-----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, SIeBNWjWXT0CCtBaW4UMi8kMq7BPYqtFCodWYreuPdWp/xOlC2k1aDIfpNFBNcqv 9aP4cqqiwHXyC35VoTxmAQ== 0000933136-00-000005.txt : 20000516 0000933136-00-000005.hdr.sgml : 20000516 ACCESSION NUMBER: 0000933136-00-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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: 630833 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 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO ______________: Commission File Number 1-14667 WASHINGTON MUTUAL, INC. (Exact name of registrant as specified in its charter) WASHINGTON 91-1653725 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1201 THIRD AVENUE, SEATTLE, WASHINGTON 98101 (Address of principal executive offices) (Zip Code) (206) 461-2000 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the issuer's classes of common stock as of April 30, 2000: Common Stock - 547,759,847(1) (1) Includes the 12,000,000 shares held in escrow. 2 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000 TABLE OF CONTENTS Page ---- PART I Item 1. Financial Statements............................................ 1 Consolidated Statements of Income - Three Months Ended March 31,2000 and 1999................... 2 Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2000 and 1999.................. 3 Consolidated Statements of Financial Condition - March 31, 2000 and December 31,1999......................... 4 Consolidated Statements of Stockholders' Equity - Three Months Ended March 31, 2000 and 1999.................. 5 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2000 and 1999.................. 6 Notes to Consolidated Financial Statements.................... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results Operations.......................................... 10 General....................................................... 10 Results of Operations......................................... 10 Review of Financial Condition................................. 15 Asset Quality................................................. 16 Lines of Business............................................. 19 Interest Rate Sensitivity..................................... 21 Liquidity..................................................... 22 Capital Adequacy.............................................. 23 Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 24 PART II Item 6. Exhibits and Reports on Form 8-K................................ 25
i 3 PART I ITEM 1. FINANCIAL STATEMENTS In the opinion of management, the accompanying consolidated statements of financial condition and related interim consolidated statements of income, comprehensive income, stockholders' equity and cash flows reflect all adjustments (which include reclassifications and normal recurring adjustments) that are necessary for a fair presentation in conformity with generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material impact on the financial statements. Certain reclassifications have been made to the 1999 financial statements to conform to the 2000 presentation. All significant intercompany transactions and balances have been eliminated. The information included in this Form 10-Q should be read in conjunction with Washington Mutual, Inc.'s 1999 Annual Report on Form 10-K to the Securities and Exchange Commission. Interim results are not necessarily indicative of results for a full year. When we refer to "we" or "Washington Mutual" or the "Company" in this Form 10-Q, we mean Washington Mutual, Inc. and its consolidated subsidiaries. 1 4 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED MARCH 31, ------------------------- 2000 1999 ----------- -------- (dollars in thousands, except per share amounts) INTEREST INCOME Loans........................................... $2,221,191 $2,028,502 Available-for-sale ("AFS") securities........... 692,244 539,012 Held-to-maturity ("HTM") securities............. 339,096 247,377 Other interest and dividend income.............. 51,115 39,227 ---------- ---------- Total interest income......................... 3,303,646 2,854,118 INTEREST EXPENSE Deposits........................................ 787,855 813,627 Borrowings...................................... 1,431,081 913,296 ---------- ---------- Total interest expense....................... 2,218,936 1,726,923 ---------- ---------- Net interest income.......................... 1,084,710 1,127,195 Provision for loan losses....................... 41,162 41,700 ---------- ---------- Net interest income after provision for loan losses 1,043,548 1,085,495 NONINTEREST INCOME Depositor and other retail banking fees......... 211,033 163,417 Securities fees and commissions................. 82,573 59,522 Insurance fees and commissions.................. 11,479 10,670 Loan servicing income........................... 33,269 26,031 Loan related income............................. 24,021 26,547 Gain on sale of loans........................... 61,228 38,362 Gain (loss) from securities..................... (21,566) (2,693) Other income.................................... 21,027 30,288 ---------- ---------- Total noninterest income...................... 423,064 352,144 NONINTEREST EXPENSE Compensation and benefits....................... 330,406 301,609 Occupancy and equipment......................... 152,501 134,904 Telecommunications and outsourced information services 76,927 70,064 Depositor and other retail banking losses....... 25,522 25,247 Transaction-related expense..................... - 23,802 Amortization of goodwill and other intangible assets 26,746 25,373 Foreclosed asset (income) expense.............. (1,395) 3,794 Other expense................................... 133,871 145,074 ---------- ---------- Total noninterest expense..................... 744,578 729,867 ---------- ---------- Income before income taxes.................... 722,034 707,772 Income taxes...................................... 263,542 263,654 ---------- ---------- NET INCOME........................................ $ 458,492 $ 444,118 ========== ========== Net income attributable to common stock........... $ 458,492 $ 444,118 ========== ========== Net income per common share: Basic........................................... $0.83 $0.76 Diluted......................................... 0.83 0.76
See Notes to Consolidated Financial Statements. 2 5 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) THREE MONTHS ENDED MARCH 31, ------------------------ 2000 1999 -------- -------- (in thousands) Net income.................................................. $458,492 $444,118 Other comprehensive loss, net of income tax benefit: Unrealized loss on securities: Unrealized holding loss during the period, net of deferred income tax benefit of $146,395 and $39,981.......... (221,672) (61,187) Reclassification adjustment for realized loss (gain) included in net income, net of income tax (benefit) of $(8,275) and $837 12,527 (1,280) Amortization of market adjustment for mortgage-backed securities ("MBS") transferred from available for sale to held to maturity, net of deferred income tax of $882 and $2,480 (1,280) (3,795) --------- -------- (210,425) (66,262) Minimum pension liability adjustment...................... 3,648 (1,760) -------- -------- Other comprehensive loss..................................... (206,777) (68,022) -------- -------- Comprehensive income......................................... $251,715 $376,096 ======== ========
See Notes to Consolidated Financial Statements. 3 6 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) MARCH 31, DECEMBER 31, 2000 1999 ------------ ------------ (in thousands) ASSETS Cash and cash equivalents................................. $ 2,818,015 $ 3,040,167 Trading securities........................................ 35,320 34,660 AFS securities, amortized cost of $42,664,879 and $42,564,180: MBS..................................................... 40,704,634 40,972,653 Investment securities................................... 444,394 411,665 HTM securities, fair value of $18,234,782 and $19,037,435: MBS..................................................... 18,596,688 19,263,413 Investment securities................................... 138,014 138,052 Loans: Loans held in portfolio................................. 110,859,979 113,745,650 Loans held for sale..................................... 362,202 793,504 Reserve for loan losses................................. (1,025,244) (1,041,929) ------------ ------------ Total loans........................................... 110,196,937 113,497,225 Mortgage servicing rights................................. 767,596 643,185 Foreclosed assets......................................... 190,030 198,961 Premises and equipment.................................... 1,541,906 1,558,649 Investment in Federal Home Loan Banks ("FHLBs")........... 3,091,918 2,916,749 Goodwill and other intangible assets...................... 1,165,221 1,199,854 Other assets.............................................. 8,914,545 2,638,397 ------------- ------------ Total assets........................................ $188,605,218 $186,513,630 ============ ============ LIABILITIES Deposits: Checking accounts...................................... $ 15,553,923 $ 13,489,471 Savings accounts and money market deposit accounts ("MMDAs") 29,702,330 30,048,378 Time deposit accounts.................................. 37,256,706 37,591,919 ------------ ------------ Total deposits........................................ 82,512,959 81,129,768 Federal funds purchased and commercial paper.............. 2,410,693 866,543 Securities sold under agreements to repurchase ("reverse repurchase agreements")...................... 28,467,663 30,162,823 Advances from FHLBs....................................... 57,853,022 57,094,053 Other borrowings.......................................... 6,832,067 6,203,197 Other liabilities......................................... 1,823,241 2,004,567 ------------ ------------ Total liabilities................................... 179,899,645 177,460,951 STOCKHOLDERS' EQUITY Common stock, no par value: 1,600,000,000 shares authorized - 552,626,483 and 571,589,272 shares issued............... - - Capital surplus - common stock............................ 1,760,242 2,205,201 Accumulated other comprehensive loss: Unrealized loss on securities............................ (877,839) (667,414) Minimum pension liability adjustment..................... (3,382) (7,030) Retained earnings......................................... 7,826,552 7,521,922 ------------ ------------ Total stockholders' equity.......................... 8,705,573 9,052,679 ------------ ------------ Total liabilities and stockholders' equity.......... $188,605,218 $186,513,630 ============ ============
See Notes to Consolidated Financial Statements. 4 7 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) CAPITAL ACCUMULATED SURPLUS- OTHER COMMON COMPREHENSIVE RETAINED TOTAL STOCK INCOME EARNINGS ---------- -------- ------------ --------- (in thousands) BALANCE, December 31, 1999....... $9,052,679 $2,205,201 $(674,444) $7,521,922 Net income....................... 458,492 - - 458,492 Cash dividends declared on common stock (153,862) - - (153,862) Common stock issued through employee stock plans, including tax benefit 19,904 19,904 - - Other comprehensive loss, net of related income tax benefit..... (206,777) - (206,777) - Common stock repurchased and retired (464,863) (464,863) - - ---------- ---------- --------- ---------- BALANCE, March 31, 2000.......... $8,705,573 $1,760,242 $(881,221) $7,826,552 ========== ========== ========= ========== BALANCE, December 31, 1998....... $9,344,400 $2,994,653 $ 74,281 $6,275,466 Net income....................... 444,118 - - 444,118 Cash dividends declared on common stock (132,236) - - (132,236) Common stock issued through employee stock plans, including tax benefit 21,266 21,266 - - Other comprehensive loss, net of related income tax benefit..... (68,022) - (68,022) - ---------- ---------- --------- ---------- BALANCE, March 31, 1999.......... $9,609,526 $3,015,919 $ 6,259 $6,587,348 ========== ========== ========= ==========
See Notes to Consolidated Financial Statements. 5 8 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31, -------------------------- 2000 1999 ---------- --------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income.............................................$ 458,492 $ 444,118 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses............................ 41,162 41,700 Gain on sale of loans............................... (61,228) (38,362) Loss from securities.................................. 21,566 2,693 Depreciation and amortization........................ 119,294 89,125 Stock dividends from FHLBs.......................... (41,870) (28,555) Transaction-related expense.......................... - 23,802 Decrease in trading securities....................... 2,567 9,655 Origination of loans held for sale................... (1,251,645) (1,539,803) Sales of loans held for sale......................... 1,658,338 3,541,833 (Increase) decrease in other assets.................. (812,793) 52,528 Decrease in other liabilities...................... (42,450) (22,336) ------------ ------------ Net cash provided by operating activities.......... 91,433 2,576,398 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of AFS securities.......................... (40,492) (12,320,686) Purchases of HTM securities........................... - (5,989) Sales of AFS securities................................ 117,629 1,283,970 Maturities of AFS securities........................... 3,428 29,100 Principal payments on securities....................... 2,007,405 3,684,364 Purchases of Investment in FHLBs....................... (135,051) (153,685) Purchases of loans..................................... (704,347) (1,300,807) Sales of loans......................................... 1,889,464 9,681 Origination of loans, net of principal payments........ (5,342,875) (2,333,956) Sales of foreclosed assets............................. 72,672 78,933 Cash used for Alta..................................... (21,823) - Purchases of premises and equipment, net............... (40,642) (70,029) ------------ ------------ Net cash used by investing activities.............. (2,194,632) (11,099,104) CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in deposits........................ 1,383,191 (1,312,515) Decrease in short-term borrowings..................... (4,697,263) (586,887) Proceeds from long-term borrowings.................... 8,681,219 8,042,744 Repayments of long-term borrowings..................... (3,644,809) (1,384,668) Proceeds from FHLBs advances........................... 21,118,794 28,232,168 Repayments of FHLBs advances........................... (20,359,820) (25,205,331) Cash dividends paid on common stock.................... (153,862) (132,236) Repurchase of common stock............................. (464,863) - Other capital transactions............................. 18,460 20,377 ------------ ------------ Net cash provided by financing activities........ 1,881,047 7,673,652 -------------- ------------ Decrease in cash and cash equivalents. ........... (222,152) (849,054) Cash and cash equivalents, beginning of period... 3,040,167 2,756,974 ------------ ------------ Cash and cash equivalents, end of period.......... $ 2,818,015 $ 1,907,920 ============ ============
See Notes to Consolidated Financial Statements. 6 9 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31, ---------------------------- 2000 1999 ---------- ---------- (in thousands) NONCASH ACTIVITIES Loans exchanged for MBS................................ $1,954,652 $1,805,534 Real estate acquired through foreclosure............... 74,938 102,248 Loans originated to facilitate the sale of foreclosed assets 11,197 10,928 Loans held for sale originated to refinance existing loans 64,616 1,353,378 Loans held in portfolio originated to refinance existing loans 824,778 1,028,605 Trade date purchases not yet settled................... - 3,433,853 Trade date sales not yet settled....................... 5,467,690 106,861 Trade date borrowings not yet settled.................. 500,000 - Transfer of reserves................................... 16,930 5,214 CASH PAID DURING THE PERIOD FOR Interest on deposits................................... 731,349 743,948 Interest on borrowings................................. 1,591,746 990,125 Income taxes........................................... 817 136,364
See Notes to Consolidated Financial Statements. 7 10 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1: EARNINGS PER SHARE ("EPS") Earnings per share ("EPS") are presented under two formats: earnings per share and diluted earnings per share. Earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the period plus the impact of potential dilutive common shares, such as stock options. Information used to calculate EPS was as follows: THREE MONTHS ENDED MARCH 31, -------------------------- 2000 1999 ------------ -------- (dollars in thousands, except per share amounts) Net income................................... $458,492 $444,118 Weighted average shares - ----------------------- Basic weighted average number of common shares outstanding...................... 551,787,125 581,939,740 Dilutive effect of potential common shares. 871,533 2,640,443 ------------ ----------- Diluted weighted average number of common shares outstanding...................... 552,658,658 584,580,183 =========== ============ Net income per common share - --------------------------- Basic and diluted.......................... $0.83 $0.76
Options to purchase an additional 13,201,323 shares of common stock, with an exercise price ranging from $24.30 per share to $49.69 per share, were outstanding at March 31, 2000, but were not included in the computation of diluted EPS because their exercise prices were greater than the average market price of the common stock during the period. Additionally, as part of the business combination with Keystone Holdings, 12 million shares of common stock, with an assigned value of $27.74 per share, are held in an escrow for the benefit of the general and limited partners of Keystone Holdings, the Federal Savings and Loan Insurance Corporation Resolution Fund and their transferees. The conditions under which these shares can be released from escrow are related to the outcome of certain litigation and not based on earnings or market price. At March 31, 2000, the conditions were not met, and, therefore, the shares were not included in the above computations. NOTE 2: OTHER BORROWINGS As of both March 31, 2000 and December 31, 1999, other borrowings included Company-obligated mandatorily redeemable capital securities of the Company's subsidiary trusts holding solely $950.0 million aggregate liquidation amount of subordinated deferrable interest debentures of the Company. In March 2000, the Company issued subordinated debt securities totaling $500.0 million and bearing a fixed rate of 8.25%. The notes are due on April 1, 2010. 8 11 WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 3: LINES OF BUSINESS Washington Mutual is managed along five major lines of business: consumer banking, mortgage banking, commercial banking, financial services, and consumer finance. The treasury group, although not considered a line of business, is responsible for the management of investments and interest rate risk. Financial highlights by lines of business: THREE MONTHS ENDED MARCH 31, 2000 -------------------------------------------------------------------------- CONSUMER MORTGAGE COMMERCIAL FINANCIAL CONSUMER TREASURY/ BANKING BANKING BANKING SERVICES FINANCE OTHER TOTAL -------- -------- ---------- --------- -------- --------- -------- (in thousands) Condensed income statement: Net interest income after provision for loan losses $613,693 $200,838 $89,826 $ 83 $80,337 $58,771 $1,043,548 Noninterest income...... 224,141 90,962 4,709 95,352 30,970 (23,070) 423,064 Noninterest expense..... 449,255 133,439 29,059 59,986 63,180 9,659 744,578 Income taxes............ 139,736 56,925 23,806 14,195 19,476 9,404 263,542 -------- -------- ------- ------- ------- ------- ---------- Net income.............. $248,843 $101,436 $41,670 $21,254 $28,651 $16,638 $ 458,492 ======== ======== ======= ======= ======= ======= ========== March 31, 2000 ------------------------------------------------------------------------------- Total assets............ $85,162,463 $48,061,516 $20,472,871 $148,215 $7,163,327 $27,596,826 $188,605,218 =========== =========== =========== ======== ========== =========== ============ THREE MONTHS ENDED MARCH 31, 1999 -------------------------------------------------------------------------- CONSUMER MORTGAGE COMMERCIAL FINANCIAL CONSUMER TREASURY/ BANKING BANKING BANKING SERVICES FINANCE OTHER TOTAL -------- -------- ---------- --------- -------- --------- ------- (in thousands) Condensed income statement: Net interest income after provision for loan losses $597,397 $214,138 $101,187 $ 594 $54,163 $118,016 $1,085,495 Noninterest income... 180,065 74,136 8,024 70,830 6,679 12,410 352,144 Transaction-related expense 17,551 4,378 138 1,474 - 261 23,802 Noninterest expense..... 447,295 141,146 25,833 46,044 34,748 10,999 706,065 Income taxes............ 116,109 53,025 30,980 9,066 10,154 44,320 263,654 -------- -------- -------- ------- -------- -------- ---------- Net income.............. $196,507 $ 89,725 $ 52,260 $14,840 $15,940 $ 74,846 $ 444,118 ======== ======== ======== ======= ======= ======== ========== March 31, 1999 ------------------------------------------------------------------------------- Total assets............ $87,006,907 $32,634,021 $19,271,811 $119,913 $3,168,651 $32,093,749 $174,295,052 =========== =========== =========== ======== ========== =========== ============
NOTE 4: OTHER ASSETS At March 31, 2000, the Company had $5.97 billion of trade date receivables relating to sales of loans and securities which had not yet settled, which were a component of "Other assets." The Company had no trade date receivables at year-end 1999. 9 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section contains forward-looking statements, which are not historical facts and pertain to our future operating results. These forward-looking statements are within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in this report that are not historical facts. When used in this report, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions are generally intended to identify forward-looking statements. These forward-looking statements are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Actual results may differ materially from the results discussed in these forward-looking statements for the reasons, among others, discussed under the heading "Business-Risk Factors" in our 1999 Annual Report on Form 10-K to the Securities and Exchange Commission, which are incorporated herein by reference. GENERAL Washington Mutual, Inc. is a financial services company committed to serving consumers and small to mid-sized businesses. Our banking subsidiaries, Washington Mutual Bank, FA ("WMBFA"), Washington Mutual Bank ("WMB") and Washington Mutual Bank fsb ("WMBfsb"), accept deposits from the general public, make residential loans, consumer loans, and limited types of commercial real estate loans (primarily loans secured by multi-family properties), and engage in certain commercial banking activities. Our consumer finance operations provide direct installment loans and related credit insurance services and purchase retail installment contracts. We originate, purchase, sell and service specialty mortgage finance loans through our subsidiaries, Washington Mutual Finance and Long Beach Mortgage. We also market annuities and other insurance products, offer full service securities brokerage, and act as the investment advisor to and the distributor of mutual funds. In connection with one of our current performance goals, to decrease the proportion of single-family residential ("SFR") loans on our balance sheet, we sold approximately $9.00 billion of SFR loans and mortgage-backed securities ("MBS") during the first quarter. We intend to use the proceeds from these sales to reduce our wholesale borrowings and fund our expanded share repurchase program. RESULTS OF OPERATIONS OVERVIEW. Our net income for first quarter 2000 was $458.5 million, compared with $444.1 million for the same period a year ago. We had basic and diluted earnings per share of $0.83 in first quarter 2000 and $0.76 in first quarter 1999. NET INTEREST INCOME. Despite an increase in average interest-earning assets to $180.46 billion for first quarter 2000 from $158.66 billion in the same period a year ago, net interest income declined approximately 4% for the first quarter of 2000 to $1.08 billion, compared with $1.13 billion in the first quarter of 1999. The decline in net interest income was due to the drop in the net interest spread and margin. The net interest spread and margin were 2.25% and 2.38% for first quarter 2000, compared with 2.60% and 2.79% for the same period a year ago. The compression in the net interest spread and margin is primarily due to the fact that our liabilities reprice more quickly than our assets. Interest rates have risen rapidly over the past year, as evidenced by an increase in the average three-month London Interbank Offered Rate ("LIBOR") from 5.01% in the first quarter of 1999 to 6.10% in the first quarter of 2000 and by an aggregate 125 basis point increase in the federal funds rate. 10 13 The cost of our interest-bearing liabilities increased 48 basis points to 5.08% for first quarter 2000 from 4.60% for the same period a year ago, driven primarily by a 64 basis point increase in the cost of wholesale borrowings. The cost of wholesale borrowings increased to 6.08% for first quarter 2000, compared with 5.44% for the same period a year ago. The rise in wholesale borrowing rates was partially mitigated by the cost of deposits, which remained unchanged from first quarter 1999. The overall yield on our interest-earning assets increased 13 basis points, driven primarily by a 21 basis point increase in the yield on loans to 7.64% for first quarter 2000, compared with 7.43% for the same period in 1999. Selected average financial balances and the net interest spread and margin were as follows: THREE MONTHS ENDED MARCH 31, -------------------------- 2000 1999 ---------- ------------ (dollars in thousands) Average balances: Loans..................................... $116,289,707 $109,289,268 MBS....................................... 60,046,653 45,765,022 Investment securities and Investment in FHLBs 4,120,524 3,606,580 ------------ ------------ Total interest-earning assets........... 180,456,884 158,660,870 Deposits.................................. 80,967,950 84,289,648 Borrowings................................ 94,727,478 68,015,000 ------------ ------------ Total interest-bearing liabilities.... 175,695,428 152,304,648 Total assets............................. 186,376,917 164,220,074 Stockholders' equity...................... 8,885,473 9,488,284 Weighted average yield on: Loans..................................... 7.64% 7.43% MBS....................................... 6.81 6.78 Investment securities and Investment in FHLBs 5.88 5.56 Interest-earning assets................. 7.33 7.20 Weighted average cost of: Deposits.................................. 3.91 3.91 Borrowings................................ 6.08 5.44 Interest-bearing liabilities............ 5.08 4.60 Net interest spread....................... 2.25 2.60 Net interest margin....................... 2.38 2.79
The net interest spread is the difference between our weighted average yield on our interest-earning assets and the weighted average cost of our interest-bearing liabilities. The net interest margin measures our annualized net interest income as a percentage of average interest-earning assets. 11 14 The dollar amounts of interest income and interest expense fluctuate depending upon changes in amounts (volume) and upon changes in interest rates of our interest-earning assets and interest-bearing liabilities. The following table details changes attributable to (i) changes in volume (changes in average outstanding balances multiplied by the prior period's rate) and (ii) changes in rate (changes in average interest rate multiplied by the prior period's volume). Changes in rate/volume (changes in rate times the change in volume) were allocated proportionately to the changes in volume and the changes in rate. THREE MONTHS ENDED MARCH 31, 2000 VS. 1999 ---------------------------------------- INCREASE/(DECREASE) DUE TO ---------------------------------------- VOLUME RATE TOTAL CHANGE --------- -------- ------------- (in thousands) Interest income: Loans........................................ $134,713 $ 57,976 $192,689 MBS.......................................... 243,150 3,008 246,158 Investment securities and Investment in FHLBs 7,653 3,028 10,681 -------- -------- -------- Total interest income...................... 385,516 64,012 449,528 Interest expense: Deposits..................................... (25,578) (194) (25,772) Borrowings................................... 399,463 118,322 517,785 -------- -------- -------- Total interest expense..................... 373,885 118,128 492,013 -------- -------- -------- Net interest income...................... $ 11,631 $(54,116) $(42,485) ======== ======== ========
NONINTEREST INCOME. Noninterest income was $423.1 million for the quarter ended March 31, 2000, compared with $352.1 million for the same period in 1999. Noninterest income consisted of the following: THREE MONTHS ENDED MARCH 31, ------------------------ 2000 1999 ----------- --------- (in thousands) Depositor and other retail banking fees...... $211,033 $163,417 Securities fees and commissions.............. 82,573 59,522 Insurance fees and commissions............... 11,479 10,670 Loan servicing income........................ 33,269 26,031 Loan related income.......................... 24,021 26,547 Gain on sale of loans........................ 61,228 38,362 Gain (loss) from securities.................. (21,566) (2,693) Other income................................. 21,027 30,288 ---------- ---------- Total noninterest income................. $423,064 $352,144 ======== ========
Depositor and other retail banking fees of $211.0 million for the quarter ended March 31, 2000 increased 29% from $163.4 million for the same period in 1999. We collected more debit card, ATM, overdraft protection, nonsufficient funds and other fees related to checking accounts. The number of checking accounts increased by over 427,000 or 11% to 4,428,225 at March 31, 2000. Securities fees and commissions were $82.6 million for the first quarter of 2000, up from $59.5 million for the first quarter of 1999. During the first quarter of 2000, there were higher sales of investment products and additional growth of assets under management by our investment management affiliate from $6.03 billion at March 31, 1999 to $8.16 billion at March 31, 2000. 12 15 Loan servicing income increased to $33.3 million for the quarter ended March 31, 2000 from $26.0 million for the comparable period in 1999. The ncrease of $7.3 million in loan servicing income was primarily due to growth in loans serviced for others as a result of securitizations and portfolio sales. The impact of this portfolio growth was partially offset by a 4.62 basis point decline in the average servicing fee rate. The decline in the average servicing fee rate was primarily due to lower servicing rates received from new securitizations and portfolio sales, and by paydowns of existing loans with higher servicing rates. Since the majority of the loan securitizations occurred in March 2000, the impact on loan servicing income will not be fully realized until second quarter 2000. Loan servicing income was $33.3 million for the first quarter of 2000, compared with $38.5 million for the fourth quarter of 1999. Fourth quarter loan servicing income included a $4.3 million impairment recovery. Gain on sale of loans during the first quarter of 2000 was $61.2 million, up from $38.4 million for the same period in 1999. The increase was primarily due to a gain from the sale of $5.08 billion of adjustable-rate loans during the first quarter of 2000. During the quarter, we also recognized gains from the sale of loans originated by Long Beach Mortgage, which sells most of its loan production in the secondary market. Total sales of loans held for sale were $1.75 billion in first quarter 2000, compared with $3.55 billion in first quarter 1999. Losses from securities were $21.6 million during the first quarter of 2000, compared with $2.7 million during the first quarter of 1999. The losses incurred during first quarter 2000 were primarily the result of a loss of $19.4 million on the sale of available-for-sale ("AFS"), private issue MBS, as an additional part of our balance sheet remixing strategy. Other income declined to $21.0 million for the quarter ended March 31, 2000 from $30.3 million for the same period a year ago. Other income in the first quarter of 1999 included a $7.1 million gain on the sale of the former Coast Federal Bank, Federal Savings Bank headquarters property. 13 16 NONINTEREST EXPENSE. Noninterest expense totaled $744.6 million for the quarter ended March 31, 2000, compared with $729.9 million for the same period in 1999. Noninterest expense consisted of the following: THREE MONTHS ENDED MARCH 31, ----------------------- 2000 1999 ---------- -------- (in thousands) Compensation and benefits................. $330,406 $301,609 Occupancy and equipment .................. 152,501 134,904 Telecommunications and outsourced information services................... 76,927 70,064 Depositor and retail banking losses....... 25,522 25,247 Transaction-related expense............... - 23,802 Amortization of goodwill and other intangible assets...................... 26,746 25,373 Foreclosed asset (income) expense......... (1,395) 3,794 Advertising and promotion................. 20,761 26,850 Postage................................... 23,515 22,051 Professional fees......................... 20,538 16,217 Regulatory assessments.................... 8,019 15,363 Office supplies........................... 8,779 7,848 Travel and training....................... 14,603 11,978 Proprietary mutual fund expense........... 7,837 7,591 Other expense............................. 29,819 37,176 -------- -------- Total noninterest expense............. $744,578 $729,867 ======== ========
Compensation and benefits expense increased to $330.4 million for the quarter ended March 31, 2000 from $301.6 million for the same period in 1999. The acquisition of Long Beach Mortgage in October 1999 contributed approximately $14.0 million of compensation and benefits expense in the first quarter of 2000. In addition to the acquisition of Long Beach Mortgage, we have been increasing staffing levels to accommodate our growth in new markets, expansion of existing business lines, and the introduction of new products. Occupancy and equipment expense was $152.5 million for the first quarter of 2000, compared with $134.9 million for the same period in 1999. Computer system upgrades caused an increase in depreciation, equipment and maintenance expense. Telecommunications and outsourced information services expense of $76.9 million for the first quarter of 2000 was up from $70.1 million for the same period in 1999. The increase reflects higher use of services resulting from increased staffing levels, new locations and a rate increase in our contract with IBM Global Services, effective January 1, 2000. We completed the integration of H. F. Ahmanson & Co. ("Ahmanson") in the fourth quarter of 1999. Therefore, there were no transaction-related expenses incurred in the quarter ended March 31, 2000, compared with $23.8 million for the same period in 1999. During the first quarter of 1999, we incurred costs associated with contract and temporary employment services, severance, facilities and equipment impairment as well as other costs that were expensed as incurred. 14 17 TAXATION. Income taxes include federal and applicable state income taxes and payments in lieu of taxes. Income taxes of $263.5 million for the first quarter of 2000 represented an effective tax rate of 36.50%. Income taxes were $263.7 million for the first quarter of 1999, which represented an effective tax rate of 37.25%. REVIEW OF FINANCIAL CONDITION ASSETS. At March 31, 2000, our assets were $188.61 billion, an increase of 1% from $186.51 billion at December 31, 1999. In spite of a decline in loans and securities, assets were higher at the end of the first quarter due to $5.97 billion of trade date receivables in "Other assets." See "Notes to Consolidated Financial Statements - Note 4: Other Assets." SECURITIES. Our securities portfolio decreased by $901.4 million to $59.92 billion during the quarter ended March 31, 2000. This decline was due to sales, paydowns, and additional unrealized losses on the AFS investment portfolio in excess of the amount of loans securitized and retained. There were no purchases of MBS during first quarter 2000. LOANS. Total loans at March 31, 2000 were $111.22 billion, down from $114.54 billion at December 31, 1999. This decline in loan balances was primarily the result of loan sales and loan securitizations of $10.66 billion, and loan payments of $5.40 billion, offset by originations of new loans of $12.16 billion and purchases of $704.3 million. Our current ARM products are tied to Treasury-based indices. Due to the repayment of portfolio loans indexed to the Cost of Funds Index of the Eleventh District Federal Home Loan Bank ("COFI") and the securitization and sale of COFI-based loans, the percentage of portfolio loans indexed to Treasury averages is increasing. At March 31, 2000, 88% of real estate loans were adjustable rate, of which 58% were indexed to U.S. Treasury indices, 35% were indexed to COFI, and 7% to other indices. The remaining 12% of the real estate loan portfolio at March 31, 2000 were fixed rate. At December 31, 1999, 85% of real estate loans were adjustable rate, of which 52% were indexed to U.S. Treasury indices, 42% were indexed to COFI, and 6% to other indices. The remaining 15% of the year-end 1999 real estate loan portfolio were fixed rate. Total loan originations increased slightly in the first quarter of 2000 to $12.16 billion from $11.88 billion in the first quarter of 1999. SFR originations were $8.50 billion for first quarter 2000, compared with $9.67 billion for the same period in 1999. Originations of second mortgage and other consumer, specialty mortgage finance, commercial business, commercial real estate and residential construction loans totaled $3.67 billion for the most recent quarter, up from $2.21 billion in the first quarter of 1999. Due to the higher interest rate environment during first quarter 2000, compared with the same period a year ago, SFR adjustable-rate originations increased to $7.77 billion during the first quarter of 2000 from $5.17 billion during the first quarter of 1999, whereas SFR fixed-rate originations declined to $732.4 million during the first quarter of 2000 from $4.50 billion for the same period in 1999. During the first quarter of 2000, loan sales of $8.71 billion included $6.84 billion of seasoned SFR loans which were securitized and sold, $657.6 million of current production SFR loans, $1.09 billion of loans originated by Long Beach Mortgage and $123.6 million of student loans. 15 18 Changes in first quarter 2000 and fourth quarter 1999 mortgage servicing rights ("MSR") were as follows: THREE MONTHS ENDED ---------------------------- MARCH 31, DECEMBER 31, 2000 1999 ---------- ------------ (in thousands) Balance, beginning of period................ $643,185 $489,037 Additions................................... 150,453 169,844 Amortization................................ (26,041) (19,977) Impairment recovery......................... - 4,281 -------- -------- Balance, end of period...................... $767,597 $643,185 ======== ========
MSR increased to $767.6 million at March 31, 2000 from $643.2 million at December 31, 1999. The additions to MSR during the first quarter of 2000 and fourth quarter of 1999 were primarily due to loan sales and loan securitizations. Amortization during the first quarter of 2000 included the full effect of the fourth quarter 1999 securitizations. The impact of the first quarter 2000 loan sales and loan securitizations on amortization will not be fully realized until second quarter 2000. LIABILITIES. We primarily use customer deposits and wholesale borrowings to fund our loans and investments. Due to increased market competition for customer deposits, we have increasingly relied on wholesale borrowings to fund our asset growth. Deposits increased to $82.51 billion at March 31, 2000 from $81.13 billion at year-end 1999. Our strategy is to increase the ratio of transaction accounts to total deposits. As a result of this strategy, savings accounts, MMDAs and checking accounts have increased as a percentage of total deposits to 55% at March 31, 2000, compared with 54% at December 31, 1999. These three products have the benefit of lower interest costs, compared with time deposit accounts. Even though transaction accounts are more liquid, we consider them to be the core relationship with our customers. In the aggregate, we view these core accounts to be a more stable source of long-term funding than time deposits. Our wholesale borrowing portfolio increased by $1.24 billion to $95.56 billion at March 31, 2000, compared with year-end 1999. The increase was primarily due to our use of wholesale borrowings as an alternative to retail deposits as a funding source for asset growth. Due to relative pricing advantages, we generally used advances from FHLBs and reverse repurchase agreements as our primary funding vehicles. In addition, on March 30, 2000, we issued $500.0 million of non-callable, 8.25% subordinated notes due April 1, 2010. ASSET QUALITY PROVISION AND RESERVE FOR LOAN LOSSES. We analyze several important elements in determining the level of the provision for loan losses in any given period, such as current and historical economic conditions, nonaccrual asset trends, historical loan loss experience, and plans for problem loan administration and resolution. The results of the analysis indicated continued improvement in asset quality during the first quarter of 2000. Nonaccrual loans decreased to $789.3 million at March 31, 2000 from $827.0 million at December 31, 1999 and $895.9 million at March 31, 1999. Actual loss experience, as measured by net charge offs, decreased to $40.9 million for the first quarter of 2000 from $44.8 million for the fourth quarter of 1999 and $45.0 million for the first quarter of 1999. Net charge offs as a percentage of average loans were 0.14% for first quarter 2000, down from 0.15% for fourth quarter 1999 and 0.16% for first quarter 1999. 16 19 At March 31, 2000, we had specific reserves totaling $42.6 million, compared with $81.6 million at December 31, 1999 and $129.0 million at March 31, 1999. Reserves specified for the apartment building and commercial real estate loan portfolios have declined by 44% since year-end 1999 and by 70% since March 31, 1999 and now total $33.3 million at March 31, 2000. The decline from March 31, 1999 to March 31, 2000 was primarily due to California economic growth and the recovery of commercial real estate markets nationwide, which resulted in significant improvement in the quality of these portfolios. The result was a reduction in the level of nonaccrual loans in these portfolios. In the following table, the transfer of $16.9 million from the reserve for loan losses during the first quarter of 2000 related to loans securitized or loans sold. The amount transferred reduced the basis of the loans that were securitized. The transfer of $5.2 million to the reserve for loan losses during the first quarter of 1999 related to loans securitized and/or sold as well as merger-related adjustments to conform Home Savings' policies to our policies. Changes in the reserve for loan losses were as follows: THREE MONTHS ENDED MARCH 31, ------------------------ 2000 1999 ----------- ---------- (dollars in thousands) Balance, beginning of period.............. $1,041,929 $1,067,840 Provision for loan losses................. 41,162 41,700 Transfers of reserves..................... (16,930) 5,214 Loans charged off: SFR and SFR construction................ (6,767) (11,080) Second mortgage and other consumer...... (37,753) (37,178) Specialty mortgage finance.............. (588) (56) Commercial business..................... (780) (2,455) Commercial real estate.................. (1,557) (3,925) ---------- ---------- (47,445) (54,694) Recoveries of loans previously charged off: SFR and SFR construction................ 148 2,096 Second mortgage and other consumer...... 5,165 4,633 Specialty mortgage finance.............. 509 28 Commercial business..................... 230 228 Commercial real estate ................. 476 2,674 ---------- ---------- 6,528 9,659 ---------- ---------- Net charge offs........................... (40,917) (45,035) ---------- ---------- Balance, end of period.................... $1,025,244 $1,069,719 ========== ========== Net charge offs as a percentage of average loans 0.14% 0.16% MARCH 31, DECEMBER 31, 2000 1999 ---------- ----------- Total reserve for loan losses as a percentage of: Nonaccrual loans........................ 130% 126% Nonperforming assets.................... 105 102 Total loans (exclusive of the reserve for loan losses) 0.92 0.91
At March 31, 2000, we had $17.39 billion of loans securitized and retained with recourse, and $4.51 billion of loans securitized and sold with recourse. At March 31, 2000, the liability for this recourse was $109.5 million. When we securitize loans with recourse, we typically retain the exposure for potential losses on the loans underlying these securities and, as a result, have established a recourse 17 20 obligation. Because the loans underlying these securities are similar to the loans in our loan portfolio, we estimate our recourse obligation on these securities in a manner similar to the method we use for establishing the reserve for loan losses on our loan portfolio. The liability for this recourse obligation is included in "Other liabilities." Changes in the recourse liability were as follows: THREE MONTHS ENDED MARCH 31, -------------------------- 2000 1999 --------- -------- (in thousands) Balance, beginning of period ................ $113,089 $144,257 Transfer to reserve for loan losses.......... - (15,000) Charge offs, net of provision for recourse losses (3,548) (1,291) -------- -------- Balance, end of period....................... $109,541 $127,966 ======== ========
The total loss coverage represents the reserve for loan losses and recourse liability as a percentage of nonaccrual loans. MARCH 31, DECEMBER 31, 2000 1999 ---------- ----------- Total loss coverage percentage 144% 140%
NONPERFORMING ASSETS. Assets considered to be nonperforming include nonaccrual loans and foreclosed assets. When loans securitized or sold with recourse become nonperforming, we repurchase them and include them in nonaccrual loans. Management's classification of a loan as nonaccrual does not necessarily indicate that the principal of the loan is uncollectible in whole or in part. Loans are generally placed on nonaccrual status when they are four payments or more past due. Nonperforming assets consisted of the following: MARCH 31, DECEMBER 31, 2000 1999 ----------- ---------- (dollars in thousands) Nonaccrual loans: SFR ........................................ $574,070 $ 601,896 SFR construction............................ 10,632 18,017 Second mortgage and other consumer.......... 91,469 98,126 Specialty mortgage finance.................. 65,883 57,193 Commercial business......................... 15,571 9,826 Commercial real estate...................... 31,648 41,967 -------- ---------- 789,273 827,025 Foreclosed assets............................. 190,030 198,961 -------- ---------- $979,303 $1,025,986 ======== ========== Nonperforming assets as a percentage of total assets 0.52% 0.55%
18 21 LINES OF BUSINESS We are managed along five major lines of business: consumer banking, mortgage banking, commercial banking, financial services, and consumer finance. Although we do not consider the treasury group to be a line of business, it manages investments and interest rate risk. MBS and whole loans that we purchase (other than specialty mortgage finance loans) are allocated to treasury. CONSUMER BANKING MORTGAGE BANKING COMMERCIAL BANKING FINANCIAL SERVICES -------------------------------------------------------------------------------------- MARCH 31, MARCH 31, MARCH 31, MARCH 31, --------- --------- --------- --------- 2000 1999 2000 1999 2000 1999 2000 1999 -------------------------------------------------------------------------------------- (in thousands) CONDENSED INCOME STATEMENT Net interest income after provision for loan losses $613,693 $597,397 $200,838 $214,138 $89,826 $101,187 $ 83 $ 594 Noninterest income 224,141 180,065 90,962 74,136 4,709 8,024 95,352 70,830 Transaction-related expense - 17,551 - 4,378 - 138 - 1,474 Noninterest expense 449,255 447,295 133,439 141,146 29,059 25,833 59,986 46,044 Income taxes 139,736 116,109 56,925 53,025 23,806 30,980 14,195 9,066 -------- -------- -------- -------- ------- ------- ------- ------- Net income $248,843 $196,507 $101,436 $ 89,725 $41,670 $52,260 $21,254 $14,840 ======== ======== ======== ========= ======= ======= ======= ======= Total assets $85,162,463 $87,006,907 $48,061,516 $32,634,021 $20,472,871 $19,271,811 $148,215 $119,913 =========== =========== =========== =========== =========== =========== ======== ======== CONSUMER FINANCE TREASURY/OTHER TOTAL -------------------------------------------------------------------- MARCH 31, MARCH 31, MARCH 31, --------- --------- --------- 2000 1999 2000 1999 2000 1999 -------------------------------------------------------------------- (in thousands) CONDENSED INCOME STATEMENT Net interest income after provision for loan losses $80,337 $54,163 $58,771 $118,016 $1,043,548 $1,085,495 Noninterest income 30,970 6,679 (23,070) 12,410 423,064 352,144 Transaction-related expense - - - 261 - 23,802 Noninterest expense 63,180 34,748 9,659 10,999 744,578 706,065 Income taxes 19,476 10,154 9,404 44,320 263,542 263,654 ------- ------- ------- ------- --------- --------- Net income $28,651 $15,940 $16,638 $74,846 $ 458,492 $ 444,118 ======= ======= ======= ======= ========= ========= Total assets $7,163,327 $3,168,651 $27,596,826 $32,093,749 $188,605,218 $174,295,052 ========== ========== =========== =========== ============ ============
On a consolidated basis, net income for first quarter 2000 was $458.5 million, compared with $444.1 million for the same period a year ago. In addition, there were no transaction-related expenses incurred during the quarter ended March 31, 2000. We are constantly analyzing our line of business performance and developing better ways to measure profitability. CONSUMER BANKING Net income for the first quarter of 2000 was $248.8 million, an increase of $52.3 million from $196.5 million for the first quarter of 1999. This increase was primarily due to an increase of $44.1 million in noninterest income, a decline of $17.6 million in transaction-related expense and an increase of $16.3 million in interest income after provision for loan losses. Noninterest income rose by $44.1 million as a result of an increase in depositor and other retail banking fees. The consumer banking group collected more debit card, ATM, overdraft protection, nonsufficient funds and other fees related to checking accounts. 19 22 MORTGAGE BANKING Net income for the first quarter of 2000 was $101.4 million, an increase of $11.7 million from $89.7 million for the first quarter of 1999. This increase was comprised of an increase of $16.8 million in noninterest income and a decrease in noninterest expense of $7.7 million, partially offset by a decrease in net interest income after provision for loan losses of $13.3 million. Noninterest income increased as a result of increased gain on sale of loans sold during the first quarter of 2000 and increased loan servicing income from loans sold during the fourth quarter of 1999. The decline in net interest income was primarily due to the compression of the net interest spread and margin. The cost of borrowings responded more quickly than the yield on assets to the rise in short-term interest rates during the first quarter of 2000. Total assets increased by approximately 47% from March 31, 1999 to March 31, 2000 due to more loans securitized and retained. COMMERCIAL BANKING Net income for the first quarter of 2000 was $41.7 million, a decrease of $10.6 million from $52.3 million for the first quarter of 1999. This decrease was primarily due to a decline of $11.4 million in net interest income after provision for loan losses, resulting from the compression of the net interest spread and margin in the commercial real estate portfolio where the repricing indices for the majority of the portfolio responded more slowly to the rise in short-term interest rates than the cost of borrowings. The decline was partially offset by an increase in net interest income for our Western Bank division due to a $457.7 million increase in average loans over first quarter 1999, while maintaining a comparable net interest margin. FINANCIAL SERVICES Net income for the first quarter of 2000 was $21.3 million, an increase of $6.5 million from $14.8 million for the first quarter of 1999. Noninterest income was up during the first quarter of 2000 as a result of an increase in securities fees and commissions. During the first quarter of 2000, there were higher sales of investment products and growth of assets under management. The increase in noninterest expense was primarily due to an increase in commissions expense related to a greater number of licensed sales employees and the growth in the business. CONSUMER FINANCE Net income for the first quarter of 2000 was $28.7 million, an increase of $12.8 million from $15.9 million for the first quarter of 1999. The increase was attributable to increases of $26.2 million in net interest income after provision for loan losses and $24.3 million in noninterest income, partially offset by increases of $28.4 million in noninterest expense. The increase in net interest income was due to an increase in average loans for the quarter ended March 31, 2000. This increase was attributable to the growth in loans originated and purchases of specialty mortgage finance loans. The increase in noninterest income was primarily due to the growth in insurance fees and commissions and gain on sale of loans. Washington Mutual acquired Long Beach Mortgage on October 1, 1999. Since the transaction was accounted for as a purchase, Long Beach Mortgage operations were not included in first quarter 1999 results. TREASURY/OTHER The net loss of $23.1 million in noninterest income during the first quarter of 2000 represented a net loss on the sale of securities, compared with the net gain of $12.4 million during the first quarter of 20 23 1999. The changes in net interest income were attributable to the treasury group's function of managing our investments and interest rate risk. INTEREST RATE SENSITIVITY Our long-run profitability depends not only on the success of the services we offer to our customers and the credit quality of our loans and securities, but also the extent to which our earnings are not negatively affected by changes in interest rates. We engage in a comprehensive asset and liability management program that attempts to reduce the risk of significant decreases in net interest income caused by interest rate changes without unduly penalizing current earnings. As part of this strategy, we actively manage the amounts and maturities of our assets and liabilities. A conventional view of interest rate sensitivity for savings institutions is the gap report, which indicates the difference between assets maturing or repricing within a period and total liabilities maturing or repricing within the same period. In assigning assets to maturity and repricing categories we take into consideration expected prepayment speeds rather than contractual maturities. The balances reflect actual amortization of principal and do not take into consideration reinvestment of cash. Principal prepayments are the amounts of principal reduction over and above normal amortization. We have used prepayment assumptions based on market estimates and past experience with our current portfolio. Since our non-maturity deposits are not contractually subject to repricing, they have been allocated based on expected decay rates. Non-rate sensitive items such as the reserve for loan losses and deferred loan fees/costs are not included in the table. The balance of fixed-rate loans held for sale is included in the 0-3 months category. 21 24 MARCH 31, 2000 ------------------------------------------------------------------------ PROJECTED REPRICING ------------------------------------------------------------------------ 0-3 MONTHS 4-12 MONTHS 1-5 YEARS THEREAFTER TOTAL ---------- ----------- ----------- ---------- ---------- (dollars in thousands) INTEREST-SENSITIVE ASSETS Adjustable-rate loans (1) $52,825,586 $20,389,070 $19,419,365 $ 565,906 $ 93,199,927 Fixed-rate loans (1) 1,752,044 2,726,319 6,974,734 6,191,545 17,644,642 Adjustable-rate securities (1),(2) 27,395,939 3,935,882 6,774,836 - 38,106,657 Fixed-rate securities (1) 963,135 2,660,386 10,246,873 12,767,539 26,637,933 Cash and cash equivalents 2,818,015 - - - 2,818,015 ----------- ----------- ----------- ----------- ------------ $85,754,719 $29,711,657 $43,415,808 $19,524,990 $178,407,174 =========== =========== =========== =========== ============ INTEREST-SENSITIVE LIABILITIES Noninterest-bearing checking accounts (3) $ 460,402 $ 1,127,014 $ 3,220,877 $ 3,775,057 $ 8,583,350 Interest-bearing checking accounts, savings accounts and MMDAs (3) 4,182,671 7,381,448 15,375,593 9,733,191 36,672,903 Time deposit accounts 11,667,179 20,284,814 5,241,941 61,672 37,255,606 Short-term and adjustable-rate borrowings 76,396,251 3,513,000 - - 79,909,251 Fixed-rate borrowings 1,034,299 4,520,157 6,959,042 3,174,138 15,687,636 Derivatives matched against liabilities (19,689,050) 8,784,600 11,914,450 (1,010,000) - ----------- ------------ ----------- ----------- ------------ $74,051,752 $ 45,611,033 $42,711,903 $15,734,058 $178,108,746 =========== ============ =========== =========== ============ Repricing gap $11,702,967 $(15,899,376) $ 703,905 $ 3,790,932 =========== ============ =========== =========== Cumulative gap $11,702,967 $ (4,196,409) $(3,492,504) $ 298,428 =========== ============ =========== =========== Cumulative gap as a percentage of assets 6.21% (2.22)% (1.85)% 0.16% Total assets $188,605,218 ============ - --------------------- (1) Based on scheduled maturity or scheduled repricing and estimated prepayments of principal. (2) Includes Investment in FHLBs. (3) Based on experience and anticipated decay rates of checking, savings, and money market deposit accounts.
LIQUIDITY Liquidity management focuses on the need to meet both short-term funding requirements and long-term growth objectives. Our long-term growth objectives are to attract and retain stable consumer deposit relationships and to maintain stable sources of wholesale funds. Because the low interest rate environment of recent years has inhibited growth of consumer deposits, we have supported our growth through business combinations with other financial institutions and by increasing our use of wholesale borrowings. If we are not be able to increase deposits either internally or through acquisitions, our ability to grow would be dependent upon, and to a certain extent limited by, our borrowing capacity. We monitor our ability to meet short-term cash requirements using guidelines established by our Board of Directors. These guidelines ensure that short-term secured borrowing capacity is sufficient to satisfy unanticipated cash needs. As presented in the Consolidated Statements of Cash Flows, the sources of liquidity vary between the comparable periods. The statement of cash flows includes operating, investing and financing 22 25 categories. Cash flows fromoperating activities included net income for the first quarter of 2000 of $458.5 million, $60.9 million for noncash items and $427.9 million of other net cash inflows from operating activities. Cash flows from investing activities consisted mainly of both proceeds from and purchases of securities, and loan principal repayments and loan originations. For the quarter ended March 31, 2000, cash flows from investing activities included sales, maturities and principal payments on securities totaling $2.13 billion. Loans originated and purchased for investment were in excess of repayments and sales by $4.16 billion, and $40.5 million was used for the purchase of securities. Cash flows from financing activities consisted of the net change in our deposit accounts and short-term borrowings, the proceeds and repayments from both long-term reverse repurchase agreements and FHLB advances, the issuance of long-term debt, and the repurchase of our common stock. For the first quarter of 2000, the above mentioned financing activities increased cash and cash equivalents by $2.02 billion on a net basis. Cash and cash equivalents were $2.82 billion at March 31, 2000. See "Consolidated Financial Statements - Consolidated Statements of Cash Flows." At March 31, 2000, we were in a position to obtain approximately $25.87 billion in additional borrowings primarily through the use of collateralized borrowings and deposits of public funds using unpledged MBS and other wholesale borrowing sources. CAPITAL ADEQUACY Our capital (stockholders' equity) was $8.71 billion at March 31, 2000, down from $9.05 billion at December 31, 1999. In order to effectively deploy excess capital, we continue to repurchase our common stock. In April 2000, we announced that our Board of Directors approved an expanded share repurchase program to acquire, from time to time, up to 55 million additional shares of Washington Mutual, Inc.'s common stock. Since April 20, 1999, the inception of the repurchase program, we have repurchased a total of 51.3 million shares. During the first quarter of 2000, we repurchased 19.8 million shares of common stock at an average price of $23.42. These stock repurchases, the unrealized loss on AFS securities of $877.8 million and the growth in assets were the primary factors in a decline of the ratio of stockholders' equity to assets to 4.62% at March 31, 2000 from 4.85% at December 31, 1999. The unrealized loss on AFS securities at December 31, 1999 was $667.4 million. Excluding the unrealized loss from AFS securities, the ratio of stockholders' equity to assets would have been 5.04% at March 31, 2000, compared with 5.18% at year-end 1999. The regulatory capital ratios of WMBFA, WMB and WMBfsb and the minimum regulatory requirements to be categorized as well capitalized were as follows: MARCH 31, 2000 --------------------------------------------- WELL-CAPITALIZED WMBFA WMB WMBfsb MINIMUM ----- --- ------ -------- Capital ratios: Tier 1 capital to adjusted total assets (leverage) 5.51% 5.73% 7.71% 5.00% Tier 1 capital to risk-weighted assets...... 10.19 10.46 12.74 6.00 Total capital to risk-weighted assets....... 11.35 11.36 13.81 10.00
In addition, Washington Mutual Finance's industrial bank, First Community Industrial Bank, met all Federal Deposit Insurance Corporation requirements to be categorized as well capitalized at March 31, 2000. Our federal savings bank subsidiaries are also required by Office of Thrift Supervision regulations to maintain tangible capital of at least 1.50% of assets. WMBFA and WMBfsb both satisfied this requirement at March 31, 2000. 23 26 Our broker-dealer subsidiaries are also subject to capital requirements. At March 31, 2000, both of our securities subsidiaries were in compliance with their applicable capital requirements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We believe that there have not been any material changes in quantitative and qualitative information about market risk since year-end 1999. In particular, the loan securitizations during the fourth quarter of 1999 and first quarter of 2000 do not have a material impact on our interest rate risk profile. 24 27 PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits See Index of Exhibits on page 27. (b) Reports on Form 8-K During the first quarter of 2000, the Company filed a report on Form 8-K dated January 20, 2000. The report included under Item 7 of Form 8-K a press release announcing Washington Mutual's fourth quarter 1999 financial results and audited consolidated financial statements for the quarter and year ended December 31, 1999. 25 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 12, 2000. WASHINGTON MUTUAL, INC. By: /s/ FAY L. CHAPMAN -------------------------------------- Fay L. Chapman Senior Executive Vice President By: /s/ RICHARD M. LEVY -------------------------------------- Richard M. Levy Senior Vice President and Controller (Principal Accounting Officer) 26 29 WASHINGTON MUTUAL, INC. INDEX OF EXHIBITS Exhibit No. - ----------- 3.1 Restated Articles of Incorporation of the Company, as amended (the "Articles") (filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,1999 and incorporated herein by reference. File No. 0-25188). 3.2 Bylaws of the Company, as amended (filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference. File No. 0-25188). 4.1 Rights Agreement, dated October 16, 1990 (filed as an exhibit to the Company's Current Report on Form 8-K dated November 29, 1994 and incorporated herein by reference. File No. 0-25188). 4.2 Amendment No. 1 to Rights Agreement, dated October 31, 1994 (filed as an exhibit to the Company's Current Report on Form 8-K dated November 29, 1994 and incorporated herein by reference. File No. 0-25188). 4.3 Supplement to Rights Agreement, dated November 29, 1994 (filed as an exhibit to the Company's current report on Form 8-K dated November 29, 1994 and incorporated herein by reference. File No. 0-25188.) 4.4 The registrant agrees to furnish the Securities and Exchange Commission, upon request, with copies of all instruments defining the rights of holders of long-term debt of Washington Mutual and its consolidated subsidiaries. 27 Financial Data Schedule.* - ----------- * Filed electronically with the Securities and Exchange Commission.
27 30 EX-27 2 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-Q OF WASHINGTON MUTUAL, INC. FOR THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-2000 MAR-31-2000 2,511,001 307,014 0 35,320 41,149,028 18,734,702 18,234,782 111,222,181 1,025,244 188,605,218 82,512,959 0 1,823,241 0 0 0 0 8,705,573 188,605,218 2,221,191 1,031,340 51,115 3,303,646 787,855 2,218,936 1,084,710 41,162 0 744,578 722,034 458,492 0 0 458,492 0.83 0.83 2.38 789,273 0 0 0 1,041,929 47,445 6,528 1,025,244 42,550 0 982,694
-----END PRIVACY-ENHANCED MESSAGE-----