from time to time, provide indemnification and pay expenses in advance of the final disposition of a proceeding to officers, employees and agents of the corporation or another corporation, partnership, joint venture trust or other enterprise with the same scope and effect as the provisions of this Article with respect to the indemnification and advancement of expenses of directors of the corporation or pursuant to rights granted pursuant to, or provided by, the Washington Business Corporation Act or otherwise; or (b) The corporation shall pay for or reimburse the reasonable expenses incurred by any officer or employee of the corporation, who is not a director, who is a party to a proceeding in advance of final disposition of the proceeding if: (1) such person furnishes the corporation with an affidavit stating that (a) he or she was made a party to a proceeding because he or she is or was an officer or employee of the corporation, (b) he or she acted in good faith, (c) the conduct in question was carried out in his or her official capacity with the corporation, and (d) his or her conduct was in the corporation's best interests, (2) such person furnishes the corporation with a written undertaking, executed personally, to repay the advance if it is ultimately determined that such person did not meet the standard of conduct set forth in the affidavit and (3) such payment or reimbursement is approved in writing by the President or the Chief Executive Officer of the corporation, or by a designee of either of them. Section 8.7. Contract Right. The rights to indemnification conferred in this Article shall be a contract right and any amendment to or repeal of this Article shall not adversely affect any right or protection of a director of the corporation for or with respect to any acts or omissions of such director or officer occurring prior to such amendment or repeal. Section 8.8. Severability. If any provision of this Article or any application thereof shall be invalid, unenforceable or contrary to applicable law, the remainder of this Article, or the application of such provision to persons or circumstances other than those as to which it is held invalid, unenforceable or contrary to applicable law, shall not be affected thereby and shall continue in full force and effect. ARTICLE IX BOOKS AND RECORDS The corporation shall keep correct and complete books and records of account, stock transfer books, minutes of the proceedings of its shareholders and the board of directors and such other records as may be necessary or advisable. ARTICLE X FISCAL YEAR The fiscal year of the corporation shall be the calendar year. ARTICLE XI VOTING OF SHARES OF ANOTHER CORPORATION Shares of another corporation held by this corporation may be voted by the Chief Executive Officer, by the President of the Corporation, by the Senior Executive Vice President, by an Executive Vice President, or by a Senior Vice President, or by proxy appointment form executed by any of them, unless the directors by resolution shall designate some other person to vote the shares. ARTICLE XII AMENDMENTS TO BYLAWS These bylaws may be altered, amended or repealed, and new bylaws may be adopted, by the board of directors, subject to the concurrent power of the shareholders, by at least two-thirds affirmative vote of the shares of the corporation entitled to vote thereon, to alter amend or repeal these bylaws or to adopt new bylaws. EX-10 3 exhibit10-1.txt Exhibit 10.1 WASHINGTON MUTUAL, INC. SECOND AMENDMENT TO 1994 STOCK OPTION PLAN AMENDED AND RESTATED AS OF FEBRUARY 15, 2000 Article 6 of the Washington Mutual 1994 Stock Option Plan, Amended and Restated as of February 15, 2000, is hereby amended by adding a new section at the end thereof to read as follows, effective April 17, 2001: 6.6 DEFERRAL OF STOCK OPTION GAIN. The Committee may authorize, in its discretion, a Participant who exercises a Nonqualified Option to defer the taxable income attributable to such exercise. To the extent the Committee elects to permit such deferrals, the Committee shall identify the Participants to whom such deferral elections shall be made available and establish administrative procedures under this Plan or another Company plan for implementing such deferrals. A Participant who makes a deferral under this Section 6.6 may also be credited with deemed dividends under this Plan on such terms as the Committee shall prescribe. All deferrals and any deemed dividends under this Section 6.6 shall be distributed to Participants in the form of Stock. IN WITNESS WHEREOF, Washington Mutual, Inc. has caused this Second Amendment to be duly executed on the 17th day of April, 2001. WASHINGTON MUTUAL, INC. By: /s/ Daryl D. David Its: Executive Vice President EX-10 4 exhibit10-2.txt Exhibit 10.2 WASHINGTON MUTUAL EQUITY INCENTIVE PLAN As Amended and Restated as of January 16, 2001 TABLE OF CONTENTS Page ARTICLE 1. PURPOSE OF THE PLAN ARTICLE 2. DEFINITIONS 2.1 Affiliate.......................................................................................1 2.2 Agreement.......................................................................................1 2.3 Award...........................................................................................1 2.4 Board...........................................................................................1 2.5 Code............................................................................................2 2.6 Committee.......................................................................................2 2.7 Company.........................................................................................2 2.8 Exchange Act....................................................................................2 2.9 Grant Date......................................................................................2 2.10 Participant.....................................................................................2 2.11 Plan............................................................................................2 2.12 Restricted Stock................................................................................2 2.13 Stock...........................................................................................2 2.14 Stock Units.....................................................................................2 2.15 Unrestricted Stock..............................................................................2 ARTICLE 3. ADMINISTRATION 3.1 Administration of Plan..........................................................................2 3.2 Authority to Grant Awards.......................................................................2 3.3 Participants' Accounts..........................................................................3 3.4 Transfer of Unrestricted Stock..................................................................3 3.5 Discretionary Authority of Committee............................................................4 3.6 Persons Subject to Section 162(m)...............................................................5 3.7 Shareholder Rights..............................................................................5 ARTICLE 4. ELIGIBILITY AND LIMITATIONS ON GRANTS 4.1 Participation...................................................................................5 4.2 Limitations on Grants...........................................................................5 ARTICLE 5. STOCK SUBJECT TO PLAN 5.1 Maximum Number of Shares........................................................................5 ARTICLE 6. RESTRICTIONS AND FORFEITURES 6.1 General Restrictions............................................................................6 6.2 Termination of Employment.......................................................................6 6.3 Retirement......................................................................................6 i 6.4 Lapse of Restrictions - General.................................................................6 6.5 Employee Status.................................................................................7 6.6 Performance-Based Grants........................................................................7 6.7 Surrender of Restricted Stock...................................................................9 ARTICLE 7. ADJUSTMENT UPON CORPORATE CHANGES 7.1 Adjustments to Shares..........................................................................10 7.2 Substitution of Awards on Merger or Acquisition................................................10 7.3 Effect of Certain Transactions.................................................................10 7.4 No Preemptive Rights...........................................................................11 ARTICLE 8. COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES 8.1 General........................................................................................11 8.2 Representations by Participants................................................................11 ARTICLE 9. TAXES 9.1 Immediate Taxation.............................................................................11 9.2 Deferred Taxation..............................................................................12 ARTICLE 10. GENERAL PROVISIONS 10.1 Effect on Employment...........................................................................12 10.2 Unfunded Plan..................................................................................12 10.3 Rules of Construction..........................................................................12 10.4 Governing Law..................................................................................12 10.5 Compliance With Section 16 of the Exchange Act.................................................12 10.6 Amendment......................................................................................13 10.7 Effective Date of Plan.........................................................................13 ii
WASHINGTON MUTUAL EQUITY INCENTIVE PLAN As Amended and Restated as of January 16, 2001 ARTICLE 1. PURPOSE OF THE PLAN The purpose of the Plan is to advance the interests of the Company, to provide a performance incentive and to align the interests of the Participants with the interests of the Company, its Affiliates and its shareholders through increased stock ownership by the Participants. It is intended that Participants may acquire or increase their proprietary interests in the Company and that Participant employees will be encouraged to remain in the employ of the Company or of its Affiliates. The Plan was established January 1, 1986 as the WM Financial, Inc. Restricted Stock Plan. Washington Mutual Savings Bank, the prior Plan sponsor, amended the Plan by a First Amendment, effective as of July 1, 1987, a Second Amendment, effective as of March 31, 1988, a Third Amendment, effective as of June 30, 1991, a Fourth Amendment, effective as of June 18, 1991, and a Fifth Amendment, effective as of October 20, 1992. By action of the respective boards of directors of Washington Mutual Savings Bank and the Company, the Company became the sponsor of the Plan, effective November 29, 1994, after which the Company adopted an amendment and restatement of the Plan, effective November 29, 1994, that incorporated all material provisions of the Plan prior to such date and amended the Plan in certain respects. The Company amended and restated the Plan, effective February 18, 1997, and amended the Amended and Restated Plan twice in 1999. The Company amended and restated the Plan effective January 18, 2000. Finally, the Plan was amended by action of the Board of Directors on January 16, 2001, subject to approval by the shareholders of the Company. The Board approved this restatement of the Plan to incorporate all such amendments. ARTICLE 2. DEFINITIONS 2.1 Affiliate. A "parent corporation," as defined in section 424(e) of the Code, or "subsidiary corporation," as defined in section 424(f) of the Code, of the Company. 2.2 Agreement. A written agreement (including any amendment or supplement thereto) between the Company or an Affiliate and a Participant specifying the terms and conditions of an Award granted to such Participant. 2.3 Award. An award under the Plan that is expressed as a stated number of whole shares of Restricted Stock or denominated in Stock Units. An Award shall be subject to the terms of an Agreement. 2.4 Board. The board of directors of the Company. 2.5 Code. The Internal Revenue Code of 1986, as amended. 2.6 Committee. A committee composed of two or more members of the Board who are not officers or employees of the Company or an Affiliate, who are otherwise qualified as Non-Employee Directors as defined under Rule 16b-3(b)(3)(i) of the Exchange Act, and who qualify as outside directors as defined in Section 162(m) of the Code. 2.7 Company. Washington Mutual, Inc., successor to Washington Mutual Savings Bank as Plan sponsor, and its successors. 2.8 Exchange Act. The Securities Exchange Act of 1934, as amended. 2.9 Grant Date. The date that an Award is granted to a Participant hereunder. 2.10 Participant. A person who is granted an Award hereunder. Members of the Board, and employees, consultants and advisors of the Company or of an Affiliate, are the only persons who are eligible to be Participants. 2.11 Plan. The Washington Mutual Equity Incentive Plan, as embodied herein and as amended from time to time, and including all predecessor versions of the Plan. 2.12 Restricted Stock. Stock that is awarded subject to restrictions hereunder and has not become Unrestricted Stock in accordancewith Article 6. 2.13 Stock. The common stock of the Company. 2.14 Stock Units. An Award denominated in units of Stock that have not vested in accordance with the terms of the Award. 2.15 Unrestricted Stock. Shares of Stock granted under the Plan that are no longer subject to restrictions that constitute a substantial risk of for feiture, in accordance with Article 6, or shares of Stock paid in respect of the vesting of an Award of Stock Units. ARTICLE 3. ADMINISTRATION 3.1 Administration of Plan. The Plan shall be administered by the Committee. The express grant in the Plan of any specific power to the Committee shall not be construed as limiting any power or authority of the Committee. Any decision made or action taken by the Committee to administer the Plan shall be final and conclusive. No member of the Committee shall be liable for any act done in good faith with respect to the Plan or any Agreement or Award. The Company shall bear all expenses of Plan administration. 3.2 Authority to Grant Awards. The Committee shall have authority to grant Awards upon such terms as the Committee deems appropriate and that are not inconsistent with the provisions of Articles 4 and 5 of the Plan. Such terms may include restrictions on the transfer of all or any portion of the Stock or Stock Units granted under an Award. -2- 3.3 Participants' Accounts. The Committee shall establish and maintain adequate records to disclose the names of the Participants and their respective Awards, the restrictions thereon, the stock certificates related thereto, any dividends or distributions payable or paid thereon, any votes taken with respect thereto, and such other matters as may be relevant to the proper administration of the Plan. (a) Dividends and Distributions. All cash dividends and other cash distributions paid in respect of an Award shall be credited to the account of the Participant and invested in Stock or Stock Units pursuant to the terms of the Company's general dividend reinvestment program for shareholders of the Company. All such amounts and their proceeds shall be subject to the same restrictions on the same basis as the underlying Restricted Stock or Stock Units and shall be treated as Restricted Stock or Stock Units for all purposes under the Plan. (b) Forfeitures. Upon the occurrence of a forfeiture hereunder, all shares of Restricted Stock or Stock Units subject to an Award (including any Restricted Stock or Stock Units purchased with dividends paid on the underlying Restricted Stock or Stock Units) shall be retained by the Company or cancelled, as appropriate. 3.4 Transfer of Unrestricted Stock. The Company shall generally transfer Unrestricted Stock to the Participant at an administratively feasible time after the lapse of restrictions hereunder on an Award of Restricted Stock or the vesting of an Award of Stock Units. Any fractional shares of Unrestricted Stock shall be paid to the Participant in cash. (a) Termination of Employment. Upon the termination of employment for any reason of a Participant who is an employee of the Company or an Affiliate (including upon the Participant's death), or upon such a Participant's retirement or permanent and total disability, the Company shall deliver to the Participant (or his personal representative) all Unrestricted Stock held for his account. (b) Death of Participant. Each Participant shall have the right, at any time, to designate any person or persons as his beneficiary or beneficiaries (both principal as well as contingent) to whom all amounts that are otherwise due hereunder after termination of employment shall be paid upon his death. Each beneficiary designation shall become effective only when filed in writing with the Committee during the Participant's lifetime on a form acceptable to the Committee. (1) If the Participant is married as of the date of filing a beneficiary designation and names a principal beneficiary other than his spouse, such designation shall not be effective unless the spouse consents to the beneficiary designation in writing, witnessed by a notary public. -3- (2) The filing of a new beneficiary designation form as provided herein shall cancel all beneficiary designations previously filed. Any finalized divorce or marriage (other than a common law marriage) of a Participant subsequent to the date of filing a beneficiary designation form, which divorce or marriage is communicated to the Committee in writing, shall revoke any prior designation. As used herein "divorce" includes a dissolution of a marriage or an annulment of a marriage. (3) If all designated beneficiaries predecease a Participant or die prior to complete distribution, the Committee shall make distributions to the Participant's personal representative or executor. If a Participant fails to designate a beneficiary as provided above, the Committee shall make distributions to the Participant's personal representative or executor. 3.5 Discretionary Authority of Committee. The Committee shall have full discretionary power, subject to, and within the limits of, Articles 4 and 5 of the Plan: (a) To determine from time to time who of the eligible persons shall be granted Awards, and the time or times when, and the number of shares of Restricted Stock or Stock Units for which, an Award or Awards shall be granted to such persons. (b) To prescribe the other terms and provisions (which need not be identical) of each Award granted under the Plan to eligible persons. (c) To modify or amend any term or provision of any Award granted under the Plan (including without limitation in the ways described in Sections 3.5 (f), (g) and (h) below), provided that the consent of the holder thereof must be obtained for any modification or amendment that reduces the benefits to the holder of the Award. (d) To construe and interpret the Plan and Awards granted hereunder, and to establish, amend, and revoke rules and regulations for administration. The Committee, in the exercise of this power, may correct any defect or supply any omission, or reconcile any inconsistency in the Plan, or in any Award or Agreement, in the manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. In exercising this power the Committee may retain counsel at the expense of the Company. All decisions and determinations by the Committee in exercising this power shall be final and binding upon the Company and the Participants. (e) To determine the duration and purposes of leaves of absence which may be granted to a Participant without constituting a termination of his or her employment for purposes of the Plan or an Agreement. (f) To accelerate the time at which the restrictions on Restricted Stock granted under an Award will lapse, or the time at which Stock Units will vest, or otherwise modify the restrictions on Awards in a manner favorable to the Participant. -4- (g) To determine, for any group or class of Participants, that restrictions on Awards shall lapse upon specified events occurring upon or after a change in control of the Company or an Affiliate, subject to such terms and limitations as the Committee may determine. (h) To waive or modify the application of Section 6.2 (forfeiture of Restricted Stock or Stock Units upon termination of employment) as to any Award, in whole or in part. (i) To authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Award previously granted hereunder. (j) To interpret the Plan and make any determinations that are necessary or desirable in the administration of the Plan. (k) To exercise such powers and to make all other determinations deemed necessary or expedient to promote the best interests of the Company with respect to the Plan. 3.6 Persons Subject to Section 162(m). Notwithstanding anything in the Plan to the contrary, the Committee, in its absolute discretion, may bifurcate the Plan so as to restrict, limit or condition the use of certain provisions of the Plan by Participants who are officers subject to Section 162(m) of the Code, without so restricting, limiting or conditioning the Plan with respect to other Participants. 3.7 Shareholder Rights. Except as provided in Section 6.1, each Participant shall have, with respect to Restricted Stock, all the rights of a shareholder of Stock including the right to vote the shares. ARTICLE 4. ELIGIBILITY AND LIMITATIONS ON GRANTS 4.1 Participation. The Committee may from time to time designate persons to whom Awards are to be granted from among those who are eligible to become Participants. Such designation shall specify the number of shares of Restricted Stock or Stock Units subject to each Award. All Awards granted under the Plan shall be evidenced by Agreements which shall be subject to applicable provisions of the Plan or such other provisions as the Committee may adopt that are not inconsistent with the Plan. 4.2 Limitations on Grants. Awards may be granted only to persons who are eligible to be Participants. The maximum aggregate number of shares of Stock with respect to which Awards may be granted to any Participant in any calendar year under the Plan is 225,000. The maximum aggregate number of shares of Restricted Stock subject to restrictions based solely on continuous employment that may be issued under the Plan is 6,000,000. -5- ARTICLE 5. STOCK SUBJECT TO PLAN 5.1 Maximum Number of Shares. The maximum aggregate number of shares of Stock that may be issued pursuant to Awards under the Plan (including all predecessors of the Plan) is 12,075,122 shares, subject to adjustments as provided in Article 7 made after January 16, 2001. -6- ARTICLE 6. RESTRICTIONS AND FORFEITURES 6.1 General Restrictions. A Participant shall not be permitted (i) to sell, transfer, pledge (as collateral for a loan or as security for the performance of an obligation or for any other purpose) or assign shares of Restricted Stock or Stock Units awarded (or purchased through dividend or distribution reinvestment) under the Plan, (ii) to receive payment of any dividends or distributions made in respect of Awards, or (iii) to receive a stock certificate representing Awards, until, in each case, the restrictions stated in the Participant's Agreement lapse. 6.2 Termination of Employment. Unless otherwise provided in the Agreement, upon the termination of employment for any reason of a Participant who is an employee of the Company or an Affiliate before the Participant has attained age 60 (including termination because of the death or permanent disability of the Participant), all Restricted Stock or Stock Units shall be forfeited without compensation to the Participant, unless otherwise determined by the Committee. 6.3 Retirement. In the event of a Participant's retirement from the Company and its Affiliates or a Participant's death or permanent disability after the Participant has attained age 60, all remaining restrictions on such Participant's Restricted Stock that relate solely to the Participant's length of service with the Company or an Affiliate shall automatically be waived. Restrictions not related solely to the Participant's length of service with the Company or an Affiliate (such as restrictions tied to the performance of the Company) shall remain in effect unless otherwise determined by the Committee. 6.4 Lapse of Restrictions - General. Each Award of Restricted Stock granted to a Participant shall become Unrestricted Stock according to the terms established by the Committee and specified in the Participant's Agreement. The Committee is authorized but not required to subject an Award to the restrictions described in Schedule A or Schedule B below by setting forth this determination in the Participant's Agreement. Schedule A Years of Continued Employment Percentage Unrestricted Less than 1 0% 1 but less than 2 20% 2 but less than 3 40% 3 but less than 4 60% 4 but less than 5 80% 5 or more 100% -7- Schedule B Years of Continued Employment Percentage Unrestricted Less than 3 0% 3 but less than 4 33.33% 4 but less than 5 66.67% 5 or more 100% For purposes of Schedules A and B, unless otherwise determined by the Committee and stated in the relevant Agreement, a Year of Continued Employment shall be credited to a Participant with respect to each Award on each March 31, beginning in the calendar year that follows the Grant Date of an Award, provided that the Participant has been continuously employed by the Company or one of its Affiliates since the Grant Date of the Award. The lapse of restrictions on Restricted Stock (including, if applicable, the number of Years of Continued Employment) shall be calculated separately with respect to each Award granted to a Participant. 6.5 Employee Status. As provided in Section 3.5(e), the Committee shall determine the extent to which a leave of absence for military or government service, illness, temporary disability, or other reasons shall be treated as termination or interruption of employment for purposes of determining questions of forfeiture and Years of Continued Employment for purposes of the lapse of restrictions on Restricted Stock. 6.6 Performance-Based Grants. The Committee may provide in any Award for the restrictions on Restricted Stock to lapse or the Stock Units to vest upon the Company's attainment of performance-based goals established by the Committee. Any such Award may, but need not be, granted under and pursuant to the terms of this Section 6.6. In addition, the Committee may determine that any performance-based Award granted by the Committee before the adoption of the Plan shall be treated as if granted under this Section 6.6, provided that the Award is modified so as to comply with the terms of this Section 6.6. (a) Intent to Qualify Under Section 162(m). This Section 6.6 is intended to qualify the Awards granted under it as performance-based compensation under Section 162(m) of the Code. All Awards granted pursuant to this Section 6.6 shall be construed in a manner consistent with that intent. (b) Shareholder Approval. As to Awards granted under this Section 6.6, no restrictions on Awards may lapse or Awards vest until after the material terms of the performance goals set out below are disclosed to and approved by the Company's shareholders. To the extent necessary for Awards under this Section 6.6 to qualify as performance-based compensation under Section 162(m) of the Code under then applicable law, the material terms of the performance goals shall be disclosed to and reapproved by the shareholders no later than the first shareholder meeting that occurs in the fifth year following the year in which shareholders previously approved the performance goals. -8- (c) Business Criteria on Which Performance Goals Shall be Based. The lapse of restrictions on or vesting of Awards granted under this Section 6.6 shall be based on the Company's attainment of performance goals based on one or more of the following business criteria, where such goals may be stated in absolute terms or relative to comparison companies, as the Committee shall determine, in its sole discretion: Return on average common shareholders' equity. Return on average equity. Total shareholder return. Stock price appreciation. Efficiency ratio (other expense as a percentage of other income plus net interest income), either before or after amortization of intangible assets (goodwill). Net operating expense (other income less other expense), either before or after amortization of intangible assets (goodwill). Earnings per diluted share of common stock. Operating earnings (earnings before transaction-related expense) per diluted share of common stock, either before or after amortization of intangible assets (goodwill). Net operating earnings (earnings before transaction-related expense) per diluted share of common stock, either before or after amortization of intangible assets (goodwill). Return on average assets. Ratio of nonperforming to performing assets. Return on an investment in an affiliate. Net interest income. Net interest margin. Ratio of common equity to total assets. These business criteria shall be construed consistent with the use of the same terms in the Company's published financial statements. All business criteria other than earnings per diluted share of common stock shall exclude transaction-related expense unless otherwise determined by the Committee in selecting the business criteria for a particular Award pursuant to Section 6.6(d) below. In selecting any business criteria other than earnings per diluted share of common stock, the Committee may elect, pursuant to Section 6.6(d) below, to exclude amortization of intangible assets (goodwill), or to exclude depreciation and amortization. -9- (d) Establishing Performance Goals. The Committee shall establish, for each Award granted under this Section 6.6: (i) the measurement period(s) to which the performance goals will be applied; (ii) the specific business criterion or criteria, or combination thereof, that will be used; (iii) the specific performance targets that will be used for the selected business criterion or criteria; (iv) any special adjustments that will be applied in calculating whether the performance targets have been met to factor out extraordinary items; and (v) the formula for calculating the lapse of restrictions in relation to the performance targets. These determinations shall be set out in the Agreement for each Award. Except as otherwise permitted under Section 162(m) of the Code, each Award under this Section 6.6 shall be granted no later than 90 days after the start of any applicable measurement period, on or before the date that 25 percent of each applicable measurement period has elapsed, and while the outcome is substantially uncertain. (e) Determination of Attainment of Performance Goals. The Committee shall determine, pursuant to the performance goals and other elements established pursuant to Section 6.6(d) above, whether the criteria for the lapse of restrictions or vesting have been satisfied. The Committee's determinations shall be final and binding on all Participants. These determinations must be certified in writing before Stock is transferred to the Participant. This requirement may be satisfied by a writing that sets out the determinations made by the Committee that is signed on behalf of the Committee by the Committee's secretary. (f) Lapse of Restrictions Upon Death, Disability or Change of Ownership or Control. Notwithstanding the other terms of this Section 6.6, the performance-related criteria for the lapse of restrictions on an Award made under this Section 6.6: (i) may lapse (A) as provided in Section 7.3, or (B) upon a Participant's disability or upon a change of ownership or control, to the extent so provided in any Agreement, employment agreement or action of the Committee, and (ii) shall lapse upon the Participant's death. (g) Other Restrictions. In addition to the performance goals described above, the Committee may determine to subject any Award granted under this Section 6.6 to other, additional restrictions, including restrictions requiring the Participant to remain in the employ of the Company or an Affiliate for specified lengths of time. 6.7 Surrender of Restricted Stock. A Participant who also is a participant in the Washington Mutual Deferred Compensation Plan for Directors and Certain Highly Compensated Employees (the "DCP") may surrender to the Company all or a portion of an Award pursuant to the terms and provisions of the DCP relating to surrender of restricted stock in return for a contribution credit under the DCP. -10- ARTICLE 7. ADJUSTMENT UPON CORPORATE CHANGES 7.1 Adjustments to Shares. The maximum number and kind of shares of Stock with respect to which Awards hereunder may be granted and which are the subject of outstanding Awards shall be adjusted by way of increase or decrease as the Committee determines (in its sole discretion) to be appropriate, in the event that: (a) the Company effects one or more stock dividends, stock splits, reverse stock splits, subdivisions, consolidations or other similar events; (b) the Company or an Affiliate engages in a transaction to which Section 424 of the Code applies; or (c) there occurs any other event which in the judgment of the Committee necessitates such action. Provided, however, that if an event described in paragraph (a) or (b) above occurs, the Committee shall make adjustments to the limits on Awards specified in Section 4.2 and in the limitation on aggregate Awards under Section 5.1 that are proportionate to the modifications of the Stock that are on account of such corporate changes. 7.2 Substitution of Awards on Merger or Acquisition. The Committee may grant Awards in substitution for stock awards, stock options, stock appreciation rights or similar awards held by an individual who becomes an employee of the Company or an Affiliate in connection with a transaction to which Section 424(a) of the Code applies. The terms of such substituted Awards shall be determined by the Committee in its sole discretion, subject only to the limitations of Article 5. 7.3 Effect of Certain Transactions. Upon a merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation of the Company, as a result of which the shareholders of the Company receive cash, stock or other property in exchange for their shares of Stock (an "Event"), restrictions on any Award of Restricted Stock granted hereunder shall lapse and any Award of Stock Units shall vest, whether or not the requirements for lapse of restrictions or vesting set forth in any Agreement have been satisfied, unless otherwise specifically stated in the Agreement. The foregoing notwithstanding, an Event shall not cause restrictions on Restricted Stock related solely to the Participant's length of service with the Company or any Affiliate to lapse on any Awards that the Committee elects, before the Event, to convert into restricted stock of an acquiring corporation. If the Committee so elects to convert the Awards, the number of shares of such converted restricted stock shall be determined by adjusting the amount and price of the Awards granted hereunder in the same proportion as used for determining the number of shares of stock of the acquiring corporation the holders of the Stock receive in such merger, consolidation, acquisition of property or stock, separation or reorganization, and the schedule for lapse of restrictions set forth in the Agreement shall continue to apply to the converted restricted stock. Nothing in this Section 7.3 or elsewhere in the Plan shall authorize the Committee to take any action contrary to any provision regarding lapse of restrictions that is contained in any Agreement or employment agreement if the action would reduce the benefits to the Participant, unless the Participant consents to the action. -11- 7.4 No Preemptive Rights. The issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services rendered, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, outstanding Awards. ARTICLE 8. COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES 8.1 General. No Award shall be granted, no Stock shall be issued, and no certificates for shares of Stock shall be delivered under the Plan except in compliance with all federal and state laws and regulations (including, without limitation, withholding tax requirements), federal and state securities laws and regulations and the rules of all national securities exchanges or self-regulatory organizations on which the Company's shares may be listed. The Company shall have the right to rely on an opinion of its counsel as to such compliance. Any certificate issued to evidence shares of Stock awarded hereunder may bear such legends and statements as the Committee upon advice of counsel may deem advisable to assure compliance with federal and state laws and regulations. No Award shall be granted, no Stock shall be issued, and no certificate for shares shall be delivered under the Plan until the Company has obtained such consent or approval as the Committee may deem advisable from any regulatory bodies having jurisdiction over such matters. 8.2 Representations by Participants. As a condition to receiving an Award, the Company may require a Participant to represent and warrant at the time of any such award that the shares are being held only for investment and without any present intention to sell or distribute such shares, if, in the opinion of counsel for the Company, such representation is required by any relevant provision of the laws referred to in Section 8.1. At the option of the Company, a stop transfer order against any shares of Stock may be placed on the official stock books and records of the Company, and a legend indicating that the Stock may not be pledged, sold or otherwise transferred unless an opinion of counsel is provided (concurred in by counsel for the Company) and stating that such transfer is not in violation of any applicable law or regulation may be stamped on the stock certificate in order to assure exemption from registration. The Committee may also require such other action or agreement by the Participants as may from time to time be necessary to comply with the federal and state securities laws. This provision shall not obligate the Company or any Affiliate to undertake registration of Stock hereunder. -12- ARTICLE 9. TAXES 9.1 Immediate Taxation. If an employee elects, pursuant to Section 83(b) of the Code, to include in gross income for federal income tax purposes an amount equal to the fair market value of Restricted Stock subject to an Award, the employee shall make arrangements satisfactory to the Company to pay to the Company or its Affiliate any federal, state or local taxes required to be withheld with respect to such Stock. If an employee who makes such an election fails to pay the necessary amounts to the Company or its Affiliate, the Company or its Affiliate shall, to the extent permitted by law, have the right to deduct from any payment of any kind otherwise due to the employee any taxes of any kind required by law to be withheld with respect to the Stock covered by the Award. 9.2 Deferred Taxation. If an election under Section 83(b) of the Code has not been made, then at the time Restricted Stock becomes Unrestricted Stock or an Award otherwise becomes taxable, the Participant shall, upon notification of the amount due and prior to or concurrently with the delivery of the certificates representing the shares of Stock to which the Participant is entitled hereunder, pay to the Company or its Affiliate amounts necessary to satisfy applicable federal, state and local withholding tax requirements or shall otherwise make arrangements satisfactory to the Company for such requirements. The Company or its Affiliate shall, to the extent permitted by law, have the right to deduct from any payment of any kind otherwise due to the employee any federal, state or local taxes of any kind required by law to be withheld with respect to the Restricted Stock becoming Unrestricted Stock or an Award otherwise becoming taxable. ARTICLE 10. GENERAL PROVISIONS 10.1 Effect on Employment. Neither the adoption of the Plan, its operation, nor any documents describing or referring to the Plan (or any part thereof) shall confer upon any employee any right to continue in the employ of the Company or an Affiliate or in any way affect any right and power of the Company or an Affiliate to terminate the employment of any employee at any time with or without assigning a reason therefor. 10.2 Unfunded Plan. The Plan shall be unfunded, and the Company shall not be required to segregate any assets that may at any time be represented by grants under the Plan. Any liability of the Company to any person with respect to any grant under the Plan shall be based solely upon contractual obligations that may be created hereunder. No such obligation of the Company shall be deemed to be secured by any pledge of, or other encumbrance on, any property of the Company. 10.3 Rules of Construction. Headings are given to the articles and sections of the Plan solely as a convenience to facilitate reference. The masculine gender when used herein refers to both masculine and feminine. The reference to any statute, regulation or other provision of law shall be construed to refer to any amendment to or successor of such provision of law. -13- 10.4 Governing Law. The laws of the State of Washington shall apply to all matters arising under the Plan, to the extent that federal law does not apply. 10.5 Compliance With Section 16 of the Exchange Act. With respect to persons subject to Section 16 of the Exchange Act, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void to the extent permitted by law and deemed advisable by the Committee. 10.6 Amendment. The Committee may amend or terminate the Plan at any time; provided, however, an amendment that would have a material adverse effect on the rights of a Participant under an outstanding Award is not valid with respect to such Award without the Participant's consent. Provided further that the shareholders of the Company must approve any amendment that changes the number of shares in the aggregate which may be issued pursuant to Awards granted under the Plan, the maximum number of shares with respect to which any Participant may be granted Awards in any calendar year, or the maximum number of shares that may be granted as Awards of Restricted Stock that are subject to restrictions based solely on continuous employment, except pursuant to Article 7. 10.7 Effective Date of Plan. No Award under the terms of the Plan as amended and restated as of January 16, 2001, will be effective unless and until the amendments approved by the Board on January 16, 2001, are approved by shareholders holding a majority of the Company's outstanding voting stock present or represented by proxy and entitled to vote at the Company's next annual shareholders' meeting, which is duly held, that occurs after January 16, 2001, the date that the Board authorized the Company to adopt the amendments to the Plan which are being submitted to the shareholders in such annual shareholders meeting. If such amendments are not so approved by the shareholders of the Company, then the Plan as amended and restated as of January 16, 2001 shall be of no force or effect and the Plan as amended and restated as of January 18, 2000 shall continue to govern. IN WITNESS WHEREOF, the Company has caused the Plan to be executed on this the __ day of ___, 2001, but to be effective on January 16, 2001. WASHINGTON MUTUAL, INC. By: -------------------------------- Its: -------------------------------- -14- EX-10 5 exhibit10-3.txt Exhibit 10.3 WASHINGTON MUTUAL, INC. DEFERRED COMPENSATION PLAN FOR DIRECTORS AND CERTAIN HIGHLY COMPENSATED EMPLOYEES Initially Adopted February 17, 1987 Amended and Restated Effective April 17, 2001 The Deferred Compensation Plan for Directors and Certain Highly Compensated Employees was initially adopted by Washington Mutual Savings Bank on February 17, 1987, was amended and restated effective January 1, 1988 and was subsequently amended and restated effective January 1, 1993. Sponsorship of the Plan was transferred to Washington Mutual, Inc. in 1994 in connection with the corporate reorganization pursuant to which Washington Mutual Savings Bank was merged into Washington Mutual Bank and became a subsidiary of Washington Mutual, Inc. The Plan was amended and restated in its entirety by Washington Mutual, Inc., generally effective February 1, 1997 and was subsequently amended and restated effective January 1, 2000. Effective April 17, 2001, the Plan is hereby amended and restated to provide certain additional investment and deferral provisions with respect to the Participants and to effect certain other changes: 1. DEFINITIONS. 1.1 "Account" means a separate bookkeeping account established for each Participant on the books of the Company that employs the applicable Participant for the purpose of recording amounts of Compensation deferred, Restricted Stock Awards surrendered or Discretionary Company Contributions made by or on behalf of such Participant, and income earned thereon, pursuant to the provisions of the Plan. 1.2 "Board" means the Board of Directors of WM, Inc. 1.3 "Annual Bonus" has its usual and ordinary meaning. It is not intended to include commissions or other similar variable compensation, and is not intended to include bonuses for services for less than the full calendar year. 1.4 "Code" means the Internal Revenue Code of 1986, as it may be amended or replaced from time to time. 1.5 "Company" means WM, Inc., or any direct or indirect subsidiary of WM, Inc. With respect to any Participant or former Participant, the term "Company" means the Company by whom the Participant is currently employed, or was last employed in the case of a former Participant. 1 1.6 "Compensation" means salary, Annual Bonus, quarterly or semiannual bonuses, commissions, variable compensation and other direct cash compensation payable by a Company to an Eligible Employee for employment by the Company, and Directors' fees payable by WM, Inc. to its Directors. The term "Compensation" shall not include reimbursement for expenses incurred by the Eligible Employee, or contributions to or benefits accrued under any Retirement Plan. In addition, the term "Compensation" does not include Restricted Stock Awards. 1.7 "Compensation Committee" means the Directors' Compensation and Stock Option Committee of the Board. 1.8 "Discretionary Company Contributions" has the meaning set forth in Section 2.6. 1.9 "Effective Date" means April 17, 2001, for purposes of this amendment and restatement. 1.10 "Eligible Employee" means (a) each Director of WM, Inc., (b) each salaried employee of either WM, Inc. or any banking subsidiary of WM, Inc. who has the following corporate title: Chairman, Vice Chairman, Group President, President, Senior Executive Vice President, Executive Vice President or Senior Vice President, and (c) each salaried employee of a nonbanking subsidiary of WM, Inc. who has the corporate title of President, and each salaried employee of any nonbanking subsidiary of WM, Inc. who has the corporate title of Senior Vice President and who is determined by the Plan Administration Committee, in its discretion, to be eligible to participate under the Plan. 1.11 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.12 "Nonqualified Stock Options" means those nonqualified stock options of the Company awarded to a Participant pursuant to the Washington Mutual Amended and Restated 1994 Stock Option Plan. 1.13 "Participant" means any Eligible Employee who has elected to defer Compensation under the Plan. 1.14 "Plan" means this plan for the deferral of Compensation, as it may be amended from time to time. 1.15 "Plan Administration Committee" or "Committee" means such person or persons appointed under the provisions of Section 6 to administer and interpret the terms of the Plan. 1.16 "Plan Year" means the 12-consecutive-month period commencing each January 1 and ending each December 31. 2 1.17 "Pre-Existing Plan" means the Plan as in effect prior to the Effective Date. 1.18 "Qualifying Gain" means the net shares accrued on behalf of a Participant upon his or her exercise of Nonqualified Stock Options using the stock-for-stock cashless payment method set forth in Section 2.4. 1.19 "Qualifying Gain Account" means a separate bookkeeping account established for the Participant on the books of each Company that employs such Participant for purposes of accounting for any Qualifying Gain deferred by such Participant, and phantom dividend equivalent units earned thereon, pursuant to the provisions of the Plan. Any Qualifying Gain that is deferred and held in this account shall be converted to phantom stock units equal to the Qualifying Gain. Any phantom dividend equivalent units credited to this account shall be converted to phantom stock units in accordance with Section 4.3(c). 1.20 "Retirement Plan" means any defined benefit or defined contribution plan qualified under Section 401(a) of the Code, and which is sponsored by one or more Companies. 1.21 "Restricted Stock Award" means an award of stock of WM, Inc. made to a Participant pursuant to the Washington Mutual, Inc. Restricted Stock Plan. 1.22 "Termination Date" means the date on which an Eligible Employee ceases to be an Eligible Employee, for any reason. 1.23 "WM, Inc." means Washington Mutual, Inc., a Washington corporation. 2. DEFERRAL ELECTION AND DISCRETIONARY COMPANY CONTRIBUTION. 2.1 Election to Defer Compensation. (a) Any Eligible Employee may elect at any time on or prior to 15 days preceding the first day of any calendar quarter to defer the receipt of all or any portion of his or her Compensation for services to be rendered in the immediately following calendar quarter or quarters (not including any Annual Bonus). In the case of a bonus determined on less than an annual basis (e.g., a quarterly or semiannual bonus), the deferral election must be made on or prior to 15 days preceding the first day of the first calendar quarter in which any services will be rendered that relate, in whole or in part, to the bonus in question. (b) Notwithstanding anything in this Section 2.1 to the contrary, any amount to be deferred under the Plan shall not reduce the current Compensation of the Participant below the total amount that is to be withheld from the Participant's Compensation pursuant to a requirement of law or pursuant to an elected optional payroll deduction. (c) The parties hereto understand that the Plan does not determine or affect any Participant's entitlement to any bonus. Accordingly, in the event that a Participant elects to defer a percentage of any potential bonus that is not ultimately awarded, such election shall be null and void. 3 2.2 Election to Defer Annual Bonus. (a) Each Eligible Employee may elect to defer a certain percentage amount, up to 100%, of any Annual Bonus that may be awarded by the Company. Each such election must be made on or before December 31 of the calendar year preceding the Plan Year in respect to which the Annual Bonus may be awarded. For example, for an Annual Bonus for services rendered during the Plan Year 2001, any Annual Bonus deferral election must be made by December 31, 2000. (b) The parties hereto understand that the Plan does not determine or affect any Participant's entitlement to any Annual Bonus. Accordingly, in the event that a Participant elects to defer a percentage of his or her potential Annual Bonus that is not ultimately awarded, such election shall be null and void. 2.3 Election of Deferral Credit in Exchange for Restricted Stock Award. (a) Each Eligible Employee may elect to surrender all or a portion of any Restricted Stock Award, in whole shares, in exchange for a credit to such Eligible Employee's Account, determined as set forth in Section 4.2(c). (b) An election pursuant to this Section 2.3 shall be made at least six months before the date on which the restrictions with respect to the subject Restricted Stock Award lapse, and otherwise shall comply with Section 2.5. 2.4 Election of Qualifying Gain Deferral. (a) Each Eligible Employee may elect to defer all Qualifying Gain derived from a specific grant of Nonqualified Stock Options in exchange for a credit to such Eligible Employee's Qualifying Gain Account, in accordance with Section 4.2(d), if (i) an irrevocable deferral election is completed and signed by such Eligible Employee, (ii) such deferral election is delivered to and accepted by the Committee at least six months before the date on which such Eligible Employee elects to exercise Nonqualified Stock Options (the "Exercised Options"), (iii) such Eligible Employee pays, through an attestation acceptable to the Committee, the exercise price in shares of WM, Inc. common stock that the Participant owns and has owned continuously for the six-month period ending on the date of exercise (the "Mature Shares"), and (iv) such Eligible Employee complies with all other rules the Committee may establish from time to time. A deferral of Qualifying Gain under this Section 2.4 shall be deemed to be (A) a tender of Mature Shares in exchange for an equivalent number of shares pursuant to the exercise of Nonqualified Stock Options and (B) a conversion of the Participant's right to receive any additional shares related to the Exercised Options into a right to receive deferred compensation pursuant to the Plan. A deferral election under this Section 2.4 shall expire at any time elected by a Participant therein and shall automatically be revoked upon a Participant's termination of employment or in the event of a change in control or at any other time determined by the Committee in its sole discretion. (b) The Plan governs the deferral of Qualifying Gain. The underlying Nonqualified Stock Options are governed by the stock option plan under which they were granted. No stock options or shares of WM, Inc. common stock are authorized to be issued under the Plan. 4 2.5 Form and Manner of Election. Any election under Sections 2.1 through 2.4 shall be made in writing and in such form and manner as may be prescribed by the Committee. The election shall specify such items as the Committee shall reasonably require, including but not limited to: (a) (1) With respect to an election made pursuant to Section 2.1 or 2.2, the amount to be deferred, either as a specific dollar amount or as a percentage of Compensation. Each election of a dollar amount shall be not less than $300 for each calendar quarter. Each election of a percentage amount shall be not less than 15% of Compensation for each calendar quarter; provided, however, that an election under Section 2.2 with respect to any Annual Bonus that may be granted by the Company shall be only in such percentage amount as determined by the Participant; (2) With respect to an election made pursuant to Section 2.3, which Restricted Stock Award or portion thereof, and the number of whole shares of the Restricted Stock Award that are to be surrendered; and (3) With respect to a deferral election made pursuant to Section 2.4, the identity of the Nonqualified Stock Option grant that is subject to the election, the grant date, the exercise price, the expiration date (if any) of the deferral election and the date of payment commencement under Section 2.8; (b) One of the applicable payment options designated under Section 2.7, unless an option has previously been designated (including any designation under the Pre-Existing Plan), in which event the election need include such a designation only if a change from the existing designated payment option is desired; (c) A payment commencement date as specified under Section 2.8, unless a payment commencement date has previously been designated (including any designation under the Pre-Existing Plan), in which event the election need include such a designation only if a change from the existing designated commencement date is desired; 5 (d) A designated beneficiary or beneficiaries as provided in Section 3; and (e) A method for determining additional credits pursuant to Section 4.3. 2.6 Discretionary Company Contribution. In its sole discretion, and for the purpose of attracting or retaining highly qualified employees, the Compensation Committee may credit an Eligible Employee's account with a contribution known as a Discretionary Company Contribution. Any Discretionary Company Contribution made on behalf of an Eligible Employee pursuant to this Section 2.6 shall be credited to the Eligible Employee's Account as of a date determined by the Compensation Committee and may be subject to such other terms and conditions, including provisions regarding vesting, that are set forth in an individual agreement between the Participant and the Plan Administration Committee setting forth such terms and conditions. 2.7 Payment Options. At the time of making an election under Sections 2.1 through 2.4, or within 30 days of being credited with a Discretionary Company Contribution under Section 2.6, the Participant shall specify one of the following payment options: (a) Payment of the entire Account balance attributable to such deferral or credit in a single lump sum payment. (b) Payment of the Account balance attributable to such deferral or credit in monthly installments over a period certain not to exceed 10 years, with each installment to be an amount equal to the Account balance as of the date of payment divided by the number of installments remaining to be paid, including the current installment; provided, however, that no monthly installment may be less than $300. If a Participant fails to specify a payment option described above, option (a) shall apply. If a Participant designates different payment options at different times, the last payment option elected shall apply (including any last election under the Pre-Existing Plan). All payments from a Participant's Account shall be in cash. All payments from a Participant's Qualifying Gain Account shall be in the form of whole shares of WM, Inc. common stock equal to the number of phantom stock units held in such Account, rounded down to the nearest whole unit, such shares to be paid from the Washington Mutual 1994 Stock Option Plan, as amended. For purposes of this Section 2.7, all references to "Account" shall be deemed to include a Participant's Qualifying Gain Account. 2.8 Commencement of Payment. At the time of making a deferral election under Sections 2.1 through 2.4, or within 30 days of being credited with a Discretionary Company Contribution under Section 2.6, the Participant shall irrevocably specify the date for the commencement of payment of the Compensation deferred pursuant to that election or contribution. If a Participant fails to specify a payment date, payment shall be made or commenced, as the case may be, on the first day of the month immediately following such Participant's Termination Date. A Participant may designate different payment commencement dates to apply to separate deferral elections or contributions. A payment date may be a date certain, or may be a date related to an employment event such as the date of termination of employment or retirement, or may be a date related to any other objectively determined event acceptable to the Plan Administration Committee. The payment commencement date may not be modified with respect to deferrals or contributions elected at the time the payment commencement date is designated. Subsequent deferral elections may specify a different payment commencement date for those deferrals or contributions. 6 2.9 Modification of Election. (a) A Participant's election under Section 2.1 shall continue from calendar quarter to calendar quarter until the election is terminated pursuant to Section 2.10, or the election is modified; provided that an election modification must be made at least 15 days prior to the first day of such calendar quarter; and provided further that if an election has been made to defer compensation that is for services to be rendered during more than one calendar quarter (e.g., a semiannual bonus), any modification of that election must be made at least 15 days prior to the first day of the first calendar quarter in which any services are to be rendered that relate, in whole or in part, to the element of Compensation that was deferred. A Participant's election under Section 2.2 is effective only for the Plan Year for which the election is made. Any modification of such election must be made prior to January 1 of the Plan Year for which the Annual Bonus may be awarded. An election pursuant to Section 2.3 or 2.4 is irrevocable. (b) Payment options may be modified at any time more than 30 days prior to the Participant's payment commencement date. As provided in Section 3, Beneficiary designations may be modified at any time. Payment commencement dates may not be modified. Any modification of an election pursuant to this Section 2.9 shall be ineffective unless it is made in writing and is timely delivered to the Plan Administration Committee, in such form as shall be reasonably required by the Committee. 2.10 Termination of Election. A Participant's deferral election under Section 2.1 shall terminate upon the earliest of (a) the first day of the calendar quarter immediately following the date on which the Plan Administration Committee receives from such Participant written notice stating that his or her election is terminated (provided that if an election has been made to defer compensation that is for services to be rendered during more than one calendar quarter (e.g., a semiannual bonus), any termination of that election must be done at least 15 days prior to the first day of the first calendar quarter in which any services are to be rendered that relate, in whole or in part, to the element of Compensation that was deferred); (b) such Participant's Termination Date; or (c) termination of the Plan. In the event of a voluntary termination of an election by the Participant pursuant to clause (a) above, the Participant may not defer additional amounts until a timely election is made to defer Compensation that is payable in a subsequent calendar quarter, as provided in Section 2.1. 3. BENEFICIARY DESIGNATION. 7 3.1 Designation of Beneficiary. At the time of making an election under Sections 2.1 through 2.4, or within 30 days of being credited with a Discretionary Company Contribution under Section 2.6, a Participant shall designate a person or persons as the Participant's beneficiary or beneficiaries (both primary as well as secondary) to whom payment under the Plan shall be made in the event of the Participant's death prior to complete distribution of such Participant's Account balance under the Plan. Each beneficiary designation shall become effective only when filed in writing with the Plan Administration Committee during the Participant's lifetime on a form prescribed by the Committee. Such payments shall be made to the primary beneficiary if such person survives the Participant. If not, such payments shall be made to the secondary beneficiary if such person survives the Participant, and if not, then payments will be made in accordance with the provisions of Section 3.3. If a beneficiary dies at a time such beneficiary is entitled to receive payments hereunder, the remaining payments shall be made to such beneficiary's estate, as provided in Section 3.4. 3.2 Filing New Designation. The filing of a new beneficiary designation form will cancel all beneficiary designations previously filed. Any finalized divorce, dissolution or annulment of marriage or any new marriage of a Participant subsequent to the date of filing of a beneficiary designation form shall revoke such designation. 3.3 Failure to Designate. If a Participant fails to designate a beneficiary as provided above, or if a Participant's beneficiary designation is revoked by marriage, divorce, dissolution, annulment or otherwise without execution of a new designation; or if all designated beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits hereunder; then, the Plan Administration Committee shall direct the distribution of such benefits to the Participant's estate. 3.4 Death of Beneficiary. At the death of the beneficiary who is entitled to receive payments hereunder, the balance (if any) then remaining in the Participant's Account shall be paid in a lump sum to the beneficiary's estate. Such payment shall completely discharge the Company's obligations under the Plan. 3.5 Change of Beneficiary. Notwithstanding any other provision of the Plan, any beneficiary designation may be changed by a Participant at any time by the written filing of such change on a form prescribed by the Plan Administration Committee. 4. ACCOUNTS. 4.1 Separate Accounts. The Plan Administration Committee shall establish a separate Account for each Participant, to which it will credit each amount required to be credited hereunder. The Account thus established shall be a bookkeeping Account, and shall not grant to any Participant any security interest or other prior right in any assets of the Company by reason of such credits. 8 4.2 Timing of Credit. (a) Subject to Section 5.2(c), as of the first day of each month, the Plan Administration Committee shall credit to each Participant's Account that portion of such Participant's regular monthly Compensation earned during the immediately preceding month for which a deferral election under Section 2.1 is in effect. (b) Subject to Section 5.2(c), with respect to each deferral election under Section 2.1 or 2.2 that defers any bonus, commission, variable compensation or other element of Compensation that is not regular monthly compensation, the Plan Administration Committee shall credit to each Participant's Account the amount of the deferral election as of the date the bonus, commission, variable compensation or other Compensation, if any, is awarded by the Company to the Participant. (c) Subject to Section 5.2(c), with respect to any deferral election made by a Participant under Section 2.3 (relating to restricted stock), the Plan Administration Committee shall credit to the Participant's Account the amount of the value of the surrendered Restricted Stock Award as of the date the restrictions lapse. The value of such Restricted Stock Award shall be the number of shares of Restricted Stock surrendered to the Company multiplied by the closing price of such shares of stock as of the date the restrictions on such stock otherwise would have lapsed pursuant to the terms of the Restricted Stock Award. For these purposes, the closing price shall be the closing price of the common stock of WM, Inc. on the New York Stock Exchange, or on such other national securities exchange or national securities association on which such stock is then traded. (d) Subject to Section 5.2(c), with respect to any deferral election made under Section 2.4 (relating to Qualifying Gain deferral), the Plan Administration Committee shall credit to the Participant's Qualifying Gain Account a number of phantom stock units equal to the value of deferred Qualifying Gain divided by the closing price of WM, Inc. common stock on the effective date of the Qualifying Gain deferral. For these purposes, the closing price shall be the closing price of the common stock of WM, Inc. on the New York Stock Exchange, or on such other national securities exchange or national securities association on which such stock is then traded. (e) Subject to Section 5.2(c), with respect to any Discretionary Company Contribution made with respect to a Participant under Section 2.6, the Plan Administration Committee shall credit to the Participant the amount of each contribution as of the date specified by the Compensation Committee. 9 4.3 Additional Credits. (a) Each Participant's Account shall be credited with additional amounts pursuant to the "Interest Method" set forth in Section 4.3(b)(1) or the "Stock Fund Method" set forth in Section 4.3(b)(2). The method of crediting shall be elected in writing by the Participant pursuant to procedures established by the Plan Administration Committee. Such election also may be modified from time to time effective as of the first day of a calendar quarter pursuant to such procedures. A Participant may elect the Interest Method with respect to a portion of his or her Account and the Stock Fund Method with respect to the remainder of the Account. However, no method can be elected by a Participant unless at least 10% of the Participant's Account is allocated to such method. Portions of an Account for which there is no effective election shall be credited pursuant to Section 4.3(b)(1). (b) (1) With respect to the portion of a Participant's Account credited pursuant to the Interest Method, as of the first day of each calendar quarter, the Plan Administration Committee shall credit to the Participant's Account interest on the average daily balance of such Account subject to the Interest Method during the immediately preceding calendar quarter, using the actual number of days in such preceding calendar quarter, at the interest rate in effect for such preceding calendar quarter. The applicable interest rate shall be determined as follows: As of January 1 of each year, commencing with the Effective Date, the Plan Administration Committee, in its sole discretion, will establish the applicable interest rate for the then commencing Plan Year by reference to the interest rate that the Committee determines could be applicable as of such date to any unsecured junior debt offering by Washington Mutual Bank or by a comparable financial institution or public corporation. Such determination will be made by the Committee, which shall request an estimate of such debt offering interest rate from at least one nationally recognized investment banking firm. The interest rate so determined will be set forth in writing and kept with the Plan records. (2) With respect to the portion of a Participant's Account credited pursuant to the Stock Fund Method, as of the first day of any calendar quarter, the Plan Administration Committee shall credit or debit such Account to reflect the rate of return that would have been earned on such portion of the Participant's Account had such portion been invested in the Company stock fund under the Washington Mutual, Inc. Retirement Savings and Investment Plan during the previous calendar quarter. The foregoing notwithstanding, if, as of the first day of a calendar quarter, the value of the WM, Inc. common stock in the Company stock fund under the Washington Mutual, Inc. Retirement Savings and Investment Plan comprises less than 70% of the total value of such fund, the Plan Administration Committee shall credit or debit the portion of the Participant's Account allocated to the Stock Fund Method for the prior calendar quarter as if such portion had been invested in whole or partial shares of such common stock and received any dividends paid on such common stock. 10 (c) Each Participant's Qualifying Gain Account shall be credited with phantom dividend equivalent units equal to the product of the dividend paid on a share of WM, Inc. common stock multiplied by the number of phantom stock units held in the Participant's Qualifying Gain Account on the record date for the cash dividend. Phantom dividend equivalent units credited to each Participant's Qualifying Gain Account shall be used to "purchase" additional phantom stock units for such Account at a price equal to the closing price of the WM, Inc. common stock on the date such phantom dividend equivalent units are so credited. No fractional phantom stock units shall be credited based on this "purchase." 5. PAYMENT OF ACCOUNT BALANCE. 5.1 Payment Method. The Company shall pay the Participant's Account balance under the Plan to such Participant in accordance with the payment option designated by the Participant pursuant to Section 2.7. In the event of the death of the Participant prior to payment of the entire Account balance, payment shall be made to such Participant's beneficiary or beneficiaries designated under Section 3 in accordance with the payment method designated by the Participant pursuant to Section 2, or in accordance with any accelerated method (including lump sum) as the Plan Administration Committee shall determine in its sole discretion. 5.2 Withholding and Offset. (a) Any payment or other distribution of benefits under the Plan may be reduced by any amount required to be withheld by the Company under any applicable law, rule, regulation, order or other requirement, now or hereafter in effect, of any governmental authority. (b) If a Participant becomes entitled to a distribution of benefits under the Plan, and if at such time such Participant has outstanding any debt, obligation or other liability representing an amount owing to the Company, then the Company may offset such amount owing it against the amount of benefits otherwise distributable. Such determination shall be made by the Plan Administration Committee. (c) If any tax withholding is required with respect to Compensation deferred hereunder, a deferral credit with respect to surrendered restricted stock or a Discretionary Company Contribution, the Company shall withhold such amounts as are required from Compensation paid to the Participant that is not deferred; provided that if there is insufficient nondeferred Compensation to allow for the required withholding, the withholding shall be taken from the deferred Compensation and the Participant's credit under Section 4.2 shall be reduced accordingly. 11 5.3 Payment for Unforeseeable Emergency. A Participant shall not be entitled to withdraw any portion of the balance of his or her Account except that, in cases of an unforeseeable emergency, the Plan Administration Committee may authorize, on a uniform and nondiscriminatory basis and taking into account other resources reasonably available to the Participant, payment of so much of the Participant's Account as is required to meet the need created by the emergency. For the purposes hereof, an "unforeseeable emergency" is an unanticipated emergency that is caused by an event beyond the control of the Participant or the Participant's beneficiary and that would result in severe financial hardship to the individual if early withdrawal were not permitted. Without limiting the generality of the foregoing, an unforeseeable emergency shall include a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Code ss. 152(a)) of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the Participant's control. The circumstances that will constitute an unforeseeable emergency will depend on the facts of each case, as determined by the Plan Administration Committee in its sole discretion, but, in any case, payment may not be made to the extent that such hardship is or may be relieved: (a) through reimbursement or compensation by insurance or otherwise; (b) by liquidation of the Participant's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship; or (c) by cessation of deferrals under the Plan. For the purposes hereof, examples of what are not considered to be unforeseeable emergencies shall include the need to send a Participant's child to college or the desire to purchase a home. 5.4 Limitation on Liability. The Company's maximum liability to make payments hereunder is limited to the amount of the Participant's Account (including the interest thereon pursuant to Section 4.3). 6. ADMINISTRATION OF THE PLAN. The Compensation Committee shall from time to time appoint a committee, which shall be designated the Plan Administration Committee, to administer the Plan. The Compensation Committee may fix or change the number of members of the Committee at any time at its discretion. Each member of the Plan Administration Committee shall serve until such member resigns or becomes unable to serve due to death or disability or until such member is removed by the Compensation Committee. The Plan Administration Committee shall administer and interpret the Plan and for that purpose may make, amend or revoke rules and regulations at any time. The Committee also shall make determinations about benefits hereunder. All decisions of the Plan Administration Committee shall be by vote of a majority of its members eligible to vote on a particular matter, and shall be final and binding on all parties. The Plan Administration Committee shall have absolute discretion to carry out its responsibilities hereunder. Members of the Plan Administration Committee shall be eligible to participate in the Plan while serving as a member of the Committee; provided, however, that no member shall be entitled to vote or take any other action as part of the Committee with respect to such member's benefits or any other matter affecting such member's rights as a Participant under the Plan. 12 7. CLAIMS PROCEDURE. 7.1 Claims Procedure. Any person desiring a benefit under, interpretation or construction of, ruling under or information regarding the Plan shall submit a written request therefor to the Plan Administration Committee. The Committee shall respond in writing to any such request as soon as practicable. Any interpretation or construction of, and any ruling under, the Plan by the Plan Administration Committee shall be final and binding on all parties. 7.2 Denial of Claim. If a claim for benefits is denied in whole or in part, the Plan Administration Committee shall notify the claimant of such denial and of his or her right to a conference with an individual designated in the notice for the purpose of explaining the denial. If the claimant does not want such a conference, or is dissatisfied with its outcome, he or she shall be furnished in writing, in a manner calculated to be understood by the claimant, specific reasons for such denial, specific references to the Plan provisions on which the denial is based, a description of any additional material necessary for him or her to perfect his or her claim, an explanation of why such material is necessary, and an explanation of the Plan's review procedure as described in Section 7.3. 7.3 Review Procedure. Any person, or his or her duly authorized representative, whose claim for benefits under the Plan has been denied in whole or in part, may appeal from such denial to the Plan Administration Committee by submitting to the Committee a written request for review within 75 days after receiving notice of denial. The Plan Administration Committee shall give the claimant an opportunity to review pertinent documents relating to the denial in preparing his or her request for review. The request must set forth all the grounds upon which it is based, supporting facts and documents, and any other matters that the claimant deems pertinent, and the relief sought. The Committee may require the claimant to submit such additional facts, documents or other material as it deems necessary or advisable in making its review. The Plan Administration Committee shall act upon a request for review within 60 days after receipt thereof unless special circumstances require further time, but in no event later than 120 days after such receipt. If the Plan Administration Committee confirms the denial in whole or in part, the Committee shall give written notice to the claimant setting forth, in a manner calculated to be understood by the claimant, the specific reasons for denial and specific reference to the Plan provisions on which the decision was based. The determination of the Plan Administration Committee upon such review shall be final and conclusive and shall be binding on the claimant and all persons claimed by, through or under him or her, subject, however, to any right of appeal under applicable law. 13 8. AMENDMENT AND TERMINATION OF PLAN. 8.1 Amendment. The Compensation Committee may at any time amend the Plan, provided that no amendment shall deny or reduce any amounts previously credited to any Participant's Account. 8.2 Termination. (a) The Compensation Committee may at any time terminate the Plan, if in its judgment the continuance of the Plan, or the tax, accounting or other effects thereof, would not be in the best interest of the Company. (b) Upon any termination of the Plan under this Section 8.2, the Participant will be deemed to have withdrawn from the Plan as of the date of such termination, the remaining deferred Compensation for the balance of the calendar quarter shall prospectively cease to be deferred for such calendar quarter, and the Company will pay to the Participant the balance in the Participant's Account at such times and pursuant to such terms and conditions as the Board in its sole discretion shall determine. 9. MISCELLANEOUS. 9.1 Unsecured General Creditor; Unfunded Plan. A Participant and such Participant's beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interest or claims in any property or assets of the Company. Such assets of the Company shall not be held under any trust for the benefit of a Participant, or such Participant's beneficiaries, heirs, successors or assigns, or held in any way as collateral security for the fulfillment of the obligations of the Company under the Plan. Any and all assets of the Company shall be, and remain, the general, unpledged, unrestricted assets of the Company. The Company's obligation hereunder shall be merely that of an unfunded and unsecured promise of the Company to pay money in the future. It is the intention of the parties hereto that the Plan be unfunded for tax purposes and for purposes of Title I of ERISA. 9.2 Plan Administrator. With respect to ERISA, the Plan Administration Committee shall be the plan administrator and named fiduciary as to the Plan and the corporate secretary of WM, Inc. shall be the agent for purposes of receiving legal process. 9.3 No Right to Employment. The Plan shall not confer upon any person the right to be retained in the employ of the Company, interfere with the right of the Company to discharge or otherwise deal with any person without regard to the existence of the Plan or otherwise be interpreted or construed as creating or modifying any employment or other contract between the Company and any person. 14 9.4 Alienation. No right, interest or benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, security interest, encumbrance, charge, execution, attachment, garnishment or legal process by the creditors of the Participant or the Participant's beneficiary, and any attempt to do so shall be void. 9.5 Information. Participants and their beneficiaries under the Plan shall provide such authorizations, elections, designations and other information as the Plan Administration Committee shall deem necessary for the proper administration of the Plan. All such authorizations, elections, designations and other information shall be in form approved by the Committee. The Plan Administration Committee shall not be obligated to determine the accuracy or authenticity of any information provided by any Participant or beneficiary under the Plan and any payment or other distribution of benefits based thereon shall be binding on such person, or on anyone claiming by, through or under such person, and shall completely discharge any liability under the Plan to the extent of any payment made. 9.6 Headings. Headings of sections and paragraphs of the Plan are inserted for convenience of reference only and shall not constitute a part of the Plan. 9.7 Applicable Law. The Plan shall be interpreted, construed and enforced in accordance with the laws of the State of Washington, except insofar as state law has been preempted by ERISA. 9.8 Validity. In the event any provision of the Plan is held invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the remainder of the Plan. IN WITNESS WHEREOF, the Company has caused the Plan to be executed on this 17th day of April, 2001, but to be effective as of the Effective Date. WASHINGTON MUTUAL, INC. By: /s/ Daryl D. David Its: Executive Vice President 15 -----END PRIVACY-ENHANCED MESSAGE-----