UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
Commission File Number 1-14667
WASHINGTON MUTUAL, INC.
( Exact name of registrant as specified in its charter)
Washington |
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91-1653725 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification Number) |
1201 Third Avenue, Seattle, Washington |
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98101 |
(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (206) 461-2000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
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Common Stock |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
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Title of each class |
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Name of each exchange on which registered |
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Litigation Tracking Warrants™ |
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NASDAQ |
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes x N o o .
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x .
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 N o o .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer o Non-accelerated file r o .
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x .
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2005, based on the closing sale price as reported on the New York Stock Exchange:
Common Stock—$35,345,279,226 (1)
(1) Does not include any value attributable to 6,000,000 shares held in escrow.
The number of shares outstanding of the issuer’s classes of common stock as of February 28, 2006:
Common Stock—992,254,791 (2)
(2) Includes 6,000,000 shares held in escrow.
Documents Incorporated by Reference
Portions of the definitive proxy statement for the Annual Meeting of Shareholders to be held April 18, 2006, are incorporated by reference into Part III.
WASHINGTON MUTUAL, INC.
2005 ANNUAL REPORT ON FORM 10-K
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(1) Not applicable
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With a history dating back to 1889, Washington Mutual, Inc. (together with its subsidiaries, “Washington Mutual,” or the “Company”) is a retailer of financial services to consumers and small businesses. Based on its consolidated assets at December 31, 2005 the Company was the seventh largest among all U.S.-based bank and thrift holding companies.
The Company’s earnings are primarily driven by lending to consumers and deposit taking activities which generate net interest income and by activities that generate noninterest income, including the sale and servicing of loans and providing fee-based services to its customers.
Washington Mutual strives to be the nation’s leading retailer of financial services for consumers and small businesses. It plans to achieve this by building strong, profitable relationships with a broad spectrum of consumers and businesses. Expanding the Company’s retail banking franchise, diversifying its sources of income and achieving efficiencies in operations will be critical to future success.
Following the acquisition of the three largest California-based thrift institutions in the latter part of the 1990s, the Company continued to expand nationally by acquiring companies with strong retail banking franchises in Texas and the greater New York metropolitan area and by building out its branch network into select new markets. During this period, Washington Mutual developed and launched its award-winning and innovative retail banking stores that serve customers in an open, free-flowing retail environment. With the goal of combining its strengths as a deposit taker and portfolio lender with those of a mortgage banker, the Company also expanded its presence in the home loan origination and servicing businesses through acquisition. These mortgage banking acquisitions also served to further broaden the Company’s national presence.
Having created a viable branch presence in many of the largest metropolitan areas over the past decade, the Company shifted its retail banking strategy to focus on consumers in markets where the Company has both a home loan and retail banking presence. As compared to its branching strategy over the last decade, this current focus on building stores in its existing markets carries lower execution risk because it enables the Company to leverage both existing infrastructure and brand awareness. For more detail on the products and services offered by the Retail Banking and Financial Services Group, refer to Management’s Discussion and Analysis – “Operating Segments.”
The Company’s acquisition of Providian Financial Corporation (“Providian”) on October 1, 2005, has enabled the Company to offer credit cards to both new and existing customers, thereby creating and strengthening those relationships. For more detail on the products and services offered by the Card Services Group, refer to Management’s Discussion and Analysis – “Operating Segments.”
In the home loans business, the Company will continue to focus its attention on improving efficiency and productivity by consolidating technology platforms, enhancing customer service and leveraging the Company’s distribution network to cross sell additional products and services. For more detail on the products and services offered by the Home Loans Group, refer to Management’s Discussion and Analysis – “Operating Segments.”
Multi-family lending complements the Company’s expertise in residential real estate secured lending. During 2005, the Company successfully grew this business in its top 15 targeted metropolitan markets. These markets have stable demand, a large disparity between the cost of renting and the cost of home ownership, and households that typically rent for an extended period of time. Its target markets also have supply constraints such as geographic barriers, rent control and zoning restrictions. For more detail on the
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products and services offered by the Commercial Group, of which multi-family lending is the most significant part, refer to Management’s Discussion and Analysis – “Operating Segments.”
Washington Mutual makes its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to such reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act, available free of charge on or through its website located at www.wamu.com/ir as soon as reasonably practicable after their filing with the United States Securities and Exchange Commission.
The Company has implemented a Code of Ethics applicable to senior financial officers of the Company and a revised Company Code of Conduct applicable to all Company officers, employees and directors. The Code of Ethics provides fundamental ethical principles to which Company senior financial officers are expected to adhere. The Code of Conduct operates as a tool to help Washington Mutual officers, employees and directors understand and adhere to the high ethical standards required for employment by, or association with, the Company. Both the Code of Ethics and the Code of Conduct are available on the Company’s website at www.wamu.com/ir . Shareholders may also obtain written copies at no cost by writing the Company at 1201 Third Avenue, Seattle, Washington 98101, Attention: Investor Relations Department, WMT 2140, or by calling (206) 461-3187.
At December 31, 2005, Washington Mutual had 60,798 employees, compared with 52,579 at December 31, 2004 and 63,720 at December 31, 2003, which in 2003 included 2,346 employees related to the Company’s operations that have subsequently been discontinued. During 2005, the number of employees increased primarily due to the acquisition of Providian Financial Corporation, and the continuing expansion of the Company’s retail banking franchise. During 2004, the number of employees decreased primarily due to the Company’s cost containment initiative directed at reducing the fixed cost structure of the home loans business. The Company believes that it has been successful in attracting quality employees and that employee relations are good.
Factors That May Affect Future Results
The Company’s Form 10-K and other documents that it files with the Securities and Exchange Commission contain forward-looking statements. In addition, the Company’s senior management may make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “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.”
Forward-looking statements provide management’s current expectations or predictions of future conditions, events or results. They may include projections of the Company’s revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items, descriptions of management’s plans or objectives for future operations, products or services, or descriptions of assumptions underlying or relating to the foregoing. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. These statements speak only as of the date they are made. Management does not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements were made. There are a number of factors, many of which are beyond management’s control or its ability to accurately forecast or predict their significance, which could cause actual conditions, events or results to differ materially from those described in the forward-looking statements.
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Significant among these factors are the following:
Volatile interest rates impact the mortgage banking business.
Changes in interest rates affect the mortgage banking business in complex and significant ways. Changes in interest rates can affect loan origination volumes, gain from mortgage loans and loan servicing fees, which are the principal components of revenue from sales and servicing of home mortgage loans. When mortgage rates decline, the Company generally expects loan volumes to increase as borrowers refinance, which leads to accelerated early payoffs of mortgage loans in its servicing portfolio. As a result, when mortgage rates decline, the fair value of the Company’s mortgage servicing rights (“MSR”) declines and gain from mortgage loans tend to increase. When mortgage rates rise, the Company generally expects loan volumes to decrease, which generally leads to reduced payoffs in its servicing portfolio. As a result, when mortgage rates rise, the fair value of the Company’s MSR increases and gain from mortgage loans decrease.
As part of its overall risk management activities, the Company seeks to mitigate changes in fair value of its MSR asset by purchasing and selling financial instruments, entering into interest rate contracts and forward commitments to purchase or sell mortgage-backed securities, and adjusting the mix and amount of such financial instruments or contracts to take into account the effects of different interest rate environments. The MSR asset and the mix of financial instruments used to mitigate changes in its fair value are not perfectly correlated. This imperfect correlation creates the potential for excess MSR risk management gains or losses during any period. The Company’s management must exercise judgment in selecting the amount, type and mix of financial instruments and contracts to mitigate changes in fair value of its MSR. The Company cannot assure that the amount, type and mix of financial instruments and contracts it selects will fully offset significant changes in the value of the MSR and the Company’s actions could negatively impact earnings. The Company’s reliance on these risk management instruments may be impacted by periods of illiquidity in the secondary markets, which could negatively impact the performance of the MSR risk management instruments. For further discussion of how interest rate risk, basis risk and prepayment risk are managed, refer to Management’s Discussion and Analysis – “Market Risk Management.”
Rising interest rates, unemployment and decreases in housing prices impact credit performance.
The Company’s assessment of its credit profile is based in part on management’s evaluation of economic trends that affect the real estate lending environment, which has been generally positive in recent years. With recent increases in short-term interest rates, however, the favorable economic environment may not persist. The Company continually monitors changes in the economy, particularly unemployment rates and housing prices. If unemployment were to rise and either a slowdown in housing price appreciation or outright declines in housing prices were to occur, borrowers might have difficulty repaying their loans. As a result, the Company could experience higher credit losses in its mortgage and home equity portfolios, which could adversely affect its earnings.
Risks related to the option adjustable-rate mortgage product.
The Company continually monitors the credit risk inherent in its option adjustable-rate mortgage product (“Option ARM”) portfolio and assesses the adequacy of its loan loss allowance in light of prevailing circumstances and the historical and current levels of negative amortization in its Option ARM portfolio. If credit risks associated with the Option ARM were to increase in severity, the Company’s earnings could be adversely affected. For further discussion of the Option ARM product, refer to Management’s Discussion and Analysis – “Credit Risk Management.”
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Risks related to subprime lending.
The Company remains committed to the subprime mortgage market and intends to increase the loan volume of its subprime mortgage business, Long Beach Mortgage Company, and to maintain the size of its purchased subprime home loan portfolio. A portion of the Company’s Card Services portfolio is made up of subprime credit card loans and Card Services may continue to originate a portion of its credit card loans to subprime borrowers. If unemployment were to rise or either a slowdown in housing price appreciation or outright declines in housing prices were to occur, subprime borrowers, who tend to have greater vulnerability to such changes than prime borrowers, may be unable to repay their loans and the credit performance of the Company’s subprime portfolios could suffer, with a potential adverse effect on earnings.
Risks related to the integration of the Card Services business.
The Company commenced its credit card operations as the result of the merger of Providian Financial Corporation into the Company in a transaction completed on October 1, 2005. The success of the merger will depend, in part, on the Company’s ability to realize the anticipated benefits from the merger, such as accelerated growth, enhanced customer relationships and product and earnings diversification. One of the key factors in realizing the anticipated benefits of the merger will be the Company’s ability to retain the management personnel from Providian who are leading the Card Services business. As the integration process for the Card Services business continues, it is possible that critical financial, growth or other objectives could be missed, key employees could be lost, or data, communications and other systems or operations could fail to be successfully combined. Integration efforts also divert management attention and resources away from other activities. Any failure to successfully integrate the Card Services business into the Company, loss of key management personnel or any significant delay or unanticipated diversion of resources in completing such integration, could adversely affect the Company’s performance.
Risks related to credit card operations.
Credit card lending brings with it certain risks and uncertainties. These include the composition and risk profile of the Company’s credit card portfolio and customers, and the Company’s ability to continue growing the Company’s credit card business. The success of the credit card business will also depend, in part, on the success of its product development, product rollout efforts and marketing initiatives, including the rollout of credit card products to the Company’s existing retail and mortgage loan customers, and its ability to continue to successfully target creditworthy customers. Recent disputes involving the Visa and MasterCard networks, including their membership standards and pricing structures, could also result in changes that would be adverse to the credit card business. Changes in interest rates also affect the credit card business, including the costs associated with funding the credit card portfolio and the valuation of retained interests related to credit card securitizations.
Changes in the regulation of financial services companies, housing government-sponsored enterprises and credit card lenders.
Proposals for further regulation of the financial services industry are continually being introduced in Congress. The agencies regulating the financial services industry also periodically adopt changes to their regulations. Proposals that are now receiving a great deal of attention include consumer protection initiatives relating to bank overdraft practices, security of customer information, marketing practices, the Real Estate Settlement Procedures Act, nontraditional loan products including Option ARMs, credit card lending practices and predatory lending. In addition, there continues to be a focus on reform of the housing government-sponsored enterprises (“GSEs”) including the federal home loan bank system. It is possible that one or more legislative proposals may be adopted or regulatory changes may be made that would have an adverse effect on the Company’s business. For further discussion of the regulation of financial services, see “Regulation and Supervision.”
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The Company faces competition from banking and nonbanking companies.
The Company operates in a highly competitive environment and expects competition to continue as financial services companies combine to produce larger companies that are able to offer a wide array of financial products and services at competitive prices. In addition, customer convenience and service capabilities, such as product lines offered and the accessibility of services are significant competitive factors.
The Company’s most direct competition for loans comes from commercial banks, other savings institutions, investment banking firms, national mortgage companies and other credit card lenders. Its most direct competition for deposits comes from commercial banks, other savings institutions and credit unions doing business in the Company’s market areas. As with all banking organizations, the Company also experiences competition from nonbanking sources, including mutual funds, corporate and government debt securities and other investment alternatives offered within and outside of its primary market areas. In addition, technological advances and the growth of e-commerce have made it possible for non-depository institutions to offer products and services that were traditionally offered only by banks. Many of these competitors have fewer regulatory constraints and some have lower cost structures.
The Company also faces competition for talent. Its success depends, in large part, on its ability to hire and keep key people. Competition for the best people in most businesses in which the Company engages can be intense. If the Company is unable to attract and retain talented people, its business could suffer.
General business and economic conditions, including movements in interest rates, the slope of the yield curve and the potential overextension of housing prices in certain geographic markets.
The Company’s business and earnings are sensitive to general business and economic conditions. These conditions include the slope of the yield curve, inflation, the money supply, the value of the U.S. dollar as compared to foreign currencies, fluctuations in both debt and equity capital markets, and the strength of the U.S. economy and the local economies in which the Company conducts business. Changes in these conditions may adversely affect its business and earnings. For example, when short-term interest rates rise, there is a lag period until adjustable-rate mortgages reprice. As a result, the Company may experience compression of its net interest margin with a commensurate adverse effect on earnings. Likewise, the Company’s earnings could also be adversely affected when a flat or inverted yield curve develops, as this may inhibit the Company’s ability to grow its adjustable-rate mortgage portfolio and may also cause margin compression. A prolonged economic downturn could increase the number of customers who become delinquent or default on their loans, or a rising interest rate environment could increase the negative amortization of Option ARM loans, which may eventually result in increased delinquencies and defaults. Rising interest rates could also decrease customer demand for loans. An increase in delinquencies or defaults could result in a higher level of charge-offs and provision for loan and lease losses, which could adversely affect earnings.
The Company’s business and earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies. The Company is particularly affected by the policies of the Board of Governors of the Federal Reserve System, which regulates the supply of money and credit in the United States. Federal Reserve System policies directly and indirectly influence the yield on the Company’s interest-earning assets and the cost of its interest-bearing liabilities. Changes in those policies are beyond the Company’s control and difficult to predict.
Negative public opinion impacts the Company’s reputation.
Reputational risk, meaning the risk to earnings and capital from negative public opinion, is inherent in the Company’s business. Negative public opinion can result from the actual or perceived manner in which the Company conducts its business activities, which include its sales and trading practices, its loan origination and servicing activities, its retail banking and credit card operations, its management of actual
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or potential conflicts of interest and ethical issues, and its protection of confidential customer information. Negative public opinion can adversely affect the Company’s ability to keep and attract customers and can expose it to litigation and regulatory action. The Company takes steps to minimize reputation risk in the way it conducts its business activities and deals with its customers and communities.
Each of the factors discussed in the preceding paragraphs can significantly impact the Company’s businesses, operations, activities, condition and results in significant ways that are not described in the foregoing discussion and which are beyond the Company’s ability to anticipate or control, and could cause actual results to differ materially from the outcomes described in the forward-looking statements.
The Company’s business and properties are subject to federal and state laws and regulations governing environmental matters, including the regulation of hazardous substances and wastes. For example, under the federal Comprehensive Environmental Response, Compensation, and Liability Act and similar state laws, owners and operators of contaminated properties may be liable for the costs of cleaning up hazardous substances without regard to whether such persons actually caused the contamination. Such laws may affect the Company both as an owner or former owner of properties used in or held for its business, and as a secured lender on property that is found to contain hazardous substances or wastes. The Company’s general policy is to obtain an environmental assessment prior to foreclosing on commercial property. The Company may elect not to foreclose on properties that contain such hazardous substances or wastes, thereby limiting, and in some instances precluding, the liquidation of such properties.
The following discussion describes elements of the extensive regulatory framework applicable to savings and loan holding companies as well as federal savings associations and provides some specific information relevant to Washington Mutual. This regulatory framework is primarily intended for the protection of depositors, federal deposit insurance funds and the banking system as a whole rather than for the protection of shareholders and creditors.
To the extent that this section describes statutory and regulatory provisions, it is qualified in its entirety by reference to those provisions. Those statutes and regulations, as well as related policies, are subject to change by Congress, state legislatures and federal and state regulators. Changes in statutes, regulations or regulatory policies applicable to the Company, including interpretation or implementation thereof, could have a material effect on the Company’s business.
General
Washington Mutual, Inc. is a Washington State corporation. It owns two federal savings associations as well as numerous nonbank subsidiaries. Washington Mutual, Inc. is a savings and loan holding company. As a savings and loan holding company, Washington Mutual, Inc. is subject to regulation by the Office of Thrift Supervision (the “OTS”).
The federal savings associations are subject to extensive regulation and examination by the OTS, their primary federal regulator, as well as the Federal Deposit Insurance Corporation (“FDIC”). On January 1, 2005, the Company’s state savings bank, the former Washington Mutual Bank merged into Washington Mutual Bank, FA, and ceased to exist; subsequently, Washington Mutual Bank, FA changed its name to Washington Mutual Bank (“WMB”). Consequently, the Company no longer owns a state savings bank that is subject to regulation and supervision by the Director of Financial Institutions of the State of Washington. Its nonbank financial subsidiaries are also subject to various federal and state laws and regulations.
Both of the Company’s banking subsidiaries are under the common control of Washington Mutual, Inc. and are insured by the FDIC. If an insured institution fails, claims for administrative expenses of the receiver and for deposits in U.S. branches (including claims of the FDIC as subrogee of the failed institution) have priority over the claims of general unsecured creditors. In addition, the FDIC has
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authority to require either of the Company’s banking subsidiaries to reimburse it for losses it incurs in connection with the failure of the other banking subsidiary or with the FDIC’s provision of assistance to a Washington Mutual banking subsidiary that is in danger of failure.
Payment of Dividends
Washington Mutual, Inc. is a legal entity separate and distinct from its banking and nonbanking subsidiaries. Its principal sources of funds are cash dividends paid by those subsidiaries, investment income, and borrowings. Federal laws limit the amount of dividends or other capital distributions that a banking institution, such as the Company’s two federal savings associations, can pay. Each of its two banking subsidiaries has a policy to remain well-capitalized and, accordingly, would not pay dividends to the extent payment of the dividend would result in it not being well-capitalized. In addition, the two federal savings associations must file a notice with the OTS at least 30 days before they can pay dividends to their parent companies. Refer to Note 18 to the Consolidated Financial Statements – “Regulatory Capital Requirements and Dividend Restrictions” for a more detailed description of the limits on subsidiary bank dividends.
Capital Adequacy
Washington Mutual, Inc. is not currently subject to any regulatory capital requirements, but each of its subsidiary depository banking institutions is subject to OTS capital requirements. An institution’s capital category depends upon where its capital levels are in relation to relevant capital measures, which include a risk-based capital measure, a leverage ratio capital measure, a tangible equity ratio measure, and certain other factors.
Federal law and regulations establish minimum capital standards. Under such standards federal savings associations are required to maintain a leverage ratio of core capital to adjusted total assets of at least 4.00%, a Tier 1 risk-based capital ratio of at least 4.00%, a total risk-based capital ratio of at least 8.00% and a tangible capital ratio of at least 1.50%. Federal law and regulations also establish five capital categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution is treated as well-capitalized if its ratio of total capital to risk-weighted assets is 10.00% or more, its ratio of Tier 1 capital to risk-weighted assets is 6.00% or more, its leverage ratio is 5.00% or more, and it is not subject to any federal supervisory order or directive to meet a specific capital level. In order to be adequately capitalized, an institution must have a total risk-based capital ratio of not less than 8.00%, a Tier 1 risk-based capital ratio of not less than 4.00%, and (unless it is in the most highly-rated category) a leverage ratio of not less than 4.00%. Any institution that is neither well-capitalized nor adequately capitalized will be considered undercapitalized. Any institution with a tangible equity ratio of 2.00% or less will be considered critically undercapitalized.
As of December 31, 2005 both of the Company’s banking subsidiaries met all capital requirements to which they were subject and satisfied the requirements to be treated as well-capitalized institutions. See Note 18 to the Consolidated Financial Statements – “Regulatory Capital Requirements and Dividend Restrictions” for an analysis of the regulatory capital of the Company.
The Company continues to actively follow the progress of the U.S. banking agencies and the Basel Committee on Banking Supervision in developing a new set of regulatory risk-based capital requirements. The Basel Committee on Banking Supervision is a committee established by the central bank governors of certain industrialized nations, including the United States. The new requirements are commonly referred to as Basel II or The New Basel Capital Accord. The Company is participating in efforts to refine these standards to ensure that they measure risk as precisely as possible within the framework of The New Basel Capital Accord, and is working to ensure that its internal measurement of credit risk, market risk, and operational risk will comply with the new standards. The Company is also assessing the potential impacts The New Basel Capital Accord may have on its business practices as well as broader competitive effects within the industry.
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Holding Company Status and Acquisitions
Washington Mutual, Inc. is a multiple savings and loan holding company, as defined by federal law, because it owns more than one savings association. However, Washington Mutual, Inc. is regulated as a unitary savings and loan holding company because the OTS deems its federal savings associations to have been acquired in supervisory transactions. Therefore, it is exempt from certain restrictions that would otherwise apply under federal law to the activities and investments of a multiple savings and loan holding company. These restrictions will apply to Washington Mutual, Inc. if either of its banking institutions fail to meet a qualified thrift lender test established by federal law. As of December 31, 2005, the Company’s two banking subsidiaries were in compliance with qualified thrift lender standards.
Washington Mutual, Inc. may not acquire control of another savings association unless the OTS approves. Washington Mutual, Inc. may not be acquired by a company, other than a bank holding company, unless the OTS approves, or by an individual unless the OTS does not object after receiving notice. Washington Mutual, Inc. may not be acquired by a bank holding company unless the Board of Governors of the Federal Reserve System (the “Federal Reserve”) approves. In any case, the public must have an opportunity to comment on the proposed acquisition, and the OTS or Federal Reserve must complete an application review. Without prior approval from the OTS, Washington Mutual, Inc. may not acquire more than 5% of the voting stock of any savings institution that is not already one of its subsidiaries.
The Gramm-Leach-Bliley Act generally restricts any non-financial entity from acquiring Washington Mutual, Inc. unless such non-financial entity was, or had submitted an application to become, a savings and loan holding company as of May 4, 1999. Since Washington Mutual, Inc. was treated as a unitary savings and loan holding company prior to that date, Washington Mutual, Inc. may engage in non-financial activities and acquire non-financial subsidiaries.
Federal Home Loan Bank System
The primary purpose of the Federal Home Loan Banks (“FHLBs”) is to provide funding to their members for making housing loans as well as for affordable housing and community development lending. The FHLBs are generally able to make advances to their member institutions at interest rates that are lower than could otherwise be obtained by such institutions. The FHLB System consists of twelve regional FHLBs; each is federally chartered but privately owned by its member institutions. The Federal Housing Finance Board (“Finance Board”), a government agency, is generally responsible for regulating the FHLB System.
One of the Company’s federal savings associations, WMB, currently is a member of the San Francisco FHLB. The other federal savings association, Washington Mutual Bank fsb (“WMBfsb”), is a member of the Seattle FHLB.
In June 2004, the Finance Board issued a regulation that required each FHLB to register a class of its equity securities with the Securities and Exchange Commission (“SEC”) by filing a Form 10 Registration Statement no later than June 30, 2005 and to ensure that the registration be declared effective no later than August 29, 2005. Upon becoming an SEC registrant, each FHLB is required to file quarterly, annual and supplemental financial disclosures with the Securities and Exchange Commission and to provide more public disclosure. The San Francisco FHLB filed a Registration Statement on June 30, 2005. The Seattle FHLB filed a Registration Statement with the SEC on June 30, 2005, but on August 26, 2005 filed to withdraw that Registration Statement and has not subsequently filed a new Registration Statement. The Seattle FHLB is reviewing certain issues related to derivatives accounting under Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“Statement”) No. 133, Accounting for Derivative Instruments and Hedging Activities , as amended, and expects to re-file a registration statement with the SEC as soon as these issues have been resolved.
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As a condition of membership and as a condition of obtaining advances, members of a FHLB are required to purchase and hold certain amounts of equity securities of that FHLB. Effective May 18, 2005, the Seattle FHLB has suspended payment of dividends on equity securities and suspended repurchases of most of its equity securities. The Company cannot predict when the Seattle FHLB will begin to pay dividends on or repurchase its equity securities.
Congress is considering proposals which would establish a new regulator for the FHLB system, as well as for other housing government-sponsored enterprises. Washington Mutual cannot predict at this time which, if any, of these proposals may be adopted or what effect they would have on the business of the Company.
Deposit Insurance
The FDIC insures the deposits of each of the Company’s banking subsidiaries to the applicable maximum in each institution, and such insurance is backed by the full faith and credit of the United States government. The FDIC administers two separate deposit insurance funds, the Bank Insurance Fund (the “BIF”) and the Savings Association Insurance Fund (the “SAIF”). The BIF is a deposit insurance fund for commercial banks and some federal and state-chartered savings banks. The SAIF is a deposit insurance fund for most savings associations. The Company’s federal savings associations are members of the SAIF, but a small portion of WMB’s deposits are insured through the BIF.
The FDIC has established a risk-based system for setting deposit insurance assessments. Under the risk-based assessment system, an institution’s insurance assessments vary according to the level of capital the institution holds and the degree to which it is the subject of supervisory concern. During 2005, the assessment rate for both SAIF and BIF deposits ranged from zero to 0.27% of assessable deposits. The Company’s banking subsidiaries qualified for the lowest rate on their deposits in 2005 and paid no deposit insurance assessments.
In February 2006, the President signed federal deposit insurance reform legislation. This legislation requires the FDIC to merge the BIF and the SAIF into a newly created Deposit Insurance Fund (“DIF”); increases the amount of deposit insurance coverage for retirement accounts; allows for deposit insurance coverage on individual accounts to be indexed for inflation starting in 2010; provides the FDIC more flexibility in setting and imposing deposit insurance assessments; and provides eligible institutions, such as the Company’s banking subsidiaries, credits on future assessments.
The merger of the BIF and the SAIF is required to take place in the first half of 2006. Once the two funds are merged, the Company’s banking subsidiaries will become members of the DIF. The Company’s banking subsidiaries will be subject to the new assessment and credit provisions once the FDIC, sometime before November 6, 2006, promulgates regulations implementing these provisions.
Affiliate Transaction Restrictions
Washington Mutual’s two banking subsidiaries are subject to, and comply with, the affiliate and insider transaction rules applicable to member banks of the Federal Reserve System as well as additional limitations imposed by the OTS. These provisions prohibit or limit a banking institution from extending credit to, or entering into certain transactions with, affiliates (such as Washington Mutual, Inc.), principal stockholders, directors and executive officers of the banking institution and its affiliates.
Federal Reserve, Consumer and Other Regulation
Numerous regulations promulgated by the Federal Reserve Board affect the business operations of the Company’s banking subsidiaries. These include regulations relating to equal credit opportunity, electronic fund transfers, collection of checks, truth in lending, truth in savings and availability of funds.
9
Under Federal Reserve Board regulations, both of the Company’s banking subsidiaries are required to maintain a reserve against their transaction accounts (primarily interest-bearing and noninterest-bearing checking accounts). Because reserves must generally be maintained in cash or in noninterest-bearing accounts, the effect of the reserve requirements is to increase an institution’s cost of funds.
The Gramm-Leach-Bliley Act included provisions that give consumers new protections regarding the transfer and use of their nonpublic personal information by financial institutions. In addition, states are permitted under the Gramm-Leach-Bliley Act to have their own privacy laws, which may offer greater protection to consumers than the Gramm-Leach-Bliley Act. Numerous states in which the Company does business have enacted such laws.
The Bank Secrecy Act and the USA PATRIOT Act, which were enacted following the events of September 11, 2001, included numerous provisions designed to fight international money laundering and to block terrorist access to the U.S. financial system. Washington Mutual has established policies and procedures to ensure compliance with the provisions of the Bank Secrecy Act and the USA PATRIOT Act, and the impact of these Acts on the Company’s operations has not been material.
Community Reinvestment Act
The Community Reinvestment Act (“CRA”) requires that the Company’s banking subsidiaries ascertain and help meet the credit needs of the communities it serves, including low- to moderate-income neighborhoods, while maintaining safe and sound banking practices. The primary federal regulatory agency assigns one of four possible ratings to an institution’s CRA performance and is required to make public an institution’s rating and written evaluation. The four possible ratings of meeting community credit needs are outstanding, satisfactory, needs to improve, and substantial noncompliance. In the most recent examination results, the Company’s two federal associations received an “outstanding” CRA rating from the OTS. The Company maintains a CRA public file that is available for viewing. The file includes copies of its most recent CRA Public Evaluations, descriptions of its products and services, delivery outlet information, and public comments.
In September 2001, Washington Mutual announced a ten-year $375 billion community commitment, effective January 2002. This commitment replaced prior ones made by the Company and the companies it acquired. As of December 31, 2005, the Company had exceeded its yearly targets for lending in low- to moderate-income neighborhoods and underserved market areas .
Regulatory Enforcement
The OTS and the FDIC may take regulatory enforcement actions against any of their regulated institutions that do not operate in accordance with applicable regulations, policies and directives. Proceedings may be instituted against any banking institution, or any institution-affiliated party, such as a director, officer, employee, agent, or controlling person, who engages in unsafe and unsound practices, including violations of applicable laws and regulations. Each of the OTS and the FDIC has authority under various circumstances to appoint a receiver or conservator for an insured institution that it regulates, to issue cease and desist orders, to obtain injunctions restraining or prohibiting unsafe or unsound practices, to revalue assets and to require the establishment of reserves. The FDIC has additional authority to terminate insurance of accounts, after notice and hearing, upon a finding that the insured institution is or has engaged in any unsafe or unsound practice that has not been corrected, is operating in an unsafe or unsound condition, or has violated any applicable law, regulation, rule, or order of, or condition imposed by the FDIC.
Regulation of Nonbanking Affiliates
As broker-dealers registered with the Securities and Exchange Commission and as members of the NASD (National Association of Securities Dealers), Inc., the Company’s broker-dealer subsidiaries are
10
subject to various regulations and restrictions imposed by those entities, as well as by various state authorities. As a registered investment advisor, WM Advisors is subject to various federal and state securities regulations and restrictions. The Company’s subprime mortgage subsidiary, Long Beach Mortgage Company, is subject to various federal and state laws and regulations, including those relating to truth-in-lending, equal credit opportunity, fair credit reporting, real estate settlement procedures, debt collection practices and usury. The Company’s insurance subsidiaries are subject to regulation by various state insurance regulators. Some of the Company’s subsidiaries are subject to various state licensing and examination requirements.
The following table sets forth certain information regarding the executive officers of Washington Mutual:
Executive Officers |
|
|
|
Age |
|
Capacity in Which Served |
|
|
|
Employee of
|
|
||||
Kerry K. Killinger |
|
|
56 |
|
|
Chairman and Chief Executive Officer |
|
|
1983 |
|
|
||||
Thomas W. Casey |
|
|
43 |
|
|
Executive Vice President and Chief Financial Officer |
|
|
2002 |
|
|
||||
Ronald J. Cathcart |
|
|
53 |
|
|
Executive Vice President and Chief Enterprise Risk Officer |
|
|
2005 |
|
|
||||
Fay L. Chapman |
|
|
59 |
|
|
Senior Executive Vice President and General Counsel |
|
|
1997 |
|
|
||||
Daryl D. David |
|
|
51 |
|
|
Executive Vice President, Human Resources |
|
|
2000 |
|
|
||||
Debora D. Horvath |
|
|
51 |
|
|
Executive Vice President and Chief Information Officer |
|
|
2004 |
|
|
||||
Kenneth E. Kido |
|
|
48 |
|
|
Executive Vice President and Acting President,
Retail
|
|
|
2001 |
|
|
||||
J. Benson Porter |
|
|
40 |
|
|
Executive Vice President and Chief Administrative Officer |
|
|
1996 |
|
|
||||
Stephen J. Rotella |
|
|
52 |
|
|
President and Chief Operating Officer |
|
|
2005 |
|
|
||||
David C. Schneider |
|
|
40 |
|
|
Executive Vice President and President, Home Loans |
|
|
2005 |
|
|
||||
John F. Woods |
|
|
41 |
|
|
Senior Vice President and Controller |
|
|
2005 |
|
|
Mr. Killinger established the Executive Committee in 1990 to facilitate and coordinate decision making and communication among the most senior executive officers of the Company who, as a committee, determine the Company’s strategic direction. The executive officers serving on this committee are indicated below.
Mr. Killinger is Chairman and Chief Executive Officer of Washington Mutual. He was named President and a Director in 1988, Chief Executive Officer in 1990 and Chairman in 1991. He served as President through 2004. He has been a member of the Executive Committee since its formation in 1990.
Mr. Casey is Executive Vice President, Chief Financial Officer and a member of the Executive Committee of Washington Mutual. He oversees all aspects of Washington Mutual’s corporate finance, strategic planning and investor relations functions. Prior to joining Washington Mutual, Mr. Casey was with GE Capital Corp. from 1992 through 2002 where he held advising, controllership and analyst positions prior to becoming a Vice President of GE and Senior Vice President and Chief Financial Officer of GE Financial Assurance in 1999.
Mr. Cathcart joined the Company in December 2005 as Executive Vice President and Chief Enterprise Risk Officer and became a member of the Executive Committee at that time. He is responsible for overseeing the credit, market and operational risk functions for the company. Prior to joining Washington Mutual, he served as Executive Vice President of Retail Risk Management at the Canadian Imperial Bank of Commerce (“CIBC”) from 2002 to 2005. Prior to joining CIBC, Mr. Cathcart served in a variety of risk management positions at Bank One from 1999 to 2002, including Executive Vice President, Retail Risk Management.
11
Ms. Chapman has served as the Company’s General Counsel and Senior Executive Vice President since 1999. She became Executive Vice President, General Counsel and a member of the Executive Committee in 1997. Prior to joining Washington Mutual, she was a partner at the Seattle law firm of Foster Pepper & Shefelman PLLC from 1979 to 1997.
Mr. David joined Washington Mutual in 2000 as Executive Vice President, Human Resources. He is responsible for talent acquisition, organizational capabilities, leadership development and rewards and benefits. Mr. David became a member of the Executive Committee in 2001. Previously he served as Vice President of Strategic Growth and Human Resources at Amazon.com from 1999 to 2000. He also served in executive human resource positions with Sanga International, Magnetek, Inc., and Allied Signal from 1992 to 1999.
Ms. Horvath joined Washington Mutual in 2004 as Executive Vice President and Chief Information Officer and became a member of the Executive Committee at that time. She is responsible for overseeing the Company’s enterprise-wide technology efforts. Prior to joining Washington Mutual, she served as Senior Vice President and Chief Information Officer with GE Capital – Great Northern Annuity, GE Financial Assurance and GE Insurance from 1993 to 2004.
Mr. Kido is Executive Vice President and Acting President, Retail Banking. He manages all aspects of consumer lending and deposit product management and operations and is responsible for the management and operations of over 2,100 financial centers in 16 states including the Company’s small business operations. He became a member of the Executive Committee in 2005. Mr. Kido joined Washington Mutual in July 2001 after spending 24 years with Bank of America, most recently as head of their Consumer Card Division.
Mr. Porter has served as Executive Vice President and Chief Administrative Officer since 2004. In this role, he oversees teams that provide company-wide support for sourcing and purchasing, corporate communications, operational excellence initiatives, corporate property management, community affairs, the enterprise-wide call centers and community lending and investment. Mr. Porter joined Washington Mutual in 1996 and became a member of the Executive Committee in 2004.
Mr. Rotella became President and Chief Operating Officer of Washington Mutual in January 2005 and became a member of the Executive Committee at that time. He is responsible for overseeing the Company’s retail, home loans, credit card and commercial lines of business, the technology group and marketing, as well as day-to-day corporate administration. Prior to joining Washington Mutual, he was an Executive Vice President with JPMorgan Chase and served on its executive committee from 2001 to 2004. In addition, he was the Chief Executive Officer of Chase Home Finance from 2001 to 2004 and its Chief Operating Officer from 1998 to 2001.
Mr. Schneider joined the Company in July 2005 as Executive Vice President and President, Home Loans and became a member of the Executive Committee at that time. He oversees all aspects of the Company’s home loans business including prime mortgage lending, mortgage banker finance, Long Beach Mortgage Company and specialty mortgage finance. Prior to joining Washington Mutual, Mr. Schneider served as President and Chief Operating Officer of CitiMortgage, Inc. Prior to joining CitiMortgage in April 2001, he served as Executive Vice President of Retail Banking for Old Kent Financial Corporation from 1998 to 2001.
Mr. Woods joined the Company in December 2005 as Senior Vice President and Controller. He serves as the Company’s principal accounting officer. Prior to joining the Company, Mr. Woods served in various positions at Freddie Mac including Senior Vice President, Principal Accounting Officer and Corporate Controller. Prior to joining Freddie Mac in 2002, Mr. Woods was a partner at Arthur Andersen in its financial services audit and consulting practices.
12
The Company’s primary executive and business segment headquarters are located at 1201 Third Avenue, Seattle, Washington 98101. The Company leases approximately 400,000 square feet at this location and an additional 700,000 square feet in other downtown Seattle locations for administrative functions.
The Company, in a joint venture with the Seattle Art Museum, is constructing a new headquarters building in downtown Seattle. On completion of the building, the Company will own approximately 900,000 square feet and will lease from the Seattle Art Museum an additional 250,000 square feet for a period of up to 25 years. The lessor has the right to cancel the lease, in whole or in part, at any time after the tenth year of the lease. Occupancy and the term of the lease are expected to commence concurrently in 2006; accordingly, certain of the leases in downtown Seattle locations will not be renewed when their terms expire, as the majority of those occupants will move to the new headquarters building.
As of December 31, 2005, the Company or its subsidiaries owned or leased property in 38 states for 2,140 retail banking stores, 487 lending stores and centers and 323 administrative and other offices. Administrative facilities involve the ownership or leasing of approximately 2.4 million square feet in California, 1.2 million square feet in Texas, 900,000 square feet in Florida and 500,000 square feet in Illinois.
In the ordinary course of business, the Company and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. In certain of these actions and proceedings, claims for substantial monetary damages are asserted against the Company and its subsidiaries. Certain of these actions and proceedings are based on alleged violations of consumer protection, banking and other laws.
In July 2004, the Company and a number of its officers were named as defendants in a series of cases alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 thereunder and Section 20(a) of the Exchange Act. By stipulation, those cases were consolidated into a single case currently pending in the U.S. District Court for the Western Division of Washington. South Ferry L.P. #2 v. Killinger et al. , No. CV04-1599C (W.D. Wa., Filed Jul. 19, 2004) (the “Securities Action”). In brief, the plaintiffs in the Securities Action allege, on behalf of a putative class of purchasers of Washington Mutual, Inc., securities from April 15, 2003, through June 28, 2004, that in various public statements the defendants purportedly made misrepresentations and failed to disclose material facts concerning, among other things, alleged internal systems problems and hedging issues.
The defendants moved to dismiss the Securities Action on May 17, 2005. After briefing, but without oral argument, the Court on November 17, 2005, denied the motion in principal part; however, the Court dismissed the claims against certain of the individual defendants, dismissed claims pleaded on behalf of sellers of put options on Washington Mutual stock, and concluded that the plaintiffs could not rely on supposed violations of accounting standards to support their claims. The remaining defendants subsequently moved for reconsideration or, in the alternative, certification of the opinion for interlocutory appeal to the United States Court of Appeals for the Ninth Circuit. The District Court denied the motion for reconsideration, but on March 6, 2006, granted the motion for certification. The defendants will now move the Ninth Circuit to have the appellate court accept the case for interlocutory review of the District Court’s original order denying the motion to dismiss. The District Court stayed further proceedings before it pending the outcome of the defendant’s motion to the Ninth Circuit.
On November 29, 2005, 12 days after the Court denied the motion to dismiss the Securities Action, a separate plaintiff filed in Washington State Superior Court a derivative shareholder lawsuit purportedly asserting claims for the benefit of the Company. The case was removed to federal court, where it is now
13
pending. Lee Family Investments, by and through its Trustee W.B. Lee, Derivatively and on behalf of Nominal Defendant Washington Mutual, Inc. v. Killinger et al. , No. CV05-2121C (W.D. Wa., Filed Nov. 29, 2005) (the “Derivative Action”). The defendants in the Derivative Action include those individuals remaining as defendants in the Securities Action, as well as those of the Company’s current independent directors who were directors at any time from April 15, 2003, through June 2004. The allegations in the Derivative Action mirror those in the Securities Action, but seek relief based on claims that the independent director defendants failed properly to respond to the misrepresentations alleged in the Securities Action and that the filing of that action has caused the Company to expend sums to defend itself and the individual defendants and to conduct internal investigations related to the underlying claims. The defendants have not yet responded to the complaint in the Derivative Action.
See Note 14 to the Consolidated Financial Statements – “Commitments, Guarantees and Contingencies” for a further discussion of pending and threatened litigation action and proceedings against the Company.
Submission of Matters to a Vote of Security Holders
None.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Washington Mutual’s common stock trades on The New York Stock Exchange under the symbol WM. As of February 28, 2006, there were 992,254,791 shares issued and outstanding (including 6 million shares held in escrow) held by 61,025 shareholders of record. The information regarding high and low quarterly sales prices of the Company’s common stock, and the quarterly cash dividends declared thereon, is set forth in this Form 10-K in the “Quarterly Results of Operations” table included under Supplementary Data on page 175 and is expressly incorporated herein by reference.
The table below represents share repurchases made by the Company for the quarter ended December 31, 2005. Management may engage in future share repurchases as liquidity conditions permit and market conditions warrant.
Issuer Purchases of Equity Securities |
|
|
|
Total
|
|
Average
|
|
Total
|
|
Maximum
|
|
|||||||||
October 1, 2005 to October 31, 2005 |
|
|
18,932,665 |
|
|
|
$ |
42.23 |
|
|
|
18,932,000 |
|
|
|
84,500,000 |
|
|
||
November 1, 2005 to November 30, 2005 |
|
|
300,386 |
|
|
|
44.61 |
|
|
|
– |
|
|
|
84,500,000 |
|
|
|||
December 1, 2005 to December 31, 2005 |
|
|
711 |
|
|
|
43.63 |
|
|
|
– |
|
|
|
84,500,000 |
|
|
|||
Total |
|
|
19,233,762 |
|
|
|
42.26 |
|
|
|
18,932,000 |
|
|
|
84,500,000 |
|
|
(1) In addition to shares repurchased pursuant to the Company’s publicly announced repurchase program, this column includes shares acquired under equity compensation arrangements with the Company’s employees and directors.
(2) Effective July 15, 2003, the Company adopted a share repurchase program approved by the Board of Directors (the “2003 Program”). Under the 2003 Program, the Company was authorized to repurchase up to 100 million shares of its common stock, as conditions warranted. On October 18, 2005, the Company discontinued the 2003 Program and adopted a new share repurchase program approved by the Board of Directors (the “2005 Program”). The Company had repurchased 64,842,794 shares under the 2003 Program, of which 3,432,000 were repurchased during the fourth quarter of 2005, prior to its discontinuance. Under the 2005 Program, the Company is authorized to repurchase up to 100 million shares of its common stock as conditions warrant and had repurchased 15,500,000 shares under this program as of December 31, 2005.
14
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Acquisition of Providian Financial Corporation
On October 1, 2005 the Company completed its acquisition of Providian Financial Corporation in a stock and cash merger valued at approximately $5.8 billion. For each share of Providian common stock, Providian stockholders received .4005 shares of Washington Mutual common stock and $2.00 in cash. As a result of this acquisition, the Company now ranks as the eighth largest among all credit card issuers. The card services activities of the Company are conducted through a new operating segment entitled Washington Mutual Card Services (“Card Services”).
Subsequent Accounting Revision
Subsequent to furnishing the Company’s fourth quarter 2005 earnings release on Form 8-K on January 18, 2006, the Company made a reclassification change to the Consolidated Statements of Income, included within this Annual Report on Form 10-K, with regard to the presentation of credit card receivables that were sold in the fourth quarter of 2005. This change was made to conform Providian’s historical accounting practice for such sales to Washington Mutual’s accounting policy for transactions of this nature. When loans that were originally recorded in the Company’s held for investment portfolio are subsequently sold, the Company’s policy results in the reduction of their cost basis by the amount of the loan loss allowance allocable to the sold loans. Providian’s practice, by contrast, did not consider the allocable allowance when computing gain on credit card sales. Providian’s historical accounting practice was applied for reporting purposes in the Company’s Form 8-K dated January 18, 2006. This change resulted in an increase of $96 million to the fourth quarter credit card gain on sale (which is reported in the Consolidated Statements of Income under the noninterest income caption “Revenue from sales and servicing of consumer loans”) and a corresponding increase to the provision for loan and lease losses. This change had no effect on net income.
Discontinued Operations
In January 2004, the Company sold its subsidiary, Washington Mutual Finance Corporation, for approximately $1.30 billion in cash. Accordingly, this former subsidiary is presented in this report as a discontinued operation with its results of operations and cash flows segregated from the Company’s results of continuing operations for the affected periods presented on the Consolidated Statements of Income, Cash Flows and Notes to the Consolidated Financial Statements as well as the tables presented herein, unless otherwise noted.
Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934.
Management reviews and evaluates the design and effectiveness of the Company’s disclosure controls and procedures on an ongoing basis, which may result in the discovery of deficiencies, and improves its controls and procedures over time, correcting any deficiencies that may have been discovered.
15
Changes in Internal Control Over Financial Reporting
Management reviews and evaluates the design and effectiveness of the Company’s internal control over financial reporting on an ongoing basis, which may result in the discovery of deficiencies, some of which may be significant, and changes its internal control over financial reporting as needed to maintain their effectiveness, correcting any deficiencies, as needed, in order to ensure the continued effectiveness of the Company’s internal controls. The Company’s internal control over financial reporting changed when the Company acquired Providian Financial Corporation on October 1, 2005, to include the key controls inherent within the credit card operations it acquired. Except for this change, there have not been any other changes in the Company’s internal control over financial reporting during the fourth quarter of 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. For management’s assessment of the Company’s internal control over financial reporting, refer to Management’s Report on Internal Control Over Financial Reporting on page 88.
Net income for 2005 was $3.43 billion, or $3.73 per diluted share, an increase from $2.88 billion, or $3.26 per diluted share for 2004. Included in earnings for 2004 was an after-tax gain of $399 million, or 45 cents per diluted share, from the first quarter sale and disposal of the Company’s former consumer finance subsidiary, Washington Mutual Finance Corporation.
Net interest income was $7.89 billion in 2005, compared with $7.12 billion in 2004. The increase was primarily due to growth in the average total loan portfolio and loans held for sale, which collectively increased by 16% during 2005. Largely offsetting the growth in interest-earning assets was contraction in the net interest margin. The net interest margin in 2005 was 2.67%, a decline of 15 basis points from 2004. The decrease in the net interest margin was due to an increase in the cost of the Company’s interest-bearing liabilities, which was driven by continuous increases in short-term interest rates since June of 2004. As the U.S. economy rebounded in 2004 and 2005 from the downturn in the early part of the decade, the Federal Reserve Board initiated a series of 25 basis point increases in the targeted federal funds rate. This benchmark interest rate has increased from 1.00% in the second quarter of 2004 to 4.50% at the end of January 2006. These increases gradually shifted the Federal Reserve’s monetary policy from a position that provided a stimulus effect on the domestic economy towards a more neutral fiscal policy that reduces the potential threat of inflation. Although the Federal Reserve has not stated that a 4.50% rate represents a position of neutrality, it did recently imply, for the first time since the current series of increases began, that the current rate is no longer at a level that would stimulate economic expansion. Accordingly, the current rate appears to be close to entering the Federal Reserve’s target zone for fiscal policy neutrality. Until rates move into that zone, additional increases are likely. Since the Company’s adjustable-rate home loans and securities reprice to current market rates more slowly than its wholesale borrowing sources, the Company expects the net interest margin will continue to be pressured until the federal funds rate stabilizes.
Partially mitigating the disparity in repricing speeds is the growth in home equity line of credit balances, which have repricing frequencies that are more closely aligned with the faster repricing behavior of the Company’s wholesale borrowings. The average balance of home equity lines of credit was $36.14 billion in 2005, an increase of $9.71 billion, or 37% from 2004, while the yield on this portfolio increased from 4.23% to 5.85%. Additionally, the margin benefited from the fourth quarter addition of the credit card portfolio acquired from Providian Financial Corporation and from the partial restructuring of the available-for-sale securities portfolio in the first quarter of 2005, which resulted in the sale of approximately $3 billion of lower-yielding debt securities and the subsequent purchase of securities with comparatively higher yields.
Noninterest income in 2005 was $5.74 billion, an increase of $1.13 billion from 2004. The increase was largely due to consumer loan sales and servicing income of $413 million and credit card fee income of $139
16
million, all of which resulted from the Company’s new Card Services segment, and improved revenues from the Company’s home loan banking operations. At December 31, 2005, total managed credit card receivables were approximately $19.96 billion, an increase of nearly $700 million during the fourth quarter of 2005. A significant portion of this increase was the result of cross-selling credit card products to the Company’s retail banking customer base.
Revenue from sales and servicing of home mortgage loans, including the effects of all MSR risk management instruments, was $1.79 billion in 2005, an increase from $1.47 billion in 2004. The increase was primarily due to higher levels of gains from the sale of mortgage loans and originated mortgage backed securities, net of gains and losses from risk management instruments. This increase was fostered by the strength of the U.S. housing market, which fueled strong customer demand for fixed-rate mortgages and the Company’s Option ARM portfolio. In particular, the sustained liquidity of the Option ARM product in the secondary market enabled the Company to sell approximately $48.13 billion of Option ARM volume during 2005, compared with $14.12 billion in 2004. The Company also sells substantially all of its fixed-rate and medium-term adjustable-rate home loan volume.
As the yield curve continued to flatten throughout 2005 (and ended the year virtually flat), the interest rate differential between short-term adjustable-rate loans, such as the Option ARM, and fixed-rate loans continued to compress, which increases the desirability of fixed-rate loan products. Accordingly, short-term adjustable-rate loans, as a percentage of total home loan volume, declined from 39% in the fourth quarter of 2004 to 26% in the final quarter of 2005, while fixed-rate loans, as a percentage of total home loan volume, increased from 32% to 44% during the same periods.
The Company recorded a provision for loan and lease losses of $316 million in 2005, compared with a provision of $209 million in 2004. Reflecting the higher risk profile associated with the unsecured, higher-yielding lending activities conducted by Card Services, the 2005 provision included $195 million that was related to the credit card portfolio in the fourth quarter. A relatively benign credit risk environment for the Company’s real estate secured lending activities existed through most of 2005, reflecting the positive effects of a low mortgage interest rate environment, stable or appreciating housing prices in most of the Company’s markets, and a relatively low national unemployment rate.
Depositor and other retail banking fees were $2.19 billion in 2005, a 10% increase from 2004. The growth was driven by strong increases in the number of retail checking accounts as well as an increase in debit card interchange and ATM-related income. The number of retail checking accounts at December 31, 2005 totaled approximately 9.9 million, compared with approximately 9.0 million at December 31, 2004, an increase of over 900,000 accounts. Total retail transaction accounts, which include checking, money market and savings accounts, increased by nearly 1.5 million in 2005.
The Company continues to grow its retail banking business by opening new stores and enhancing its products and services. The Company opened 210 new stores in 2005, and has established a target of opening between 150 and 200 new stores within its existing markets during 2006. Although the Company expects total noninterest expense to be higher in 2006 as a result of the continuing expansion of the retail banking franchise and the full-year effect of absorbing the Card Services Group into the Company’s cost structure, those efforts will also be accompanied by rigorous expense management discipline and the implementation of operational efficiencies and productivity improvements, including the redeployment of certain back-office support operations to more cost-effective labor markets and the consolidation of other administrative support facilities.
The preparation of financial statements in accordance with the accounting principles generally accepted in the United States of America requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the
17
Consolidated Financial Statements. Various elements of the Company’s accounting policies, by their nature, involve the application of highly sensitive and judgmental estimates and assumptions. Some of these policies and estimates relate to matters that are highly complex and contain inherent uncertainties. In some instances, different estimates and assumptions could have been reasonably used to supplant those that were applied. Had those alternative estimates and assumptions been applied, the differences that may result from those alternative applications could have a material effect on the financial statements.
The Company has identified three accounting estimates that, due to the judgments and assumptions inherent in those estimates, and the potential sensitivity of its Consolidated Financial Statements to those judgments and assumptions, are critical to an understanding of its Consolidated Financial Statements. These estimates are: the fair value of certain financial instruments and other assets; derivatives and hedging activities; and the allowance for loan and lease losses and contingent credit risk liabilities.
Management has discussed the development and selection of these critical accounting estimates with the Company’s Audit Committee. The Company believes that the judgments, estimates and assumptions used in the preparation of its Consolidated Financial Statements are appropriate given the facts and circumstances as of December 31, 2005. These judgments, estimates and assumptions are described in greater detail in subsequent sections of Management’s Discussion and Analysis and in Note 1 to the Consolidated Financial Statements – “Summary of Significant Accounting Policies.”
The discussion below presents information about the nature of the Company’s critical accounting estimates:
Fair Value of Certain Financial Instruments and Other Assets
A portion of the Company’s assets are carried at fair value, including: certain retained interests from securitization activities (which are classified as trading assets), available-for-sale securities and derivatives. Mortgage servicing rights and loans held for sale are recorded at the lower of carrying value or fair value. For those that qualify as hedged items under fair value hedge accounting, their changes in fair value are recognized in earnings and offset the changes in fair value of derivatives used as hedge accounting instruments.
Fair value is defined as the amount at which a financial instrument could be exchanged in a hypothetical transaction between willing, unrelated parties, other than in a forced or liquidation sale. Generally, for assets that are reported at fair value, the Company uses quoted market prices or internal valuation models that utilize market data inputs and other assumptions, such as loan prepayment speeds, forward interest rate yield curves, market volatilities and pricing spreads to determine their fair values. The degree of management judgment involved in determining the fair value of a financial instrument or other asset is dependent upon the availability of quoted market prices or observable market value inputs. For financial instruments that are actively traded in the marketplace or whose values are based on readily available market value data, little, if any, subjectivity is applied when determining the instrument’s fair value. When observable market prices and data do not exist, significant management judgment is necessary to estimate fair value. In those cases, small changes in assumptions could result in significant changes in valuation.
The following financial instruments and other assets require the Company’s most complex judgments and assumptions when estimating fair value:
Mortgage Servicing Rights and Certain Other Retained Interests in Securitizations
MSRs and certain other retained interests from securitization activities do not trade in an active, open market with readily quoted prices. Although sales do occur from time to time, the terms of such sales are generally not readily available. Consequently, the Company estimates the fair value of MSRs and certain other retained interests in securitization activities utilizing internal discounted cash flow models.
18
For MSRs, the discounted cash flow model calculates the present value of the expected future net cash flows of the servicing portfolio based on various assumptions, such as estimated future servicing costs, expected servicing portfolio prepayment speeds and discount rates that are commensurate with the risk profile of the serviced assets. This model is highly sensitive to changes in certain assumptions. Different anticipated prepayment speeds, in particular, can result in substantial changes in the estimated fair value of MSR. If actual prepayment experience differs from the anticipated rates used in the Company’s model, this difference would likely result in a material change in MSR fair value. While the Company’s model estimates a value, the specific value used is based on a variety of market-based factors, such as documented observable data and anticipated changes in prepayment speeds. The reasonableness of management’s assumptions about these factors is evaluated through quarterly independent broker surveys. Independent appraisals of the fair value of the servicing portfolio are obtained periodically, but not less frequently than quarterly, and are used by management to evaluate the reasonableness of the fair value conclusions. Changes in MSR value are reported in the Consolidated Statements of Income under the noninterest income caption “Revenue from sales and servicing of home mortgage loans.” Additional discussion regarding the estimation of MSR fair value, including limitations to the MSR fair value measurement process, are described in the subsequent section of Management’s Discussion and Analysis – “Earnings Performance.” Key economic assumptions and the sensitivity of MSR fair value to immediate changes in those assumptions are described in Note 6 to the Consolidated Financial Statements – “Mortgage Banking Activities.”
For other retained interests in securitization activities (such as interest-only strips and residual interests) the discounted cash flow model used in determining fair value utilizes projections of expected cash flows that are greatly influenced by anticipated prepayment speeds and, in some cases, expected net credit losses or finance charges related to the securitized assets. Changes in those and other assumptions used could have a significant effect on the valuation of these retained interests. Changes in the value of other retained interests in securitization activities are reported in the Consolidated Statements of Income under the noninterest income caption “Trading assets income (loss)” and on the Consolidated Statements of Financial Condition as “Trading assets.”
Loans held for sale
The fair value of loans designated as held-for-sale is generally based on observable market prices of securities that are similar to those that will be collateralized by such loans. If market prices are not readily available, fair value is based on a discounted cash flow model, which takes into account prepayment factors and the degree of credit risk associated with the loans and the estimated effects of changes in market interest rates. When the estimated fair value of loans held for sale is lower than their carrying value or, for those that achieve fair value hedge accounting under Statement No. 133, as amended, when the estimated fair value is greater than their carrying value, a valuation adjustment that accounts for this difference is reported on the Consolidated Statements of Income as a component within the noninterest income caption “Revenue from sales and servicing of home mortgage loans.” Valuation adjustments for consumer loans held for sale are recorded under the noninterest income caption “Revenue from sales and servicing of consumer loans.”
Goodwill Impairment
Under FASB Statement No. 142, Goodwill and Other Intangibles, goodwill must be allocated to reporting units and tested for impairment. The Company tests goodwill for impairment at least annually or more frequently if events or circumstances, such as adverse changes in the business, indicate that there may be justification for conducting an interim test. Impairment testing is performed at the reporting-unit level (which is the same level as the Company’s four major operating segments identified in Note 25 to the Consolidated Financial Statements). The first part of the test is a comparison, at the reporting unit level, of the fair value of each reporting unit to its carrying value, including goodwill. If the fair value is less than the
19
carrying value, then the second part of the test is needed to measure the amount of potential goodwill impairment. The implied fair value of the reporting unit goodwill is calculated and compared to the actual carrying value of goodwill recorded within the reporting unit. If the carrying value of reporting unit goodwill exceeds the implied fair value of that goodwill, then the Company would recognize an impairment loss for the amount of the difference, which would be recorded as a charge against net income.
The fair values of the reporting units are determined primarily using discounted cash flow models based on each reporting unit’s internal forecasts. In addition, analysis using market-based trading and transaction multiples, where available, is used to assess the reasonableness of the valuations derived from the discounted cash flow models.
Goodwill was not impaired as of December 31, 2005 or December 31, 2004, nor was any goodwill written off during the years ended December 31, 2005, 2004 and 2003. For additional information regarding the carrying values of goodwill by operating segment, see Note 7 to the Consolidated Financial Statements – “Goodwill and Other Intangible Assets.”
Other Intangible assets
As part of a business combination accounted for under the purchase method, the Company must record all acquired assets and liabilities at fair value as of the acquisition date. Acquired assets include any identified intangible assets, such as purchased credit card relationships or core deposit intangibles. The fair value of those intangible assets usually is determined based on a discounted cash flow model that considers the expected net cash inflows resulting from those intangible relationships. If the intangible asset has a determinable finite life, the asset is amortized through earnings over its estimated life. Such amortization expense generally is recognized in the Consolidated Statements of Income under the noninterest expense caption, “Other Expense.” For additional information regarding other intangible assets, see Note 7 to the Consolidated Financial Statements – “Goodwill and Other Intangible Assets.”
Derivatives and Hedging Activities
The Company enters into derivative contracts to manage the various risks associated with certain assets, liabilities, or probable forecasted transactions. When the Company enters into derivative contracts, the derivative instrument is designated as: (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (a “fair value” hedge); (2) a hedge of the variability in expected future cash flows associated with an existing recognized asset or liability or a probable forecasted transaction (a “cash flow” hedge); or (3) held for other risk management purposes (“risk management derivatives”).
All derivatives, whether designated in hedging relationships or not, are recorded at fair value as either assets or liabilities on the Consolidated Statements of Financial Condition. Changes in fair value of derivatives that are not in hedge accounting relationships (as in (3) above) are recorded within the Consolidated Statements of Income in the period in which the change in value occurs. Changes in the fair value of derivatives that are designated as cash flow hedges (as in (2) above), to the extent such hedges are deemed highly effective, are recorded as a separate component of accumulated other comprehensive income and reclassified into earnings when the earnings effect of the hedged cash flows is recognized. Changes in the fair value of derivatives in qualifying fair value hedge accounting relationships (as in (1) above) are recorded each period in earnings along with the change in fair value of the hedged item.
The determination of whether a derivative qualifies for hedge accounting requires judgment about the application of Statement No. 133, as amended. Statement No. 133, as amended, requires contemporaneous documentation of the Company’s hedge relationships. Such documentation includes the nature of the risk being hedged, the identification of the asset or cash flow, or the group of assets or cash flows, that share the risk exposure that is designated as being hedged (i.e., the hedged item), the selection of the instrument that will be used to hedge the identified risk, and the method used to assess the effectiveness of the hedge
20
relationship. The effectiveness assessment requires calculations that utilize standard statistical methods of correlation that must support the determination that the hedging relationship is expected to be highly effective, during the period that the hedge is designated, in achieving offsetting changes in fair value or cash flows attributable to the hedged risk. If the Company’s documentation and assessment of effectiveness are not considered to be adequate to achieve hedge accounting treatment, the derivative is treated as a free-standing risk management instrument.
Allowance for Loan and Lease Losses and Contingent Credit Risk Liabilities
Allowance for loan and lease losses
The allowance for loan and lease losses represents management’s estimate of incurred credit losses inherent in the Company’s loan and lease portfolios as of the balance sheet date. The estimation of the allowance is based on a variety of factors, including past loan loss experience, the current credit profile of the Company’s borrowers, adverse situations that have occurred that may affect the borrowers’ ability to repay, the estimated value of underlying collateral, the interest rate climate as it affects adjustable-rate loans and general economic conditions. Determining the adequacy of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the loan portfolio, in light of the factors then prevailing may result in significant changes in the allowance for loan and lease losses in future periods.
The allowance for loan and lease losses is reported within the Consolidated Statements of Financial Condition and the provision for loan and lease losses is reported within the Consolidated Statements of Income.
The estimates and judgments are described in further detail in the subsequent section of Management’s Discussion and Analysis – “Credit Risk Management” and in Note 1 to the Consolidated Financial Statements – “Summary of Significant Accounting Policies.”
Contingent Credit Risk Liabilities
In the ordinary course of business, the Company sells loans to third parties but retains credit risk exposure on those loans. When loans are sold with retained credit risk provisions attached to the sale, the Company commits to stand ready to perform, if the loan defaults, by making payments to remedy the default or repurchasing the loan. The Company also sells loans without retained credit risk that it may be required to repurchase for violation of a representation or warranty made in connection with the sale of the loan that has a material adverse effect on the value of the loan, or if the Company agreed to repurchase the loan in the event of a first payment or early payment default. When a loan sold to an investor without retained credit risk fails to perform according to its contractual terms, the investor will typically review the loan file to search for errors that may have been made in the process of originating the loan. If errors are discovered and it is determined that such errors constitute a violation of a representation or warranty made to the investor in connection with the loan’s sale, then the Company will be required to either repurchase the loan or indemnify the investor for losses sustained if the violation had a material adverse effect on the value of the loan.
In 2004 and 2005, the Company’s Long Beach Mortgage Company subsidiary engaged in whole loan sale transactions of originated subprime loans in which it agreed to repurchase from the investor each “early payment default” loan at a price equal to the loan’s face value plus the amount of any premium paid by the investor. An early payment default occurs when the borrower fails to make the first post-sale payment due on the loan by a contractually specified date. Usually when such an event occurs, the fair value of the loan at the time of its repurchase is lower than the face value. In the fourth quarter of 2005, the Company experienced increased incidents of repurchases of early payment default loans sold by Long Beach Mortgage Company and this trend is expected to continue in the first part of 2006.
21
Reserves are established for the Company’s exposure to these contingent credit risk liabilities in the aforementioned circumstances when it becomes probable that a loss has been incurred and the amount can be reasonably estimated. Throughout the life of these contingent credit risk liabilities, the Company may learn of additional information that can affect the assessment of loss probability or the estimation of the amounts involved. Changes in these assessments can lead to significant changes in the recorded reserves. Contingent credit risk liabilities are recorded within other liabilities on the Consolidated Statements of Financial Condition, and losses are recorded on the Consolidated Statements of Income under the noninterest income caption “Revenue from sales and servicing of home mortgage loans.”
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board (“FASB”) issued a revised version of the original Statement of Financial Accounting Standards (“Statement”) No. 123, Accounting for Stock-Based Compensation . Statement No. 123R, Share-Based Payment , supersedes Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees . This Statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This Statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair value-based measurement method in accounting for share-based payment transactions with employees, except for equity instruments held by employee stock ownership plans. Effective January 1, 2003 and in accordance with the transitional guidance of Statement No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure , the Company elected to prospectively apply the fair value method of accounting for stock-based awards granted subsequent to December 31, 2002. The Company will prospectively apply Statement No. 123R to its financial statements as of January 1, 2006. However, as the Company has already adopted Statement No. 148 and substantially all stock-based awards granted prior to its adoption have fully vested as of December 31, 2005, Statement No. 123R will not have a significant effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.
In March 2005, Securities and Exchange Commission (‘‘SEC’’) Staff Accounting Bulletin No. 107 (‘‘SAB 107’’) was issued, which expresses views of the staff regarding the interaction between Statement No. 123R, Share-Based Payment , and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. The Company will consider the guidance provided by SAB 107 as part of its adoption of Statement No. 123R.
In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3 . This Statement replaces APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements , and changes the requirements for the accounting and reporting of a change in accounting principle. This Statement requires changes in accounting principles to be retrospectively applied to the prior periods presented in the financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This Statement applies to all voluntary changes in accounting principles and also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This Statement also carries forward, without substantive change, the provisions for the correction of an error from APB Opinion No. 20. Statement No. 154 is effective for accounting changes and corrections of errors made after December 31, 2005. The Company does not expect the application of this Statement to have a significant effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.
In February 2006, the FASB issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments . This Statement amends Statements No. 133, Accounting for Derivative Instruments and Hedging Activities and No. 140 , Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
22
Liabilities to simplify and make more consistent the accounting for certain financial instruments. This Statement permits fair value remeasurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. This Statement also allows a qualifying special purpose entity to hold a derivative financial instrument that pertains to a beneficial interest. Statement No. 155 is effective for all of the Company’s financial instruments acquired or issued after December 31, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. The Company is currently evaluating the impact this guidance will have on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.
23
Five-Year Summary of Selected Financial Data
|
|
December 31, |
|
||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|
|
(in millions, except per share amounts) |
|
||||||||
Income Statement Data (for the year ended) |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ 7,886 |
|
$ 7,116 |
|
$ 7,629 |
|
$ 8,129 |
|
$ 6,492 |
|
Provision for loan and lease losses |
|
316 |
|
209 |
|
42 |
|
404 |
|
426 |
|
Noninterest income |
|
5,738 |
|
4,612 |
|
5,850 |
|
4,469 |
|
3,176 |
|
Noninterest expense |
|
7,870 |
|
7,535 |
|
7,408 |
|
6,188 |
|
4,416 |
|
Net income |
|
3,432 |
|
2,878 |
|
3,880 |
|
3,861 |
|
3,104 |
|
Basic earnings per common share (1) : |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
3.84 |
|
2.88 |
|
4.20 |
|
4.01 |
|
3.57 |
|
Income from discontinued operations, net |
|
– |
|
0.46 |
|
0.09 |
|
0.08 |
|
0.07 |
|
Net income |
|
3.84 |
|
3.34 |
|
4.29 |
|
4.09 |
|
3.64 |
|
Diluted earnings per common share (1) : |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
3.73 |
|
2.81 |
|
4.12 |
|
3.94 |
|
3.51 |
|
Income from discontinued operations, net |
|
– |
|
0.45 |
|
0.09 |
|
0.08 |
|
0.07 |
|
Net income |
|
3.73 |
|
3.26 |
|
4.21 |
|
4.02 |
|
3.58 |
|
Dividends declared per common share (1) |
|
1.90 |
|
1.74 |
|
1.40 |
|
1.06 |
|
0.90 |
|
Balance Sheet Data (at year end) |
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
$ 24,659 |
|
$ 19,219 |
|
$ 36,707 |
|
$ 43,905 |
|
$ 58,233 |
|
Loans held for sale |
|
33,582 |
|
42,743 |
|
20,837 |
|
39,623 |
|
27,574 |
|
Loans held in portfolio |
|
229,632 |
|
207,071 |
|
175,150 |
|
143,028 |
|
126,396 |
|
Mortgage servicing rights |
|
8,041 |
|
5,906 |
|
6,354 |
|
5,341 |
|
6,241 |
|
Goodwill |
|
8,298 |
|
6,196 |
|
6,196 |
|
6,213 |
|
2,116 |
|
Assets |
|
343,839 |
|
307,918 |
|
275,178 |
|
268,225 |
|
242,468 |
|
Deposits |
|
193,167 |
|
173,658 |
|
153,181 |
|
155,516 |
|
106,946 |
|
Securities sold under agreements to repurchase |
|
15,532 |
|
15,944 |
|
28,333 |
|
16,717 |
|
39,447 |
|
Advances from Federal Home Loan
|
|
68,771 |
|
70,074 |
|
48,330 |
|
51,265 |
|
61,072 |
|
Other borrowings |
|
23,777 |
|
18,498 |
|
15,483 |
|
14,712 |
|
9,925 |
|
Stockholders’ equity |
|
27,616 |
|
21,226 |
|
19,742 |
|
20,061 |
|
14,025 |
|
Supplemental Data |
|
|
|
|
|
|
|
|
|
|
|
Loan volume: |
|
|
|
|
|
|
|
|
|
|
|
Home loans: |
|
|
|
|
|
|
|
|
|
|
|
Adjustable rate |
|
$ 95,114 |
|
$ 103,305 |
|
$ 99,899 |
|
$ 84,627 |
|
$ 37,224 |
|
Fixed rate |
|
78,118 |
|
77,723 |
|
263,604 |
|
180,745 |
|
108,105 |
|
Specialty mortgage finance (2) |
|
34,490 |
|
31,334 |
|
20,678 |
|
14,077 |
|
10,333 |
|
Total home loan volume |
|
207,722 |
|
212,362 |
|
384,181 |
|
279,449 |
|
155,662 |
|
Total loan volume |
|
261,157 |
|
266,733 |
|
432,245 |
|
309,419 |
|
172,951 |
|
(1) Restated for all stock splits.
(2) Represents purchased subprime loan portfolios and mortgages originated by Long Beach Mortgage Company.
24
Ratios and Other Supplemental Data
|
|
Year Ended December 31, |
|
||||
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
(dollars in millions, except per share amounts) |
|
||||
Profitability |
|
|
|
|
|
|
|
Return on average assets (1) |
|
1.05 |
% |
1.01 |
% |
1.37 |
% |
Return on average common equity (1) |
|
14.63 |
|
14.02 |
|
18.85 |
|
Net interest margin |
|
2.67 |
|
2.82 |
|
3.11 |
|
Efficiency ratio (2)(3) |
|
57.76 |
|
64.25 |
|
54.96 |
|
Asset Quality |
|
|
|
|
|
|
|
Nonaccrual loans (4)(5) |
|
$ 1,686 |
|
$ 1,534 |
|
$ 1,626 |
|
Foreclosed assets (4) |
|
276 |
|
261 |
|
311 |
|
Total nonperforming assets (4)(5) |
|
1,962 |
|
1,795 |
|
1,937 |
|
Nonperforming assets/total assets (4)(5) |
|
0.57 |
% |
0.58 |
% |
0.70 |
% |
Restructured loans (4) |
|
$ 22 |
|
$ 34 |
|
$ 111 |
|
Total nonperforming assets and restructured loans (4)(5) |
|
1,984 |
|
1,829 |
|
2,048 |
|
Allowance for loan and lease losses (4) |
|
1,695 |
|
1,301 |
|
1,250 |
|
Allowance as a percentage of total loans held in portfolio (4) |
|
0.74 |
% |
0.63 |
% |
0.71 |
% |
Net charge-offs |
|
$ 244 |
|
$ 135 |
|
$ 309 |
|
Capital Adequacy (4) |
|
|
|
|
|
|
|
Stockholders’ equity/total assets |
|
8.03 |
% |
6.89 |
% |
7.17 |
% |
Tangible equity (6) /total tangible assets (6) |
|
5.72 |
|
5.05 |
|
5.26 |
|
Estimated total risk-based capital/risk-weighted assets (7) |
|
10.90 |
|
11.34 |
|
10.94 |
|
Per Common Share Data |
|
|
|
|
|
|
|
Number of common shares outstanding at end of period (in thousands) |
|
993,914 |
|
874,262 |
|
880,986 |
|
Common stock dividend payout ratio |
|
49.48 |
% |
52.10 |
% |
32.63 |
% |
Book value per common share (4)(8) |
|
$ 27.95 |
|
$ 24.45 |
|
$ 22.56 |
|
Market prices: |
|
|
|
|
|
|
|
High |
|
44.54 |
|
45.28 |
|
46.55 |
|
Low |
|
36.92 |
|
37.63 |
|
32.98 |
|
Year end |
|
43.50 |
|
42.28 |
|
40.12 |
|
(1) Includes income from continuing and discontinued operations.
(2) Based on continuing operations.
(3) The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
(4) As of year end.
(5) Excludes nonaccrual loans held for sale.
(6) Excludes unrealized net gain/loss on available-for-sale securities and derivatives, goodwill and intangible assets, but includes MSR. These adjustments are applied to both the numerator and the denominator.
(7) Estimate of what the total risk-based capital ratio would be if Washington Mutual, Inc. were a bank holding company that is subject to Federal Reserve Board capital requirements.
(8) Excludes 6 million shares held in escrow at December 31, 2005, 2004 and 2003.
25
Earnings Performance from Continuing Operations
For 2005, net interest income increased $770 million, or 11%, compared with 2004. The increase was largely due to growth in average interest-earning assets, which collectively increased 17% during 2005. Partially offsetting the growth in interest-earning assets was further contraction in the net interest margin, which declined 15 basis points from 2004. The decrease in the net interest margin was due to an increase in the cost of the Company’s interest-bearing liabilities, which was driven by continual increases in short-term interest rates since June of 2004. This causes compression in the margin as the Company’s interest-bearing liabilities reprice at a faster pace than the Company’s interest-earning assets. Partially mitigating the disparity in repricing speeds during 2005 was growth in home equity lines of credit balances, which have repricing frequencies that are more closely aligned with the faster repricing behavior of the Company’s wholesale borrowings.
Interest rate contracts, including embedded derivatives, held for asset/liability risk management purposes increased net interest income by $52 million in 2005. Such interest rate contracts, including embedded derivatives, decreased net interest income by $222 million in 2004.
26
Certain average balances, together with the total dollar amounts of interest income and expense related to such balances and the weighted average interest rates, were as follows:
|
|
Year Ended December 31, |
|
||||||||||||||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
||||||||||||||||||||
|
|
Average
|
|
Rate |
|
Interest
|
|
Average
|
|
Rate |
|
Interest
|
|
Average
|
|
Rate |
|
Interest
|
|
||||||||
|
|
(dollars in millions) |
|
||||||||||||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and securities purchased under agreements to resell |
|
$ 2,154 |
|
3.42 |
% |
|
$ 74 |
|
|
$ 884 |
|
1.42 |
% |
|
$ 13 |
|
|
$ 2,570 |
|
|
1.45 |
% |
|
|
$ 37 |
|
|
Trading assets |
|
7,217 |
|
6.50 |
|
|
469 |
|
|
2,368 |
|
6.39 |
|
|
151 |
|
|
1,235 |
|
|
6.78 |
|
|
|
84 |
|
|
Available-for-sale securities (1) : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
16,347 |
|
4.80 |
|
|
784 |
|
|
10,255 |
|
3.99 |
|
|
409 |
|
|
20,977 |
|
|
4.91 |
|
|
|
1,030 |
|
|
Investment securities |
|
4,506 |
|
4.74 |
|
|
214 |
|
|
10,732 |
|
3.30 |
|
|
355 |
|
|
18,742 |
|
|
3.77 |
|
|
|
708 |
|
|
Loans held for sale (2) |
|
44,847 |
|
5.31 |
|
|
2,382 |
|
|
29,721 |
|
4.95 |
|
|
1,472 |
|
|
45,438 |
|
|
5.51 |
|
|
|
2,501 |
|
|
Loans held in portfolio (2)(3) : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home (4) |
|
110,326 |
|
4.90 |
|
|
5,403 |
|
|
107,518 |
|
4.21 |
|
|
4,529 |
|
|
86,443 |
|
|
4.77 |
|
|
|
4,124 |
|
|
Specialty mortgage finance (5) |
|
20,555 |
|
5.19 |
|
|
1,066 |
|
|
15,767 |
|
4.84 |
|
|
763 |
|
|
10,794 |
|
|
5.43 |
|
|
|
586 |
|
|
Total home loans |
|
130,881 |
|
4.94 |
|
|
6,469 |
|
|
123,285 |
|
4.29 |
|
|
5,292 |
|
|
97,237 |
|
|
4.84 |
|
|
|
4,710 |
|
|
Home equity loans and lines of credit |
|
47,915 |
|
5.93 |
|
|
2,841 |
|
|
35,859 |
|
4.69 |
|
|
1,683 |
|
|
21,163 |
|
|
4.98 |
|
|
|
1,053 |
|
|
Home construction (6) |
|
2,074 |
|
6.22 |
|
|
129 |
|
|
2,489 |
|
5.50 |
|
|
137 |
|
|
2,062 |
|
|
5.90 |
|
|
|
122 |
|
|
Multi-family |
|
24,070 |
|
5.31 |
|
|
1,279 |
|
|
21,090 |
|
4.96 |
|
|
1,046 |
|
|
19,409 |
|
|
5.30 |
|
|
|
1,029 |
|
|
Other real estate |
|
5,091 |
|
6.56 |
|
|
334 |
|
|
6,396 |
|
5.94 |
|
|
380 |
|
|
7,243 |
|
|
6.35 |
|
|
|
460 |
|
|
Total loans secured by real estate |
|
210,031 |
|
5.26 |
|
|
11,052 |
|
|
189,119 |
|
4.51 |
|
|
8,538 |
|
|
147,114 |
|
|
5.01 |
|
|
|
7,374 |
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card |
|
2,082 |
|
11.96 |
|
|
249 |
|
|
– |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
|
– |
|
|
Other |
|
707 |
|
10.66 |
|
|
75 |
|
|
899 |
|
10.11 |
|
|
91 |
|
|
1,208 |
|
|
8.87 |
|
|
|
107 |
|
|
Commercial business |
|
2,614 |
|
5.00 |
|
|
131 |
|
|
4,415 |
|
4.43 |
|
|
196 |
|
|
4,165 |
|
|
4.49 |
|
|
|
187 |
|
|
Total loans held in portfolio |
|
215,434 |
|
5.34 |
|
|
11,507 |
|
|
194,433 |
|
4.54 |
|
|
8,825 |
|
|
152,487 |
|
|
5.03 |
|
|
|
7,668 |
|
|
Other (7) |
|
4,367 |
|
3.63 |
|
|
158 |
|
|
4,108 |
|
3.05 |
|
|
125 |
|
|
3,874 |
|
|
3.47 |
|
|
|
135 |
|
|
Total interest-earning assets |
|
294,872 |
|
5.29 |
|
|
15,588 |
|
|
252,501 |
|
4.50 |
|
|
11,350 |
|
|
245,323 |
|
|
4.96 |
|
|
|
12,163 |
|
|
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights |
|
6,597 |
|
|
|
|
|
|
|
6,406 |
|
|
|
|
|
|
|
5,721 |
|
|
|
|
|
|
|
|
|
Goodwill |
|
6,712 |
|
|
|
|
|
|
|
6,196 |
|
|
|
|
|
|
|
6,198 |
|
|
|
|
|
|
|
|
|
Other assets (8) |
|
18,496 |
|
|
|
|
|
|
|
18,975 |
|
|
|
|
|
|
|
25,877 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ 326,677 |
|
|
|
|
|
|
|
$ 284,078 |
|
|
|
|
|
|
|
$ 283,119 |
|
|
|
|
|
|
|
|
|
(1) The average balance and yield are based on average amortized cost balances.
(2) Nonaccrual loans and related income, if any, are included in their respective loan categories.
(3) Interest income for loans held in portfolio includes amortization of net deferred loan origination costs of $401 million, $351 million, and $314 million for the years ended December 31, 2005, 2004 and 2003.
(4) Deferred interest recognized in earnings that resulted from negative amortization within the Option ARM portfolio totaled $316 million, $19 million and $7 million for the years ended December 31, 2005, 2004 and 2003.
(5) Represents purchased subprime home loan portfolios and subprime home loans originated by Long Beach Mortgage Company and held in its investment portfolio.
(6) Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.
(7) Interest-earning assets in nonaccrual status (other than loans) and related income, if any, are included within this category.
(8) Includes assets of continuing and discontinued operations.
(This table is continued on next page.)
27
|
|
Year Ended December 31, |
|
||||||||||||||||||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
||||||||||||||||||||||||
|
|
Average
|
|
Rate |
|
Interest
|
|
Average
|
|
Rate |
|
Interest
|
|
Average
|
|
Rate |
|
Interest
|
|
||||||||||||
|
|
(dollars in millions) |
|
||||||||||||||||||||||||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking deposits |
|
$ 46,524 |
|
|
1.95 |
% |
|
|
$ 906 |
|
|
$ 59,826 |
|
|
1.28 |
% |
|
|
$ 766 |
|
|
$ 62,723 |
|
|
1.69 |
% |
|
|
$ 1,057 |
|
|
Savings and money market deposits |
|
42,555 |
|
|
1.76 |
|
|
|
750 |
|
|
35,927 |
|
|
1.11 |
|
|
|
399 |
|
|
28,085 |
|
|
0.94 |
|
|
|
263 |
|
|
Time deposits |
|
62,175 |
|
|
3.33 |
|
|
|
2,072 |
|
|
35,917 |
|
|
2.44 |
|
|
|
878 |
|
|
31,416 |
|
|
2.69 |
|
|
|
845 |
|
|
Total interest-bearing deposits |
|
151,254 |
|
|
2.46 |
|
|
|
3,728 |
|
|
131,670 |
|
|
1.55 |
|
|
|
2,043 |
|
|
122,224 |
|
|
1.77 |
|
|
|
2,165 |
|
|
Federal funds purchased and commercial paper |
|
5,314 |
|
|
3.56 |
|
|
|
190 |
|
|
3,522 |
|
|
1.50 |
|
|
|
53 |
|
|
3,158 |
|
|
1.18 |
|
|
|
37 |
|
|
Securities sold under agreements to repurchase |
|
15,365 |
|
|
3.40 |
|
|
|
523 |
|
|
16,660 |
|
|
2.26 |
|
|
|
377 |
|
|
22,318 |
|
|
2.44 |
|
|
|
545 |
|
|
Advances from Federal Home Loan
|
|
68,713 |
|
|
3.46 |
|
|
|
2,377 |
|
|
58,622 |
|
|
2.16 |
|
|
|
1,268 |
|
|
49,441 |
|
|
2.62 |
|
|
|
1,296 |
|
|
Other |
|
21,603 |
|
|
4.09 |
|
|
|
884 |
|
|
13,724 |
|
|
3.59 |
|
|
|
493 |
|
|
13,315 |
|
|
3.68 |
|
|
|
491 |
|
|
Total interest-bearing liabilities |
|
262,249 |
|
|
2.94 |
|
|
|
7,702 |
|
|
224,198 |
|
|
1.89 |
|
|
|
4,234 |
|
|
210,456 |
|
|
2.15 |
|
|
|
4,534 |
|
|
Noninterest-bearing sources: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
34,769 |
|
|
|
|
|
|
|
|
|
33,738 |
|
|
|
|
|
|
|
|
|
41,361 |
|
|
|
|
|
|
|
|
|
Other liabilities (9) |
|
6,192 |
|
|
|
|
|
|
|
|
|
5,614 |
|
|
|
|
|
|
|
|
|
10,724 |
|
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
23,467 |
|
|
|
|
|
|
|
|
|
20,528 |
|
|
|
|
|
|
|
|
|
20,578 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ 326,677 |
|
|
|
|
|
|
|
|
|
$ 284,078 |
|
|
|
|
|
|
|
|
|
$ 283,119 |
|
|
|
|
|
|
|
|
|
Net interest spread and net interest income |
|
|
|
|
2.35 |
|
|
|
$ 7,886 |
|
|
|
|
|
2.61 |
|
|
|
$ 7,116 |
|
|
|
|
|
2.81 |
|
|
|
$ 7,629 |
|
|
Impact of noninterest-bearing sources |
|
|
|
|
0.32 |
|
|
|
|
|
|
|
|
|
0.21 |
|
|
|
|
|
|
|
|
|
0.30 |
|
|
|
|
|
|
Net interest margin |
|
|
|
|
2.67 |
|
|
|
|
|
|
|
|
|
2.82 |
|
|
|
|
|
|
|
|
|
3.11 |
|
|
|
|
|
|
(9) Includes liabilities of continuing and discontinued operations.
28
The dollar amounts of interest income and interest expense fluctuate depending upon changes in interest rates and upon changes in the volume of interest-earning assets and interest-bearing liabilities. Changes attributable to (i) changes in volume (changes in average outstanding balances multiplied by the prior period’s rate), (ii) changes in rate (changes in average interest rate multiplied by the prior period’s volume), and (iii) changes in rate/volume (changes in rate times the change in volume) which were allocated proportionately to the changes in volume and the changes in rate and included in the relevant column below were as follows:
|
|
2005 vs. 2004 |
|
2004 vs. 2003 |
|
||||||||||||||
|
|
Increase/(Decrease)
|
|
Total |
|
Increase/(Decrease)
|
|
Total |
|
||||||||||
|
|
Volume |
|
Rate |
|
Change |
|
Volume |
|
Rate |
|
Change |
|
||||||
|
|
(in millions) |
|
||||||||||||||||
Interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and securities purchased under agreements to resell |
|
|
$ 31 |
|
|
$ 30 |
|
|
$ 61 |
|
|
|
$ (24 |
) |
|
$ – |
|
$ (24 |
) |
Trading assets |
|
|
315 |
|
|
3 |
|
|
318 |
|
|
|
73 |
|
|
(6 |
) |
67 |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
280 |
|
|
95 |
|
|
375 |
|
|
|
(454 |
) |
|
(167 |
) |
(621 |
) |
Investment securities |
|
|
(257 |
) |
|
116 |
|
|
(141 |
) |
|
|
(273 |
) |
|
(80 |
) |
(353 |
) |
Loans held for sale |
|
|
797 |
|
|
113 |
|
|
910 |
|
|
|
(798 |
) |
|
(231 |
) |
(1,029 |
) |
Loans held in portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home |
|
|
121 |
|
|
754 |
|
|
875 |
|
|
|
926 |
|
|
(521 |
) |
405 |
|
Specialty mortgage finance (1) |
|
|
245 |
|
|
57 |
|
|
302 |
|
|
|
246 |
|
|
(69 |
) |
177 |
|
Total home loans |
|
|
366 |
|
|
811 |
|
|
1,177 |
|
|
|
1,172 |
|
|
(590 |
) |
582 |
|
Home equity loans and lines of credit |
|
|
649 |
|
|
509 |
|
|
1,158 |
|
|
|
693 |
|
|
(63 |
) |
630 |
|
Home construction (2) |
|
|
(24 |
) |
|
16 |
|
|
(8 |
) |
|
|
24 |
|
|
(9 |
) |
15 |
|
Multi-family |
|
|
155 |
|
|
78 |
|
|
233 |
|
|
|
86 |
|
|
(69 |
) |
17 |
|
Other real estate |
|
|
(83 |
) |
|
37 |
|
|
(46 |
) |
|
|
(52 |
) |
|
(28 |
) |
(80 |
) |
Total loans secured by real estate |
|
|
1,063 |
|
|
1,451 |
|
|
2,514 |
|
|
|
1,923 |
|
|
(759 |
) |
1,164 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card |
|
|
249 |
|
|
– |
|
|
249 |
|
|
|
– |
|
|
– |
|
– |
|
Other |
|
|
(20 |
) |
|
4 |
|
|
(16 |
) |
|
|
(30 |
) |
|
14 |
|
(16 |
) |
Commercial business |
|
|
(88 |
) |
|
23 |
|
|
(65 |
) |
|
|
11 |
|
|
(2 |
) |
9 |
|
Total loans held in portfolio |
|
|
1,204 |
|
|
1,478 |
|
|
2,682 |
|
|
|
1,904 |
|
|
(747 |
) |
1,157 |
|
Other |
|
|
8 |
|
|
25 |
|
|
33 |
|
|
|
7 |
|
|
(17 |
) |
(10 |
) |
Total interest income |
|
|
2,378 |
|
|
1,860 |
|
|
4,238 |
|
|
|
435 |
|
|
(1,248 |
) |
(813 |
) |
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking deposits |
|
|
(197 |
) |
|
336 |
|
|
139 |
|
|
|
(47 |
) |
|
(244 |
) |
(291 |
) |
Savings and money market deposits |
|
|
84 |
|
|
268 |
|
|
352 |
|
|
|
82 |
|
|
54 |
|
136 |
|
Time deposits |
|
|
797 |
|
|
397 |
|
|
1,194 |
|
|
|
114 |
|
|
(81 |
) |
33 |
|
Total deposits |
|
|
684 |
|
|
1,001 |
|
|
1,685 |
|
|
|
149 |
|
|
(271 |
) |
(122 |
) |
Federal funds purchased and commercial paper |
|
|
37 |
|
|
100 |
|
|
137 |
|
|
|
5 |
|
|
11 |
|
16 |
|
Securities sold under agreements to repurchase |
|
|
(31 |
) |
|
177 |
|
|
146 |
|
|
|
(130 |
) |
|
(38 |
) |
(168 |
) |
Advances from Federal Home Loan Banks |
|
|
247 |
|
|
862 |
|
|
1,109 |
|
|
|
218 |
|
|
(246 |
) |
(28 |
) |
Other |
|
|
315 |
|
|
76 |
|
|
391 |
|
|
|
15 |
|
|
(13 |
) |
2 |
|
Total interest expense |
|
|
1,252 |
|
|
2,216 |
|
|
3,468 |
|
|
|
257 |
|
|
(557 |
) |
(300 |
) |
Net interest income |
|
|
$ 1,126 |
|
|
$ (356 |
) |
|
$ 770 |
|
|
|
$ 178 |
|
|
$ (691 |
) |
$ (513 |
) |
(1) Represents purchased subprime home loan portfolios and subprime home loans originated by Long Beach Mortgage Company and held in its investment portfolio.
(2) Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.
29
Noninterest Income
Noninterest income from continuing operations consisted of the following:
|
|
Year Ended December 31, |
|
Percentage Change |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2005/2004 |
|
2004/2003 |
|
|||||||
|
|
(in millions) |
|
|
|
|
|
|||||||||||
Revenue from sales and servicing of home mortgage loans |
|
$ |
2,030 |
|
$ |
1,387 |
|
$ |
1,974 |
|
|
46 |
% |
|
|
(30 |
)% |
|
Revenue from sales and servicing of consumer loans |
|
413 |
|
4 |
|
3 |
|
|
– |
|
|
|
38 |
|
|
|||
Depositor and other retail banking fees |
|
2,193 |
|
1,999 |
|
1,818 |
|
|
10 |
|
|
|
10 |
|
|
|||
Credit card fees |
|
139 |
|
– |
|
– |
|
|
– |
|
|
|
– |
|
|
|||
Securities fees and commissions |
|
448 |
|
426 |
|
395 |
|
|
5 |
|
|
|
8 |
|
|
|||
Insurance income |
|
172 |
|
226 |
|
188 |
|
|
(24 |
) |
|
|
20 |
|
|
|||
Portfolio loan related income |
|
387 |
|
401 |
|
439 |
|
|
(3 |
) |
|
|
(9 |
) |
|
|||
Trading assets income (loss) |
|
(257 |
) |
89 |
|
116 |
|
|
– |
|
|
|
(23 |
) |
|
|||
Gain (loss) from other available-for-sale securities |
|
(84 |
) |
50 |
|
676 |
|
|
– |
|
|
|
(93 |
) |
|
|||
Gain (loss) on extinguishment of borrowings |
|
1 |
|
(237 |
) |
(129 |
) |
|
– |
|
|
|
84 |
|
|
|||
Other income |
|
296 |
|
267 |
|
370 |
|
|
10 |
|
|
|
(28 |
) |
|
|||
Total noninterest income |
|
$ |
5,738 |
|
$ |
4,612 |
|
$ |
5,850 |
|
|
24 |
|
|
|
(21 |
) |
|
Revenue from sales and servicing of home mortgage loans
Revenue from sales and servicing of home mortgage loans, including the effects of all MSR risk management instruments, consisted of the following:
|
|
Year Ended December 31, |
|
Percentage Change |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2005/2004 |
|
2004/2003 |
|
|||||||
|
|
(in millions) |
|
|
|
|
|
|||||||||||
Revenue from sales and servicing of home mortgage loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Sales activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Gain from home mortgage loans and originated mortgage-backed securities |
|
$ |
850 |
|
$ |
651 |
|
$ |
1,570 |
|
|
31 |
% |
|
|
(59 |
)% |
|
Revaluation gain (loss) from derivatives |
|
99 |
|
80 |
|
(159 |
) |
|
23 |
|
|
|
– |
|
|
|||
Gain from home mortgage loans and originated mortgage-backed securities, net of hedging and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
risk management instruments |
|
949 |
|
731 |
|
1,411 |
|
|
30 |
|
|
|
(48 |
) |
|
|||
Servicing activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Home mortgage loan servicing revenue, net (1) |
|
2,123 |
|
1,943 |
|
2,080 |
|
|
9 |
|
|
|
(7 |
) |
|
|||
Amortization of MSR |
|
(2,170 |
) |
(2,521 |
) |
(3,269 |
) |
|
(14 |
) |
|
|
(23 |
) |
|
|||
MSR valuation adjustments (2) |
|
965 |
|
(235 |
) |
712 |
|
|
– |
|
|
|
– |
|
|
|||
Revaluation gain from derivatives |
|
163 |
|
1,469 |
|
1,040 |
|
|
(89 |
) |
|
|
41 |
|
|
|||
Home mortgage loan servicing revenue, net of hedging and derivative risk management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
instruments |
|
1,081 |
|
656 |
|
563 |
|
|
65 |
|
|
|
16 |
|
|
|||
Total revenue from sales and servicing of home mortgage loans |
|
2,030 |
|
1,387 |
|
1,974 |
|
|
46 |
|
|
|
(30 |
) |
|
|||
Impact of other MSR risk management instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Revaluation gain (loss) from certain trading securities |
|
(223 |
) |
81 |
|
– |
|
|
– |
|
|
|
– |
|
|
|||
Gain (loss) from certain available-for-sale securities |
|
(18 |
) |
1 |
|
305 |
|
|
– |
|
|
|
(100 |
) |
|
|||
Total impact of other MSR risk management instruments |
|
(241 |
) |
82 |
|
305 |
|
|
– |
|
|
|
(73 |
) |
|
|||
Total revenue from sales and servicing of home mortgage loans and all MSR risk management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
instruments |
|
$ |
1,789 |
|
$ |
1,469 |
|
$ |
2,279 |
|
|
22 |
|
|
|
(36 |
) |
|
(1) Includes late charges, prepayment fees and loan pool expenses (the shortfall of the scheduled interest required to be remitted to investors compared to what is collected from the borrowers upon payoff).
(2) Net of fair value hedge ineffectiveness as well as any impairment/reversal recognized on MSR that results from the application of the lower of cost or market value accounting methodology.
30
Revenue from sales and servicing of home mortgage loans, including the effects of all MSR risk management instruments, increased $320 million, or 22%, from 2004. Gain from home mortgage loans and mortgage-backed securities, net of hedging and risk management instruments increased $218 million, or 30%, as the strength of the U.S. housing market fueled strong customer demand for fixed-rate mortgages and the Company’s option adjustable-rate mortgage product (“Option ARM”). In particular, the sustained liquidity of the Option ARM product in the secondary market enabled the Company to sell approximately $48.13 billion of Option ARM loans during 2005, compared with $14.12 billion in 2004. The Company also sells substantially all of its fixed-rate and medium-term adjustable-rate home loan volume.
The fair value changes in loans held for sale and the offsetting changes in the derivative instruments used as fair value hedges are recorded within gain from mortgage loans when hedge accounting treatment is achieved. Loans held for sale where hedge accounting treatment is not achieved are recorded at the lower of cost or fair value. This accounting method requires declines in the fair value of these loans, to the extent such value is below their cost basis, to be immediately recognized in earnings, but any increases in the value of these loans that exceed their original cost basis may not be recorded until the loans are sold. However, all changes in the value of derivative instruments that are used to manage the interest rate risk of these loans must be recognized in earnings as those changes occur. At December 31, 2005, the amount by which the aggregate fair value of loans held for sale exceeded their aggregate cost basis was approximately $117 million.
The following table presents the aggregate valuation adjustments for the MSR and the corresponding hedging and risk management derivative instruments and securities, and amortization of the MSR during the years ended December 31, 2005, 2004 and 2003:
|
|
Year Ended December 31, |
|
|||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
(in millions) |
|
|||||||
MSR Risk Management and Amortization: |
|
|
|
|
|
|
|
|||
MSR valuation adjustments: |
|
|
|
|
|
|
|
|||
Statement No. 133 MSR accounting valuation adjustments |
|
$ |
999 |
|
$ |
699 |
|
$ |
– |
|
Amortization of MSR |
|
(2,170 |
) |
(2,521 |
) |
(3,269 |
) |
|||
(Impairment) reversal |
|
943 |
|
(466 |
) |
712 |
|
|||
Net change in MSR valuation |
|
(228 |
) |
(2,288 |
) |
(2,557 |
) |
|||
Gain (loss) on MSR hedging and risk management instruments: |
|
|
|
|
|
|
|
|||
Statement No. 133 fair value hedging adjustments |
|
(977 |
) |
(468 |
) |
– |
|
|||
Revaluation gain from derivatives |
|
163 |
|
1,469 |
|
1,040 |
|
|||
Revaluation gain (loss) from certain trading securities |
|
(223 |
) |
81 |
|
– |
|
|||
Gain (loss) from certain available-for-sale securities |
|
(18 |
) |
1 |
|
305 |
|
|||
Total gain (loss) on MSR hedging and risk management instruments |
|
(1,055 |
) |
1,083 |
|
1,345 |
|
|||
Total MSR risk management and amortization |
|
$ |
(1,283 |
) |
$ |
(1,205 |
) |
$ |
(1,212 |
) |
The following tables reconcile the gains (losses) on investment securities that are designated as MSR risk management instruments to trading assets income (loss) and the gain (loss) on other available-for-sale securities that are reported within noninterest income during the years ended December 31, 2005, 2004 and 2003:
|
|
Year Ended December 31, 2005 |
|
|||||||||
|
|
MSR |
|
Other |
|
Total |
|
|||||
|
|
(in millions) |
|
|||||||||
Trading assets loss |
|
$ |
(223 |
) |
|
$ |
(34 |
) |
|
$ |
(257 |
) |
Loss from other available-for-sale securities |
|
(18 |
) |
|
(66 |
) |
|
(84 |
) |
|||
31
|
|
Year Ended December 31, 2004 |
|
|||||||||||||
|
|
MSR |
|
Other |
|
Total |
|
|||||||||
|
|
(in millions) |
|
|||||||||||||
Trading assets income |
|
|
$ |
81 |
|
|
|
$ |
8 |
|
|
|
$ |
89 |
|
|
Gain from other available-for-sale securities |
|
|
1 |
|
|
|
49 |
|
|
|
50 |
|
|
|
|
Year Ended December 31, 2003 |
|
|||||||||
|
|
MSR |
|
Other |
|
Total |
|
|||||
|
|
(in millions) |
|
|||||||||
Trading assets income |
|
$ |
– |
|
|
$ |
116 |
|
|
$ |
116 |
|
Gain from other available-for-sale securities |
|
305 |
|
|
371 |
|
|
676 |
|
|||
Total MSR risk management and amortization was $(1.28) billion in 2005, compared with $(1.21) billion in 2004. Although average mortgage rates on conventional fixed-rate loans for 2005 were only slightly higher than at the end of 2004, more significant fluctuations occurred over the course of 2005. The Federal National Mortgage Association (“FNMA”) 30-year fixed mortgage rate, for example, reached a 2005 high of 5.96% in November and a low of 4.93% in June. As interest rates fluctuate, spreads between mortgage rate indices and the indices of interest rate derivative contracts that are used for MSR risk management purposes may expand or compress, which causes the change in value of the risk management instruments to differ from changes in value of the MSR. The benchmark 10-year interest rate swap, for example, reached a high of 5.21% in November of 2005 and a low of 4.30% in June of 2005. To mitigate the earnings volatility that occurs when spreads between interest rate indices fluctuate, the Company restructured the composition of its MSR risk management portfolio in the latter half of 2004. The portfolio now encompasses a broader array of instruments, such as principal-only mortgage-backed securities and forward commitments to purchase and sell mortgage-backed securities, whose valuation adjustments are determined by changes in mortgage interest rates.
Since the second quarter of 2004, the Company has applied fair value hedge accounting treatment, as prescribed by Statement No. 133, as amended, to most of its MSR. The application of this guidance results in netting of the changes in fair value of the hedged MSR with the changes in fair value of the hedging derivative in the Consolidated Statements of Income, if the hedge relationship is determined to be highly effective. The Company uses conventional statistical methods of correlation to determine if the results of the changes in value of the hedged MSR and the hedging derivative meet the Statement No. 133, as amended, criteria for a highly effective hedge accounting relationship. Under lower of cost or fair value accounting, impairment is recognized through a valuation allowance. The portion of the MSR in which the hedging relationship is determined not to be highly effective will continue to be accounted for at the lower of cost or fair value.
The FASB has released an exposure draft, which would amend Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities , and specifically addresses accounting for servicing of financial assets. For each class of separately recognized servicing assets, this proposed Statement would permit an entity to choose either to continue the current practice of amortizing servicing assets in proportion to and over the period of estimated net servicing income and assess servicing assets for impairment at each reporting date, or to report servicing assets at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur. This proposed Statement also would require additional disclosures for all separately recognized servicing assets. If the Company were to elect the fair value option of this proposed Statement, the separate calculations and disclosures of amortization and impairment would discontinue and be replaced with a fair value adjustment that encompasses both market-driven valuation changes and the runoff in value that occurs from the passage of time. The Company is assessing the potential impact of this guidance. The FASB plans to issue this Statement in the first quarter of 2006.
32
During 2005, the Company recorded an other-than-temporary MSR impairment of $106 million on the MSR asset. This amount was determined by applying an appropriate interest rate shock to the MSR in order to estimate the amount of the valuation allowance that is expected to be recovered in the foreseeable future. To the extent that the gross carrying value of the MSR, including the Statement No. 133, as amended, valuation adjustments, exceeded the estimated recoverable amount, that portion of the gross carrying value was written off as other-than-temporary impairment. Although the writedowns had no impact on the Company’s results of operations or financial condition, they did reduce the gross carrying value of the MSR, which is used as the basis for MSR amortization. The Company recorded other-than-temporary MSR impairment of $895 million in 2004.
In evaluating the MSR for impairment, loans are stratified in the servicing portfolio based on loan type and coupon rate. An impairment valuation allowance for a stratum is recorded when, and in the amount by which, its fair value is less than its gross carrying value. A reversal of the impairment allowance for a stratum is recorded when its fair value exceeds its net carrying value. However, a reversal in any particular stratum cannot exceed its valuation allowance. At December 31, 2005, loans in the servicing portfolio were stratified as follows:
|
|
|
|
December 31, 2005 |
|
||||||||||||||||
|
|
Rate Band |
|
Gross
|
|
Valuation
|
|
Net
|
|
Fair
|
|
||||||||||
|
|
|
|
(in millions) |
|
||||||||||||||||
Primary Servicing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Adjustable |
|
All loans |
|
|
$ |
1,572 |
|
|
|
$ |
– |
|
|
|
$ |
1,572 |
|
|
$ |
1,607 |
|
Government-sponsored enterprises |
|
6.00% and below |
|
|
3,622 |
|
|
|
(196 |
) |
|
|
3,426 |
|
|
3,426 |
|
||||
Government-sponsored enterprises |
|
6.01% to 7.49% |
|
|
1,282 |
|
|
|
(365 |
) |
|
|
917 |
|
|
917 |
|
||||
Government-sponsored enterprises |
|
7.50% and above |
|
|
108 |
|
|
|
(1 |
) |
|
|
107 |
|
|
107 |
|
||||
Government |
|
6.00% and below |
|
|
546 |
|
|
|
(91 |
) |
|
|
455 |
|
|
455 |
|
||||
Government |
|
6.01% to 7.49% |
|
|
381 |
|
|
|
(113 |
) |
|
|
268 |
|
|
268 |
|
||||
Government |
|
7.50% and above |
|
|
126 |
|
|
|
(43 |
) |
|
|
83 |
|
|
83 |
|
||||
Private |
|
6.00% and below |
|
|
597 |
|
|
|
(8 |
) |
|
|
589 |
|
|
589 |
|
||||
Private |
|
6.01% to 7.49% |
|
|
295 |
|
|
|
(57 |
) |
|
|
238 |
|
|
238 |
|
||||
Private |
|
7.50% and above |
|
|
61 |
|
|
|
(14 |
) |
|
|
47 |
|
|
47 |
|
||||
Total primary servicing |
|
|
|
|
8,590 |
|
|
|
(888 |
) |
|
|
7,702 |
|
|
7,737 |
|
||||
Master servicing |
|
All loans |
|
|
96 |
|
|
|
– |
|
|
|
96 |
|
|
114 |
|
||||
Subprime |
|
All loans |
|
|
227 |
|
|
|
(26 |
) |
|
|
201 |
|
|
201 |
|
||||
Multi-family |
|
All loans |
|
|
42 |
|
|
|
– |
|
|
|
42 |
|
|
46 |
|
||||
Total |
|
|
|
|
$ |
8,955 |
|
|
|
$ |
(914 |
) |
|
|
$ |
8,041 |
|
|
$ |
8,098 |
|
The value of the MSR asset is subject to prepayment risk. Future expected net cash flows from servicing a loan in the servicing portfolio will not be realized if the loan pays off earlier than anticipated. Moreover, since most loans within the servicing portfolio do not contain penalty provisions for early payoff, a corresponding economic benefit will not be received if the loan pays off earlier than expected. MSR represent the discounted present value of the future net cash flows the Company expects to receive from the servicing portfolio. Accordingly, prepayment risk subjects the MSR to potential impairment.
The Company estimates fair value of each MSR stratum using a discounted cash flow model. The discounted cash flow model calculates the present value of the estimated future net cash flows of the servicing portfolio based on various factors, such as servicing costs, expected prepayment speeds and discount rates, about which management must make assumptions based on future expectations. While the Company’s model estimates a value, the specific value used is based on a variety of market-based factors, such as documented observable data and anticipated changes in prepayment speeds. The reasonableness of management’s assumptions about these factors is evaluated through quarterly independent broker surveys.
33
Independent appraisals of the fair value of the servicing portfolio are obtained periodically, but not less frequently than quarterly, and are used by management to evaluate the reasonableness of the fair value conclusions.
The fair value of MSR is highly sensitive to changes in assumptions. For example, the determination of fair value uses anticipated prepayment speeds. Actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made as of a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time. Refer to “Market Risk Management” for discussion of how MSR prepayment risk is managed and to Note 1 to the Consolidated Financial Statements – “Summary of Significant Accounting Policies” for further discussion of how MSR impairment is measured. For a quantitative analysis of key economic assumptions used in measuring the fair value of MSR, and a sensitivity analysis based on changes to those assumptions, see Note 6 to the Consolidated Financial Statements – “Mortgage Banking Activities.”
All Other Noninterest Income
The addition of the Card Services Group on October 1, 2005 added more than $400 million of revenue from sales and servicing of consumer loans and $139 million of credit card fee income.
Depositor and other retail banking fees increased by $194 million, or 10%, primarily due to higher levels of checking fees that resulted from an increase in the number of noninterest-bearing checking accounts and an increase in debit card interchange and ATM-related income. The number of noninterest-bearing checking accounts at December 31, 2005 totaled approximately 7.8 million, compared with approximately 7.1 million at December 31, 2004.
Insurance income decreased $54 million, or 24%, primarily due to a decline in mortgage-related insurance income, as payoffs of loans with mortgage insurance more than offset insurance income generated from loan volume during 2005.
Several securities sold under agreements to repurchase (“repurchase agreements”) with embedded pay-fixed swaps were terminated during the third quarter of 2004, resulting in a net loss on extinguishment of borrowings of $147 million. During the first half of 2004, the Company terminated certain pay-fixed swaps hedging variable rate FHLB advances, resulting in a loss of $90 million. These transactions had the immediate effect of reducing the Company’s wholesale borrowing costs.
34
Noninterest Expense
Noninterest expense from continuing operations consisted of the following:
|
|
Year Ended December 31, |
|
Percentage Change |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2005/2004 |
|
2004/2003 |
|
|||||||
|
|
(in millions) |
|
|
|
|
|
|||||||||||
Compensation and benefits |
|
$ |
3,737 |
|
$ |
3,428 |
|
$ |
3,304 |
|
|
9 |
% |
|
|
4 |
% |
|
Occupancy and equipment |
|
1,523 |
|
1,659 |
|
1,592 |
|
|
(8 |
) |
|
|
4 |
|
|
|||
Telecommunications and outsourced information services |
|
450 |
|
479 |
|
554 |
|
|
(6 |
) |
|
|
(14 |
) |
|
|||
Depositor and other retail banking losses |
|
226 |
|
195 |
|
154 |
|
|
16 |
|
|
|
27 |
|
|
|||
Advertising and promotion |
|
327 |
|
276 |
|
278 |
|
|
19 |
|
|
|
(1 |
) |
|
|||
Professional fees |
|
182 |
|
158 |
|
267 |
|
|
15 |
|
|
|
(41 |
) |
|
|||
Postage |
|
293 |
|
232 |
|
220 |
|
|
26 |
|
|
|
6 |
|
|
|||
Loan expense |
|
101 |
|
111 |
|
125 |
|
|
(9 |
) |
|
|
(11 |
) |
|
|||
Other expense |
|
1,031 |
|
997 |
|
914 |
|
|
3 |
|
|
|
9 |
|
|
|||
Total noninterest expense |
|
$ |
7,870 |
|
$ |
7,535 |
|
$ |
7,408 |
|
|
4 |
|
|
|
2 |
|
|
Employee compensation and benefits increased $309 million, or 9%, from 2004 primarily due to higher salaries expense resulting from an increase in employees, due to growth in the Company’s operations. The Company also incurred a $45 million increase in salaries expense due to the addition of Card Services. The number of employees was 60,798 at December 31, 2005 compared with 52,579 at December 31, 2004.
The decrease in occupancy and equipment expense during 2005 was primarily due to decreased depreciation and lease expense and a decline in losses recognized on the disposal of assets.
The increase in depositor and other retail banking losses during 2005 was largely due to higher levels of overdraft charge-offs, losses from returned deposited checks and debit card and check fraud.
The increase in advertising and promotion expense in 2005 was primarily due to marketing and other professional services expense incurred due to the addition of the Card Services Group in the fourth quarter.
Professional fees increased in 2005 primarily due to both increased outside attorney fees for litigation related to supervisory goodwill lawsuits, in which the Company is a plaintiff, and increased outside recruiting fees.
Postage expense increased during 2005 largely due to increased direct mail volume related to the Card Services Group.
Available-for-Sale Securities
Securities consisted of the following:
|
|
December 31, |
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in millions) |
|
||||
Available-for-sale securities, total amortized cost of $24,810 and $19,047: |
|
|
|
|
|
||
Mortgage-backed securities |
|
$ |
20,648 |
|
$ |
14,923 |
|
Investment securities |
|
4,011 |
|
4,296 |
|
||
Total available-for-sale securities |
|
$ |
24,659 |
|
$ |
19,219 |
|
The Company holds available-for-sale securities primarily for interest rate risk management and liquidity enhancement purposes. The Company’s available-for-sale securities increased $5.44 billion during
35
2005 predominantly due to the purchase of mortgage-backed securities. Refer to Note 3 to the Consolidated Financial Statements – “Securities” for additional information on securities, classified by security type.
Loans
Total loans consisted of the following:
|
|
December 31, |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|||||
|
|
(in millions) |
|
|||||||||||||
Loans held for sale |
|
$ |
33,582 |
|
$ |
42,743 |
|
$ |
20,837 |
|
$ |
39,623 |
|
$ |
27,574 |
|
Loans held in portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Home loans (1) |
|
135,290 |
|
129,134 |
|
113,016 |
|
92,970 |
|
87,833 |
|
|||||
Home equity loans and lines of credit |
|
50,851 |
|
43,650 |
|
27,647 |
|
16,168 |
|
7,970 |
|
|||||
Home construction (2) |
|
2,037 |
|
2,344 |
|
2,220 |
|
1,949 |
|
2,602 |
|
|||||
Multi-family (3) |
|
25,601 |
|
22,282 |
|
20,324 |
|
18,000 |
|
15,608 |
|
|||||
Other real estate (4) |
|
5,035 |
|
5,664 |
|
6,649 |
|
7,986 |
|
6,089 |
|
|||||
Total loans secured by real estate |
|
218,814 |
|
203,074 |
|
169,856 |
|
137,073 |
|
120,102 |
|
|||||
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Credit card |
|
8,043 |
|
– |
|
– |
|
– |
|
– |
|
|||||
Other |
|
638 |
|
792 |
|
1,028 |
|
1,663 |
|
2,009 |
|
|||||
Commercial business |
|
2,137 |
|
3,205 |
|
4,266 |
|
4,292 |
|
4,285 |
|
|||||
Total loans held in portfolio (5) |
|
$ |
229,632 |
|
$ |
207,071 |
|
$ |
175,150 |
|
$ |
143,028 |
|
$ |
126,396 |
|
(1) Includes specialty mortgage finance loans, which are comprised of purchased subprime home loans and subprime home loans originated by Long Beach Mortgage Company and held in its investment portfolio. Specialty mortgage finance loans were $21.15 billion, $19.18 billion, $12.98 billion, $10.13 billion and $8.21 billion at December 31, 2005, 2004, 2003, 2002 and 2001.
(2) Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.
(3) Includes multi-family construction balances of $632 million in 2005, $333 million in 2004, $325 million in 2003, $491 million in 2002 and $385 million in 2001.
(4) Includes other commercial real estate construction balances of $208 million in 2005, $277 million in 2004, $382 million in 2003, $469 million in 2002 and $608 million in 2001.
(5) Includes net unamortized deferred loan origination costs of $1.53 billion, $1.25 billion, $1.01 billion, $587 million and $433 million at December 31, 2005, 2004, 2003, 2002 and 2001.
Total home loans consisted of the following:
|
|
December 31, |
|
||||||
|
|
2005 |
|
2004 |
|
||||
|
|
(in millions) |
|
||||||
Home loans: |
|
|
|
|
|
|
|
||
Short-term adjustable-rate loans (1) : |
|
|
|
|
|
|
|
||
Option ARMs (2) |
|
|
$ |
70,191 |
|
|
$ |
66,310 |
|
Other ARMs |
|
|
14,666 |
|
|
9,065 |
|
||
Total short-term adjustable-rate loans |
|
|
84,857 |
|
|
75,375 |
|
||
Medium-term adjustable-rate loans (3) |
|
|
41,511 |
|
|
45,197 |
|
||
Fixed-rate loans |
|
|
8,922 |
|
|
8,562 |
|
||
Total home loans |
|
|
$ |
135,290 |
|
|
$ |
129,134 |
|
(1) Short-term is defined as adjustable-rate loans that reprice within one year or less.
(2) The total amount by which the unpaid principal balance (“UPB”) of Option ARM loans exceeded their original principal amount was $157 million and $11 million at December 31, 2005 and 2004.
(3) Medium-term is defined as adjustable-rate loans that reprice after one year.
36
During most of 2005, loans held for sale remained at elevated levels, with an average balance during 2005 of $44.85 billion compared with $29.72 billion during 2004. As the yield curve continued to flatten during 2005, it began to influence the product mix of loans originated, steering customers towards fixed-rate products, which the Company generally designates for sale. Additionally, during 2005 the Company designated approximately $43.97 billion of Option ARMs for sale, representing 70% of 2005 Option ARM volume, compared with $31.48 billion, or 47% of Option ARM volume in 2004.
The Company’s loans held in portfolio increased $22.56 billion to $229.63 billion at December 31, 2005 from $207.07 billion at December 31, 2004. The increase was substantially due to the addition of the credit card portfolio from the Card Services Group and an increase in total home loan and home equity loans and lines of credit balances. Primarily all of the growth in the home loan and home equity loan and line of credit portfolios resulted from the origination of short-term adjustable-rate products. The Company’s short-term adjustable-rate home loans, which were predominantly comprised of Option ARM loans, increased from $75.38 billion at December 31, 2004 to $84.86 billion at December 31, 2005.
Home, multi-family and other commercial real estate construction loans and commercial business loans by maturity date were as follows:
|
|
December 31, 2005 |
|
||||||||||||||||
|
|
Due
|
|
After One
|
|
After
|
|
Total |
|
||||||||||
|
|
(in millions) |
|
||||||||||||||||
Home construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Adjustable rate |
|
|
$ |
829 |
|
|
|
$ |
88 |
|
|
|
$ |
1 |
|
|
$ |
918 |
|
Fixed rate |
|
|
203 |
|
|
|
4 |
|
|
|
912 |
|
|
1,119 |
|
||||
Multi-family construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Adjustable rate |
|
|
251 |
|
|
|
220 |
|
|
|
2 |
|
|
473 |
|
||||
Fixed rate |
|
|
47 |
|
|
|
59 |
|
|
|
53 |
|
|
159 |
|
||||
Other commercial real estate construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Adjustable rate |
|
|
58 |
|
|
|
143 |
|
|
|
1 |
|
|
202 |
|
||||
Fixed rate |
|
|
4 |
|
|
|
2 |
|
|
|
– |
|
|
6 |
|
||||
Commercial business: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Adjustable rate |
|
|
1,586 |
|
|
|
166 |
|
|
|
94 |
|
|
1,846 |
|
||||
Fixed rate |
|
|
28 |
|
|
|
205 |
|
|
|
58 |
|
|
291 |
|
||||
Total |
|
|
$ |
3,006 |
|
|
|
$ |
887 |
|
|
|
$ |
1,121 |
|
|
$ |
5,014 |
|
Deposits
Deposits consisted of the following:
|
|
December 31, |
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in millions) |
|
||||
Retail deposits: |
|
|
|
|
|
||
Checking deposits: |
|
|
|
|
|
||
Noninterest bearing |
|
$ |
20,752 |
|
$ |
17,463 |
|
Interest bearing |
|
42,253 |
|
51,099 |
|
||
Total checking deposits |
|
63,005 |
|
68,562 |
|
||
Savings and money market deposits |
|
36,664 |
|
36,836 |
|
||
Time deposits |
|
40,359 |
|
27,268 |
|
||
Total retail deposits |
|
140,028 |
|
132,666 |
|
||
Commercial business deposits |
|
11,459 |
|
7,611 |
|
||
Wholesale deposits |
|
29,917 |
|
18,448 |
|
||
Custodial and escrow deposits (1) |
|
11,763 |
|
14,933 |
|
||
Total deposits |
|
$ |
193,167 |
|
$ |
173,658 |
|
(1) Substantially all custodial and escrow deposits reside in noninterest-bearing checking accounts.
37
The increase in noninterest-bearing retail checking deposits was driven by an increase in the number of individual and small business checking accounts. Interest-bearing checking deposits decreased as customers shifted from Platinum checking accounts to time deposits as a result of higher rates offered for these products. Wholesale deposits increased 62% from 2004, due predominantly to an increase in institutional investor certificates of deposit as well as brokered certificates of deposit acquired from Providian Financial Corporation.
Transaction accounts (checking, savings and money market deposits) comprised 71% of retail deposits at December 31, 2005, compared with 79% at year-end 2004. These products generally have the benefit of lower interest costs, compared with time deposits, and represent the core customer relationship that is maintained within the retail banking franchise. Deposits funded 56% of total assets at December 31, 2005 and 2004.
The Company has four operating segments for the purpose of management reporting: the Retail Banking and Financial Services Group, the Home Loans Group (previously called the “Mortgage Banking Group”), the Card Services Group and the Commercial Group. The Retail Banking and Financial Services Group, the Home Loans Group and the Card Services Group are consumer-oriented while the Commercial Group serves commercial customers. In addition, the category of Corporate Support/Treasury and Other includes the community lending and investment operations as well as the Treasury function – which manages the Company’s interest rate risk, liquidity, capital, borrowings, and a majority of the Company’s investment securities. The Corporate Support function provides facilities, legal, accounting and finance, human resources and technology services.
During the fourth quarter of 2005, the Company announced its plans to reorganize its single family residential mortgage lending operations. This reorganization combined the Company’s subprime mortgage origination business, Long Beach Mortgage Company, as well as its Mortgage Banker Finance lending operations within the Home Loans Group. This change in structure was effective as of January 1, 2006. The following discussion and presentation of financial results reflects the structure that was in place during 2005.
The Company serves the needs of 19.5 million consumer households through its 2,140 retail banking stores, 487 lending stores and centers, 3,747 ATMs, telephone call centers and online banking.
The principal activities of the Retail Banking and Financial Services Group include:
· Offering a comprehensive line of deposit and other retail banking products and services to consumers and small businesses;
· Originating, managing and servicing home equity loans and lines of credit;
· Providing investment advisory and brokerage services, sales of annuities, mutual fund management and other financial services; and
· Holding the Company’s portfolio of home loans held for investment, excluding loans originated by Long Beach Mortgage Company (which are held by the Commercial Group).
Deposit products offered by the segment in all its stores include the Company’s signature free checking and interest-bearing Platinum checking accounts, as well as other personal checking, savings, money market deposit and time deposit accounts.
Financial consultants provide investment advisory and securities brokerage services to the public while licensed bank employees offer fixed annuities. The Company’s mutual fund management business offers investment advisory and mutual fund distribution services.
38
This segment’s home loan portfolio consists of home loans purchased from both the Home Loans Group and secondary market participants. The segment also purchases and re-underwrites loans to subprime borrowers which are held in the home loan portfolio. Loans held in portfolio generate interest income and loan-related noninterest income, such as late fees and prepayment fees.
The principal activities of the Home Loans Group include:
· Originating and servicing home loans;
· Buying and selling home loans in the secondary market; and
· Selling insurance-related products and participating in reinsurance activities with other insurance companies.
Home loans are either originated in the retail and wholesale channels or are purchased from other lenders through the correspondent channel. The profitability of each channel varies over time and the Company’s emphasis on each channel varies accordingly. The segment offers a wide variety of home loans, including:
· Fixed-rate home loans;
· Adjustable-rate home loans or “ARMs” (where the interest rate may be adjusted as frequently as every month);
· Hybrid home loans (where the interest rate is fixed for a predetermined time period, typically 3 to 5 years, and then converts to an ARM that reprices monthly or annually, depending on the product);
· Option ARM loans (for more details on Option ARMs, refer to Management’s Discussion and Analysis – “Credit Risk Management”); and
· Government insured or guaranteed home loans.
From an enterprise-wide perspective, loans are either retained or sold. Loans which are sold generate gain or loss on sale as well as interest income from the time they are funded until the time they are sold, while loans held in portfolio generate interest income and ancillary noninterest income. Fixed-rate home loans, which subject the Company to more interest rate risk than other types of home loans, are generally sold as part of the Company’s overall asset/liability risk management process. The decision to retain or sell other home loan products requires balancing the combination of additional interest income and the interest rate and credit risks inherent with holding loans in portfolio, with the size of the gain or loss that would be realized if the loans were sold. Such decisions are elements of the Company’s capital management process.
For management reporting purposes, home loans originated by this segment are either transferred through inter-segment sales to the Retail Banking and Financial Services Group or are sold to secondary market participants, including the housing government-sponsored enterprises – such as the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the regional branches of the Federal Home Loan Banks. The premium received on inter-segment sales to the Retail Banking and Financial Services Group is based on prices available in the secondary market, adjusted for hedging costs.
The Home Loans Group typically retains the right to service all home loans, whether held for sale, sold to secondary market participants or held in portfolio by the Retail Banking and Financial Services Group. Mortgage servicing involves the administration and collection of home loan payments. In servicing home loans, the Company collects and remits loan payments, responds to borrower inquiries, applies the collected principal and interest to the individual loans, collects, holds and disburses escrow funds for payment of property taxes and insurance premiums, counsels delinquent customers, supervises
39
foreclosures and property dispositions and generally administers the loans. In return for performing these functions, the Company receives servicing fees and other remuneration.
In addition to selling loans to secondary market participants, the Home Loans Group generates both interest income and noninterest income by acquiring home loans from a variety of sources, pooling and securitizing those loans, selling the resulting mortgage-backed securities to secondary market participants and providing ongoing servicing and bond administration for all securities issued.
The Home Loans Group makes insurance products available to its customers that complement the mortgage process, including private mortgage insurance, mortgage life insurance, flood, homeowners’, earthquake and other property and casualty insurance. Other types of insurance products made available include accidental death and dismemberment and term and whole life insurance. This segment also manages the Company’s captive reinsurance activities.
The principal activities of the Card Services Group include:
· Originating and servicing of credit card loans; and
· Providing other cardholder services.
The Card Services Group manages the Company’s credit card operations, which target customers by leveraging the Company’s retail banking distribution network and through direct mail solicitations, which serve as the Group’s primary new customer acquisition channels, augmented by online and telemarketing activities and other marketing programs. In addition to credit cards, this segment markets a variety of cardholder service products to its customer base. These products, which may be originated within the Company or jointly marketed with others, include debt suspension, auto- and health-related services, credit-related services, and selected insurance products.
The principal activities of the Commercial Group include:
· Providing financing to developers and investors for the acquisition or construction of multi-family dwellings and, to a lesser extent, other commercial properties;
· Originating and servicing multi-family and other commercial real estate loans and either holding such loans in portfolio as part of its commercial asset management business or selling them in the secondary market;
· Providing financing and other banking services to mortgage bankers for the origination of residential mortgage loans; and
· Originating and servicing home loans made to subprime borrowers through the Company’s subsidiary, Long Beach Mortgage Company.
The multi-family lending business, which accounts for a majority of the Group’s revenues, is comprised of three key activities: originating and managing loans retained in the loan portfolio, servicing all originated loans, whether they are retained or sold, and providing ancillary banking services to enhance customer retention. Combining these three activities into one integrated business model has allowed the Commercial Group to become a leading originator and holder of multi-family loans. The Group’s multi-family lending program has a market share of more than 20% in certain key cities along the west coast, is rapidly gaining market share in certain key cities on the east coast and is targeting similar success in other selected target markets.
As part of the Company’s specialty mortgage finance operations, the Group also originates home loans to subprime borrowers through the broker network maintained by Long Beach Mortgage Company, a wholly-owned subsidiary of the Company. Such loans may be held in the Company’s specialty mortgage finance home loan portfolio or sold to secondary market participants. The Company generally retains the servicing relationship on loans which it has sold.
40
The Corporate Support/Treasury and Other category includes enterprise-wide management of the Company’s interest rate risk, liquidity, capital, borrowings, and a majority of the Company’s investment securities. As part of the Company’s asset and liability management process, the Treasury function provides oversight and direction across the enterprise over matters that impact the profile of the Company’s balance sheet, such as product composition of loans that the Company holds in the portfolio, the appropriate mix of wholesale and capital markets borrowings at any given point in time, and the allocation of capital resources to the business segments. This category also includes the costs of the Company’s technology services, facilities, legal, human resources, and accounting and finance functions to the extent not allocated to the business segments and the community lending and investment operations. Community lending and investment programs help fund the development of affordable housing units in traditionally underserved communities. Also reported in this category is the net impact of funds transfer pricing for loan and deposit balances, lower of cost or fair value adjustments and the write-off of inter-segment premiums associated with transfers of loans from the Retail Banking and Financial Services Group to the Home Loans Group when home loans previously designated as held for investment are moved to held for sale and all charges incurred from the Company’s cost containment initiative, which was a key initiative during 2004.
Management Accounting Methodologies
The Company uses various management accounting methodologies, which are enhanced from time to time, to assign certain balance sheet and income statement items to the responsible operating segment. In order to more closely align the segments’ operating results with other internal profitability measures, the Company has discontinued the practice of allocating a goodwill cost of capital charge to the operating segments. Prior periods have been conformed to reflect this change in methodology.
Methodologies that are applied to the measurement of segment profitability include:
· A funds transfer pricing system, which allocates interest income funding credits and funding charges between the operating segments and the Treasury Division. A segment will receive a funding credit from the Treasury Division for its liabilities and its share of risk-adjusted economic capital. Conversely, a segment is assigned a charge by the Treasury Division to fund its assets. The system takes into account the interest rate risk profile of the Company’s assets and liabilities and concentrates their sensitivities within the Treasury Division, where it is centrally managed. Certain basis and other residual risk remains in the operating segments;
· A calculation of the provision for loan and lease losses based on management’s current assessment of the long-term, normalized net charge-off ratio for loan products within each segment, which is recalibrated periodically to the latest available loan loss experience data. This process differs from the “losses inherent in the loan portfolio” methodology that is used to measure the allowance for loan and lease losses for consolidated reporting purposes. This methodology is used to provide segment management with provision information for strategic decision making;
· The allocation of certain operating expenses that are not directly charged to the segments (i.e., corporate overhead), which generally are based on each segment’s consumption patterns;
· The allocation of goodwill and other intangible assets to the operating segments based on benefits received from each acquisition; and
· Inter-segment activities which include the transfer of originated mortgage loans that are to be held in portfolio from the Home Loans Group to the Retail Banking and Financial Services Group and a broker fee arrangement between Home Loans and Retail Banking and Financial Services. When originated mortgage loans are transferred, the Home Loans Group records a gain on the sale of the loans based on an assumed profit factor. This profit factor is included as a premium to the value of the transferred loans, which is amortized as an adjustment to the net interest income recorded by
41
the Retail Banking and Financial Services Group while the loan is held for investment. If a loan that was designated as held for investment is subsequently transferred to held for sale, the inter-segment premium is written off through Corporate Support/Treasury and Other. Inter-segment broker fees are recorded by the Retail Banking and Financial Services Group when home loans are initiated through retail banking stores, while the Home Loans Group records a broker fee when the origination of home equity loans and lines of credit are initiated through home loan stores. The results of all inter-segment activities are eliminated as reconciling adjustments that are necessary to conform the presentation of management accounting policies to the accounting principles used in the Company’s consolidated financial statements.
During the fourth quarter of 2005 the Company began integrating the Card Services Group into its management accounting process. During this period only the funds transfer pricing methodology was applied to this segment.
Financial highlights by operating segment were as follows:
Retail Banking and Financial Services Group
|
|
Year Ended December 31, |
|
Percentage Change |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2005/2004 |
|
2004/2003 |
|
|||||||
|
|
(dollars in millions) |
|
|
|
|
|
|||||||||||
Condensed income statement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Net interest income |
|
$ |
5,478 |
|
$ |
4,999 |
|
$ |
3,851 |
|
|
10 |
% |
|
|
30 |
% |
|
Provision for loan and lease losses |
|
165 |
|
164 |
|
175 |
|
|
1 |
|
|
|
(7 |
) |
|
|||
Noninterest income |
|
3,049 |
|
2,758 |
|
2,500 |
|
|
11 |
|
|
|
10 |
|
|
|||
Inter-segment revenue |
|
42 |
|
23 |
|
179 |
|
|
84 |
|
|
|
(87 |
) |
|
|||
Noninterest expense |
|
4,444 |
|
4,123 |
|
3,576 |
|
|
8 |
|
|
|
15 |
|
|
|||
Income before income taxes |
|
3,960 |
|
3,493 |
|
2,779 |
|
|
13 |
|
|
|
26 |
|
|
|||
Income taxes |
|
1,495 |
|
1,305 |
|
1,065 |
|
|
15 |
|
|
|
22 |
|
|
|||
Net income |
|
$ |
2,465 |
|
$ |
2,188 |
|
$ |
1,714 |
|
|
13 |
|
|
|
28 |
|
|
Performance and other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Efficiency ratio (1) |
|
51.85 |
% |
53.00 |
% |
54.76 |
% |
|
(2 |
) |
|
|
(3 |
) |
|
|||
Average loans |
|
$ |
180,556 |
|
$ |
163,328 |
|
$ |
120,705 |
|
|
11 |
|
|
|
35 |
|
|
Average assets |
|
193,342 |
|
175,713 |
|
132,411 |
|
|
10 |
|
|
|
33 |
|
|
|||
Average deposits |
|
136,894 |
|
130,337 |
|
125,440 |
|
|
5 |
|
|
|
4 |
|
|
|||
Loan volume |
|
46,951 |
|
55,282 |
|
29,717 |
|
|
(15 |
) |
|
|
86 |
|
|
|||
Employees at end of period |
|
30,437 |
|
27,341 |
|
26,564 |
|
|
11 |
|
|
|
3 |
|
|
(1) The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
The increases in net interest income were primarily due to higher average balances of home equity loans and lines of credit, largely offset by higher funding costs resulting from increasing short-term interest rates. The average balance of home equity loans and lines of credit was $47.91 billion in 2005, compared with $35.85 billion in 2004.
The increases in noninterest income were primarily due to growth in depositor and other retail banking fees that resulted from growth in the number of retail checking accounts and higher debit card interchange fees. Also contributing to the increase in 2005 was a $32 million gain from the sale of five retail branches in Texas. The number of retail checking accounts at December 31, 2005 totaled approximately 9.9 million, compared to 9.0 million in 2004.
The increases in noninterest expense were primarily due to higher compensation and benefits expense and occupancy and equipment expense. These increases are attributable to the continued expansion of the retail banking distribution network, which included the opening of 210 new retail banking stores during 2005 and 250 new retail banking stores during 2004.
42
Home Loans Group
|
|
Year Ended December 31, |
|
Percentage Change |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2005/2004 |
|
2004/2003 |
|
|||||||
|
|
(dollars in millions) |
|
|
|
|
|
|||||||||||
Condensed income statement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Net interest income |
|
$ |
1,181 |
|
$ |
1,240 |
|
$ |
2,382 |
|
|
(5 |
)% |
|
|
(48 |
)% |
|
Provision for loan and lease losses |
|
– |
|
– |
|
14 |
|
|
– |
|
|
|
(100 |
) |
|
|||
Noninterest income |
|
2,192 |
|
2,228 |
|
2,926 |
|
|
(2 |
) |
|
|
(24 |
) |
|
|||
Inter-segment expense |
|
42 |
|
23 |
|
179 |
|
|
84 |
|
|
|
(87 |
) |
|
|||
Noninterest expense |
|
2,140 |
|
2,411 |
|
2,915 |
|
|
(11 |
) |
|
|
(17 |
) |
|
|||
Income before income taxes |
|
1,191 |
|
1,034 |
|
2,200 |
|
|
15 |
|
|
|
(53 |
) |
|
|||
Income taxes |
|
449 |
|
386 |
|
839 |
|
|
17 |
|
|
|
(54 |
) |
|
|||
Net income |
|
$ |
742 |
|
$ |
648 |
|
$ |
1,361 |
|
|
15 |
|
|
|
(52 |
) |
|
Performance and other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Efficiency ratio (1) |
|
64.23 |
% |
69.99 |
% |
56.83 |
% |
|
(8 |
) |
|
|
23 |
|
|
|||
Average loans |
|
$ |
30,898 |
|
$ |
23,591 |
|
$ |
42,990 |
|
|
31 |
|
|
|
(45 |
) |
|
Average assets |
|
52,915 |
|
41,934 |
|
70,305 |
|
|
26 |
|
|
|
(40 |
) |
|
|||
Average deposits |
|
14,036 |
|
16,299 |
|
27,112 |
|
|
(14 |
) |
|
|
(40 |
) |
|
|||
Loan volume |
|
172,928 |
|
182,212 |
|
374,004 |
|
|
(5 |
) |
|
|
(51 |
) |
|
|||
Employees at end of period |
|
13,256 |
|
13,838 |
|
22,287 |
|
|
(4 |
) |
|
|
(38 |
) |
|
(1) The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
The decrease in net interest income during 2005 was predominantly due to higher funding costs driven by increasing short-term interest rates, significantly offset by higher average balances of loans held for sale. The decrease during 2004 was largely driven by a decline in the average balances of loans held for sale and a decline in noninterest-bearing custodial and escrow deposits. This occurred due to a reduction in fixed-rate loan refinancing activity, compared with 2003 when interest rates were at record low levels. The average balance of loans held for sale totaled $30.80 billion in 2005, compared with $23.29 billion in 2004 and $41.21 billion in 2003. Loan volume in 2005 was $172.93 billion, compared with $182.21 billion in 2004.
The decrease in noninterest income during 2005 was primarily due to the increased cost of MSR risk management, reflecting the continued rise in interest rates and the flattening of the yield curve. This increase in the cost was partially offset by an increase in the gain on sale of mortgage loans, driven by an increase in sales volume.
The decreases in noninterest expense during 2005 and 2004 were primarily due to lower technology, occupancy and equipment and base compensation and benefits-related expenses. These decreases resulted from productivity improvements consisting of the conversion to a single loan platform during the second half of 2004, the consolidation of various locations and functions, and lower headcount, which decreased to 13,256 at December 31, 2005 from 13,838 at December 31, 2004.
43
Card Services Group
|
|
October 1, 2005
|
|
|||
|
|
(dollars in millions) |
|
|||
Condensed income statement: |
|
|
|
|
|
|
Net interest income |
|
|
$ |
637 |
|
|
Provision for loan and lease losses |
|
|
454 |
|
|
|
Noninterest income |
|
|
352 |
|
|
|
Noninterest expense |
|
|
268 |
|
|
|
Income before income taxes |
|
|
267 |
|
|
|
Income taxes |
|
|
101 |
|
|
|
Net income |
|
|
$ |
166 |
|
|
Performance and other data: |
|
|
|
|
|
|
Efficiency ratio (2) |
|
|
27.08 |
% |
|
|
Average loans (3) |
|
|
$ |
4,908 |
|
|
Average assets (3) |
|
|
5,595 |
|
|
|
Employees at end of period |
|
|
3,124 |
|
|
(1) Securitization adjustments to arrive at the reported GAAP results for the fourth quarter of 2005 were: a decrease of $409 million in net interest income; an increase of $150 million in noninterest income; a decrease of $259 million in the provision for credit losses; a decrease of $11.01 billion in average loans; and a decrease of $9.27 billion in average assets.
(2) The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
(3) Presented on an annualized basis.
On October 1, 2005, the Company completed its acquisition of Providian Financial Corporation. As such, the financial results for 2005 only include the operating results for the final three months of that year. Operating results for the Card Services Group are presented on a managed basis as the Company treats securitized and sold credit card receivables as if they were still on the balance sheet in evaluating the overall performance of this operating segment. A managed basis presentation excludes the impact of securitizations, including their effect on income, the provision for credit losses and average loans and assets.
44
Commercial Group
|
|
Year Ended December 31, |
|
Percentage Change |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2005/2004 |
|
2004/2003 |
|
|||||||
|
|
(dollars in millions) |
|
|
|
|
|
|||||||||||
Condensed income statement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Net interest income |
|
$ |
1,371 |
|
$ |
1,314 |
|
$ |
1,307 |
|
|
4 |
% |
|
|
1 |
% |
|
Provision for loan and lease losses |
|
7 |
|
41 |
|
99 |
|
|
(83 |
) |
|
|
(59 |
) |
|
|||
Noninterest income |
|
478 |
|
379 |
|
528 |
|
|
26 |
|
|
|
(28 |
) |
|
|||
Noninterest expense |
|
637 |
|
594 |
|
511 |
|
|
7 |
|
|
|
16 |
|
|
|||
Income from continuing operations before income taxes |
|
1,205 |
|
1,058 |
|
1,225 |
|
|
14 |
|
|
|
(14 |
) |
|
|||
Income taxes |
|
455 |
|
395 |
|
468 |
|
|
15 |
|
|
|
(15 |
) |
|
|||
Income from continuing operations |
|
750 |
|
663 |
|
757 |
|
|
13 |
|
|
|
(13 |
) |
|
|||
Income from discontinued operations, net of taxes |
|
– |
|
– |
|
87 |
|
|
– |
|
|
|
(100 |
) |
|
|||
Net income |
|
$ |
750 |
|
$ |
663 |
|
$ |
844 |
|
|
13 |
|
|
|
(21 |
) |
|
Performance and other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Efficiency ratio (1) |
|
34.46 |
% |
35.06 |
% |
27.82 |
% |
|
(2 |
) |
|
|
26 |
|
|
|||
Average loans |
|
$ |
47,147 |
|
$ |
37,916 |
|
$ |
34,731 |
|
|
24 |
|
|
|
9 |
|
|
Average assets |
|
51,594 |
|
42,474 |
|
42,853 |
|
|
21 |
|
|
|
(1 |
) |
|
|||
Average deposits |
|
7,872 |
|
7,108 |
|
5,384 |
|
|
11 |
|
|
|
32 |
|
|
|||
Loan volume |
|
41,000 |
|
28,978 |
|
28,356 |
|
|
41 |
|
|
|
2 |
|
|
|||
Employees at end of period (2) |
|
4,182 |
|
3,385 |
|
5,824 |
|
|
24 |
|
|
|
(42 |
) |
|
(1) The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
(2) Includes 2,346 employees reported as part of discontinued operations at December 31, 2003.
The increase in net interest income during 2005 was primarily due to higher average balances of loans held for sale, partially offset by higher funding costs due to rising short-term interest rates. The average balance of loans held for sale was $13.81 billion in 2005, compared with $6.28 billion in 2004.
The increase in noninterest income during 2005 was primarily due to increased trading securities income related to residual interests retained from securitizations conducted by Long Beach Mortgage Company and a $55 million gain from the sale of commercial mortgage-backed securities occurring in the fourth quarter of 2005. These increases in noninterest income were partially offset by lower gain from mortgage loans, net of risk management activities, which was affected by an increase in the Company’s estimated liability to repurchase loans from previous whole loan sales that contained “early payment default” provisions. An early payment default occurs when the borrower fails to make the first post-sale payment due on the loan by a contractually specified date. Usually when such an event occurs, the fair value of the loan at the time of its repurchase is lower than the face value. In the fourth quarter of 2005, the Company experienced increased incidents of repurchases of early payment default loans sold by Long Beach Mortgage Company and this trend is expected to continue in the first part of 2006.
The increase in noninterest expense during 2005 was primarily due to higher compensation and benefits expense resulting from the growth in loan volume from Long Beach Mortgage Company. Long Beach Mortgage Company added 800 employees during 2005 to support its growing operations.
45
Corporate Support/Treasury and Other
|
|
Year Ended December 31, |
|
Percentage Change |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2005/2004 |
|
2004/2003 |
|
|||||||
|
|
(dollars in millions) |
|
|
|
|
|
|||||||||||
Condensed income statement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Net interest income (expense) |
|
$ |
(831 |
) |
$ |
(869 |
) |
$ |
(267 |
) |
|
(4 |
)% |
|
|
225 |
% |
|
Provision for loan and lease losses |
|
1 |
|
4 |
|
8 |
|
|
(81 |
) |
|
|
(51 |
) |
|
|||
Noninterest income (expense) |
|
(118 |
) |
(145 |
) |
648 |
|
|
(19 |
) |
|
|
– |
|
|
|||
Noninterest expense |
|
381 |
|
407 |
|
406 |
|
|
(6 |
) |
|
|
– |
|
|
|||
Loss from continuing operations before income taxes |
|
(1,331 |
) |
(1,425 |
) |
(33 |
) |
|
(7 |
) |
|
|
– |
|
|
|||
Income tax benefit |
|
(536 |
) |
(569 |
) |
(36 |
) |
|
(6 |
) |
|
|
– |
|
|
|||
Income (loss) from continuing operations |
|
(795 |
) |
(856 |
) |
3 |
|
|
(7 |
) |
|
|
– |
|
|
|||
Income from discontinued operations, net of taxes |
|
– |
|
399 |
|
– |
|
|
(100 |
) |
|
|
– |
|
|
|||
Net income (loss) |
|
$ |
(795 |
) |
$ |
(457 |
) |
$ |
3 |
|
|
74 |
|
|
|
– |
|
|
Performance and other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Average loans |
|
$ |
1,088 |
|
$ |
889 |
|
$ |
759 |
|
|
22 |
|
|
|
17 |
|
|
Average assets |
|
27,319 |
|
25,753 |
|
39,371 |
|
|
6 |
|
|
|
(35 |
) |
|
|||
Average deposits |
|
27,221 |
|
11,664 |
|
5,649 |
|
|
133 |
|
|
|
106 |
|
|
|||
Loan volume |
|
278 |
|
261 |
|
168 |
|
|
7 |
|
|
|
55 |
|
|
|||
Employees at end of period |
|
9,799 |
|
8,015 |
|
9,045 |
|
|
22 |
|
|
|
(11 |
) |
|
Net interest expense during 2005 and 2004 reflects the impact of the funds transfer pricing process during a rising interest rate environment. As this process concentrates the interest rate sensitivities of assets and liabilities within the Treasury Division, the results were affected by the slower repricing frequencies of the Company’s interest-earning assets.
The variance in noninterest income was primarily due to losses from the termination of repurchase agreements with embedded pay-fixed interest rate swaps in the third quarter of 2004.
The decrease in noninterest expense during 2005 was largely due to lower occupancy and equipment expense and telecommunications and outsourced information services expense, partially offset by an increase in employee base compensation and benefits expense.
Average loan balances are related to the Community Lending and Investment unit, which was transferred from the Commercial Group to Corporate Support/Treasury and Other during the third quarter of 2005.
The increases in average deposits were predominantly due to growth in institutional investor certificates of deposits as well as brokered certificates of deposits acquired through the merger of Providian Financial Corporation.
Income from discontinued operations resulted from the sale of the Company’s subsidiary, Washington Mutual Finance Corporation, in the first quarter of 2004.
Off-Balance Sheet Activities and Contractual Obligations
Asset Securitization
The Company transforms loans into securities through a process known as securitization. When the Company securitizes loans, the loans are sold to a qualifying special-purpose entity (“QSPE”), typically a trust. The QSPE, in turn, issues securities, commonly referred to as asset-backed securities, which are secured by future cash flows on the sold loans. The QSPE sells the securities to investors, which entitle the
46
investors to receive specified cash flows during the term of the security. The QSPE uses the proceeds from the sale of these securities to pay the Company for the loans sold to the QSPE. These QSPEs are not consolidated within the financial statements since they satisfy the criteria established by Statement No. 140 , Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities . In general, these criteria require the QSPE to be legally isolated from the transferor (the Company), be limited to permitted activities, and have defined limits on the assets it can hold and the permitted sales, exchanges or distributions of its assets.
When the Company sells or securitizes loans, it generally retains the right to service the loans and may retain senior, subordinated, residual, and other interests, all of which are considered retained interests in the sold or securitized assets. Retained interests may provide credit enhancement to the investors and, absent the violation of representations and warranties, generally represent the Company’s maximum risk exposure associated with these transactions. Retained interests in mortgage loan securitizations, excluding the rights to service such loans, were $2.80 billion at December 31, 2005, of which $2.19 billion have either a AAA credit rating or are agency insured. Retained interests in credit card securitizations were $1.64 billion at December 31, 2005. Additional information concerning securitization transactions is included in Notes 5 and 6 to the Consolidated Financial Statements – “Securitizations” and “Mortgage Banking Activities.”
Contractual Obligations
The following table presents, as of December 31, 2005, the Company’s significant fixed and determinable contractual obligations, within the categories described below, by payment date or contractual maturity. These contractual obligations, except for the operating lease obligations and purchase obligations, are included in the Consolidated Statements of Financial Condition. The most significant purchase obligations include contracts related to services. The payment amounts represent those amounts contractually due to the recipient.
|
|
Payments Due by Period (in millions) |
|
|||||||||||||||||||
Contractual Obligations |
|
|
|
Total |
|
Less than
|
|
1 but
|
|
3 but
|
|
5 years
|
|
|||||||||
Debt obligations |
|
$ |
108,055 |
|
|
$ |
51,439 |
|
|
$ |
42,296 |
|
|
$ |
3,134 |
|
|
$ |
11,186 |
|
||
Capital lease obligations |
|
91 |
|
|
16 |
|
|
31 |
|
|
17 |
|
|
27 |
|
|||||||
Operating lease obligations |
|
2,131 |
|
|
456 |
|
|
684 |
|
|
454 |
|
|
537 |
|
|||||||
Purchase obligations (1) |
|
793 |
|
|
221 |
|
|
326 |
|
|
134 |
|
|
112 |
|
|||||||
Total contractual obligations |
|
$ |
111,070 |
|
|
$ |
52,132 |
|
|
$ |
43,337 |
|
|
$ |
3,739 |
|
|
$ |
11,862 |
|
||
(1) Purchase obligations are defined as an agreement to purchase goods or services that is enforceable and legally binding whereby the Company commits to a fixed or minimum purchase amount over a specified period of time. Estimated payments for contracts that may be terminated early without penalty are shown through the first termination date, all others are shown through the date of contract termination. Excluded from the table are purchase obligations expected to be settled in cash within 90 days of the end of the reporting period.
The Company enters into derivative contracts under which the Company is required to either receive cash or pay cash to counterparties depending on changes in interest rates. Derivative contracts are carried at fair value on the Consolidated Statements of Financial Condition with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. The fair value of the contracts changes daily as market interest rates change. Further discussion of derivative instruments is included in Notes 1 and 21 to the Consolidated Financial Statements – “Summary of Significant Accounting Policies” and “Derivative Financial Instruments.”
47
Commitments, Guarantees and Contingencies
The Company may incur liabilities under certain contractual agreements contingent upon the occurrence of certain events. A discussion of these contractual agreements under which the Company may be held liable is included in Note 14 to the Consolidated Financial Statements – “Commitments, Guarantees and Contingencies.” In addition, the Company has commitments and obligations under pension and other postretirement benefit plans as described in Note 20 to the Consolidated Financial Statements – “Employee Benefits Programs and Other Expense.”
The regulatory capital ratios of Washington Mutual Bank and Washington Mutual Bank fsb (“WMBfsb”) and minimum regulatory capital ratios to be categorized as well-capitalized were as follows:
|
|
December 31, 2005 |
|
Well-Capitalized |
|
||||||
|
|
WMB |
|
WMBfsb |
|
Minimum |
|
||||
Tier 1 capital to adjusted total assets (leverage) |
|
6.56 |
% |
|
85.21 |
% |
|
|
5.00 |
% |
|
Adjusted tier 1 capital to total risk-weighted assets |
|
8.61 |
|
|
383.89 |
|
|
|
6.00 |
% |
|
Total risk-based capital to total risk-weighted assets |
|
11.62 |
|
|
383.91 |
|
|
|
10.00 |
% |
|
|
|
December 31, 2004 |
|
Well-Capitalized |
|
||||||
|
|
WMB |
|
WMBfsb |
|
Minimum |
|
||||
Tier 1 capital to adjusted total assets (leverage) |
|
5.46 |
% |
|
93.67 |
% |
|
|
5.00 |
% |
|
Adjusted tier 1 capital to total risk-weighted assets |
|
8.12 |
|
|
393.52 |
|
|
|
6.00 |
% |
|
Total risk-based capital to total risk-weighted assets |
|
11.68 |
|
|
393.56 |
|
|
|
10.00 |
% |
|
The Company’s federal savings bank subsidiaries are also required by Office of Thrift Supervision regulations to maintain tangible capital of at least 1.50% of assets. WMB and WMBfsb satisfied this requirement at December 31, 2005 and December 31, 2004.
The Company’s broker-dealer subsidiaries are also subject to capital requirements. At December 31, 2005 and 2004, all of its broker-dealer subsidiaries were in compliance with their applicable capital requirements.
On February 1, 2004, WMBfsb became a subsidiary of WMB. This reorganization was followed by the contribution of $23.27 billion of mortgage-backed and investment securities by WMB to WMBfsb on March 1, 2004. Due to the low risk weights assigned to these securities under the federal banking agency regulatory capital guidelines, their contribution to WMBfsb’s capital base substantially increased that entity’s risk-based capital ratios.
In 2003, the Company adopted a share repurchase program approved by the Board of Directors (the “2003 Program”). Under the 2003 Program, the Company was authorized to repurchase up to 100 million shares of its common stock. On October 18, 2005, the Company discontinued the 2003 Program and adopted a new share repurchase program approved by the Board of Directors (the “2005 Program”). The Company had repurchased 64.8 million shares under the 2003 Program prior to its discontinuance. Under the 2005 Program, the Company is authorized to repurchase up to 100 million shares of its common stock, as conditions warrant. There is no fixed termination date for the 2005 Program, and purchases may be made in the open market, through block trades, accelerated share repurchase transactions and other private transactions.
In October 2005, the Company entered into a contractual agreement with an investment bank under which the Company repurchased 15.5 million shares of its outstanding common stock at an initial purchase price of $38.26 per share, for a preliminary total of $593 million. Under the agreement, the counterparty borrowed the shares at the contract’s inception, which were sold to, and immediately canceled by, the Company. In turn, the counterparty purchased the borrowed shares in the open market over a subsequent time period. The agreement was subject to a future contingent purchase price adjustment based on the
48
actual costs of the shares purchased by the counterparty, and the contract allowed for the settlement of this adjustment to occur either in cash or shares of Washington Mutual common stock, at the Company’s option. On January 31, 2006, the contract was settled in cash, based on an average share price of $43.18. As this price exceeded the purchase price at the contract’s inception, the Company paid an additional $76 million to the counterparty on the settlement date. This additional amount was recorded in the first quarter of 2006 as a reduction of capital surplus.
At February 28, 2006, the total remaining common stock repurchase authority under the 2005 Program was approximately 71.5 million shares.
As a result of recently revised guidance from the Company’s rating agencies that allows high equity content securities, such as preferred stock and hybrid capital instruments, to be included as core capital elements within the capital structures of financial institutions, the Company initiated a review of its capital funding and issuance strategies, and adopted a capital management program that is consistent with the revised guidance. As part of this program, the Company issued $2 billion of high equity content securities in March 2006 through Washington Mutual Preferred Funding LLC, an indirect subsidiary of Washington Mutual Bank. As core capital elements, such securities will be included as equity components within the Company’s tangible equity to total tangible assets ratio.
The Company is exposed to four major categories of risk: credit, liquidity, market and operational.
The Company’s Chief Enterprise Risk Officer is responsible for enterprise-wide risk assessment. The Company’s Enterprise Risk Management function oversees the identification, measurement, monitoring, control and reporting of credit, market and operational risks. The Company’s Treasury function is responsible for the measurement, management and control of liquidity risk. The Internal Audit function, which reports to the Audit Committee of the Board of Directors, provides independent assessment of the Company’s compliance with risk management controls, policies and procedures.
The Audit Committee of the Board of Directors oversees the Company’s monitoring and controlling of significant risk exposures, including the Company’s guidelines and policies governing risk assessment and risk management. The Corporate Relations Committee of the Board of Directors oversees the Company’s reputation and those elements of operational risk that impact the Company’s reputation. Governance and oversight of credit, liquidity and market risks are provided by the Finance Committee of the Board of Directors. Risk oversight is also provided by management committees whose membership includes representation from the Company’s lines of business and the Enterprise Risk Management function. These committees include the Enterprise Risk Management Committee, the Credit Policy Committee, the Market Risk Committee and the Asset and Liability Committee.
Enterprise Risk Management works with the lines of business to establish appropriate policies, standards and limits designed to maintain risk exposures within the Company’s risk tolerance. Significant risk management policies approved by the relevant management committees are also reviewed and approved by the Audit and Finance Committees. Enterprise Risk Management also provides objective oversight of risk elements inherent in the Company’s business activities and practices and oversees compliance with laws and regulations.
Management is responsible for balancing risk and reward in determining and executing business strategies. Business lines, Enterprise Risk Management and Treasury divide the responsibilities of conducting measurement and monitoring of the Company’s risk exposures. Risk exceptions, depending on their type and significance, are elevated to management or Board committees responsible for oversight.
49
Credit risk is the risk of loss arising from adverse changes in a borrower’s or counterparty’s ability to meet its financial obligations under agreed-upon terms and exists primarily in lending and derivative portfolios. The degree of credit risk will vary based on many factors including the size of the asset or transaction, the credit characteristics of the borrower, the contractual terms of the agreement and the availability and quality of collateral. For additional details on derivative counterparty credit risk see Management’s Discussion and Analysis – “Derivative Counterparty Credit Risk.”
The Finance Committee of the Board of Directors, by means of a broad set of policies and principles contained in the Company’s Credit Policy, exercises oversight over the framework for the Company’s credit risk management activities. The Credit Policy Committee, chaired by the Chief Credit Officer and comprised of senior management, evaluates and approves credit standards (including key features of residential loans) and is responsible for oversight of the credit risk management function.
The Credit Policy Committee’s primary responsibilities include ensuring the adequacy of the Company’s credit risk management infrastructure, overseeing credit risk management strategies and methodologies, monitoring conditions in real estate and other markets having an impact on lending activities, and evaluating and monitoring overall credit risk. The Chief Credit Officer’s primary responsibilities include overseeing the work of the Credit Policy Committee, monitoring the credit quality of the Company’s loan portfolio, determining the reasonableness of the Company’s allowance for loan and lease losses, reviewing and approving large credit exposures, setting underwriting criteria for credit-related products and programs, and delegating credit approval authority.
On October 1, 2005, the Company acquired Providian Financial Corporation, a credit card lender. Credit card loans are generally unsecured and typically generate significantly higher delinquency rates and charge-offs than real estate secured loans. Consequently, the allowance for losses on credit card loans, expressed as a percentage of the credit card portfolio, is significantly higher than on real estate secured loans. Further discussion of credit risk in the Company’s credit card loan portfolio can be found in Management’s Discussion and Analysis – “Credit Card Loans.”
Certain categories of residential loans held in the Company’s portfolio, the most significant being Option ARM loans, have features that result in increased credit risk when compared to residential loans without these features. Loans with these features, to the extent material to the Company, as well as any compensating factors and mitigating circumstances that reduce the credit risk arising from these features, are discussed in more detail in the section of Management’s Discussion and Analysis – “Features of Residential Loans.”
50
Nonaccrual Loans, Foreclosed Assets and Restructured Loans
Loans, excluding credit card loans, are generally placed on nonaccrual status upon reaching 90 days past due. Additionally, loans in non-homogeneous portfolios are placed on nonaccrual status prior to becoming 90 days past due when payment in full of principal or interest is not expected. Management’s classification of a loan as nonaccrual or restructured does not necessarily indicate that the principal or interest of the loan is uncollectible in whole or in part. Nonaccrual loans and foreclosed assets (“nonperforming assets”) and restructured loans, in each instance excluding credit card loans, consisted of the following:
|
|
December 31, |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|||||
|
|
(dollars in millions) |
|
|||||||||||||
Nonperforming assets and restructured loans: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Nonaccrual loans (1)(2) : |
|
|
|
|
|
|
|
|
|
|
|
|||||
Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Home |
|
$ |
565 |
|
$ |
534 |
|
$ |
736 |
|
$ |
1,068 |
|
$ |
1,010 |
|
Specialty mortgage finance (3) |
|
872 |
|
682 |
|
597 |
|
438 |
|
292 |
|
|||||
Total home nonaccrual loans |
|
1,437 |
|
1,216 |
|
1,333 |
|
1,506 |
|
1,302 |
|
|||||
Home equity loans and lines of credit |
|
88 |
|
66 |
|
47 |
|
36 |
|
34 |
|
|||||
Home construction (4) |
|
10 |
|
28 |
|
35 |
|
49 |
|
36 |
|
|||||
Multi-family |
|
25 |
|
12 |
|
19 |
|
50 |
|
56 |
|
|||||
Other real estate |
|
70 |
|
162 |
|
153 |
|
413 |
|
376 |
|
|||||
Total nonaccrual loans secured by real estate |
|
1,630 |
|
1,484 |
|
1,587 |
|
2,054 |
|
1,804 |
|
|||||
Consumer |
|
8 |
|
9 |
|
8 |
|
22 |
|
16 |
|
|||||
Commercial business |
|
48 |
|
41 |
|
31 |
|
79 |
|
100 |
|
|||||
Total nonaccrual loans held in portfolio |
|
1,686 |
|
1,534 |
|
1,626 |
|
2,155 |
|
1,920 |
|
|||||
Foreclosed assets |
|
276 |
|
261 |
|
311 |
|
328 |
|
216 |
|
|||||
Total nonperforming assets |
|
$ |
1,962 |
|
$ |
1,795 |
|
$ |
1,937 |
|
$ |
2,483 |
|
$ |
2,136 |
|
As a percentage of total assets |
|
0.57 |
% |
0.58 |
% |
0.70 |
% |
0.93 |
% |
0.88 |
% |
|||||
Restructured loans |
|
$ |
22 |
|
$ |
34 |
|
$ |
111 |
|
$ |
98 |
|
$ |
118 |
|
Total nonperforming assets and restructured loans |
|
$ |
1,984 |
|
$ |
1,829 |
|
$ |
2,048 |
|
$ |
2,581 |
|
$ |
2,254 |
|
(1) If interest on nonaccrual loans under the original terms had been recognized, such income is estimated to have been $79 million in 2005, $64 million in 2004, $86 million in 2003 and $118 million in 2002.
(2) Nonaccrual loans held for sale, which are excluded from the nonaccrual balances presented above, were $245 million, $76 million, $66 million, $119 million and $123 million at December 31, 2005, 2004, 2003, 2002 and 2001. Loans held for sale are accounted for at lower of aggregate cost or fair value, with valuation changes included as adjustments to gain from mortgage loans.
(3) Represents purchased subprime home loan portfolios and subprime home loans originated by Long Beach Mortgage Company and held in its investment portfolio.
(4)
Represents
loans to builders for the purpose of financing the acquisition, development and
construction of single-family
residences for sale and construction loans made directly to the intended
occupant of a single-family residence.
51
Loans held in portfolio (excluding the allowance for loan and lease losses) and nonaccrual loans, in each instance excluding credit card loans, by geographic concentration at December 31, 2005 were as follows:
|
|
California |
|
Washington/Oregon |
|
New York/New Jersey |
|
||||||||||||||||||||||
|
|
Portfolio |
|
Nonaccrual |
|
Portfolio |
|
Nonaccrual |
|
Portfolio |
|
Nonaccrual |
|
||||||||||||||||
|
|
(dollars in millions) |
|
||||||||||||||||||||||||||
Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Home |
|
$ |
52,031 |
|
|
$ |
91 |
|
|
|
$ |
5,603 |
|
|
|
$ |
31 |
|
|
|
$ |
12,865 |
|
|
|
$ |
76 |
|
|
Specialty mortgage finance (1) |
|
4,864 |
|
|
68 |
|
|
|
817 |
|
|
|
27 |
|
|
|
2,394 |
|
|
|
100 |
|
|
||||||
Total home loans |
|
56,895 |
|
|
159 |
|
|
|
6,420 |
|
|
|
58 |
|
|
|
15,259 |
|
|
|
176 |
|
|
||||||
Home equity loans and lines of credit |
|
27,088 |
|
|
29 |
|
|
|
5,880 |
|
|
|
13 |
|
|
|
3,663 |
|
|
|
7 |
|
|
||||||
Home construction (2) |
|
1,141 |
|
|
– |
|
|
|
326 |
|
|
|
2 |
|
|
|
98 |
|
|
|
– |
|
|
||||||
Multi-family |
|
17,609 |
|
|
7 |
|
|
|
1,552 |
|
|
|
7 |
|
|
|
3,673 |
|
|
|
3 |
|
|
||||||
Other real estate |
|
1,926 |
|
|
10 |
|
|
|
913 |
|
|
|
15 |
|
|
|
830 |
|
|
|
4 |
|
|
||||||
Total loans secured by real estate |
|
104,659 |
|
|
205 |
|
|
|
15,091 |
|
|
|
95 |
|
|
|
23,523 |
|
|
|
190 |
|
|
||||||
Consumer |
|
235 |
|
|
1 |
|
|
|
239 |
|
|
|
4 |
|
|
|
33 |
|
|
|
– |
|
|
||||||
Commercial business |
|
324 |
|
|
11 |
|
|
|
170 |
|
|
|
14 |
|
|
|
310 |
|
|
|
7 |
|
|
||||||
Total loans held in portfolio |
|
$ |
105,218 |
|
|
$ |
217 |
|
|
|
$ |
15,500 |
|
|
|
$ |
113 |
|
|
|
$ |
23,866 |
|
|
|
$ |
197 |
|
|
Loans and nonaccrual loans as a percentage of total loans and total nonaccrual loans |
|
48 |
% |
|
13 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
11 |
% |
|
|
11 |
% |
|
(1) Represents purchased subprime home loan portfolios and subprime home loans originated by Long Beach Mortgage Company and held in its investment portfolio.
(2) Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.
|
|
Florida |
|
Texas |
|
Illinois |
|
||||||||||||||||||||||||
|
|
Portfolio |
|
Nonaccrual |
|
Portfolio |
|
Nonaccrual |
|
Portfolio |
|
Nonaccrual |
|
||||||||||||||||||
|
|
(dollars in millions) |
|
||||||||||||||||||||||||||||
Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Home |
|
|
$ |
9,892 |
|
|
|
$ |
58 |
|
|
|
$ |
1,492 |
|
|
|
$ |
20 |
|
|
|
$ |
4,451 |
|
|
|
$ |
41 |
|
|
Specialty mortgage finance (1) |
|
|
2,034 |
|
|
|
46 |
|
|
|
1,186 |
|
|
|
78 |
|
|
|
1,093 |
|
|
|
72 |
|
|
||||||
Total home loans |
|
|
11,926 |
|
|
|
104 |
|
|
|
2,678 |
|
|
|
98 |
|
|
|
5,544 |
|
|
|
113 |
|
|
||||||
Home equity loans and lines of credit |
|
|
3,789 |
|
|
|
4 |
|
|
|
3,634 |
|
|
|
11 |
|
|
|
999 |
|
|
|
1 |
|
|
||||||
Home construction (2) |
|
|
126 |
|
|
|
1 |
|
|
|
32 |
|
|
|
– |
|
|
|
23 |
|
|
|
1 |
|
|
||||||
Multi-family |
|
|
313 |
|
|
|
– |
|
|
|
311 |
|
|
|
4 |
|
|
|
562 |
|
|
|
– |
|
|
||||||
Other real estate |
|
|
80 |
|
|
|
4 |
|
|
|
539 |
|
|
|
30 |
|
|
|
4 |
|
|
|
1 |
|
|
||||||
Total loans secured by real estate |
|
|
16,234 |
|
|
|
113 |
|
|
|
7,194 |
|
|
|
143 |
|
|
|
7,132 |
|
|
|
116 |
|
|
||||||
Consumer. |
|
|
25 |
|
|
|
1 |
|
|
|
24 |
|
|
|
– |
|
|
|
1 |
|
|
|
– |
|
|
||||||
Commercial business |
|
|
155 |
|
|
|
2 |
|
|
|
205 |
|
|
|
6 |
|
|
|
22 |
|
|
|
– |
|
|
||||||
Total loans held in portfolio |
|
|
$ |
16,414 |
|
|
|
$ |
116 |
|
|
|
$ |
7,423 |
|
|
|
$ |
149 |
|
|
|
$ |
7,155 |
|
|
|
$ |
116 |
|
|
Loans and nonaccrual loans as a percentage of total loans and total nonaccrual loans |
|
|
7 |
% |
|
|
7 |
% |
|
|
3 |
% |
|
|
9 |
% |
|
|
3 |
% |
|
|
7 |
% |
|
(1) Represents purchased subprime home loan portfolios and subprime home loans originated by Long Beach Mortgage Company and held in its investment portfolio.
(2) Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.
52
|
|
Other (3) |
|
Total |
|
||||||||||||
|
|
Portfolio |
|
Nonaccrual |
|
Portfolio |
|
Nonaccrual |
|
||||||||
|
|
(dollars in millions) |
|
||||||||||||||
Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Home |
|
$ |
27,810 |
|
|
$ |
248 |
|
|
$ |
114,144 |
|
|
$ |
565 |
|
|
Specialty mortgage finance (1) |
|
8,758 |
|
|
481 |
|
|
21,146 |
|
|
872 |
|
|
||||
Total home loans |
|
36,568 |
|
|
729 |
|
|
135,290 |
|
|
1,437 |
|
|
||||
Home equity loans and lines of credit |
|
5,798 |
|
|
23 |
|
|
50,851 |
|
|
88 |
|
|
||||
Home construction (2) |
|
291 |
|
|
6 |
|
|
2,037 |
|
|
10 |
|
|
||||
Multi-family |
|
1,581 |
|
|
4 |
|
|
25,601 |
|
|
25 |
|
|
||||
Other real estate |
|
743 |
|
|
6 |
|
|
5,035 |
|
|
70 |
|
|
||||
Total loans secured by real estate |
|
44,981 |
|
|
768 |
|
|
218,814 |
|
|
1,630 |
|
|
||||
Consumer |
|
81 |
|
|
2 |
|
|
638 |
|
|
8 |
|
|
||||
Commercial business |
|
951 |
|
|
8 |
|
|
2,137 |
|
|
48 |
|
|
||||
Total loans held in portfolio |
|
$ |
46,013 |
|
|
$ |
778 |
|
|
$ |
221,589 |
(4) |
|
$ |
1,686 |
|
|
Loans and nonaccrual loans as a percentage of total loans and total nonaccrual loans |
|
21 |
% |
|
46 |
% |
|
100 |
% |
|
100 |
% |
|
(1) Represents purchased subprime home loan portfolios and subprime home loans originated by Long Beach Mortgage Company and held in its investment portfolio.
(2) Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.
(3) Of this category, Colorado had the largest portfolio balance of approximately $4.79 billion and Michigan had the largest nonaccrual amount of $76 million.
(4) Excludes credit card loans of $8.04 billion.
Credit Card Loans
In 2005, the Company acquired Providian Financial Corporation, a credit card lender. Credit cards are revolving, generally unsecured lines of credit. Credit card loans typically have much smaller balances, shorter average expected lives, higher delinquency rates and higher risk of loss than real estate secured mortgage loans. Credit card loans tend to experience both increased delinquencies and credit losses as loan balances age.
When underwriting credit card accounts, the Company sets credit limits and determines the interest rate to be charged based on a customer’s credit profile and through the use of profitability and risk matrices. Such matrices are calculated using proprietary technology, statistically-derived credit risk models as well as widely accepted credit scoring and analytical tools. To offset the higher credit risk inherent in credit card loans, interest rates thereon are generally structured to generate higher yields than on real estate secured loans. The Company may also charge borrowers late fees, over-limit fees, returned payment fees and annual fees.
After a credit card account is opened, the Company regularly monitors a customer’s credit risk profile and may adjust the credit limit, interest rate and other product terms in order to reflect changes in the customer’s risk profile and to reduce the Company’s exposure to credit loss. The Company reserves the right under its credit card account agreement to change or terminate at any time, subject to applicable notice requirements, any terms, conditions, services, or features of the agreement, including increasing or decreasing interest rates, other fees and charges, or minimum payment requirements. The Company uses a delinquency lifecycle strategy, in combination with event-driven approaches, consumer counseling, and consumer debt management programs, to manage delinquent accounts. The Company’s collection efforts are prioritized to focus on delinquent loans.
53
Features of Residential Loans
Certain residential loans have features that may result in increased credit risk when compared to residential loans without those features. Categories of loans within the Company’s portfolio that have such features include loans with an option to defer the payment of interest (i.e., Option ARM home loans), home loans where the loan-to-value ratio is greater than 80 percent, home equity loans and lines of credit where the combined loan-to-value ratio is greater than 80 percent, and interest-only payment loans. The loan-to-value ratio measures the ratio of the original loan amount to the appraised value of the collateral at origination. The combined loan-to-value ratio measures the ratio of the original loan amount of the first lien product (typically a first lien mortgage loan) and the original loan amount of the second lien product (typically a second lien home equity loan or line of credit) to the appraised value of the collateral that underlies the loan the Company is originating.
In the underwriting of these loans, the Company usually considers compensating factors and mitigating circumstances that may serve to reduce the potential for increased credit risk arising from these features. Loan balances for these categories of loans and their relative significance as a percentage of total loans held in portfolio (excluding the allowance for loan and lease losses) at December 31, 2005, is presented in the table below:
|
|
Loan
|
|
As a % of Total
|
|
|||||
|
|
(in millions) |
|
|
|
|||||
Option ARM home loans |
|
|
$ |
70,191 |
|
|
|
31 |
% |
|
Home loans without private mortgage insurance or government guarantees where the loan-to-value ratio at origination is greater than 80 percent. |
|
|
9,012 |
|
|
|
4 |
|
|
|
Home equity loans and lines of credit where the combined loan-to-value ratio at origination is greater than 80 percent |
|
|
12,312 |
|
|
|
5 |
|
|
|
Interest-only home loans |
|
|
10,660 |
|
|
|
5 |
|
|
Option ARM Home Loans
Loan Feature s
The Option ARM product is an adjustable-rate mortgage loan that each month provides the borrower with the option to make a fully-amortizing, interest-only, or minimum payment. The minimum payment on an Option ARM loan is based on the interest rate charged during the introductory period. This introductory rate is usually significantly below the fully-indexed rate for loans with short duration introductory periods (which typically last for one or three months depending on the type of Option ARM loan selected by the borrower). The fully-indexed rate is calculated using an index rate plus a margin. Once the introductory period ends, the contractual interest rate charged on the loan increases to the fully-indexed rate and adjusts monthly to reflect movements in the index.
If the borrower continues to make the minimum monthly payment after the introductory period ends, the payment may not be sufficient to cover interest accrued in the previous month. In this case, the loan will “negatively amortize” as unpaid interest is deferred and added to the principal balance of the loan. The minimum payment on an Option ARM loan is adjusted on the loan’s anniversary date but can only increase or decrease by a maximum of 7.5% on such date until a “recasting event” occurs.
Recasting events occur at least every 60 months, at which time a new minimum monthly payment is calculated without regard to any limits on the increase in amount that would otherwise apply under the annual 7.5% payment cap. This new minimum monthly payment is calculated to be sufficient to fully repay the principal balance of the loan, including any theretofore deferred interest, over the remainder of the loan term using the fully-indexed rate then in effect. A recasting event immediately occurs whenever the unpaid principal balance reaches 125% of the original loan balance or 110% of the original loan balance
54
for loans secured by property located in New York and loans purchased through the correspondent channel.
In the first month that follows a recasting event, the minimum payment will equal the fully-amortizing payment. If in subsequent months the index rate decreases, the minimum payment may exceed the fully-amortizing payment. Conversely, if the index rate increases in subsequent months, negative amortization may resume. In this situation, the 7.5% annual payment cap could once again limit the change in the minimum payment until the next recasting event.
If borrowers with Option ARM loans continue to make monthly payments in accordance with the terms of their loan agreements, the loans will continue to accrue interest based on the fully-indexed rate.
Loan Performance
Trends in loan performance and risk attributes such as loan-to-value ratios, credit scores, negative amortization, minimum payment adjustments, degree of minimum payment utilization, and geographic concentrations are monitored and analyzed as part of the Company’s credit risk management process. Interest rates, housing price trends and other economic variables are also taken into consideration when modeling these risks. Credit scores are a useful measure for assessing the credit quality of a borrower. Credit scores are numbers reported by credit repositories, based on statistical models, that summarize an individual’s credit record. FICO ® scores, developed by Fair Isaac Corporation, are the most commonly used credit scores.
Key statistics for Option ARM loans held in the Company’s home loan portfolio include:
|
|
December 31, |
|
|||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
(dollars in millions) |
|
|||||||
Loan balance |
|
$ |
70,191 |
|
$ |
66,310 |
|
$ |
49,267 |
|
Loan volume (1) |
|
63,260 |
|
67,485 |
|
30,092 |
|
|||
Deferred interest recognized in earnings that resulted from negative amortization (1) |
|
316 |
|
19 |
|
7 |
|
|||
Total amount by which the unpaid principal balance exceeded the original principal amount |
|
157 |
|
11 |
|
43 |
|
|||
Balance of loans that experienced a net increase in negative amortization during the year |
|
43,856 |
|
18,364 |
|
959 |
|
|||
Percentage of borrowers whose final loan payment of the year resulted in negative amortization: |
|
|
|
|
|
|
|
|||
By number of loans |
|
47 |
% |
21 |
% |
1 |
% |
|||
By value of loans |
|
55 |
|
25 |
|
1 |
|
|||
(1) For the year.
55
The geographic distribution of the Company’s Option ARM portfolio is set forth in the table below:
|
|
Portfolio |
|
Weighted Average Loan-
|
|
|||||
|
|
(dollars in millions) |
|
|
|
|||||
California |
|
$ |
33,875 |
|
48 |
% |
|
70 |
% |
|
Florida |
|
7,253 |
|
10 |
|
|
71 |
|
|
|
New York/New Jersey |
|
7,043 |
|
10 |
|
|
70 |
|
|
|
Washington/Oregon |
|
2,615 |
|
4 |
|
|
74 |
|
|
|
Illinois |
|
1,972 |
|
3 |
|
|
74 |
|
|
|
Texas |
|
735 |
|
1 |
|
|
75 |
|
|
|
Other |
|
16,698 |
|
24 |
|
|
72 |
|
|
|
Total home loan Option ARMs held in portfolio |
|
$ |
70,191 |
|
100 |
% |
|
71 |
|
|
Underwriting and Risk Mitigation
The Company actively manages the credit risk inherent in its Option ARM portfolio primarily by ensuring compliance with its underwriting standards, monitoring loan performance and conducting risk modeling procedures. Risk attributes and compensating factors, which may include an applicant’s credit score, the loan-to-value ratio, loan size and debt-to-income ratio, are taken into consideration as part of the underwriting process. The Company’s practices of not offering Option ARM loans through its specialty mortgage finance lending program and of selectively selling Option ARM loans to secondary market participants have further limited the potential for credit risk in its Option ARM portfolio.
In the underwriting of loans, one of many factors the Company considers when deciding whether to approve or decline a loan is the applicant’s debt-to-income ratio. The Company’s underwriting process for Option ARM loans has historically involved calculating an applicant’s debt-to-income ratio using an administratively set interest rate. Prior to 2004, the administratively set rate approximated the then-prevailing fully-indexed rate. However, as short-term interest rates (and hence the fully-indexed rate) increased in 2004 and 2005, the Company’s administratively set qualifying rate was not adjusted upward, which resulted in loans being made to borrowers who were qualified based on debt-to-income ratios calculated using an interest rate below the fully-indexed rate. The administratively set rate was adjusted upward in October 2005, and beginning in mid-December 2005, it was replaced with a fully-indexed rate that adjusts monthly for changes in the index rate.
The Company’s experience shows that debt-to-income ratios are less predictive of loan performance than credit scores and loan-to-value ratios, which the Company believes are the two key determinants in forecasting future loan performance. Therefore, having considered the credit scores and loan-to-value ratios of the Option ARM loans made to borrowers who were qualified based on debt-to-income ratios calculated using an interest rate below the fully-indexed rate, the Company expects that the credit performance of these loans will not differ materially from the expected performance of Option ARM loans qualified using the fully-indexed rate.
Option ARM loans originated in 2004 and 2005 and held in portfolio at December 31, 2005 had an unpaid principal balance of $42.87 billion, a weighted average FICO score of 681 and a weighted average loan-to-value ratio at origination of 72 percent. Of such loans, the unpaid principal balance for borrowers who were qualified at below the fully-indexed rate totaled $29.97 billion, with a weighted average FICO score of 685 and a weighted average loan-to-value ratio at origination of 72 percent.
Risk mitigation activities include proactive risk management strategies such as re-designating Option ARM loans from held in portfolio to held for sale (prior to selling the loans in the secondary market), such as occurred during 2005 when the Company sold approximately $3 billion of Option ARM loans that were originally held in its loan portfolio. Additionally, the 60-month recasting feature that is inherent within the
56
Option ARM product serves to limit the amount of negative amortization. The Company did not conduct risk mitigation activities that involved the use of insurance arrangements, credit default agreements or credit derivatives during 2005.
Impact of External Factors
Certain external factors have, over the last five years, contributed to a reduction in the credit risk inherent in the Option ARM portfolio. The two most significant economic factors affecting the Option ARM portfolio are prepayment rates, which operate to reduce the risk of payment shock in the portfolio caused by the 60-month recasting event, and changes in housing prices, which affect current loan-to-value ratios. The risk of payment shock is reduced because many Option ARM borrowers will prepay their loans prior to the occurrence of the first 60-month recasting event. Furthermore, credit risk usually diminishes when housing prices appreciate. Option ARM loans originated prior to 2005 have benefited from a longer period of housing price appreciation than loans originated in 2005; with such earlier originations accounting for 62% by balance and 71% by number of Option ARM loans held in portfolio at December 31, 2005, current loan-to-value ratios have generally improved – in many cases offsetting the credit risk associated with negative amortization that may have resulted from the borrower’s use of the minimum payment option.
Home Loans with Loan-to-Value Ratios Greater Than 80 percent Without Private Mortgage Insurance or Government Guarantees
Loan-to-value ratios are a key determinant of future performance. Home loans with loan-to-value ratios of greater than 80 percent at origination without private mortgage insurance or government guarantees expose the Company to greater credit risk than home loans with loan-to-value ratios of 80 percent or less at origination. Credit risk is also reduced when the loan amount above 80 percent of the collateral value is guaranteed by the government or is insured under a policy of private mortgage insurance purchased by the borrower. This greater credit risk arises because, in general, both default risk and the severity of loss is higher when borrowers have less equity to protect in the event of foreclosure. At December 31, 2005, home loans held in portfolio with these features amounted to $9.01 billion and the weighted average loan-to-value ratio at origination of such loans was 88 percent. Substantially all of these loans were made to subprime borrowers, including $6.91 billion of purchased subprime loans. Total home loans with these features accounted for 10% of the Company’s home loan volume in 2005.
The Company actively monitors conditions in housing markets in which it has a concentration of home loans. Geographic concentrations are taken into account when deciding which home loans to sell in the secondary market. Only $604 million, or 0.4% of home loans held in portfolio at December 31, 2005, had no private mortage insurance or government guarantees and had loan-to-value ratios in excess of 90 percent at origination. The highest proportion of these loans was secured by properties in California, a market in which housing prices have generally appreciated over the last five years.
Typically, borrowers requesting financing with loan-to-value ratios of greater than 80 percent without government guarantees are required to purchase private mortgage insurance from a third party. In the event of default, the Company can recover losses from the private mortgage insurer. Alternatively, under certain loan programs, qualifying customers can elect to pay a higher interest rate to the Company in lieu of paying for private mortgage insurance. This higher interest rate is expected to compensate the Company for the incremental credit risk inherent in lending to borrowers without private mortgage insurance.
The Company seeks to mitigate credit risk in its purchased subprime loan portfolio by requiring minimum credit scores and by re-underwriting all such loans. Furthermore, with limited exceptions, the Company does not purchase loans through this program that have loan-to-value ratios of greater than 90 percent.
57
Home Equity Loans and Lines of Credit where the Combined Loan-to-Value Ratio is Greater Than 80 percent
Instead of undertaking cash-out refinance transactions, many borrowers have elected to leverage increasing amounts of equity in their homes by borrowing money through either a first or second lien home equity loan or line of credit. The existence of a first lien mortgage loan and second lien home equity loan or line of credit made to one borrower and secured by the same property, most often arises when the Company:
· Simultaneously originates the first lien mortgage loan and second lien home equity loan or line of credit (so called “piggyback” loans);
· Originates or purchases the first lien mortgage loan and at a subsequent date originates a second lien home equity loan or line of credit;
· Originates a second lien home equity loan or line of credit subordinate to another lender’s first lien mortgage loan.
When the Company holds a lien on a property that is subordinate to a first lien mortgage held by another lender, both the probability of default and severity of loss risk is generally higher than when the Company holds both the first lien home loan and second lien home equity loan or line of credit. In the event of foreclosure, the probability of default is generally higher because the first lien holder does not have to take into consideration any losses the second lien holder may sustain when deciding whether to foreclose on a property. The severity of loss risk is higher principally because a second lien holder who exercises its right to foreclose on a property must ensure the first lien holder’s investment is repaid in full. By taking this action, the second lien holder increases its exposure to greater loss on liquidation of the collateral.
The balance of home equity loans and lines of credit with combined loan-to-value ratios of greater than 80 percent at origination totaled $12.31 billion at December 31, 2005 and accounted for 37% of the Company’s home equity volume in 2005. Substantially all of this portfolio had a combined loan-to-value ratio at origination of between 80 and 90 percent.
To compensate for the increased credit risk in the home equity portfolio that arises where the combined loan-to-value ratio at origination is greater than 80 percent, the Company typically charges such borrowers a higher rate of interest than would be charged if the combined loan-to-value ratio at origination was less than 80 percent. The Company also buys pool mortgage insurance that insulates it from the risk of default on those home equity loans or lines of credit where the combined loan-to-value ratio at origination is greater than 90 percent.
Interest-only Payment Home Loans
Borrowers with interest-only loans are initially required to make monthly payments that are sufficient to cover the full amount of contractual interest accrued in the previous month. After a predetermined period of time (usually 5 years), the payment is reset to allow the loan to fully-amortize over its remaining life. The Company held $10.66 billion of interest-only home loans in portfolio at December 31, 2005. Loans with these features accounted for 8% of the Company’s home loan volume in 2005. Borrowers with interest-only loans generally have the highest credit ratings, lowest weighted average loan-to-value ratios at origination and the most favorable delinquency statistics of all loan programs in the Company’s home loan portfolio. Compared to fully-amortizing loan products, interest-only loans originated by the Company contain other restrictions such as lower maximum loan-to-value ratios and lower maximum loan levels. Borrowers with interest-only loans are also charged a higher interest rate to compensate for the potentially higher credit risk.
58
Allowance for Loan and Lease Losses
The allowance for loan and lease losses represents management’s estimate of incurred credit losses inherent in the Company’s loan and lease portfolios as of the balance sheet date. The estimation of the allowance is based on a variety of factors, including past loan loss experience, the current credit profile of borrowers, adverse situations that have occurred that may affect the borrowers’ ability to repay, the estimated value of underlying collateral, the interest rate climate as it affects adjustable-rate loans and general economic conditions. Determining the adequacy of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan and lease losses in future periods.
The allowance provides for incurred losses that are inherent in the loan portfolio. Losses are recognized when (a) available information indicates that it is probable that a loss has been incurred and (b) the amount of the loss can be reasonably estimated. Generally, borrowers are impacted by events that result in loan default and eventual loss well in advance of a lender’s knowledge of those events. Examples of such loss-causing events for home loans are borrower job loss, divorce and medical crisis. An example for commercial real estate loans would be the loss of a major tenant.
In determining the allowance for loan and lease losses, the Company allocates a portion of the allowance to its various loan product categories based on an analysis of individual loans and pools of loans. However, the entire allowance (both the allocated component and the portion that remains unallocated) is available to absorb credit losses inherent in the total loan portfolio as of the balance sheet date.
The allocated allowance for homogeneous loans (such as home loans, home equity loans and lines of credit, speciality mortgage finance and credit card loans) is determined using statistical forecasting models that estimate default and loss outcomes based on an evaluation of past performance of loans in the Company’s portfolio and other factors as well as industry historical loan loss data. Management periodically reviews these models for reasonableness and updates the assumptions used in these models.
Non-homogeneous loans (such as multi-family and non-residential real estate loans) are individually reviewed and assigned a risk grade. The loans are then categorized by their risk grade into pools, with each pool having a pre-assigned loss factor commensurate with the applicable level of estimated risk. Loss factors are then multiplied by the unpaid principal balance of loans in each pool to determine the allocated allowance applicable to that pool.
The Company also evaluates certain loans on an individual basis for impairment (as defined by Statement No. 114, Accounting by Creditors for Impairment of a Loan ) and records an allowance for impaired loans as appropriate. Such loans are excluded from other loan loss analyses so as to avoid double counting the loss exposure.
To mitigate the imprecision inherent in estimates of credit losses, the allocated component of the allowance is supplemented by an unallocated component. The unallocated component reflects management’s assessment of various risk factors that are not adequately reflected in the models used to determine the allocated component of the allowance. These factors include general economic and business conditions affecting its key lending products and markets, credit quality and collateral value trends, loan concentrations, specific industry conditions within portfolio segments, recent loss experience in particular segments of the portfolio, duration of the current business cycle and the impact of new product initiatives and other such variables for which recent historical performance does not reflect the risk profile of the portfolio.
59
Changes in the allowance for loan and lease losses were as follows:
|
|
Year Ended December 31, |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|||||
|
|
(dollars in millions) |
|
|||||||||||||
Balance, beginning of year |
|
$ |
1,301 |
|
$ |
1,250 |
|
$ |
1,503 |
|
$ |
1,278 |
|
$ |
909 |
|
Allowance transferred to loans held for sale |
|
(270 |
) |
(23 |
) |
(3 |
) |
(31 |
) |
– |
|
|||||
Allowance acquired through business combinations |
|
592 |
|
– |
|
– |
|
148 |
|
120 |
|
|||||
Other |
|
– |
|
– |
|
17 |
|
(48 |
) |
– |
|
|||||
Provision for loan and lease losses (1) |
|
316 |
|
209 |
|
42 |
|
404 |
|
426 |
|
|||||
|
|
1,939 |
|
1,436 |
|
1,559 |
|
1,751 |
|
1,455 |
|
|||||
Loans charged off: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Home |
|
(38 |
) |
(39 |
) |
(65 |
) |
(52 |
) |
(29 |
) |
|||||
Specialty mortgage finance (2) |
|
(50 |
) |
(39 |
) |
(39 |
) |
(33 |
) |
(25 |
) |
|||||
Total home loans charged off |
|
(88 |
) |
(78 |
) |
(104 |
) |
(85 |
) |
(54 |
) |
|||||
Home equity loans and lines of credit |
|
(30 |
) |
(22 |
) |
(14 |
) |
(14 |
) |
(4 |
) |
|||||
Home construction (3) |
|
(1 |
) |
(1 |
) |
(2 |
) |
(1 |
) |
– |
|
|||||
Multi-family |
|
(1 |
) |
(2 |
) |
(5 |
) |
(1 |
) |
– |
|
|||||
Other real estate |
|
(8 |
) |
(11 |
) |
(97 |
) |
(60 |
) |
(35 |
) |
|||||
Total loans secured by real estate |
|
(128 |
) |
(114 |
) |
(222 |
) |
(161 |
) |
(93 |
) |
|||||
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Credit card |
|
(138 |
) |
– |
|
– |
|
– |
|
– |
|
|||||
Other |
|
(38 |
) |
(53 |
) |
(69 |
) |
(70 |
) |
(51 |
) |
|||||
Commercial business |
|
(34 |
) |
(21 |
) |
(79 |
) |
(73 |
) |
(49 |
) |
|||||
Total loans charged off |
|
(338 |
) |
(188 |
) |
(370 |
) |
(304 |
) |
(193 |
) |
|||||
Recoveries of loans previously charged off: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Home |
|
– |
|
– |
|
10 |
|
2 |
|
2 |
|
|||||
Specialty mortgage finance (2) |
|
3 |
|
3 |
|
3 |
|
– |
|
– |
|
|||||
Total home loan recoveries |
|
3 |
|
3 |
|
13 |
|
2 |
|
2 |
|
|||||
Home equity loans and lines of credit |
|
9 |
|
4 |
|
1 |
|
1 |
|
1 |
|
|||||
Multi-family |
|
3 |
|
3 |
|
1 |
|
1 |
|
– |
|
|||||
Other real estate |
|
13 |
|
10 |
|
17 |
|
12 |
|
3 |
|
|||||
Total loans secured by real estate |
|
28 |
|
20 |
|
32 |
|
16 |
|
6 |
|
|||||
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Credit card |
|
40 |
|
– |
|
– |
|
– |
|
– |
|
|||||
Other |
|
19 |
|
19 |
|
15 |
|
13 |
|
4 |
|
|||||
Commercial business |
|
7 |
|
14 |
|
14 |
|
27 |
|
6 |
|
|||||
Total recoveries of loans previously charged off |
|
94 |
|
53 |
|
61 |
|
56 |
|
16 |
|
|||||
Net charge-offs |
|
(244 |
) |
(135 |
) |
(309 |
) |
(248 |
) |
(177 |
) |
|||||
Balance, end of year |
|
$ |
1,695 |
|
$ |
1,301 |
|
$ |
1,250 |
|
$ |
1,503 |
|
$ |
1,278 |
|
Net charge-offs as a percentage of average loans held in portfolio |
|
0.11 |
% |
0.07 |
% |
0.20 |
% |
0.17 |
% |
0.14 |
% |
|||||
Allowance as a percentage of total loans held in portfolio |
|
0.74 |
|
0.63 |
|
0.71 |
|
1.05 |
|
1.01 |
|
(1) Includes a $202 million reversal of provision for loan and lease losses recorded in the fourth quarter of 2003.
(2) Represents purchased subprime home loan portfolios and subprime home loans originated by Long Beach Mortgage Company and held in its investment portfolio.
(3) Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.
The risk profile of the Company’s loan portfolio changed significantly during 2001 and 2002. In a five quarter span from January 2001 to March 31, 2002, the Company consummated four purchase business combinations: Bank United Corp. (“Bank United”), the mortgage operations of The PNC Financial Services Group, Inc., Fleet Mortgage Corp. and Dime Bancorp, Inc. (“Dime”). As a result of these acquisitions, the Company’s loan portfolio contained substantially higher levels of credit risk. In particular, Bank United’s commercial lending activities were concentrated in underperforming sectors of the economy, such as assisted living facilities, Small Business Administration loans and highly leveraged
60
syndicated lending. This change in the loan portfolio composition was exacerbated by the downturn in the national economy, which continued to worsen following the events of September 11, 2001.
Although the national economy showed some intermittent signs of stabilizing performance in 2002, the overall climate was still one of significant uncertainty, as demonstrated by the continuing high levels of unemployment, distressed levels of consumer confidence and continuing concerns of housing price bubbles in some of the Company’s real estate markets. After their substantial growth in 2001, nonperforming asset trends stabilized in 2002 but remained at elevated levels, decreasing slightly to $2.48 billion at December 31, 2002 after reaching a first quarter peak of $2.68 billion. Though the Company continued to provision at levels that exceeded net charge-offs as a result of the continuing economic malaise, the gap between these statistical measures had declined from $74 million in the first quarter of 2002 to $2 million by the fourth quarter of that year. This reflected the Company’s cautious belief that, while the economy had not demonstrated signals of a sustained economic recovery, it at least did not appear to be deteriorating any further. This assessment was also evident in the quarterly trend of the allowance for loan and lease losses as a percentage of total loans held in portfolio. After growing steadily from 0.82% in the first quarter of 2001 to 1.08% in the second quarter of 2002, it stabilized during the remainder of that year, ending at 1.05% at December 31, 2002.
During 2003, nonperforming assets declined from $2.48 billion
at the beginning of the year to
$1.94 billion at December 31, 2003. Beginning in the fourth quarter of
2002, the Company initiated a program of periodically selling nonperforming
assets in order to reduce its exposure to potential credit losses. This program
continued throughout 2003 with the sale of $619 million of nonperforming loans
and was substantially the reason for the decline in nonperforming assets. Charge-offs
sustained from sales of these loans were, in general, at lower levels than the Company
believes it would have incurred had these loans been allowed to season further.
As economic conditions improved during 2003, the Company’s assessment of the economic climate progressed from one of continuing concern in the first quarter of 2003 to one of guarded optimism by the third quarter of that year. However, a discernable, positive trend was not evident until various economic statistics were released in the fourth quarter. Those statistics provided conclusive evidence that key economic indicators that affect the Company’s credit risk profile had improved. Those indicators included a stable interest rate environment, a consistent pattern of stable or increasing housing prices, strong levels of residential home construction, lower unemployment levels, increasing capital expenditures, steady to improving corporate profits and stronger levels of exports from a weakening U.S. dollar. These favorable external factors were augmented by the Company’s ability to sell its underperforming franchise finance loan portfolio in the fourth quarter of 2003 at a price that exceeded its carrying value by $82 million. As a result of all of these events, the Company determined that a $202 million reversal of the provision for loan and lease losses in the fourth quarter of 2003 was appropriate.
During 2004, strong loan portfolio growth, especially in the higher-risk purchased subprime portfolio, resulted in management recording a provision for loan and lease losses that exceeded net charge-offs by $74 million. However, as a reflection of the continuing favorable trend in key domestic economic indicators which facilitated a relatively benign credit environment throughout the year, the allowance for loan and lease losses as a percentage of loans held in portfolio declined from 0.71% at December 31, 2003 to 0.63% at December 31, 2004. The positive economic outlook was also affirmed by the Federal Reserve’s decision to initiate a series of measured increases in the targeted Federal Funds rate during the second half of 2004, thus reducing the degree of stimulus that the Federal Reserve believes is necessary to sustain continuing economic growth.
The allowance for loan and lease losses increased by $394 million from $1.30 billion at December 31, 2004 to $1.70 billion at December 31, 2005 largely reflecting the addition of the credit card portfolio of the former Providian Financial Corporation on October 1, 2005. Credit card loans are generally unsecured and
61
typically generate significantly higher delinquency rates and charge-offs than real estate secured loans and the allocated allowance for losses on credit card loans, expressed as a percentage of the credit card portfolio, is consequently significantly higher than on real estate secured loans. Largely as a result of the addition of a credit card portfolio, the total allowance for loan and lease losses expressed as a percentage of total loans held in portfolio, increased from 0.63% at December 31, 2004 to 0.74% at December 31, 2005. The overall economic environment surrounding the Company’s lending operations during 2005 was relatively stable despite increases in short-term interest rates, with a generally healthy business climate and continued strength in employment levels and real estate markets nationally.
An analysis of the allowance for loan and lease losses was as follows:
|
|
December 31, |
|
||||||||||||||||||||||||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
||||||||||||||||||||||||||||||
|
|
Allowance
|
|
Allocated
|
|
Loan
|
|
Allowance
|
|
Allocated
|
|
Loan
|
|
Allowance
|
|
Allocated
|
|
Loan
|
|
||||||||||||||||||
|
|
(dollars in millions) |
|
||||||||||||||||||||||||||||||||||
Allocated allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home |
|
|
$ |
222 |
|
|
|
0.19 |
% |
|
|
49.71 |
% |
|
|
$ |
215 |
|
|
|
0.20 |
% |
|
|
53.12 |
% |
|
|
$ |
321 |
|
|
|
0.32 |
% |
|
|
57.12 |
% |
|
Specialty mortgage finance (2) |
|
|
373 |
|
|
|
1.77 |
|
|
|
9.21 |
|
|
|
242 |
|
|
|
1.26 |
|
|
|
9.24 |
|
|
|
84 |
|
|
|
0.65 |
|
|
|
7.41 |
|
|
|||
Total home loans |
|
|
595 |
|
|
|
0.44 |
|
|
|
58.92 |
|
|
|
457 |
|
|
|
0.35 |
|
|
|
62.36 |
|
|
|
405 |
|
|
|
0.36 |
|
|
|
64.53 |
|
|
|||
Home equity loans and lines of credit |
|
|
107 |
|
|
|
0.21 |
|
|
|
22.14 |
|
|
|
83 |
|
|
|
0.19 |
|
|
|
21.08 |
|
|
|
82 |
|
|
|
0.30 |
|
|
|
15.78 |
|
|
|||
Home construction (3) |
|
|
6 |
|
|
|
0.29 |
|
|
|
0.89 |
|
|
|
12 |
|
|
|
0.51 |
|
|
|
1.13 |
|
|
|
18 |
|
|
|
0.81 |
|
|
|
1.27 |
|
|
|||
Multi-family |
|
|
122 |
|
|
|
0.48 |
|
|
|
11.15 |
|
|
|
101 |
|
|
|
0.45 |
|
|
|
10.76 |
|
|
|
139 |
|
|
|
0.68 |
|
|
|
11.60 |
|
|
|||
Other real estate |
|
|
69 |
|
|
|
1.37 |
|
|
|
2.19 |
|
|
|
116 |
|
|
|
2.05 |
|
|
|
2.74 |
|
|
|
110 |
|
|
|
1.65 |
|
|
|
3.80 |
|
|
|||
Total allocated allowance secured by real estate |
|
|
899 |
|
|
|
0.41 |
|
|
|
95.29 |
|
|
|
769 |
|
|
|
0.38 |
|
|
|
98.07 |
|
|
|
754 |
|
|
|
0.44 |
|
|
|
96.98 |
|
|
|||
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Credit card |
|
|
328 |
|
|
|
4.08 |
|
|
|
3.50 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|||
Other |
|
|
27 |
|
|
|
4.25 |
|
|
|
0.28 |
|
|
|
36 |
|
|
|
4.55 |
|
|
|
0.38 |
|
|
|
49 |
|
|
|
4.77 |
|
|
|
0.59 |
|
|
|||
Commercial business |
|
|
44 |
|
|
|
2.03 |
|
|
|
0.93 |
|
|
|
51 |
|
|
|
1.59 |
|
|
|
1.55 |
|
|
|
72 |
|
|
|
1.69 |
|
|
|
2.43 |
|
|
|||
Total allocated allowance held in portfolio |
|
|
1,298 |
|
|
|
0.57 |
|
|
|
100.00 |
|
|
|
856 |
|
|
|
0.41 |
|
|
|
100.00 |
|
|
|
875 |
|
|
|
0.50 |
|
|
|
100.00 |
|
|
|||
Unallocated allowance |
|
|
397 |
|
|
|
0.17 |
|
|
|
– |
|
|
|
445 |
|
|
|
0.22 |
|
|
|
– |
|
|
|
375 |
|
|
|
0.21 |
|
|
|
– |
|
|
|||
Total allowance for loan and lease losses |
|
|
$ |
1,695 |
|
|
|
0.74 |
% |
|
|
100.00 |
% |
|
|
$ |
1,301 |
|
|
|
0.63 |
% |
|
|
100.00 |
% |
|
|
$ |
1,250 |
|
|
|
0.71 |
% |
|
|
100.00 |
% |
|
(Continued on next table.)
(1) Excludes loans held for sale.
(2) Represents purchased subprime home loan portfolios and subprime home loans originated by Long Beach Mortgage Company and held in its investment portfolio.
(3) Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.
62
|
|
December 31, |
|
||||||||||||||||||||||||
|
|
2002 |
|
2001 |
|
||||||||||||||||||||||
|
|
Allowance
|
|
Allocated
|
|
Loan
|
|
Allowance
|
|
Allocated
|
|
Loan
|
|
||||||||||||||
|
|
(dollars in millions) |
|
||||||||||||||||||||||||
Allocated allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Home |
|
|
$ |
251 |
|
|
|
0.30 |
% |
|
|
57.92 |
% |
|
|
$ |
290 |
|
|
|
0.36 |
% |
|
|
63.00 |
% |
|
Specialty mortgage finance (2) |
|
|
169 |
|
|
|
1.67 |
|
|
|
7.08 |
|
|
|
97 |
|
|
|
1.18 |
|
|
|
6.49 |
|
|
||
Total home loans |
|
|
420 |
|
|
|
0.45 |
|
|
|
65.00 |
|
|
|
387 |
|
|
|
0.44 |
|
|
|
69.49 |
|
|
||
Home equity loans and lines of credit |
|
|
46 |
|
|
|
0.29 |
|
|
|
11.31 |
|
|
|
27 |
|
|
|
0.34 |
|
|
|
6.31 |
|
|
||
Home construction (3) |
|
|
22 |
|
|
|
1.13 |
|
|
|
1.36 |
|
|
|
32 |
|
|
|
1.23 |
|
|
|
2.05 |
|
|
||
Multi-family |
|
|
146 |
|
|
|
0.81 |
|
|
|
12.59 |
|
|
|
138 |
|
|
|
0.88 |
|
|
|
12.35 |
|
|
||
Other real estate |
|
|
296 |
|
|
|
3.71 |
|
|
|
5.58 |
|
|
|
161 |
|
|
|
2.64 |
|
|
|
4.82 |
|
|
||
Total allocated allowance secured by real estate |
|
|
930 |
|
|
|
0.68 |
|
|
|
95.84 |
|
|
|
745 |
|
|
|
0.62 |
|
|
|
95.02 |
|
|
||
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Credit card |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
||
Other |
|
|
70 |
|
|
|
4.21 |
|
|
|
1.16 |
|
|
|
71 |
|
|
|
3.53 |
|
|
|
1.59 |
|
|
||
Commercial business |
|
|
116 |
|
|
|
2.70 |
|
|
|
3.00 |
|
|
|
92 |
|
|
|
2.15 |
|
|
|
3.39 |
|
|
||
Total allocated allowance held in portfolio |
|
|
1,116 |
|
|
|
0.78 |
|
|
|
100.00 |
|
|
|
908 |
|
|
|
0.72 |
|
|
|
100 .00 |
|
|
||
Unallocated allowance |
|
|
387 |
|
|
|
0.27 |
|
|
|
– |
|
|
|
370 |
|
|
|
0.29 |
|
|
|
– |
|
|
||
Total allowance for loan and lease losses |
|
|
$ |
1,503 |
|
|
|
1.05 |
% |
|
|
100.00 |
% |
|
|
$ |
1,278 |
|
|
|
1.01 |
% |
|
|
100.00 |
% |
|
(1) Excludes loans held for sale.
(2) Represents purchased subprime home loan portfolios and subprime home loans originated by Long Beach Mortgage Company and held in its investment portfolio.
(3) Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences forsale and construction loans made directly to the intended occupant of a single-family residence.
Growth in the Company’s specialty mortgage finance portfolio since 2001 has resulted in a substantial increase in the allocated allowance attributable to this portfolio and a substantial increase in nonaccrual loans. The Company seeks to mitigate the credit risk in this portfolio by ensuring compliance with underwriting standards on loans originated to subprime borrowers and by re-underwriting all purchased subprime loans. During 2005, while the size of this portfolio grew by $1.97 billion or 10%, nonaccrual loans and net charge-offs expressed as a percentage of the loan category increased by 16% and 18%, and as a result, the allocated allowance increased from 1.26% of specialty mortgage finance loans held in portfolio to 1.77%.
63
Home equity loans and lines of credit increased from $7.97 billion at December 31, 2001 to $50.85 billion at December 31, 2005. With the strong housing market that has existed during the current decade, home equity loans and lines of credit have become an increasingly popular product as they enable homeowners to borrow a portion of their equity for personal expenditures. Although the allocated allowance for this portfolio increased from $27 million at December 31, 2001 to $107 million at the end of 2005, that allowance as a percentage of loans in this portfolio declined from 0.34% to 0.21% during that same period, reflecting generally high credit scores among borrowers, lower risk loan-to-value ratios and a significant portion of loans that are in a first lien position.
90 or More Days Past Due and Still Accruing
The total amount of loans held in portfolio, excluding credit card loans, that were 90 days or more contractually past due and still accruing interest was $107 million, $85 million, $46 million, $60 million and $86 million at December 31, 2005, 2004, 2003, 2002 and 2001. The majority of these loans are either VA- or FHA-insured with little or no risk of loss of principal or interest. Credit card loans held in portfolio that were 90 days or more contractually past due and still accruing interest were $87 million at December 31, 2005. Credit card loans are charged-off when they are determined to be uncollectible or by the end of the month in which the account becomes 180 days past due.
As a result of regulatory guidelines issued in 2003, delinquent mortgages contained within GNMA servicing pools that are repurchased or are eligible to be repurchased by the Company must be reported as loans on the Consolidated Statements of Financial Condition. As the Company sells most of these repurchased loans to secondary market participants, they are classified as loans held for sale on the Consolidated Statements of Financial Condition. Substantially all of these loans are either guaranteed or insured by agencies of the federal government and, therefore, do not expose the Company to significant risk of credit loss. The Company’s held for sale portfolio contained $1.06 billion, $1.60 billion, $2.50 billion, $3.22 billion and $692 million of such loans that were 90 days or more contractually past due and still accruing interest at December 31, 2005, 2004, 2003, 2002 and 2001.
The objective of liquidity management is to ensure the Company has the continuing ability to maintain cash flows that are adequate to fund operations and meet its other obligations on a timely and cost-effective basis. The Company establishes liquidity guidelines for the parent holding company, Washington Mutual, Inc., as well as for its principal operating subsidiaries. The Company also maintains contingency liquidity plans that outline alternative actions and enable appropriate and timely responses under stress scenarios.
Washington Mutual, Inc.
Liquidity for Washington Mutual, Inc. (“the Parent Company”) is generated through its ability to raise funds through dividends from subsidiaries and in various capital markets through the issuance of unsecured debt, commercial paper and other securities.
One of Washington Mutual, Inc.’s key funding sources is from dividends paid by its banking subsidiaries. Banking subsidiaries dividends may be reduced from time to time to ensure that internal capital targets are met. Various regulatory requirements related to capital adequacy and retained earnings also limit the amount of dividends that can be paid by the Parent Company’s banking subsidiaries. For more information on such dividend limitations applicable to the Company’s banking subsidiaries, refer to “Business – Regulation and Supervision” and Note 18 to the Consolidated Financial Statements – “Regulatory Capital Requirements and Dividend Restrictions.”
64
In January 2006, the Company filed an automatically effective registration statement under the Securities Offering Reform rules recently adopted by the SEC. The Company registered an unlimited amount of debt securities and preferred stock on this registration statement.
Washington Mutual, Inc. also has a commercial paper program and a revolving credit facility that are sources of liquidity. At December 31, 2005, the commercial paper program provided for up to $1 billion in funds. In addition, the Company’s revolving credit facility of $800 million provides credit support for Washington Mutual, Inc.’s commercial paper program as well as funds for general corporate purposes. At December 31, 2005, Washington Mutual, Inc. had $671 million in commercial paper available for issuance and the entire amount of the revolving credit facility was available.
The Parent Company’s senior debt and commercial paper was rated A and F1 by Fitch, A3 and P2 by Moody’s and A- and A2 by Standard and Poor’s.
Washington Mutual, Inc. maintains sufficient liquidity to cover all debt obligations maturing over the next twelve months.
Banking Subsidiaries
The principal sources of liquidity for the Company’s banking subsidiaries are customer deposits, wholesale borrowings, the maturity and repayment of portfolio loans, securities held in the available-for-sale portfolio and mortgage loans designated as held for sale. Among these sources, transaction account deposits and wholesale borrowings from FHLB advances, repurchase agreements and federal funds purchased continue to provide the Company with a significant source of stable funding. During 2005, those sources funded 65% of average total assets. The Company’s continuing ability to retain its transaction account deposit base and to attract new deposits depends on various factors, such as customer service satisfaction levels and the competitiveness of interest rates offered on deposit products. The Company continues to have the necessary assets available to pledge as collateral to obtain additional FHLB advances and repurchase agreements to offset potential declines in deposit balances.
At December 31, 2005, the Company’s proceeds from the sales of loans were approximately $167 billion. These proceeds were, in turn, used as the primary funding source for the origination and purchases, net of principal payments, of approximately $165 billion of loans held for sale during the same period. Typically, a cyclical pattern of sales and originations/purchases repeats itself during the course of a period and the amount of funding necessary to sustain mortgage banking operations does not significantly affect the Company’s overall level of liquidity resources.
The Company’s banking subsidiaries also raise funds in domestic and international capital markets to supplement their primary funding sources. In August 2003, the Company established a Global Bank Note Program that allows Washington Mutual Bank to issue senior and subordinated notes in the United States and in international capital markets in a variety of currencies and structures. The program was renewed in December 2005. Washington Mutual Bank had $22 billion available under this program at December 31, 2005.
Senior unsecured long-term obligations of Washington Mutual Bank were rated A by Fitch, A2 by Moody’s and A by Standard and Poor’s. Short-term obligations were rated F1 by Fitch, P1 by Moody’s and A1 by Standard and Poor’s.
Non-banking Subsidiaries
Long Beach Mortgage Company has revolving credit facilities with non-affiliated lenders totaling $6.5 billion that are used to fund loans held for sale. At December 31, 2005, Long Beach Mortgage Company had borrowings outstanding of approximately $2.8 billion under these credit facilities.
65
In June 2005, Long Beach Mortgage Company launched Strand Capital LLC (“Strand”), a single-seller asset-backed extendible note facility, to augment its existing credit facilities. Strand has total funding capacity of $9.5 billion, and as of December 31, 2005 approximately $4.2 billion in notes were outstanding.
Market risk is defined as the sensitivity of income, fair market values and capital to changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates or prices. The primary market risk to which the Company is exposed is interest rate risk. Substantially all of its interest rate risk arises from instruments, positions and transactions entered into for purposes other than trading. These include loans, MSR, securities, deposits, borrowings, long-term debt and derivative financial instruments.
The Company’s trading assets are primarily comprised of financial instruments that are retained from securitization transactions, or are purchased for MSR risk management purposes. The Company does not take significant short-term trading positions for the purpose of benefiting from price differences between financial instruments and markets.
Interest rate risk is managed within a consolidated enterprise risk management framework that includes asset/liability management and the management of specific portfolios (MSR and Other Mortgage Banking) discussed below. The principal objective of asset/liability management is to manage the sensitivity of net income to changing interest rates. Asset/liability management is governed by a policy reviewed and approved annually by the Board. The Board has delegated the oversight of the administration of this policy to the Finance Committee of the Board.
Types of Interest Rate Risk
The Company is exposed to different types of interest rate risks. These include lag, repricing, basis, prepayment, lifetime and periodic payment caps, and volatility risk.
Lag/Repricing Risk
Lag risk results from timing differences between the repricing of adjustable-rate assets and liabilities. Repricing risk is caused by the mismatch in the maturities between assets and liabilities. For example, the Company’s assets may reprice slower than its liabilities. The effect of this timing difference, or “lag,” will be favorable during a period of declining interest rates and unfavorable during a period of rising interest rates. Lag/repricing risk can produce short-term volatility in net interest income during periods of interest rate movements, but the effect of this lag generally balances out over time.
Basis Risk
Basis risk occurs when assets and liabilities have similar repricing frequencies but are tied to different market interest rate indices. For example, adjustable-rate loans may reprice based on Treasury rates while borrowings may reprice based on LIBOR rates.
Prepayment Risk
Prepayment risk results from the ability of customers to pay off their loans prior to maturity. Generally, prepayments increase in falling interest rate environments and decrease in rising interest rate environments.
Lifetime and Periodic Payment Cap Risk
Many of the Company’s adjustable-rate home loan products contain lifetime interest rate caps, which prevent the interest rate on the loan from exceeding a contractually determined level. In periods of dramatically rising rates, those adjustable-rate loans that have reached their lifetime cap rate will no longer reprice upward. Periodic payment caps limit the amount that a borrower’s scheduled payment on an
66
adjustable-rate loan can increase when the interest rate is adjusted upward on the loan’s periodic repricing date.
Volatility Risk
Volatility risk is the potential change in the fair value of an option, or a fixed income instrument containing options (such as mortgages) from changes in the implied market level of future volatility (“implied volatility”). For the holder of an option contract, implied volatility is a key determinant of option value with higher volatility generally increasing option value and lower volatility generally decreasing option value.
MSR Risk Management
The Company manages potential impairment in the fair value of MSR and increased amortization levels of MSR through a comprehensive risk management program. The intent is to offset the changes in MSR fair value and changes in MSR amortization above anticipated levels with changes in the fair value of risk management instruments. The risk management instruments include interest rate contracts, forward purchase commitments and available-for-sale and trading securities. The securities generally consist of fixed-rate debt securities, such as U.S. Government and agency obligations and mortgage-backed securities, including principal-only strips. The interest rate contracts typically consist of interest rate swaps, interest rate swaptions, interest rate floors and interest rate caps. The Company may purchase or sell option contracts, depending on the portfolio risks it seeks to manage. The Company also enters into forward commitments to purchase and sell mortgage-backed securities, which generally are comprised of fixed-rate mortgage-backed securities with 15 or 30 year maturities.
The fair value of MSR is primarily affected by changes in prepayments that result from shifts in mortgage rates. Changes in the value of MSR risk management instruments vary based on the specific instrument. For example, changes in the fair value of interest rate swaps are driven by shifts in interest rate swap rates and the fair value of U.S. Treasury securities is based on changes in U.S. Treasury rates. Mortgage rates may move more or less than the rates on Treasury bonds or interest rate swaps. This could result in a change in the fair value of the MSR that differs from the change in fair value of the MSR risk management instruments. This difference in market indices between the MSR and the risk management instruments results in what is referred to as basis risk.
The fair value of MSR decreases and the amortization rate increases in a declining interest rate environment due to higher prepayment activity. During periods of rising interest rates, the amortization rate of MSR decreases and the fair value of MSR increases due to lower prepayment activity.
The Company manages the MSR daily and adjusts the mix of instruments used to manage MSR fair value changes as interest rates and market conditions warrant. The objective is to maintain an efficient and fairly liquid mix as well as a diverse portfolio of risk management instruments with maturity ranges that correspond well to the anticipated behavior of the MSR. For that portion of the MSR which qualifies for hedge accounting treatment, all changes in fair value of the MSR, even when the fair value is higher than amortized cost, will be recorded through earnings. MSR which do not qualify for hedge accounting treatment must be accounted for at the lower of cost or fair value. The Company also manages the size of the MSR asset. Depending on market conditions and the desire to expand customer relationships, management may periodically sell or purchase additional servicing. Management may also structure loan sales to control the size of the MSR asset created by any particular transaction.
The Company believes this overall risk management strategy is the most efficient approach to managing MSR fair value risk. The success of this strategy, however, is dependent on management’s decisions regarding the amount, type and mix of MSR risk management instruments that are selected to manage the changes in fair value of the mortgage servicing asset. If this strategy is not successful, net income could be adversely affected.
67
Other Mortgage Banking Risk Management
The Company also manages the risks associated with its home loan mortgage warehouse and pipeline. The mortgage warehouse consists of funded loans intended for sale in the secondary market. The pipeline consists of commitments to originate or purchase mortgages to be sold in the secondary market. The risk associated with the mortgage pipeline and warehouse is the potential for changes in interest rates between the time the customer locks in the rate on the loan and the time the loan is sold.
The Company measures the risk profile of the mortgage warehouse and pipeline daily. To manage the warehouse and pipeline risk, management executes forward sales commitments, interest rate contracts and mortgage option contracts. A forward sales commitment protects against a rising interest rate environment, since the sales price and delivery date are already established. A forward sales commitment is different, however, from an option contract in that the Company is obligated to deliver the loan to the third party on the agreed-upon future date. Management also estimates the fallout factor, which represents the percentage of loans that are not expected to be funded, when determining the appropriate amount of pipeline risk management instruments.
Asset/Liability Risk Management
The purpose of asset/liability risk management is to assess the aggregate interest rate risk profile of the Company. Asset/liability risk analysis combines the MSR and Other Mortgage Banking activities with substantially all of the other remaining interest rate risk positions inherent in the Company’s operations.
To analyze net income sensitivity, management projects net income in a variety of interest rate scenarios, assuming both parallel and non-parallel shifts in the yield curve. These scenarios illustrate net interest income sensitivity that results from changes in the slope of the yield curve and changes in the spread between Treasury and LIBOR rates. The net income simulations also demonstrate projected changes in MSR and MSR hedging activity under a variety of scenarios. Additionally, management projects the fair market values of assets and liabilities under different interest rate scenarios to assess their risk exposure over longer periods of time.
The projection of the sensitivity of net interest income and net income requires numerous assumptions. Prepayment speeds, decay rates (the estimated runoff of deposit accounts that do not have a stated maturity), future deposit and loan rates and loan and deposit volume and mix projections are among the most significant assumptions. Prepayments affect the size of the loan and mortgage-backed securities portfolios, which impacts net interest income. All deposit and loan portfolio assumptions, including loan prepayment speeds and deposit decay rates, require management’s judgments of anticipated customer behavior in various interest rate environments. These assumptions are derived from internal and external analyses. The rates on new investment securities are based on secondary market rates while the rates on loans are based on the rates offered by the Company to retail customers.
The slope of the yield curve, current interest rate conditions and the speed of changes in interest rates all affect sensitivity to changes in interest rates. Short-term borrowings and, to a lesser extent, interest-bearing deposits typically reprice faster than the Company’s adjustable-rate assets. This lag effect is inherent in adjustable-rate loans and mortgage-backed securities indexed to the 12-month average of the annual yields on actively traded U.S. Treasury securities adjusted to a constant maturity of one year and those indexed to the 11th District FHLB monthly weighted average cost of funds index.
The sensitivity of new loan volume and mix to changes in market interest rate levels is also projected. Management generally assumes a reduction in total loan production in rising long-term interest rate scenarios accompanied by a shift towards a greater proportion of adjustable-rate production. Conversely, the Company generally assumes an increase in total loan production in falling long-term interest rate scenarios accompanied by a shift towards a greater proportion of fixed-rate loans. The gain from mortgage loans also varies under different interest rate scenarios. Normally, the gain from mortgage loans increases
68
in falling long-term interest rate environments primarily from high fixed-rate mortgage refinancing activity. Conversely, the gain from mortgage loans may decline when long-term interest rates increase if management chooses to retain more loans in the portfolio.
In periods of rising interest rates, the net interest margin normally contracts since the repricing period of the Company’s liabilities is shorter than the repricing period of its assets. The net interest margin generally expands in periods of falling interest rates as borrowing costs reprice downward faster than asset yields.
To manage interest rate sensitivity, management utilizes the interest rate risk characteristics of the balance sheet assets and liabilities to offset each other as much as possible. Balance sheet products have a variety of risk profiles and sensitivities. Some of the components of interest rate risk are countercyclical. Management may adjust the amount or mix of risk management instruments based on the countercyclical behavior of the balance sheet products.
When the countercyclical behavior inherent in portions of the Company’s balance sheet does not result in an acceptable risk profile, management utilizes investment securities and interest rate contracts to mitigate this situation. The interest rate contracts used for this purpose are classified as asset/liability risk management instruments. These contracts are often used to modify the repricing period of interest-bearing funding sources with the intention of reducing the volatility of net interest income. The types of contracts used for this purpose may consist of interest rate swaps, interest rate corridors, interest rate swaptions and certain derivatives that are embedded in borrowings. Management also uses receive-fixed swaps as part of the asset/liability risk management strategy to help modify the repricing characteristics of certain long-term liabilities to match those of the assets. Typically, these are swaps of long-term fixed-rate debt to a short-term adjustable-rate, which more closely resembles asset repricing characteristics.
January 1, 2006 and January 1, 2005 Sensitivity Comparison
The table below indicates the sensitivity of net interest income and net income as a result of hypothetical interest rate movements on market risk sensitive instruments. The base case used for this sensitivity analysis is similar to the Company’s most recent earnings plan for the respective twelve-month periods as of the date the analysis was performed. The comparative results assume parallel shifts in the yield curve with interest rates rising 200 basis points in even quarterly increments over the twelve-month periods ending December 31, 2006 and December 31, 2005 and interest rates decreasing by 50 basis points in even quarterly increments over the first six months of the twelve-month periods. Periodically the Company reassesses its sensitivity analysis and, as economic conditions warrant, will update key model characteristics, assumptions and parameters used in providing quantitative information about market risk. Such updates include altering the hypothetical interest rate movements applied to market risk sensitive instruments to reflect current trends in reasonably possible near term changes in expected economic conditions. Due to continual increases in short-term interest rates since June of 2004, the Company has provided an additional sensitivity analysis that considers the hypothetical effect of interest rates rising 100 basis points and decreasing 100 basis points in even quarterly increments over the twelve-month period ending December 31, 2006.
These analyses also incorporate assumptions about balance sheet dynamics such as loan and deposit growth and pricing, changes in funding mix and asset and liability repricing and maturity characteristics. The projected interest rate sensitivities of net interest income and net income shown below may differ significantly from actual results, particularly with respect to non-parallel shifts in the yield curve or changes in the spreads between mortgage, Treasury and LIBOR rates. The analysis for January 1, 2005 excludes Providian Financial Corporation, which the Company acquired on October 1, 2005.
69
Comparative Net Interest Income and Net Income Sensitivity
|
|
Gradual Change in Rates |
|
||||||
|
|
- 50 basis points |
|
+200 basis points |
|
||||
Net interest income change for the one-year period beginning: |
|
|
|
|
|
|
|
|
|
January 1, 2006 |
|
|
1.46 |
% |
|
|
(3.58 |
)% |
|
January 1, 2005 |
|
|
2.61 |
|
|
|
(2.18 |
) |
|
Net income change for the one-year period beginning: |
|
|
|
|
|
|
|
|
|
January 1, 2006 |
|
|
1.20 |
|
|
|
(5.32 |
) |
|
January 1, 2005 |
|
|
(0.95 |
) |
|
|
(1.37 |
) |
|
Net Interest Income and Net Income Sensitivity
|
|
Gradual Change in Rates |
|
||||||
|
|
- 100 basis points |
|
+100 basis points |
|
||||
Net interest income change for the one-year period beginning: |
|
|
|
|
|
|
|
|
|
January 1, 2006 |
|
|
2.62 |
% |
|
|
(2.45 |
)% |
|
Net income change for the one-year period beginning: |
|
|
|
|
|
|
|
|
|
January 1, 2006 |
|
|
2.59 |
|
|
|
(3.27 |
) |
|
Net interest income was adversely impacted by rising short-term rates and the continued flattening of the yield curve. Short-term interest rates have increased approximately 200 basis points since December 31, 2004 while long-term rates have increased less than 50 basis points. These yield curve movements have resulted in flat Treasury and LIBOR curves at December 31, 2005.
Net interest income was projected to increase in the -50 basis point scenario as expansion of the net interest margin more than offsets the unfavorable impact of a slight decline in earning assets. Net income was projected to increase in this scenario mainly due to the increase in net interest income as other income was relatively neutral. Decreases in other income in this scenario adversely impacted the prior year’s analysis.
Net interest income was projected to decrease in the +200 basis point scenario mainly due to contraction of the net interest margin. Net income was projected to decline in this scenario mainly due to the adverse impact of net interest income.
Net interest income was projected to increase in the -100 basis point scenario and decrease in the +100 basis point scenario mainly due to expansion and contraction of the net interest margin. Net income in these scenarios was primarily impacted by changes in net interest income although other income adversely affected the falling rate scenario and had a modest favorable effect in the rising rate scenario.
These sensitivity analyses are limited in that they were performed at a particular point in time. The analyses assume management does not initiate strategic actions, such as increasing or decreasing term funding or selling assets, to offset the impact of projected changes in net interest income or net income in these scenarios. The analyses are also based on the reliability of various assumptions used, including prepayment forecasts and discount rates, and do not incorporate other factors that would impact the Company’s overall financial performance in such scenarios, most significantly the impact of changes in gain from mortgage loans that result from changes in interest rates. In addition, not all of the changes in fair value may impact current period earnings. For example, the portion of the MSR that does not qualify for fair value hedge accounting treatment may increase in value, but the amount of the increase that is recorded in current period earnings may be limited to the recovery of the impairment reserve within each stratum. These analyses also assume that the projected MSR risk management strategy is effectively implemented and that mortgage and interest rate swap spreads are constant in all interest rate environments. These assumptions may not be realized. For example, changes in spreads between interest rate indices could result in significant changes in projected net income sensitivity. Projected net income may increase if market rates on interest rate swaps decrease by more than the decrease in mortgage rates,
70
while the projected net income may decline if the rates on swaps increase by more than mortgage rates. Accordingly, the preceding sensitivity estimates should not be viewed as an earnings forecast.
Operational risk is the risk of loss resulting from human fallibility, inadequate or failed internal processes and systems, or from external events, including loss related to legal risk. Operational risk can occur in any activity, function, or unit of the Company.
Primary responsibility for managing operational risk rests with the lines of business. Each line of business is responsible for identifying its operational risks and establishing and maintaining appropriate business-specific policies, internal control procedures and monitoring tools for these risks. To help identify, assess and manage corporate-wide risks, the Company uses corporate support groups such as Legal, Compliance, Information Security, Continuity Assurance, Strategic Sourcing and Finance. These groups assist the lines of business in the development and implementation of risk management practices specific to the needs of each business.
The Operational Risk Management Policy, approved by the Audit Committee of the Board of Directors, establishes the Company’s operational risk framework and defines the roles and responsibilities for the management of operational risk. The operational risk framework consists of a methodology for identifying, measuring, monitoring and controlling operational risk combined with a governance process that complements the Company’s organizational structure and risk management philosophy. The Operational Risk Management Committee ensures consistent communication and oversight of significant operational risk issues across the Company and ensures sufficient resources are allocated to maintain business-specific operational risk controls, policies and practices consistent with and in support of the operational risk framework and corporate standards. The Operational Risk Management function, part of Enterprise Risk Management, is responsible for maintaining the framework and works with the lines of business and corporate support functions to ensure consistent and effective policies, practices, controls and monitoring tools for assessing and managing operational risk across the Company. The objective of the framework is to provide an integrated risk management approach that emphasizes proactive management of operational risk using measures, tools and techniques that are risk-focused and consistently applied company-wide.
The Company has a process for identifying and monitoring operational loss event data, thereby permitting root cause analysis and monitoring of trends by line of business, process, product and risk-type. This analysis is essential to sound risk management and supports the Company’s process management and improvement efforts.
Maturity and Repricing Information
The Company uses interest rate contracts and available-for-sale and trading securities as tools to manage its interest rate risk profile. The following tables summarize the key contractual terms associated with these contracts and securities. Most of the interest rate swaps, swaptions, and caps at December 31, 2005 are indexed to three-month LIBOR.
71
The following estimated net fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies:
|
|
December 31, 2005 |
|
||||||||||||||||||||||||
|
|
Maturity Range |
|
||||||||||||||||||||||||
|
|
Net
|
|
Total
|
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
After
|
|
||||||||||
|
|
(dollars in millions) |
|
||||||||||||||||||||||||
Interest Rate Risk Management Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Asset/Liability Risk Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Pay-fixed swaps: |
|
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Contractual maturity |
|
|
|
|
|
$ |
23,458 |
|
$ |
11,933 |
|
$ |
4,506 |
|
– |
|
– |
|
$ |
5,117 |
|
$ |
1,902 |
|
|||
Weighted average pay rate |
|
|
|
|
|
4.30 |
% |
3.69 |
% |
4.95 |
% |
– |
|
– |
|
4.92 |
% |
4.97 |
% |
||||||||
Weighted average receive rate |
|
|
|
|
|
4.36 |
% |
4.33 |
% |
4.37 |
% |
– |
|
– |
|
4.43 |
% |
4.35 |
% |
||||||||
Receive-fixed swaps: |
|
|
(364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
29,303 |
|
$ |
1,000 |
|
$ |
12,773 |
|
$ |
5,173 |
|
$ |
1,232 |
|
$ |
1,185 |
|
$ |
7,940 |
|
|
Weighted average pay rate |
|
|
|
|
|
4.32 |
% |
4.34 |
% |
4.20 |
% |
4.07 |
% |
4.77 |
% |
4.25 |
% |
4.60 |
% |
||||||||
Weighted average receive rate |
|
|
|
|
|
4.34 |
% |
6.81 |
% |
3.67 |
% |
4.12 |
% |
4.25 |
% |
5.67 |
% |
5.07 |
% |
||||||||
Basis swaps: |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
5,000 |
|
– |
|
$ |
3,500 |
|
$ |
500 |
|
$ |
1,000 |
|
– |
|
– |
|
||||
Weighted average pay rate |
|
|
|
|
|
3.97 |
% |
– |
|
3.98 |
% |
3.94 |
% |
3.95 |
% |
– |
|
– |
|
||||||||
Weighted average receive rate |
|
|
|
|
|
4.29 |
% |
– |
|
4.29 |
% |
4.29 |
% |
4.29 |
% |
– |
|
– |
|
||||||||
Interest rate caps: |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
13,070 |
|
$ |
13,070 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average strike rate |
|
|
|
|
|
4.67 |
% |
4.67 |
% |
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Payor swaptions: |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity (option) |
|
|
|
|
|
$ |
4,000 |
|
$ |
4,000 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average strike rate |
|
|
|
|
|
5.50 |
% |
5.50 |
% |
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Contractual maturity (swap) |
|
|
|
|
|
– |
|
– |
|
– |
|
$ |
4,000 |
|
– |
|
– |
|
– |
|
|||||||
Weighted average pay rate |
|
|
|
|
|
– |
|
– |
|
– |
|
5.50 |
% |
– |
|
– |
|
– |
|
||||||||
Receiver swaptions: |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity (option) |
|
|
|
|
|
$ |
6,795 |
|
$ |
5,770 |
|
$ |
1,025 |
|
– |
|
– |
|
– |
|
– |
|
|||||
Weighted average strike rate |
|
|
|
|
|
3.64 |
% |
3.63 |
% |
3.69 |
% |
– |
|
– |
|
– |
|
– |
|
||||||||
Contractual maturity (swap) |
|
|
|
|
|
– |
|
– |
|
– |
|
$ |
2,850 |
|
$ |
2,595 |
|
$ |
275 |
|
$ |
1,075 |
|
||||
Weighted average receive rate |
|
|
|
|
|
– |
|
– |
|
– |
|
3.31 |
% |
3.74 |
% |
4.26 |
% |
4.15 |
% |
||||||||
Receiver floater swaps: |
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
4,167 |
|
– |
|
– |
|
$ |
4,167 |
|
– |
|
– |
|
– |
|
||||||
Weighted average pay rate |
|
|
|
|
|
3.66 |
% |
– |
|
– |
|
3.66 |
% |
– |
|
– |
|
– |
|
||||||||
Weighted average receive rate |
|
|
|
|
|
4.12 |
% |
– |
|
– |
|
4.12 |
% |
– |
|
– |
|
– |
|
||||||||
Payor floater swaps: |
|
|
(110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
13,667 |
|
– |
|
– |
|
$ |
13,667 |
|
– |
|
– |
|
– |
|
||||||
Weighted average pay rate |
|
|
|
|
|
1.33 |
% |
– |
|
– |
|
1.33 |
% |
– |
|
– |
|
– |
|
||||||||
Weighted average receive rate |
|
|
|
|
|
1.12 |
% |
– |
|
– |
|
1.12 |
% |
– |
|
– |
|
– |
|
||||||||
Receiver market value swaps: |
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
4,141 |
|
– |
|
– |
|
$ |
4,141 |
|
– |
|
– |
|
– |
|
||||||
Payor market value swaps |
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
4,141 |
|
– |
|
– |
|
$ |
4,141 |
|
– |
|
– |
|
– |
|
||||||
Eurodollar futures sale contracts: |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
32,846 |
|
$ |
31,846 |
|
$ |
1,000 |
|
– |
|
– |
|
– |
|
– |
|
|||||
Weighted average price |
|
|
|
|
|
95.18 |
|
95.18 |
|
95.26 |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Treasury futures purchase contracts: |
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
7,631 |
|
$ |
7,631 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average price |
|
|
|
|
|
104.90 |
|
104.90 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Treasury futures options: |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
4,007 |
|
$ |
4,007 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average strike price |
|
|
|
|
|
110.22 |
|
110.22 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Total asset/liability risk management |
|
|
$ |
(306 |
) |
|
$ |
152,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(This table is continued on the next page.)
72
(Continued from the previous page.)
|
|
December 31, 2005 |
|
||||||||||||||||||||||||
|
|
Maturity Range |
|
||||||||||||||||||||||||
|
|
Net
|
|
Total
|
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
After
|
|
||||||||||
|
|
(dollars in millions) |
|
||||||||||||||||||||||||
Interest Rate Risk Management Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
MSR Risk Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Pay-fixed swaps: |
|
|
$ |
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Contractual maturity |
|
|
|
|
|
$ |
960 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
$ |
960 |
|
||||||
Weighted average pay rate |
|
|
|
|
|
4.98 |
% |
– |
|
– |
|
– |
|
– |
|
– |
|
4.98 |
% |
||||||||
Weighted average receive rate |
|
|
|
|
|
4.53 |
% |
– |
|
– |
|
– |
|
– |
|
– |
|
4.53 |
% |
||||||||
Receive-fixed swaps: |
|
|
(75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
10,295 |
|
– |
|
$ |
3,700 |
|
$ |
3,575 |
|
– |
|
$ |
1,600 |
|
$ |
1,420 |
|
|||
Weighted average pay rate |
|
|
|
|
|
4.38 |
% |
– |
|
4.42 |
% |
4.35 |
% |
– |
|
4.35 |
% |
4.41 |
% |
||||||||
Weighted average receive rate |
|
|
|
|
|
4.55 |
% |
– |
|
4.35 |
% |
4.64 |
% |
– |
|
4.54 |
% |
4.88 |
% |
||||||||
Constant maturity mortgage swaps: |
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
100 |
|
– |
|
– |
|
$ |
100 |
|
– |
|
– |
|
– |
|
||||||
Weighted average pay rate |
|
|
|
|
|
5.88 |
% |
– |
|
– |
|
5.88 |
% |
– |
|
– |
|
– |
|
||||||||
Weighted average receive rate |
|
|
|
|
|
5.79 |
% |
– |
|
– |
|
5.79 |
% |
– |
|
– |
|
– |
|
||||||||
Constant maturity mortgage forward rate agreements: |
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
3,000 |
|
$ |
3,000 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average price |
|
|
|
|
|
5.77 |
% |
5.77 |
% |
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Payor swaptions: |
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity (option) |
|
|
|
|
|
$ |
21,325 |
|
$ |
21,325 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average strike rate |
|
|
|
|
|
5.26 |
% |
5.26 |
% |
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Contractual maturity (swap) |
|
|
|
|
|
– |
|
– |
|
– |
|
$ |
2,500 |
|
$ |
3,000 |
|
$ |
1,100 |
|
$ |
14,725 |
|
||||
Weighted average pay rate |
|
|
|
|
|
– |
|
– |
|
– |
|
5.34 |
% |
4.98 |
% |
5.28 |
% |
5.29 |
% |
||||||||
Written payor swaptions: |
|
|
(192 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity (option) |
|
|
|
|
|
$ |
6,600 |
|
– |
|
– |
|
$ |
3,900 |
|
– |
|
$ |
2,700 |
|
– |
|
|||||
Weighted average strike rate |
|
|
|
|
|
5.22 |
% |
– |
|
– |
|
5.03 |
% |
– |
|
5.49 |
% |
– |
|
||||||||
Contractual maturity (swap) |
|
|
|
|
|
– |
|
– |
|
– |
|
– |
|
– |
|
– |
|
$ |
6,600 |
|
|||||||
Weighted average pay rate |
|
|
|
|
|
– |
|
– |
|
– |
|
– |
|
– |
|
– |
|
5.22 |
% |
||||||||
Receiver swaptions: |
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity (option) |
|
|
|
|
|
$ |
19,050 |
|
$ |
19,050 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average strike rate |
|
|
|
|
|
4.79 |
% |
4.79 |
% |
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Contractual maturity (swap) |
|
|
|
|
|
– |
|
– |
|
$ |
2,000 |
|
$ |
1,500 |
|
$ |
2,000 |
|
– |
|
$ |
13,550 |
|
||||
Weighted average receive rate |
|
|
|
|
|
– |
|
– |
|
4.78 |
% |
4.79 |
% |
4.77 |
% |
– |
|
4.79 |
% |
||||||||
Written receiver swaptions: |
|
|
(95 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity (option) |
|
|
|
|
|
$ |
4,200 |
|
– |
|
– |
|
$ |
1,500 |
|
– |
|
$ |
2,700 |
|
– |
|
|||||
Weighted average strike rate |
|
|
|
|
|
4.50 |
% |
– |
|
– |
|
4.50 |
% |
– |
|
4.49 |
% |
– |
|
||||||||
Contractual maturity (swap) |
|
|
|
|
|
– |
|
– |
|
– |
|
– |
|
– |
|
$ |
350 |
|
$ |
3,850 |
|
||||||
Weighted average receive rate |
|
|
|
|
|
– |
|
– |
|
– |
|
– |
|
– |
|
4.85 |
% |
4.46 |
% |
||||||||
Treasury futures purchase contracts: |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
915 |
|
$ |
915 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average price |
|
|
|
|
|
109.05 |
|
109.05 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Treasury futures options: |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
2,646 |
|
$ |
2,646 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average strike price |
|
|
|
|
|
109.91 |
|
109.91 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Forward purchase agreement options: |
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
20 |
|
$ |
20 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average strike price |
|
|
|
|
|
99.27 |
|
99.27 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Forward purchase commitments: |
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
49,895 |
|
$ |
49,895 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average price |
|
|
|
|
|
100.13 |
|
100.13 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Forward sale commitments: |
|
|
(79 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
18,375 |
|
$ |
18,375 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average price |
|
|
|
|
|
99.62 |
|
99.62 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Total MSR risk management |
|
|
$ |
(163 |
) |
|
$ |
137,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(This table is continued on the next page.)
73
(Continued from the previous page.)
|
|
December 31, 2005 |
|
||||||||||||||||||||||||
|
|
Maturity Range |
|
||||||||||||||||||||||||
|
|
Net
|
|
Total
|
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
After
|
|
||||||||||
|
|
(dollars in millions) |
|
||||||||||||||||||||||||
Interest Rate Risk Management Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Other Mortgage Banking Risk Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Forward purchase commitments: |
|
|
$ |
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Contractual maturity |
|
|
|
|
|
$ |
17,078 |
|
$ |
17,078 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average price |
|
|
|
|
|
99.33 |
|
99.33 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Forward sale commitments: |
|
|
(117 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
31,033 |
|
$ |
31,033 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average price |
|
|
|
|
|
99.30 |
|
99.30 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Eurodollar futures sale contracts: |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
37,732 |
|
$ |
31,288 |
|
$ |
4,143 |
|
$ |
1,578 |
|
$ |
511 |
|
$ |
212 |
|
– |
|
||
Weighted average price |
|
|
|
|
|
95.19 |
|
95.18 |
|
95.25 |
|
95.22 |
|
95.11 |
|
95.01 |
|
– |
|
||||||||
Mortgage put options: |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
3,100 |
|
$ |
3,100 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average strike price |
|
|
|
|
|
98.63 |
|
98.63 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Pay-fixed swaps: |
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
6,266 |
|
$ |
915 |
|
$ |
2,340 |
|
$ |
1,335 |
|
$ |
10 |
|
$ |
462 |
|
$ |
1,204 |
|
|
Weighted average pay rate |
|
|
|
|
|
4.38 |
% |
3.22 |
% |
4.62 |
% |
4.47 |
% |
4.00 |
% |
4.55 |
% |
4.62 |
% |
||||||||
Weighted average receive rate |
|
|
|
|
|
4.30 |
% |
4.42 |
% |
4.25 |
% |
4.23 |
% |
4.17 |
% |
4.31 |
% |
4.38 |
% |
||||||||
Receive-fixed swaps: |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
3,660 |
|
$ |
800 |
|
$ |
800 |
|
$ |
750 |
|
– |
|
$ |
775 |
|
$ |
535 |
|
||
Weighted average pay rate |
|
|
|
|
|
4.33 |
% |
4.12 |
% |
4.50 |
% |
4.35 |
% |
– |
|
4.33 |
% |
4.36 |
% |
||||||||
Weighted average receive rate |
|
|
|
|
|
4.22 |
% |
3.34 |
% |
4.13 |
% |
4.23 |
% |
– |
|
4.53 |
% |
5.19 |
% |
||||||||
Payor swaptions: |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity (option) |
|
|
|
|
|
$ |
2,875 |
|
$ |
2,875 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average strike rate |
|
|
|
|
|
5.34 |
% |
5.34 |
% |
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Contractual maturity (swap) |
|
|
|
|
|
– |
|
– |
|
$ |
1,000 |
|
– |
|
– |
|
– |
|
$ |
1,875 |
|
||||||
Weighted average pay rate |
|
|
|
|
|
– |
|
– |
|
– |
|
5.30 |
% |
– |
|
– |
|
5.36 |
% |
||||||||
Receiver swaptions: |
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity (option) |
|
|
|
|
|
$ |
100 |
|
$ |
100 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average strike rate |
|
|
|
|
|
4.64 |
% |
4.64 |
% |
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Contractual maturity (swap) |
|
|
|
|
|
– |
|
– |
|
– |
|
– |
|
– |
|
– |
|
$ |
100 |
|
|||||||
Weighted average receive rate |
|
|
|
|
|
– |
|
– |
|
– |
|
– |
|
– |
|
– |
|
4.64 |
% |
||||||||
Total other mortgage banking risk management |
|
|
$ |
(11 |
) |
|
$ |
101,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total interest rate risk management contracts |
|
|
$ |
(480 |
) |
|
$ |
391,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|||||||||||
|
|
Amortized
|
|
Net
|
|
Fair
|
|
|||||||
|
|
(in millions) |
|
|||||||||||
MSR Risk Management: |
|
|
|
|
|
|
|
|
|
|
|
|||
Available-For-Sale Securities: |
|
|
|
|
|
|
|
|
|
|
|
|||
Mortgage-backed securities – U.S. Government and agency (1) |
|
|
$ |
891 |
|
|
|
$ |
(10 |
) |
|
$ |
881 |
|
Trading Securities: |
|
|
|
|
|
|
|
|
|
|
|
|||
Mortgage-backed securities – U.S. Government and agency |
|
|
n/a |
|
|
|
n/a |
|
|
3,607 |
|
|||
Total MSR risk management securities |
|
|
|
|
|
|
|
|
|
$ |
4,488 |
|
||
(1) Mortgage-backed securities mature after 2010.
74
|
|
December 31, 2004 |
|
||||||||||||||||||||||||||
|
|
Maturity Range |
|
||||||||||||||||||||||||||
|
|
Net
|
|
Total
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
After
|
|
||||||||||||
|
|
(dollars in millions) |
|
||||||||||||||||||||||||||
Interest Rate Risk Management Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Asset/Liability Risk Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Pay-fixed swaps: |
|
|
$ |
(112 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Contractual maturity |
|
|
|
|
|
|
$ |
16,013 |
|
|
$ |
11,780 |
|
$ |
1,433 |
|
$ |
2,800 |
|
– |
|
– |
|
– |
|
||||
Weighted average pay rate |
|
|
|
|
|
|
3.51 |
% |
|
3.08 |
% |
4.18 |
% |
5.01 |
% |
– |
|
– |
|
– |
|
||||||||
Weighted average receive rate |
|
|
|
|
|
|
2.34 |
% |
|
2.39 |
% |
2.13 |
% |
2.24 |
% |
– |
|
– |
|
– |
|
||||||||
Receive-fixed swaps: |
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
|
$ |
19,930 |
|
|
$ |
80 |
|
$ |
1,000 |
|
$ |
10,950 |
|
$ |
850 |
|
$ |
1,150 |
|
$ |
5,900 |
|
|
Weighted average pay rate |
|
|
|
|
|
|
2.53 |
% |
|
0.62 |
% |
2.29 |
% |
2.53 |
% |
2.46 |
% |
2.74 |
% |
2.55 |
% |
||||||||
Weighted average receive rate |
|
|
|
|
|
|
4.35 |
% |
|
5.41 |
% |
6.81 |
% |
3.53 |
% |
3.99 |
% |
4.25 |
% |
5.51 |
% |
||||||||
Interest rate caps: |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
|
$ |
26,075 |
|
|
$ |
3,000 |
|
$ |
19,875 |
|
$ |
3,200 |
|
– |
|
– |
|
– |
|
||||
Weighted average strike rate |
|
|
|
|
|
|
4.38 |
% |
|
3.30 |
% |
4.46 |
% |
4.91 |
% |
– |
|
– |
|
– |
|
||||||||
Interest rate corridors: |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
|
$ |
2,585 |
|
|
$ |
7 |
|
– |
|
– |
|
– |
|
– |
|
$ |
2,578 |
|
|||||
Weighted average strike rate – long cap |
|
|
|
|
|
|
9.80 |
% |
|
5.94 |
% |
– |
|
– |
|
– |
|
– |
|
9.81 |
% |
||||||||
Weighted average strike rate – short cap |
|
|
|
|
|
|
10.09 |
% |
|
7.44 |
% |
– |
|
– |
|
– |
|
– |
|
10.10 |
% |
||||||||
Payor swaptions: |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity (option) |
|
|
|
|
|
|
$ |
500 |
|
|
– |
|
$ |
500 |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average strike rate |
|
|
|
|
|
|
5.30 |
% |
|
– |
|
5.30 |
% |
– |
|
– |
|
– |
|
– |
|
||||||||
Contractual maturity (swap) |
|
|
|
|
|
|
– |
|
|
– |
|
– |
|
$ |
500 |
|
– |
|
– |
|
– |
|
|||||||
Weighted average pay rate |
|
|
|
|
|
|
– |
|
|
– |
|
– |
|
5.30 |
% |
– |
|
– |
|
– |
|
||||||||
Receiver swaptions: |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity (option) |
|
|
|
|
|
|
$ |
1,070 |
|
|
$ |
750 |
|
$ |
320 |
|
– |
|
– |
|
– |
|
– |
|
|||||
Weighted average strike rate |
|
|
|
|
|
|
3.87 |
% |
|
3.92 |
% |
3.75 |
% |
– |
|
– |
|
– |
|
– |
|
||||||||
Contractual maturity (swap) |
|
|
|
|
|
|
– |
|
|
– |
|
– |
|
– |
|
– |
|
– |
|
$ |
1,070 |
|
|||||||
Weighted average receive rate |
|
|
|
|
|
|
– |
|
|
– |
|
– |
|
– |
|
– |
|
– |
|
3.87 |
% |
||||||||
Total asset/liability risk management |
|
|
$ |
136 |
|
|
|
$ |
66,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
(This table is continued on the next page.)
75
(Continued from the previous page.)
|
|
December 31, 2004 |
|
||||||||||||||||||||||||
|
|
Maturity Range |
|
||||||||||||||||||||||||
|
|
Net
|
|
Total
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
After
|
|
||||||||||
|
|
(dollars in millions) |
|
||||||||||||||||||||||||
Interest Rate Risk Management Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
MSR Risk Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Pay-fixed swaps: |
|
|
$ |
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Contractual maturity |
|
|
|
|
|
$ |
4,500 |
|
$ |
3,000 |
|
$ |
1,500 |
|
– |
|
– |
|
– |
|
– |
|
|||||
Weighted average pay rate |
|
|
|
|
|
2.53 |
% |
2.37 |
% |
2.83 |
% |
– |
|
– |
|
– |
|
– |
|
||||||||
Weighted average receive rate |
|
|
|
|
|
2.50 |
% |
2.50 |
% |
2.49 |
% |
– |
|
– |
|
– |
|
– |
|
||||||||
Receive-fixed swaps: |
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
10,310 |
|
– |
|
$ |
600 |
|
– |
|
$ |
255 |
|
$ |
575 |
|
$ |
8,880 |
|
|||
Weighted average pay rate |
|
|
|
|
|
2.31 |
% |
– |
|
2.51 |
% |
– |
|
2.04 |
% |
2.31 |
% |
2.30 |
% |
||||||||
Weighted average receive rate |
|
|
|
|
|
4.74 |
% |
– |
|
3.36 |
% |
– |
|
3.55 |
% |
3.74 |
% |
4.93 |
% |
||||||||
Constant maturity mortgage swaps: |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
100 |
|
– |
|
– |
|
– |
|
$ |
100 |
|
– |
|
– |
|
||||||
Weighted average pay rate |
|
|
|
|
|
5.11 |
% |
– |
|
– |
|
– |
|
5.11 |
% |
– |
|
– |
|
||||||||
Weighted average receive rate |
|
|
|
|
|
5.22 |
% |
– |
|
– |
|
– |
|
5.22 |
% |
– |
|
– |
|
||||||||
Payor swaptions: |
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity (option) |
|
|
|
|
|
$ |
52,200 |
|
$ |
49,150 |
|
$ |
3,050 |
|
– |
|
– |
|
– |
|
– |
|
|||||
Weighted average strike rate |
|
|
|
|
|
5.54 |
% |
5.56 |
% |
5.22 |
% |
– |
|
– |
|
– |
|
– |
|
||||||||
Contractual maturity (swap) |
|
|
|
|
|
– |
|
– |
|
– |
|
$ |
4,950 |
|
$ |
3,800 |
|
– |
|
$ |
43,450 |
|
|||||
Weighted average pay rate |
|
|
|
|
|
– |
|
– |
|
– |
|
4.21 |
% |
4.87 |
% |
– |
|
5.75 |
% |
||||||||
Written receiver swaptions: |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity (option) |
|
|
|
|
|
$ |
7,000 |
|
$ |
7,000 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average strike rate |
|
|
|
|
|
3.44 |
% |
3.44 |
% |
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Contractual maturity (swap) |
|
|
|
|
|
– |
|
– |
|
– |
|
$ |
1,000 |
|
– |
|
– |
|
$ |
6,000 |
|
||||||
Weighted average receive rate |
|
|
|
|
|
– |
|
– |
|
– |
|
2.77 |
% |
– |
|
– |
|
3.56 |
% |
||||||||
Forward purchase commitments: |
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
41,912 |
|
$ |
41,912 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average price |
|
|
|
|
|
99.83 |
|
99.83 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Forward sale commitments: |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
5,655 |
|
$ |
5,655 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average price |
|
|
|
|
|
99.31 |
|
99.31 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Total MSR risk management |
|
|
$ |
405 |
|
|
$ |
121,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
(This table is continued on the next page.)
76
(Continued from the previous page.)
|
|
December 31, 2004 |
|
||||||||||||||||||||||||
|
|
Maturity Range |
|
||||||||||||||||||||||||
|
|
Net
|
|
Total
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
After
|
|
||||||||||
|
|
(dollars in millions) |
|
||||||||||||||||||||||||
Interest Rate Risk Management Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Other Mortgage Banking Risk Management |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Forward purchase commitments: |
|
|
$ |
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Contractual maturity |
|
|
|
|
|
$ |
11,625 |
|
$ |
11,625 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average price |
|
|
|
|
|
101.15 |
|
101.15 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Forward sale commitments: |
|
|
(48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
31,488 |
|
$ |
31,488 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average price |
|
|
|
|
|
101.02 |
|
101.02 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Eurodollar futures sale contracts: |
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
18,530 |
|
$ |
7,446 |
|
$ |
5,914 |
|
$ |
4,267 |
|
$ |
628 |
|
$ |
275 |
|
– |
|
||
Weighted average price |
|
|
|
|
|
96.30 |
|
96.75 |
|
96.19 |
|
95.83 |
|
95.48 |
|
95.13 |
|
– |
|
||||||||
Interest rate corridors: |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
3,439 |
|
– |
|
– |
|
– |
|
$ |
3,439 |
|
– |
|
– |
|
||||||
Weighted average strike rate – long cap |
|
|
|
|
|
3.94 |
% |
– |
|
– |
|
– |
|
3.94 |
% |
– |
|
– |
|
||||||||
Weighted average strike rate – short cap |
|
|
|
|
|
10.00 |
% |
– |
|
– |
|
– |
|
10.00 |
% |
– |
|
– |
|
||||||||
Mortgage put options: |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
1,215 |
|
$ |
1,215 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average strike price |
|
|
|
|
|
101.35 |
|
101.35 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Pay-fixed swaps: |
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
9,371 |
|
$ |
4,840 |
|
$ |
3,280 |
|
$ |
380 |
|
– |
|
$ |
233 |
|
$ |
638 |
|
||
Weighted average pay rate |
|
|
|
|
|
3.08 |
% |
2.79 |
% |
3.10 |
% |
3.33 |
% |
– |
|
3.91 |
% |
4.68 |
% |
||||||||
Weighted average receive rate |
|
|
|
|
|
2.37 |
% |
2.40 |
% |
2.34 |
% |
2.30 |
% |
– |
|
2.27 |
% |
2.38 |
% |
||||||||
Receive-fixed swaps: |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity |
|
|
|
|
|
$ |
1,335 |
|
– |
|
$ |
300 |
|
$ |
400 |
|
– |
|
– |
|
$ |
635 |
|
||||
Weighted average pay rate |
|
|
|
|
|
2.20 |
% |
– |
|
2.05 |
% |
2.13 |
% |
– |
|
– |
|
2.32 |
% |
||||||||
Weighted average receive rate |
|
|
|
|
|
3.84 |
% |
– |
|
2.19 |
% |
3.37 |
% |
– |
|
– |
|
4.91 |
% |
||||||||
Payor swaptions: |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Contractual maturity (option) |
|
|
|
|
|
$ |
6,040 |
|
$ |
6,040 |
|
– |
|
– |
|
– |
|
– |
|
– |
|
||||||
Weighted average strike rate |
|
|
|
|
|
6.39 |
% |
6.39 |
% |
– |
|
– |
|
– |
|
– |
|
– |
|
||||||||
Contractual maturity (swap) |
|
|
|
|
|
– |
|
– |
|
– |
|
– |
|
– |
|
– |
|
$ |
6,040 |
|
|||||||
Weighted average pay rate |
|
|
|
|
|
– |
|
– |
|
– |
|
– |
|
– |
|
– |
|
6.39 |
% |
||||||||
Total other mortgage banking risk management |
|
|
$ |
18 |
|
|
$ |
83,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total interest rate risk management contracts |
|
|
$ |
559 |
|
|
$ |
270,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 |
|
|||||||||||
|
|
Amortized
|
|
Net
|
|
Fair
|
|
|||||||
|
|
(in millions) |
|
|||||||||||
MSR Risk Management: |
|
|
|
|
|
|
|
|
|
|
|
|||
Available-For-Sale Securities: |
|
|
|
|
|
|
|
|
|
|
|
|||
Mortgage-backed securities – U.S. Government and agency (1) |
|
|
$ |
2,137 |
|
|
|
$ |
19 |
|
|
$ |
2,156 |
|
Trading Securities: |
|
|
|
|
|
|
|
|
|
|
|
|||
Mortgage-backed securities – U.S. Government and agency |
|
|
n/a |
|
|
|
n/a |
|
|
3,512 |
|
|||
Total MSR risk management securities |
|
|
|
|
|
|
|
|
|
$ |
5,668 |
|
||
(1) Mortgage-backed securities mature after 2009.
77
Derivative Counterparty Credit Risk
Derivative financial instruments expose the Company to credit risk in the event of nonperformance by counterparties to such agreements. This risk consists primarily of the termination value of agreements where the Company is in a favorable position. Credit risk related to derivative financial instruments is considered and provided for separately from the allowance for loan and lease losses. The Company manages the credit risk associated with its various derivative agreements through counterparty credit review, counterparty exposure limits and monitoring procedures. The Company obtains collateral from certain counterparties for amounts in excess of exposure limits and monitors all exposure and collateral requirements daily. The fair value of collateral received from a counterparty is continually monitored and the Company may request additional collateral from counterparties or return collateral pledged as deemed appropriate. The Company’s agreements generally include master netting agreements whereby the counterparties are entitled to settle their positions “net.” At December 31, 2005 and 2004, the gross positive fair value of the Company’s derivative financial instruments was $792 million and $899 million. The Company’s master netting agreements at December 31, 2005 and 2004 reduced the exposure to this gross positive fair value by $561 million and $266 million. The Company’s collateral against derivative financial instruments was $82 million and $280 million at December 31, 2005 and 2004. Accordingly, the Company’s net exposure to derivative counterparty credit risk at December 31, 2005 and December 31, 2004 was $149 million and $353 million.
The Company accounts for income tax contingencies in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies. The calculation of tax liabilities involves judgment in estimating the impact of uncertainties in the application of complex tax laws. The Company believes that the liabilities that have been recorded are adequate to cover the tax contingencies. Resolution of these uncertainties in a manner inconsistent with the Company’s expectations, however, could have a material impact on its results of operations.
From 1981 through 1985, H.F. Ahmanson & Co. (“Ahmanson”), which was acquired by the Company in 1998, acquired thrift institutions in six states through Federal Savings and Loan Insurance Corporation (“FSLIC”) assisted transactions. Ahmanson sold its branches and abandoned the branching rights it acquired in those states in years prior to December 31, 1998. The Company (as successor to Ahmanson) believes it is entitled to tax deductions at the time the branches were sold and the branching rights were abandoned and the Company has filed refund claims with the Internal Revenue Service (“IRS”) asserting its belief. The IRS has disallowed the claims for refund. The Company filed a claim in the U.S. District Court of Western Washington in January 2006 asserting its rights to such refunds. The potential tax benefit related to the losses on branching rights approximated $200 million, plus interest, as of December 31, 2005.
In addition, the Company believes it is entitled to tax deductions for supervisory goodwill obtained in several FSLIC assisted transactions. The potential benefit for the deduction of supervisory goodwill approximated $550 million, plus interest, as of December 31, 2005. The Company has filed claims with the IRS related to the supervisory goodwill in the amount of $173 million.
No benefit has been recognized in the Company’s Consolidated Financial Statements for the branching rights and supervisory goodwill contingency items discussed above.
On August 9, 1989, the Financial Institutions Reform, Recovery and Enforcement Act was enacted. Among other things, the Act raised the minimum capital requirements for savings institutions and required a phase-out of the amount of supervisory goodwill that could be included in satisfying certain regulatory capital requirements. The exclusion of supervisory goodwill from the regulatory capital of many savings institutions led them to take actions to replace the lost capital either by issuing new qualifying debt or
78
equity securities or to reduce assets. A number of these institutions and their investors subsequently sued the United States Government (the “U.S. Government”) seeking damages based on breach of contract and other theories (collectively “Goodwill Lawsuits”).
To date, trials have been concluded and opinions have been issued in a number of Goodwill Lawsuits in the United States Court of Federal Claims (“Court of Federal Claims”). Generally, in Goodwill Lawsuits in which these opinions on the merits have been issued by the Court of Federal Claims, either the plaintiff(s), the defendant (U.S. Government), or both the plaintiff(s) and the defendant, have opted to appeal the decision to the United State Court of Appeals for the Federal Circuit (“Court of Appeals”). Typically, following completion of these appeals, one or more parties has petitioned the United States Supreme Court (“U.S. Supreme Court”) for a writ of certiorari, but all such petitions have been denied. Generally, the appeals have resulted in the cases being remanded to the Court of Federal Claims for further trial proceedings.
Home Savings
WMB and Washington Mutual are plaintiffs in the Home Savings goodwill litigation by succession to the rights and claims of Home Savings of America FSB (“Home Savings”) and H.F. Ahmanson & Company (the parent company of Home Savings, “Ahmanson”), respectively, in connection with the merger of Ahmanson with and into Washington Mutual and the merger of Home Savings with and into WMB. Plaintiffs have continued to pursue a favorable outcome in the lawsuit originally filed by Home Savings and Ahmanson in September 1992 against the U.S. Government for damages from the exclusion from regulatory capital of supervisory goodwill resulting from Home Savings’ acquisitions of savings institutions in Florida, Missouri, Texas, Illinois, and Ohio, and of Century Federal Savings of New York, over the period from 1981 to 1985.
In the Home Savings goodwill litigation, plaintiffs alleged breaches of contract as well as certain other claims. Although all claims other than the breach of contract claims were dismissed by the Court of Federal Claims, in May 2001, the Court of Federal Claims held that the U.S. Government was liable in damages for the breaches of contract. However, the Court of Federal Claims held that the U.S. Government was not liable with respect to plaintiffs’ acquisition of four state-insured thrifts in Ohio that were merged into Home Savings in 1985. In September 2003, damages for the breaches of contract were awarded to plaintiffs in the amount of approximately $134 million. No portion of this award had been recorded in the Company’s financial statements as of December 31, 2005.
On appeal from these decisions of the Court of Federal Claims, the Court of Appeals, in a decision issued by a unanimous three judge panel, affirmed the trial court’s award of approximately $134 million in damages and vacated the trial court’s determination that no enforceable contract was formed with respect to the four state-insured thrifts in Ohio. After filing a motion for en banc review of the panel decision, which was denied, the U.S. Government did not attempt to seek further review of the decision by the U.S. Supreme Court, and the case has been returned to the Court of Federal Claims for further proceedings with respect to the state-insured thrifts in Ohio. Before the Court of Federal Claims, plaintiffs have attempted both to secure the Court of Federal Claims’ assistance in order to expedite recovery of the $134 million and to obtain a further judgment to remedy the breach of the contract covering the acquisition of the state-insured thrifts.
First, plaintiffs have filed, and the Court of Federal Claims has granted, a motion seeking to have the award in the amount of approximately $134 million designated a partial final judgment. By letter dated January 25, 2006, the Department of Justice certified the partial judgment for payment by the Federal Deposit Insurance Corporation FSLIC Resolution Fund, and payment was received on February 7, 2006.
79
Second, on February 22, 2006, the court entered a summary judgment for plaintiffs in the amount of $16 million in regard to the contract covering the acquisition of the state-insured thrifts. The defendant may ask for reconsideration and/or appeal of that judgment.
American Savings Bank, F.A.
In December 1992, American Savings Bank, Keystone Holdings, Inc. and certain related parties brought a lawsuit against the U.S. Government, alleging, among other things, that in connection with the acquisition of American Savings Bank they entered into a contract with agencies of the United States and that the U.S. Government breached that contract. As a result of the Keystone acquisition, the Company succeeded to all of the rights of American Savings Bank, Keystone Holdings and such related parties in such litigation and will receive any recovery from the litigation.
In connection with the Keystone acquisition, the Company placed 8 million shares of its common stock in escrow. Under the terms of the original escrow arrangement, upon receipt of net cash proceeds from a judgment in or settlement of the litigation, all or part of the escrow shares were to be released, 64.9% to investors in Keystone Holdings or their assigns, and 35.1% to the Federal Deposit Insurance Corporation (“FDIC”) as manager of the Federal Savings and Loan Insurance Corporation Resolution Fund or its assigns.
In the third quarter of 2003, the FDIC agreed to sell its contingent interest in the escrow to Escrow Partners, L.P., a partnership owned by investors in Keystone Holdings. In the fourth quarter of 2003, the Company, Keystone Holdings and Escrow Partners agreed to reduce the escrow to six million shares of its common stock, together with the accumulated dividends and interest earned on the cash held in escrow through that date and to extend the expiration date of the escrow to December 20, 2008, subject to certain limited extensions. As a result, in 2003, a total of 12 million shares of common stock were returned to the Company from the escrow together with $73 million in cash. Approximately $68 million of that cash amount represented dividends paid on the returned shares, which included $53 million paid prior to 2003 and $15 million paid during 2003. Also included was approximately $5 million in interest earned on the cash while in escrow.
Bank United Corp.
On October 4, 2004, the U.S. Supreme Court denied a petition for writ of certiorari filed by the Bank United Litigation Trust regarding a September 22, 2003 judgment. WMB’s only interest in this litigation was reimbursement of litigation costs. As a result of the court proceedings, WMB has received partial reimbursement for litigation costs.
Dime Bancorp, Inc.
In January 1995, Anchor Savings Bank FSB, filed suit against the U.S. Government for unspecified damages involving supervisory goodwill related to its acquisition of eight troubled savings institutions from 1982-1985. Four of the acquisitions involved financial assistance from the U.S. Government, and four did not. The Dime Savings Bank of New York, FSB acquired Anchor Savings Bank shortly after the case was brought and Dime Savings Bank assumed the rights under the litigation against the U.S. Government. Dime Bancorp distributed a Litigation Tracking Warrant ™ (an “LTW”) for each share of its common stock outstanding on December 22, 2000 to each of its shareholders on that date. In January 2002, Dime Savings Bank and Dime Bancorp merged into WMB and the Company. As a result of these mergers, the Company assumed the litigation against the U.S. Government and the LTWs are now, when exercisable, exercisable for shares of the Company’s common stock. The events and conditions that would entitle a holder to exercise an LTW did not change as a result of these mergers and had not yet occurred as of December 31, 2005. For additional information concerning the Dime goodwill litigation and the LTWs, see the Company’s Current Report on Form 8-K, dated March 12, 2003, File No. 1-14667.
80
In a series of decisions issued in 2002, the Court of Federal Claims granted the Company’s summary judgment motions as to contract liability with respect to the four acquisitions involving financial assistance, but granted the U.S. Government’s motions with respect to the four unassisted acquisitions. On September 29, 2003, the Court denied the U.S. Government’s motion for summary judgment with respect to the claim for the Company’s lost profits, but granted the U.S. Government’s motion with respect to the Company’s alternative claims for reliance damages and for the value of the lost supervisory goodwill. A six-week trial on the Company’s lost profits claim was held in June-July 2005, followed by a post-trial briefing which was completed in November 2005. The case now awaits a decision on damages from the trial judge. There can be no assurance or accurate prediction of the timing or the amount of damages that will be awarded by the trial judge. In addition, each of the trial judge’s decisions, including its findings on the U.S. Government’s contract liability and any damages awarded, is subject to appeal.
Litigation is inherently uncertain, and significant uncertainty surrounds the legal issues involved in cases involving supervisory goodwill that underlie the value of the LTWs. The Company cannot accurately predict the timing or amount of any damages, whether the U.S. Government will decide to appeal any of the trial judge’s decisions or the outcome of any appeals. As a result, the Company cannot predict if or when the conditions will be satisfied that will result in holders becoming entitled to exercise their LTWs or the value for which the LTWs will become exercisable.
The following discussion and analysis provides a comparison of the Company’s results of operations between 2004 and 2003. Financial tables within the Earnings Performance from Continuing Operations supplement this discussion.
Corporate Results of Operations
Net Interest Income
For 2004, net interest income decreased $513 million, or 7%, compared with 2003. The decrease resulted primarily from contraction of the net interest margin, which declined 29 basis points from the year ended December 31, 2003. Yields on interest-earning assets declined through the first half of 2004, reflecting the sale and runoff of higher yielding loans and debt securities during that period and diminished levels of refinancing activity, which led to a decline in noninterest-bearing custodial and escrow balances throughout the year. The decline in net interest income was partially offset by growth in home loans and home equity loans and lines of credit balances and by lower rates on interest-bearing Platinum checking accounts and wholesale borrowings.
Noninterest Income
The decrease in total revenue from sales and servicing of home mortgage loans of $587 million, or 30%, from 2003 to 2004 was primarily the result of historical low mortgage interest rates during the first part of 2003 which generated extremely high levels of fixed-rate home loan volume, most of which was the result of refinancing activity. When the industry-wide refinancing boom ended later that year, customer preferences began to shift away from fixed-rate loans to adjustable-rate products. Accordingly, the Company’s fixed-rate home loan volume declined from $270.50 billion in 2003 to $84.10 billion in 2004. Conversely, short-term adjustable-rate loan volume increased from $32.27 billion in 2003 to $70.16 billion in 2004.
The increase in depositor and other retail banking fees in 2003 and 2004 was mostly due to higher levels of checking fees that resulted from an increase in the number of noninterest-bearing checking accounts and an increase in debit card interchange and ATM-related income.
The increase in losses on extinguishment of borrowings in 2003 and 2004 was due to several securities sold under agreements to repurchase (“repurchase agreements”) with embedded pay-fixed swaps that were
81
terminated during the third quarter of 2004, resulting in a net loss on extinguishment of borrowings of $147 million. During the first half of 2004, the Company terminated certain pay-fixed swaps hedging variable rate FHLB advances, resulting in a loss of $90 million. During 2003, the Company restructured certain repurchase agreements containing embedded pay-fixed swaps resulting in a loss of $129 million. Each of these transactions had the immediate effect of reducing the Company’s wholesale borrowing costs.
The decrease in other income from 2003 to 2004 was primarily due to a $100 million fee received from Freddie Mac for swapping certain multi-family loans for 100% of the beneficial interest in those loans in the form of mortgage-backed securities in 2003. In addition, the Company completed the sale of the Ahmanson Ranch property to the Mountains Recreation and Conservation Authority of California for $150 million in the fourth quarter of 2003 which resulted in a gain of $77 million. During 2004 the Company also sold certain commercial loans which resulted in gains of $69 million.
Noninterest Expense
The increase in depositor and other retail banking losses from 2003 to 2004 was largely due to higher levels of overdraft charge-offs, losses from returned deposited checks and a general increase in debit card and check fraud.
The decrease in professional fees from 2003 to 2004 was largely due to a reduction in the use of project consultants.
The decrease in loan expense from 2003 to 2004 was primarily due to an overall reduction in home loan origination volume for the year.
The increase in other expense from 2003 to 2004 was primarily due to lower levels of deferrable consumer and mortgage loan costs, an increase in the accrual for estimated losses related to certain outstanding litigation claims and settlements, higher proprietary mutual funds expense, reinsurance expense and outside services expense.
Operating Segment Results of Operations
Retail Banking and Financial Services Group
The increase in net interest income of $1.15 billion during 2004 was mostly due to higher average balances of home loans and home equity loans and lines of credit. Average home loans increased $23.35 billion, or 27% in 2004, resulting from portfolio growth in short-term adjustable-rate mortgages. Average home equity loans and lines of credit increased $14.70 billion, or 70% in 2004. The increase in noninterest income of $258 million during 2004 was primarily driven by depositor and other retail banking fees that resulted from growth in the number of retail checking accounts, an increase in product fee pricing and higher debit card interchange fees. Noninterest-bearing retail checking accounts increased by approximately 600,000 in 2004. Inter-segment revenue declined by $156 million in 2004 due to lower broker fees received from the Home Loans Group for the origination of mortgage loans, which resulted from the overall decline in refinancing activity during 2004. The increase in noninterest expense of $547 million during 2004 was primarily due to higher employee compensation and benefits expense, occupancy and equipment expense and technology expenses, all of which resulted from expansion of the Group’s distribution network, which included the opening of 250 new retail banking stores in 2004.
Home Loans Group
The decrease in net interest income of $1.14 billion in 2004 was largely driven by a decline in the average balances of loans held for sale and a decline in noninterest-bearing custodial and escrow deposits. This occurred due to a reduction in fixed-rate loan refinancing activity, compared with 2003 when interest rates were at record low levels. Total loan volume in 2004 was $182.21 billion, compared with $374.00 billion in 2003. This decrease was partially offset by lower funding costs. The decrease in
82
noninterest income of $698 million in 2004 was mostly due to lower revenue from sales and servicing of home mortgage loans resulting from lower gain on sale of mortgage loans. The decline of inter-segment expense of $156 million in 2004 resulted from lower broker fees paid to the Retail Banking and Financial Services Group for their origination of mortgage loans. Those originations declined in 2004 as a result of the overall decline in refinancing activity, compared with 2003. The decrease in noninterest expense in 2004 was primarily due to lower occupancy and equipment, technology and compensation expenses resulting from the Company’s cost containment initiative and includes the consolidation of various locations and functions, the conversion to a single loan servicing platform and headcount reductions, which decreased to 13,838 at December 31, 2004 from 22,287 at December 31, 2003.
Net interest income was flat in 2004, compared with 2003, as average loan balances increased by approximately $3.19 billion, or 9% resulting from a shift in product mix towards short-term adjustable-rate and hybrid loans, partially offset by a decrease in investment securities interest income due to sales in 2003. The decrease in the provision for loan and lease losses of $58 million in 2004 was driven by stronger credit performance. During the fourth quarter of 2003 the Company achieved a significant improvement in the risk profile of its loan portfolio by entering into sales transactions to dispose of its franchise finance loan portfolio. These sales led to lower actual charge-offs during 2004 and declining expected charge-off rates for the remaining portfolio of commercial and multi-family loans. The decrease in noninterest income of $149 million in 2004 was substantially due to transactions occurring in the second half of 2003 that resulted in a gain of $68 million recognized from the sale of mortgage-backed securities and a fee of $100 million received as consideration for swapping approximately $6 billion of multi-family loans with Freddie Mac. Noninterest expense increased by $83 million in 2004 primarily due to higher employee compensation and benefits expense and occupancy and equipment expense resulting from increased headcount in Long Beach Mortgage Company.
Corporate Support/Treasury and Other
The increase in net interest expense of $602 million during 2004 was primarily driven by declining average balances of investment securities. The average balances of investment securities declined by $11.98 billion, or 40% in 2004, reflecting the sale of higher yielding securities during that period. The impact of changes in funds transfer pricing rates on Treasury’s operations in 2004, compared with 2003 also contributed to the increase in net interest expense, as lower transfer pricing rates were charged to the segments for the funding of loans. The lower rates were the result of the shift in the balance sheet towards assets with shorter repricing frequencies during 2004. The increase in net interest expense during 2004 was partially offset by a 12% decrease in the average rate paid on interest-bearing liabilities, reflecting the lower interest rate environment that existed during the first half of 2004. The decrease in noninterest income of $793 million in 2004, compared with 2003, was mostly due to gains realized during 2003 from the sale of available-for-sale securities and losses of $237 million from the early termination of certain wholesale borrowings with embedded pay-fixed interest rate swaps during 2004. Noninterest expense was flat in 2004, compared with 2003, as this segment incurred technology-related and restructuring charges resulting from the Company’s cost containment initiative, which began in the fourth quarter of 2003. All such charges incurred from this initiative, which amounted to $274 million in 2004, are charged to this unit. The ensuing decline in headcount in 2004, which resulted from the cost containment initiative, substantially offset the increase. The headcount reductions occurred primarily within the Company’s technology support operations.
Financial Statements and Supplementary Data
For financial statements, see Index to Consolidated Financial Statements on page 87.
83
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
None.
Items 10, 11, 12, 13 and 14 are incorporated by reference from the Company’s definitive proxy statement issued in conjunction with the Company’s Annual Meeting of Shareholders to be held April 18, 2006, except Item 12, “Equity Compensation Plans Information,” which is disclosed below. Certain information regarding the Company’s executive officers is set forth in “Business – Executive Officers.”
Equity Compensation Plans Information
The following table sets forth information regarding the Common Stock that may be issued upon the exercise of options, warrants and other rights granted to employees, directors or consultants under all of the Company’s existing equity compensation plans, as of December 31, 2005.
|
|
(a) |
|
(b) |
|
(c) |
|
|||||||||
Plan Category |
|
|
|
Number of
|
|
|
|
Number of securities
|
|
|||||||
Equity compensation plans approved by security holders |
|
|
36,862,106 |
|
|
|
$ |
35.86 |
|
|
|
26,918,887 |
(2)(3)(4) |
|
||
Equity compensation plans not approved by security holders |
|
|
4,869,410 |
(1) |
|
|
36.59 |
(1) |
|
|
4,142,476 |
(5) |
|
|||
Total |
|
|
41,731,516 |
|
|
|
35.94 |
|
|
|
31,061,363 |
|
|
|||
(1) Represents WAMU Shares Stock Option Plan grants approved by the Company’s Board of Directors. Does not include stock options that were assumed in connection with the Company’s acquisition of certain companies. The assumed options are for the purchase of 8,217,386 shares of Common Stock and have a weighted-average exercise price of $51.98 per share. In the event that any assumed option is not exercised, no further option to purchase shares of Common Stock will be issued in place of such unexercised option.
(2) Includes 2,333,097 shares of Common Stock remaining available for purchase under the Company’s Amended and Restated 2002 Employee Stock Purchase Plan and 22,948,093 shares of Common Stock remaining available for issuance under the 2003 Equity Incentive Plan (“2003 EIP”).
(3) The 2003 EIP provides that each of the Company’s nonemployee directors may receive stock grants or awards at the recommendation of the Governance Committee. See Note 19 to the Consolidated Financial Statements – “Stock-Based Compensation Plans and Shareholder Rights Plans.”
(4) Under the Company’s 2003 EIP, the Company may grant restricted stock or stock units, including performance shares. See Note 19 to the Consolidated Financial Statements – “Stock-Based Compensation Plans and Shareholder Rights Plans.”
(5) Includes shares cancelled and available for issuance under the WAMU Shares Stock Option Plans.
Non-Shareholder Approved Plans
WAMU Shares Stock Option Plans
From time to time, the Board of Directors approves grants of nonqualified stock options to certain groups of employees. The grants have been made pursuant to a series of plans, collectively known as “WAMU Shares.” In 1997, the Board of Directors approved a plan under which eligible employees were granted nonqualified options to purchase the Company’s common stock. On December 15, 1998, the Board adopted a new plan to grant additional nonqualified stock options to eligible employees (“1999 WAMU Shares”). On February 13, 2001, the Board adopted a third plan and granted nonqualified options to eligible employees (“2001 WAMU Shares”). On September 17, 2002, the Board amended the 2001 WAMU Shares Plan to provide for an additional grant of nonqualified options to eligible employees effective September 3, 2002. The aggregate number of shares authorized by the Board of Directors for
84
grants under the WAMU Shares Plans was 14,511,900. On October 16, 2002, the Board amended the 1999 WAMU Shares and the 2001 WAMU Shares plans to allow grants to a broader group of employees, including management, so that some of the authorized but unissued options could be granted to eligible employees as part of the annual grant in December 2002. Generally, eligible full-time and part-time employees on the award dates were granted options to purchase shares of Washington Mutual common stock. The exercise price for all grants is the fair market value of Washington Mutual’s common stock on designated dates, and all options vest one to three years after the award date and expire five to ten years from the award date.
Exhibits, Financial Statement Schedules
(a) (1) Financial Statements
See Index to Consolidated Financial Statements on page 87.
(2) Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or the Notes thereto.
(b) Exhibits:
The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed in the Index of Exhibits to this Annual Report on Form 10-K (pages E-1 through E-5).
85
Pursuant to the requirements of Section 13 or 15(d) 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 March 15, 2006.
|
|
WASHINGTON MUTUAL, INC. |
|
|
/s/ KERRY K. KILLINGER |
|
|
Kerry K. Killinger
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on March 15, 2006.
/s/ KERRY K. KILLINGER |
|
/s/ THOMAS W. CASEY |
Kerry K. Killinger
|
|
Thomas W. Casey
|
/s/ ANNE V. FARRELL |
|
/s/ JOHN F. WOODS |
Anne V. Farrell
|
|
John F. Woods
|
/s/ STEPHEN E. FRANK |
|
/s/ MARY E. PUGH |
Stephen E. Frank
|
|
Mary E. Pugh
|
/s/ THOMAS C. LEPPERT |
|
/s/ WILLIAM G. REED, JR. |
Thomas C. Leppert
|
|
William G. Reed, Jr.
|
/s/ CHARLES LILLIS |
|
/s/ ORIN C. SMITH |
Charles Lillis
|
|
Orin C. Smith
|
/s/ PHILLIP D. MATTHEWS |
|
/s/ JAMES H. STEVER |
Phillip D. Matthews
|
|
James H. Stever
|
/s/ MICHAEL K. MURPHY |
|
/s/ WILLIS B. WOOD, JR. |
Michael K. Murphy
|
|
Willis B. Wood, Jr.
|
/s/ MARGARET OSMER MCQUADE |
|
|
Margaret Osmer McQuade
|
|
|
86
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
87
Management’s Report on Internal Control Over Financial Reporting
The management of Washington Mutual, Inc. and subsidiaries (the “Company”) is responsible for establishing and maintaining effective internal control over financial reporting, including safeguarding of assets. The Company’s internal control structure contains monitoring mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
Management assessed the effectiveness of the Company’s internal control over financial reporting, including safeguarding of assets as of December 31, 2005. This assessment was based on criteria for effective internal control over financial reporting, including safeguarding of assets, described in “Internal Control – Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2005, the Company maintained effective internal control over financial reporting, including safeguarding of assets.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting has been audited by Deloitte & Touche LLP, independent registered public accounting firm, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Their report appears on page 89.
88
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of
Washington Mutual, Inc.
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Washington Mutual, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Int e rnal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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We have also audited, in accordance with the standards of the PCAOB, the consolidated financial statements as of and for the year ended December 31, 2005 of the Company, and our report dated March 8, 2006, expressed an unqualified opinion on those consolidated financial statements.
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Seattle, Washington |
March 8, 2006 |
90
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of
Washington Mutual, Inc.
We have audited the accompanying consolidated statements of financial condition of Washington Mutual, Inc. and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and of cash flows for each of the three years in the period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the PCAOB, the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 8, 2006, expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
|
Seattle, Washington |
March 8, 2006 |
91
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
INCOME
|
|
Year Ended December 31, |
|
|||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
(in millions, except
|
|
|||||||
Interest Income |
|
|
|
|
|
|
|
|||
Loans held for sale |
|
$ |
2,382 |
|
$ |
1,472 |
|
$ |
2,501 |
|
Loans held in portfolio |
|
11,507 |
|
8,825 |
|
7,668 |
|
|||
Available-for-sale securities |
|
998 |
|
764 |
|
1,738 |
|
|||
Trading assets |
|
469 |
|
151 |
|
84 |
|
|||
Other interest and dividend income |
|
232 |
|
138 |
|
172 |
|
|||
Total interest income |
|
15,588 |
|
11,350 |
|
12,163 |
|
|||
Interest Expense |
|
|
|
|
|
|
|
|||
Deposits |
|
3,728 |
|
2,043 |
|
2,165 |
|
|||
Borrowings |
|
3,974 |
|
2,191 |
|
2,369 |
|
|||
Total interest expense |
|
7,702 |
|
4,234 |
|
4,534 |
|
|||
Net interest income |
|
7,886 |
|
7,116 |
|
7,629 |
|
|||
Provision for loan and lease losses |
|
316 |
|
209 |
|
42 |
|
|||
Net interest income after provision for loan and lease losses |
|
7,570 |
|
6,907 |
|
7,587 |
|
|||
Noninterest Income |
|
|
|
|
|
|
|
|||
Revenue from sales and servicing of home mortgage loans |
|
2,030 |
|
1,387 |
|
1,974 |
|
|||
Revenue from sales and servicing of consumer loans |
|
413 |
|
4 |
|
3 |
|
|||
Depositor and other retail banking fees |
|
2,193 |
|
1,999 |
|
1,818 |
|
|||
Credit card fees |
|
139 |
|
– |
|
– |
|
|||
Securities fees and commissions |
|
448 |
|
426 |
|
395 |
|
|||
Insurance income |
|
172 |
|
226 |
|
188 |
|
|||
Portfolio loan related income |
|
387 |
|
401 |
|
439 |
|
|||
Trading assets income (loss) |
|
(257 |
) |
89 |
|
116 |
|
|||
Gain (loss) from other available-for-sale securities |
|
(84 |
) |
50 |
|
676 |
|
|||
Gain (loss) on extinguishment of borrowings |
|
1 |
|
(237 |
) |
(129 |
) |
|||
Other income |
|
296 |
|
267 |
|
370 |
|
|||
Total noninterest income |
|
5,738 |
|
4,612 |
|
5,850 |
|
|||
Noninterest Expense |
|
|
|
|
|
|
|
|||
Compensation and benefits |
|
3,737 |
|
3,428 |
|
3,304 |
|
|||
Occupancy and equipment |
|
1,523 |
|
1,659 |
|
1,592 |
|
|||
Telecommunications and outsourced information services |
|
450 |
|
479 |
|
554 |
|
|||
Depositor and other retail banking losses |
|
226 |
|
195 |
|
154 |
|
|||
Advertising and promotion |
|
327 |
|
276 |
|
278 |
|
|||
Professional fees |
|
182 |
|
158 |
|
267 |
|
|||
Other expense |
|
1,425 |
|
1,340 |
|
1,259 |
|
|||
Total noninterest expense |
|
7,870 |
|
7,535 |
|
7,408 |
|
|||
Income from continuing operations before income taxes |
|
5,438 |
|
3,984 |
|
6,029 |
|
|||
Income taxes |
|
2,006 |
|
1,505 |
|
2,236 |
|
|||
Income from continuing operations, net of taxes |
|
3,432 |
|
2,479 |
|
3,793 |
|
|||
(The Consolidated Statements of Income are continued on the next page.)
See Notes to Consolidated Financial Statements.
92
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
(Continued from the previous page.)
|
|
Year Ended December 31, |
|
|||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
(in millions, except
|
|
|||||||
Discontinued Operations |
|
|
|
|
|
|
|
|||
Income (loss) from discontinued operations before income taxes |
|
– |
|
(32 |
) |
137 |
|
|||
Gain on disposition of discontinued operations |
|
– |
|
676 |
|
– |
|
|||
Income taxes |
|
– |
|
245 |
|
50 |
|
|||
Income from discontinued operations, net of taxes |
|
– |
|
399 |
|
87 |
|
|||
Net Income |
|
$ |
3,432 |
|
$ |
2,878 |
|
$ |
3,880 |
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|||
Income from continuing operations |
|
$ |
3.84 |
|
$ |
2.88 |
|
$ |
4.20 |
|
Income from discontinued operations, net |
|
– |
|
0.46 |
|
0.09 |
|
|||
Net Income |
|
3.84 |
|
3.34 |
|
4.29 |
|
|||
Diluted earnings per common share: |
|
|
|
|
|
|
|
|||
Income from continuing operations |
|
$ |
3.73 |
|
$ |
2.81 |
|
$ |
4.12 |
|
Income from discontinued operations, net |
|
– |
|
0.45 |
|
0.09 |
|
|||
Net Income |
|
3.73 |
|
3.26 |
|
4.21 |
|
|||
Dividends declared per common share |
|
1.90 |
|
1.74 |
|
1.40 |
|
|||
Basic weighted average number of common shares outstanding (in thousands) |
|
894,434 |
|
862,215 |
|
903,666 |
|
|||
Diluted weighted average number of common shares outstanding (in thousands) |
|
919,238 |
|
884,050 |
|
921,757 |
|
See Notes to Consolidated Financial Statements.
93
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF FINANCIAL CONDITION
|
|
December 31, |
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(dollars in millions) |
|
||||
Assets |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
6,214 |
|
$ |
4,455 |
|
Federal funds sold and securities purchased under agreements to resell |
|
2,137 |
|
82 |
|
||
Trading assets (including securities pledged of $3,281 and $2,458) |
|
10,999 |
|
5,588 |
|
||
Available-for-sale securities, total amortized cost of $24,810 and $19,047: |
|
|
|
|
|
||
Mortgage-backed securities (including securities pledged of $3,950 and $5,716) |
|
20,648 |
|
14,923 |
|
||
Investment securities (including securities pledged of $2,773 and $3,344) |
|
4,011 |
|
4,296 |
|
||
Total available-for-sale securities |
|
24,659 |
|
19,219 |
|
||
Loans held for sale |
|
33,582 |
|
42,743 |
|
||
Loans held in portfolio |
|
229,632 |
|
207,071 |
|
||
Allowance for loan and lease losses |
|
(1,695 |
) |
(1,301 |
) |
||
Total loans held in portfolio, net of allowance for loan and lease losses |
|
227,937 |
|
205,770 |
|
||
Investment in Federal Home Loan Banks |
|
4,257 |
|
4,059 |
|
||
Mortgage servicing rights |
|
8,041 |
|
5,906 |
|
||
Goodwill |
|
8,298 |
|
6,196 |
|
||
Other assets |
|
17,715 |
|
13,900 |
|
||
Total assets |
|
$ |
343,839 |
|
$ |
307,918 |
|
Liabilities |
|
|
|
|
|
||
Deposits: |
|
|
|
|
|
||
Noninterest-bearing deposits |
|
$ |
34,014 |
|
$ |
32,780 |
|
Interest-bearing deposits |
|
159,153 |
|
140,878 |
|
||
Total deposits |
|
193,167 |
|
173,658 |
|
||
Federal funds purchased and commercial paper |
|
7,081 |
|
4,045 |
|
||
Securities sold under agreements to repurchase |
|
15,532 |
|
15,944 |
|
||
Advances from Federal Home Loan Banks |
|
68,771 |
|
70,074 |
|
||
Other borrowings |
|
23,777 |
|
18,498 |
|
||
Other liabilities |
|
7,895 |
|
4,473 |
|
||
Total liabilities |
|
316,223 |
|
286,692 |
|
||
Stockholders’ Equity |
|
|
|
|
|
||
Common stock, no par value: 1,600,000,000 shares
authorized,
|
|
– |
|
– |
|
||
Capital surplus – common stock |
|
8,176 |
|
3,350 |
|
||
Accumulated other comprehensive loss |
|
(235 |
) |
(76 |
) |
||
Retained earnings |
|
19,675 |
|
17,952 |
|
||
Total stockholders’ equity |
|
27,616 |
|
21,226 |
|
||
Total liabilities and stockholders’ equity |
|
$ |
343,839 |
|
$ |
307,918 |
|
See Notes to Consolidated Financial Statements.
94
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
|
|
Number
|
|
Capital
|
|
Accumulated
|
|
Retained
|
|
Total |
|
||||||||||||
|
|
(in millions) |
|
||||||||||||||||||||
BALANCE, December 31, 2002 |
|
|
944.0 |
|
|
|
$ |
5,961 |
|
|
|
$ |
175 |
|
|
|
$ |
13,925 |
|
|
$ |
20,061 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income – 2003 |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
3,880 |
|
|
3,880 |
|
||||
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net unrealized loss from securities arising during the year, net of reclassification adjustments |
|
|
– |
|
|
|
– |
|
|
|
(965 |
) |
|
|
– |
|
|
(965 |
) |
||||
Net unrealized gain from cash flow hedging
|
|
|
– |
|
|
|
– |
|
|
|
270 |
|
|
|
– |
|
|
270 |
|
||||
Minimum pension liability adjustment |
|
|
– |
|
|
|
– |
|
|
|
(4 |
) |
|
|
– |
|
|
(4 |
) |
||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,181 |
|
||||
Cash dividends declared on common stock |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(1,274 |
) |
|
(1,274 |
) |
||||
Cash dividends returned (1) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
53 |
|
|
53 |
|
||||
Common stock repurchased and retired |
|
|
(65.9 |
) |
|
|
(2,699 |
) |
|
|
– |
|
|
|
– |
|
|
(2,699 |
) |
||||
Common stock returned from escrow |
|
|
(12.0 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
– |
|
||||
Common stock issued |
|
|
14.9 |
|
|
|
420 |
|
|
|
– |
|
|
|
– |
|
|
420 |
|
||||
BALANCE, December 31, 2003 |
|
|
881.0 |
|
|
|
3,682 |
|
|
|
(524 |
) |
|
|
16,584 |
|
|
19,742 |
|
||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income – 2004 |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
2,878 |
|
|
2,878 |
|
||||
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net unrealized gain from securities arising during the year, net of reclassification adjustments |
|
|
– |
|
|
|
– |
|
|
|
198 |
|
|
|
– |
|
|
198 |
|
||||
Net unrealized gain from cash flow hedging instruments |
|
|
– |
|
|
|
– |
|
|
|
256 |
|
|
|
– |
|
|
256 |
|
||||
Minimum pension liability adjustment |
|
|
– |
|
|
|
– |
|
|
|
(6 |
) |
|
|
– |
|
|
(6 |
) |
||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,326 |
|
||||
Cash dividends declared on common stock |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(1,510 |
) |
|
(1,510 |
) |
||||
Common stock repurchased and retired |
|
|
(16.1 |
) |
|
|
(712 |
) |
|
|
– |
|
|
|
– |
|
|
(712 |
) |
||||
Common stock issued |
|
|
9.4 |
|
|
|
380 |
|
|
|
– |
|
|
|
– |
|
|
380 |
|
||||
BALANCE, December 31, 2004 |
|
|
874.3 |
|
|
|
3,350 |
|
|
|
(76 |
) |
|
|
17,952 |
|
|
21,226 |
|
||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income – 2005 |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
3,432 |
|
|
3,432 |
|
||||
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net unrealized loss from securities arising during the year, net of reclassification adjustments |
|
|
– |
|
|
|
– |
|
|
|
(198 |
) |
|
|
– |
|
|
(198 |
) |
||||
Net unrealized gain from cash flow hedging instruments |
|
|
– |
|
|
|
– |
|
|
|
40 |
|
|
|
– |
|
|
40 |
|
||||
Minimum pension liability adjustment |
|
|
– |
|
|
|
– |
|
|
|
(1 |
) |
|
|
– |
|
|
(1 |
) |
||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,273 |
|
||||
Cash dividends declared on common stock |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(1,709 |
) |
|
(1,709 |
) |
||||
Common stock repurchased and retired |
|
|
(23.8 |
) |
|
|
(921 |
) |
|
|
– |
|
|
|
– |
|
|
(921 |
) |
||||
Common stock issued for acquisition |
|
|
127.0 |
|
|
|
5,030 |
|
|
|
– |
|
|
|
– |
|
|
5,030 |
|
||||
Fair value of Providian stock options |
|
|
– |
|
|
|
140 |
|
|
|
– |
|
|
|
– |
|
|
140 |
|
||||
Common stock issued |
|
|
16.4 |
|
|
|
577 |
|
|
|
– |
|
|
|
– |
|
|
577 |
|
||||
BALANCE, December 31, 2005 |
|
|
993.9 |
|
|
|
$ |
8,176 |
|
|
|
$ |
(235 |
) |
|
|
$ |
19,675 |
|
|
$ |
27,616 |
|
(1) Represents accumulated dividends on shares returned from escrow.
See Notes to Consolidated Financial Statements.
95
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CASH FLOWS
|
|
Year Ended December 31, |
|
|||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
(in millions) |
|
|||||||
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|||
Net income |
|
$ |
3,432 |
|
$ |
2,878 |
|
$ |
3,880 |
|
Income from discontinued operations, net of taxes |
|
– |
|
(399 |
) |
(87 |
) |
|||
Income from continuing operations |
|
3,432 |
|
2,479 |
|
3,793 |
|
|||
Adjustments to reconcile income from continuing operations to net cash (used) provided by operating activities: |
|
|
|
|
|
|
|
|||
Provision for loan and lease losses |
|
316 |
|
209 |
|
42 |
|
|||
Gain from mortgage loans |
|
(807 |
) |
(649 |
) |
(1,250 |
) |
|||
Gain from credit card loans |
|
(103 |
) |
– |
|
– |
|
|||
Loss (gain) from available-for-sale securities |
|
41 |
|
(52 |
) |
(996 |
) |
|||
(Gain) loss on extinguishment of borrowings |
|
(1 |
) |
237 |
|
129 |
|
|||
Depreciation and amortization |
|
2,656 |
|
3,169 |
|
3,864 |
|
|||
Provision for mortgage servicing rights (reversal) impairment |
|
(944 |
) |
466 |
|
(712 |
) |
|||
Stock dividends from Federal Home Loan Banks |
|
(146 |
) |
(40 |
) |
(113 |
) |
|||
Deferred interest income from option adjustable-rate mortgages |
|
(316 |
) |
(19 |
) |
(7 |
) |
|||
Origination and purchases of loans held for sale, net of principal payments |
|
(165,424 |
) |
(148,332 |
) |
(315,106 |
) |
|||
Proceeds from sales of loans held for sale |
|
166,997 |
|
127,429 |
|
323,570 |
|
|||
Net increase in trading assets |
|
(3,227 |
) |
(4,176 |
) |
(1,045 |
) |
|||
(Increase) decrease in other assets |
|
(4,087 |
) |
624 |
|
(63 |
) |
|||
Increase (decrease) in other liabilities |
|
3,378 |
|
(1,060 |
) |
(1,038 |
) |
|||
Net cash provided (used) by operating activities |
|
1,765 |
|
(19,715 |
) |
11,068 |
|
|||
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|||
Purchases of securities |
|
(22,501 |
) |
(5,586 |
) |
(41,052 |
) |
|||
Proceeds from sales and maturities of mortgage-backed securities |
|
9,558 |
|
2,149 |
|
12,740 |
|
|||
Proceeds from sales and maturities of other available-for-sale securities |
|
6,697 |
|
22,151 |
|
28,425 |
|
|||
Principal payments on securities |
|
3,571 |
|
3,306 |
|
9,422 |
|
|||
Purchases of Federal Home Loan Bank stock |
|
(163 |
) |
(1,742 |
) |
(336 |
) |
|||
Redemption of Federal Home Loan Bank stock |
|
111 |
|
1,185 |
|
719 |
|
|||
Proceeds from sale of mortgage servicing rights |
|
– |
|
– |
|
638 |
|
|||
Origination and purchases of loans held in portfolio |
|
(99,820 |
) |
(120,012 |
) |
(114,828 |
) |
|||
Principal payments on loans held in portfolio |
|
89,437 |
|
80,704 |
|
83,822 |
|
|||
Proceeds from sales of loans held in portfolio |
|
940 |
|
844 |
|
1,429 |
|
|||
Proceeds from sales of foreclosed assets |
|
413 |
|
453 |
|
479 |
|
|||
Net (increase) decrease in federal funds sold and securities purchased under agreements to resell |
|
(1,718 |
) |
(63 |
) |
1,996 |
|
|||
Net cash used for acquisitions |
|
(536 |
) |
– |
|
– |
|
|||
Purchases of premises and equipment, net |
|
(607 |
) |
(585 |
) |
(1,053 |
) |
|||
Proceeds from sale of real estate held for investment |
|
– |
|
– |
|
149 |
|
|||
Proceeds from sale of discontinued operations, net of cash sold |
|
– |
|
1,223 |
|
– |
|
|||
Net cash used by investing activities |
|
(14,618 |
) |
(15,973 |
) |
(17,450 |
) |
|||
See Notes to Consolidated Financial Statements.
96
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(The Consolidated Statements of Cash Flows are continued on the next page.)
(Continued from the previous page.)
|
|
Year Ended December 31, |
|
|||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
(in millions) |
|
|||||||
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|||
Increase (decrease) in deposits |
|
10,911 |
|
20,477 |
|
(2,335 |
) |
|||
(Decrease) increase in short-term borrowings |
|
(1,156 |
) |
(4,530 |
) |
17,440 |
|
|||
Proceeds from long-term borrowings |
|
18,782 |
|
5,664 |
|
10,761 |
|
|||
Repayments of long-term borrowings |
|
(10,397 |
) |
(8,234 |
) |
(13,087 |
) |
|||
Proceeds from advances from Federal Home Loan Banks |
|
71,701 |
|
89,837 |
|
91,973 |
|
|||
Repayments of advances from Federal Home Loan Banks |
|
(73,000 |
) |
(68,177 |
) |
(94,885 |
) |
|||
Cash dividends paid on common stock |
|
(1,709 |
) |
(1,510 |
) |
(1,274 |
) |
|||
Cash dividends returned |
|
– |
|
– |
|
68 |
|
|||
Repurchase of common stock |
|
(921 |
) |
(712 |
) |
(2,699 |
) |
|||
Other |
|
401 |
|
310 |
|
354 |
|
|||
Net cash provided by financing activities |
|
14,612 |
|
33,125 |
|
6,316 |
|
|||
Increase (decrease) in cash and cash equivalents |
|
1,759 |
|
(2,563 |
) |
(66 |
) |
|||
Cash and cash equivalents, beginning of year |
|
4,455 |
|
7,018 |
|
7,084 |
|
|||
Cash and cash equivalents, end of year |
|
$ |
6,214 |
|
$ |
4,455 |
|
$ |
7,018 |
|
Noncash Activities |
|
|
|
|
|
|
|
|||
Loans exchanged for available-for-sale mortgage-backed securities |
|
$ |
1,366 |
|
$ |
4,712 |
|
$ |
2,854 |
|
Real estate acquired through foreclosure |
|
429 |
|
408 |
|
479 |
|
|||
Loans transferred from (to) held for sale to (from) held in portfolio, net |
|
4,962 |
|
(5,996 |
) |
2,165 |
|
|||
Common stock issued for acquisition |
|
5,030 |
|
– |
|
– |
|
|||
Cash Paid During the Year For |
|
|
|
|
|
|
|
|||
Interest on deposits |
|
3,555 |
|
1,991 |
|
2,193 |
|
|||
Interest on borrowings |
|
3,668 |
|
2,186 |
|
2,427 |
|
|||
Income taxes |
|
1,586 |
|
2,593 |
|
2,829 |
|
See Notes to Consolidated Financial Statements.
97
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
Basis of Presentation
Washington Mutual, Inc. (together with its subsidiaries, “Washington Mutual” or the “Company”) is a financial services company committed to serving consumers and small businesses. The Company accepts deposits from the general public, originates, purchases, services and sells home loans, makes consumer (predominantly credit card), home equity and commercial real estate loans (primarily loans secured by multi-family properties), and, to a lesser extent, engages in certain commercial banking activities such as providing credit facilities and cash management and deposit services. The Company also originates, purchases from correspondents, sells and services home loans to subprime borrowers. The Company also markets annuities and other insurance products, offers securities brokerage services and acts as the investment advisor to, and the distributor of, mutual funds.
The Consolidated Financial Statements include the accounts of Washington Mutual, Inc. and its majority-owned subsidiaries as well as those entities which are considered to be variable interest entities in which the Company is the primary beneficiary. Investments in unconsolidated entities are accounted for using the equity method of accounting when the Company has the ability to exercise significant influence over the operations of the investee (which generally occurs when the Company holds at least 20% of the investee’s voting common stock). Investments not meeting the criteria for equity method accounting are accounted for using the cost method of accounting. Investments in unconsolidated entities are included in other assets, and the Company’s share of income or loss is recorded in other noninterest income.
The Company’s financial reporting and accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”). Certain amounts in prior periods have been reclassified to conform with the current period’s presentation. All intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management has made significant estimates in certain areas, including valuing certain financial instruments and other assets and the allowance for loan and lease losses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For the purpose of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, U.S. Treasury bills, overnight investments and commercial paper with an initial maturity of three months or less.
Trading Assets
Securities that are acquired principally for the purpose of resale and certain retained interests arising from securitization activities are classified as trading assets. Such assets are carried at fair value, and realized and unrealized gains and losses are recorded in the trading assets income (loss) line item within noninterest income.
Securities
Securities not classified as held to maturity or trading are considered to be available-for-sale and are reported at their fair value, with unrealized gains and losses calculated using the specific identification method, and reported, net of applicable taxes, as a component of accumulated other comprehensive
98
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
income. Realized gains and losses on the sale of these securities are determined using the specific identification method and are currently recorded in noninterest income. Securities are classified as held to maturity only if the Company has the positive intent and ability to hold those securities to maturity. Currently the Company does not classify any securities as held to maturity, although it may elect to do so in the future.
For most of the Company’s investments in securities, interest income is recognized using the interest method. Deferred items, including premiums, discounts and other basis adjustments, are amortized into interest income over the estimated lives of the securities. The Company uses contractual payment terms to determine the constant yield needed to apply the interest method.
For certain of the Company’s investments, including those classified as trading, interest income is recognized using a prospective interest method in accordance with Emerging Issues Task Force (“EITF”) No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interest in Securitized Financial Assets . The Company specifically applies such guidance to beneficial interests (including undivided interests which are similar to beneficial interests) in securitized financial assets that (a) can contractually be prepaid or otherwise settled in such a way that the Company may not recover substantially all of its recorded investment (such as interest-only strips) or (b) are not of high credit quality at the acquisition date. EITF No. 99-20 requires that the Company recognize as interest income (throughout the life of a retained interest) the excess of all estimated cash flows attributable to these interests over its principal amount using the effective yield method. The Company updates its estimates of expected cash flows periodically and recognizes changes in calculated effective yield on a prospective basis.
The Company monitors its available-for-sale investment portfolio for impairment. The Company considers many factors in determining whether the impairment is deemed to be other-than-temporary, including but not limited to the length of time the security has had a market value less than the cost basis, the severity of the loss, the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value, recent events specific to the issuer or industry including the issuer’s financial condition and current ability to make future payments in a timely manner, external credit ratings and recent downgrades in such ratings. Other-than-temporary declines in fair value are recognized in the income statement as losses from other available-for-sale securities.
Loans Held for Sale
Loans held for sale are accounted for at the lower of cost or fair value and include loans originated or purchased from correspondent lenders that the Company intends to sell in the secondary market. Direct loan origination costs or fees, discounts and premiums, are deferred at origination of the loan. For credit card loans, the amount classified as held for sale is estimated based on expected future sale activity. The Company enters into various interest rate contracts to manage interest rate risk associated with loans held for sale. For those loans that qualify for fair value hedge accounting under Statement of Financial Accounting Standards (“Statement”) No. 133, Accounting for Derivative Instruments and Hedging Activities , as amended, changes in the fair value of the loans are recognized in earnings in the period of change together with the offsetting change in fair value related to the hedging derivative.
Loans Held in Portfolio
Loans held in portfolio are recorded at the principal amount outstanding, net of deferred loan costs or fees and any discounts received or premiums paid on purchased loans. Deferred costs or fees, discounts and premiums are amortized over the contractual term of the loan, adjusted for actual prepayments, using the interest method, except credit card loans which are amortized using the straight line method over one year. The Company uses contractual payment terms to determine the constant yield needed to apply the
99
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
interest method. As part of the Company’s management of loans held in portfolio, the Company will occasionally transfer loans from held in portfolio to held for sale. The process for identifying such loans includes evaluating credit quality and determining if the loan yield continues to be in alignment with the Company’s risk-adjusted return on equity targets. Upon transfer, the cost basis of those loans is reduced by the amount of the loan loss allowance allocable to the transferred loans, and the loans are accounted for at the lower of cost or fair value, with any subsequent declines in fair value below their cost basis recorded as a reduction in the gain on sale of the loans.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses represents management’s estimate of incurred credit losses inherent in the Company’s loan and lease portfolios as of the balance sheet date. The estimation of the allowance is based on a variety of factors, including past loan loss experience, the current credit profile of the Company’s borrowers, adverse situations that have occurred that may affect the borrowers’ ability to repay, the estimated value of underlying collateral, the interest rate climate as it affects adjustable-rate loans and general economic conditions. The allowance provides for incurred losses that are inherent in the loan portfolio. Losses are recognized when (a) available information indicates that it is probable that a loss has been incurred and (b) the amount of the loss can be reasonably estimated.
In determining the allowance for loan and lease losses, the Company allocates a portion of the allowance to its various loan product categories based on an analysis of individual loans and pools of loans. However, the entire allowance (both the allocated component and the portion that remains unallocated) is available to absorb credit losses inherent in the total loan portfolio as of the balance sheet date.
The allocated allowance for homogeneous loans (such as home loans, home equity loans and lines of credit, purchased subprime loans and credit card loans) is determined using statistical forecasting models that estimate default and loss outcomes based on an evaluation of past performance of loans in the Company’s portfolio and other factors as well as industry historical loan loss data.
Non-homogeneous loans (such as multi-family and non-residential real estate loans) are individually reviewed and assigned a risk grade. The loans are then categorized by their risk grade into pools with each pool having a loss factor commensurate with the applicable level of estimated risk. Loss factors are then multiplied by the unpaid principal balance of loans in each pool to determine the allocated allowance applicable to that pool.
The Company also evaluates certain loans on an individual basis for impairment (as defined by Statement No. 114, Accounting by Creditors for Impairment of a Loan ) and records an allowance for impaired loans as appropriate. Such loans are excluded from other loan loss analyses so as to avoid double counting the loss exposure.
The unallocated component of the allowance reflects management’s assessment of various risk factors that are not adequately reflected in the models used to determine the allocated component of the allowance. These factors include general economic and business conditions specific to the key lending products and markets of the Company, credit quality and collateral value trends, loan concentrations, specific industry conditions within portfolio segments, recent loss experience in particular segments of the portfolio, duration of the current business cycle and the impact of new product initiatives and other such variables for which recent historical data do not provide a high level of precision for risk evaluation.
When available information confirms that specific loans or portions thereof are uncollectible, these amounts are charged off against the allowance for loan and lease losses. The existence of some or all of the following conditions will generally confirm that a loss has been incurred: the loan is significantly delinquent and the borrower has not demonstrated the ability to bring the loan current; the borrower has insufficient
100
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
assets to repay the debt; or the fair value of the loan collateral is significantly below the current loan balance and there is little or no prospect for improvement.
Impaired Loans
Loans, other than those included in homogeneous portfolios, are considered impaired when it is probable that the Company will be unable to collect all amounts past due, including interest payments. For loans that are determined to be impaired, the amount of impairment is measured by a discounted cash flow analysis, using the loan’s effective interest rate, except when it is determined that the only source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current fair value of the collateral, reduced by estimated disposal costs, will be used in place of discounted cash flows. In estimating the fair value of collateral, the Company evaluates various factors, such as occupancy and rental rates in the relevant real estate markets.
Reserve for Contingent Credit Risk Liabilities
In the ordinary course of business, the Company sells loans to third parties but retains credit risk exposure on those loans. When loans are sold with retained credit risk provisions attached to the sale, the Company commits to stand ready to perform, if the loan defaults, by making payments to remedy the default or repurchasing the loan. The Company also sells loans without retained credit risk that it may be required to repurchase for violation of a representation or warranty made in connection with the sale of the loan that has a material adverse effect on the value of the loan, or if the Company agreed to repurchase the loan in the event of a first payment or early payment default. When a loan sold to an investor without retained credit risk fails to perform according to its contractual terms, the investor will typically review the loan file to search for errors that may have been made in the process of originating the loan. If errors are discovered and it is determined that such errors constitute a violation of a representation or warranty made to the investor in connection with the loan’s sale, then the Company will be required to either repurchase the loan or indemnify the investor for losses sustained if the violation had a material adverse effect on the value of the loan.
In 2004 and 2005, the Company’s Long Beach Mortgage Company subsidiary engaged in whole loan sale transactions of originated subprime loans in which it agreed to repurchase from the investor each “early payment default” loan at a price equal to the loan’s face value plus the amount of any premium paid by the investor. An early payment default occurs when the borrower fails to make the first post-sale payment due on the loan by a contractually specified date. Usually when such an event occurs, the fair value of the loan at the time of its repurchase is lower than the face value.
Reserves are established for the Company’s exposure to these contingent credit risk liabilities in the aforementioned circumstances when it becomes probable that a loss has been incurred and the amount can be reasonably estimated. Throughout the life of these contingent credit risk liabilities, the Company may learn of additional information that can affect the assessment of loss probability or the estimation of the amounts involved. Changes in these assessments can lead to significant changes in the recorded reserves. Contingent credit risk liabilities are recorded within other liabilities on the Consolidated Statements of Financial Condition, and losses are recorded on the Consolidated Statements of Income under the noninterest income caption “Revenue from sales and servicing of home mortgage loans.”
Nonaccrual Loans
Loans for which interest is not being accrued are referred to as loans on nonaccrual status. Mortgage loans are generally placed on nonaccrual status when they are 90 days past due. Home loans secured by real estate, including home equity loans and lines of credit, are written down to the fair value of the underlying collateral (less projected cost to sell) when they are 180 days past due. Additionally, mortgage
101
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
loans in non-homogeneous portfolios, such as commercial real estate loans, are placed on nonaccrual status prior to becoming 90 days past due when payment in full of principal or interest is not expected. When a loan is placed on nonaccrual status, all interest accrued, but not collected, is reversed.
Credit card loans are charged-off when they are determined to be uncollectible or by the end of the month in which the account becomes 180 days past due. When it is considered probable that certain amounts of interest that are accrued during the delinquency period are not collectible, a reserve for uncollectible interest is established. This reserve is recorded as a separate liability and changes to this reserve are recorded in interest income. For loans which the customer has remitted three timely payments for at least the minimum payment amount, or has remitted one payment that is equivalent to at least three minimum payments, the aging of the loan is returned to current status.
Loans in homogeneous portfolios are returned to accrual status when the borrower brings the loan to less than 30 days past due. Additionally, loans in the non-homogeneous portfolio are returned to accrual status when, in management’s opinion, projected cash proceeds are sufficient to repay both principal and interest.
Restructured Loans
In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a restructured (accruing) loan. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified are not considered to be impaired loans in the calendar years subsequent to the restructuring.
Generally, restructured loans in the non-homogeneous portfolios remain on nonaccrual for a period of six months to demonstrate that the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower will be able to comply with the new terms and may result in the loan being returned to accrual at the time of restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan.
Foreclosed Assets
Foreclosed assets are accounted for at the lower of fair value (less estimated costs to sell) or cost. The amount the Company ultimately recovers from foreclosed assets may differ substantially from the net carrying value of these assets because of future market factors beyond the Company’s control or because of changes in the Company’s strategy for sale of the property.
Investment in Federal Home Loan Banks
The Company’s investment in the stock of the Federal Home Loan Banks (“FHLBs”) is carried at cost since it is not a readily marketable security. Periodically and as conditions warrant, the Company reviews its investment in FHLB stock for impairment and adjusts the carrying value if the investment is determined to be impaired.
Derivatives and Hedging Activities
Generally, derivatives are financial instruments with little or no initial net investment in comparison to their notional amount and whose value is based upon an underlying asset, index, reference rate or other variable. They may be privately negotiated contractual agreements that can be customized to meet specific needs, including certain commitments to purchase and sell mortgage loans, mortgage-related securities and debt securities, or they may be standardized contracts executed through organized exchanges. All derivatives are reported at their fair value on the Consolidated Statements of Financial Condition.
102
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company enters into derivative contracts to manage the various risks associated with certain assets, liabilities, or probable forecasted transactions. On the date the Company enters into a derivative contract, the derivative instrument is designated as: (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (a “fair value” hedge); (2) a hedge of the variability in expected future cash flows associated with an existing recognized asset or liability or a probable forecasted transaction (a “cash flow” hedge); or (3) held for other risk management purposes (“risk management derivatives”).
In a fair value hedge, changes in the fair value of the hedging derivative are recognized in earnings and offset by recognizing changes in the fair value of the hedged item attributable to the risk being hedged. To the extent that the hedge is ineffective, the changes in fair value will not offset and the difference is reflected in earnings.
In a cash flow hedge, the effective portion of the change in the fair value of the hedging derivative is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings during the same period in which the hedged item affects earnings. The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings.
When applying the principles of fair value or cash flow hedge accounting as prescribed by Statement No. 133, Accounting for Derivative Instruments and Hedging Activities , as amended, the Company uses standard statistical methods of correlation to determine if the results of the changes in value of the hedging derivative and the hedged item meet the Statement No. 133, as amended, criteria for a highly effective hedge accounting relationship. For certain types of hedge relationships meeting specific criteria, Statement No. 133’s “shortcut” method provides for an assumption of zero ineffectiveness. Under the shortcut method, the periodic assessment of effectiveness is not required, and the entire change in the fair value of the hedging derivative is considered to be effective at achieving offsetting changes in fair values or cash flows of the hedged item. The Company’s use of this method is limited to interest rate swaps that hedge certain borrowings and available-for-sale investment securities. When applying this method, all of the critical terms of the interest rate swaps and the hedged items are documented at the inception of the hedging relationship.
Risk management derivatives are used as economic hedges in which the Company either has not attempted to achieve, or has attempted but did not achieve, the highly effective hedge accounting standard under Statement No. 133, as amended. The changes in fair value of these instruments are recorded in revenue from sales and servicing of home mortgage loans if the derivatives are home loan mortgage banking related or are recorded in other income for derivatives related to other types of asset/liability interest rate risk management.
The Company formally documents the relationship between the hedging instruments and hedged items, as well as its risk management objective and strategy before initiating a hedge. To qualify for hedge accounting, the derivatives and related hedged items must be designated as a hedge. For hedging relationships in which effectiveness is measured, the correlations between the hedging instruments and hedged items are assessed at inception of the hedge and on an ongoing basis, which includes determining whether the hedge relationship is expected to be highly effective in offsetting changes in fair value or cash flows of hedged items.
The Company discontinues hedge accounting when (1) it determines that the derivative is no longer expected to be effective in offsetting changes in the fair value or cash flows of the designated hedged item; (2) the derivative expires or is sold, terminated, or exercised; (3) the derivative is de-designated as a fair
103
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
value or cash flow hedge; or (4) it is not probable that the forecasted transaction will occur by the end of the originally specified time period.
If the Company determines that the derivative no longer qualifies as a fair value or cash flow hedge and therefore hedge accounting is discontinued, the derivative (if retained) will continue to be recorded on the balance sheet at its fair value with changes in fair value included in current earnings. For a discontinued fair value hedge, the previously hedged item no longer is adjusted for changes in fair value.
When hedge accounting is discontinued because it is not probable that a forecasted transaction will occur, the derivative will continue to be recorded on the balance sheet at its fair value with changes in fair value included in current earnings, and the gains and losses in accumulated other comprehensive income will be recognized immediately in earnings. When hedge accounting is discontinued because the hedging instrument is sold, terminated or de-designated as a hedge, the amount reported in accumulated other comprehensive income through the date of sale, termination, or de-designation will continue to be reported in accumulated other comprehensive income until the forecasted transaction affects earnings.
The Company occasionally enters into contracts that contain an embedded derivative instrument. At inception of the contract, the Company determines whether such an embedded derivative instrument is required to be accounted for separately from its host contract. Under Statement No. 133, as amended, an embedded derivative instrument must be separated from its host contract and accounted for separately if it is determined the instrument is not clearly and closely related to the host contract; the host contract is not currently measured at fair value with changes in fair value reported in earnings; and the embedded derivative instrument separately would qualify as a derivative instrument. As of December 31, 2005, 2004 and 2003, the Company’s embedded derivatives were considered clearly and closely related to the host contracts and therefore were not required to be separated from their host contracts.
When the Company securitizes loans, it may attach a derivative financial instrument to partly, but not excessively, counteract interest rate risk associated with those securitized loans. It is the Company’s general practice to sell its beneficial interests in such securitized loans to parties other than itself, its affiliates, or its agents upon securitization and to forgo its rights, if any, to the cash flows that it is otherwise entitled to receive from the attached derivative.
The Company enters into commitments to originate loans whereby the interest rate on the loan is set prior to funding (rate lock commitments). The Company also enters into commitments to purchase mortgage loans through its correspondent channel (purchase commitments). Both rate lock and purchase commitments on mortgage loans that are intended to be sold are considered to be derivatives. In addition, purchase commitments for mortgage loans that will be held for investment purposes generally qualify as derivatives. Rate lock and purchase commitments that are considered to be derivatives are recorded, at fair value, in other assets or other liabilities on the Consolidated Statements of Financial Condition, with changes in fair value recorded in gain from mortgage loans on the Consolidated Statements of Income. The amount of the expected servicing rights is not included when determining the fair value of interest rate lock commitments that are derivatives. Both rate lock and purchase commitments expose the Company to interest rate risk. The Company manages that risk by entering into various interest rate derivative contracts. The changes in fair value of these contracts are reported in revenue from sales and servicing of home mortgage loans.
104
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Transfers and Servicing of Financial Assets
Washington Mutual securitizes, sells and services interests in residential home loans, credit card loans and commercial real estate loans. When the Company sells or securitizes loans, it generally retains the right to service the loans and may retain senior, subordinated, residual, or other interests, all of which are considered retained interests in the securitized assets. Gain on sale of the assets depends, in part, on the Company’s allocation of the previous carrying amount of the assets sold to the retained interests. Previous carrying amounts are allocated in proportion to the relative fair values of the assets sold and the interests retained.
Quoted market prices, if available, are used to obtain fair values of senior, subordinated, residual and other retained interests. Generally, quoted market prices for subordinated and residual interests are not available; therefore, the Company estimates the fair values based upon the present value of the associated expected future cash flows or observed transactions for other retained interests with similar characteristics. In determining the fair value of subordinated and residual interests based on future cash flows, management is required to make assumptions about expected prepayment rates, discount rates, expected credit losses and other factors that impact the value of retained interests. See Notes 5 and 6 to the Consolidated Financial Statements – “Securitizations” and “Mortgage Banking Activities.”
The fair value of mortgage servicing rights (“MSR”) is determined by reference to internally developed estimates of fair value primarily based on the following characteristics:
· Product type (i.e., conventional, government, balloon)
· Fixed or adjustable rate of interest
· Interest rate
· Term (i.e., 15 or 30 years)
The Company records MSR when the expected future cash flows from servicing are projected to be more than adequate compensation for such services. Adequate compensation refers to the condition that exists when a mortgage servicer is able to make a level of profit that is considered reasonable by secondary market participants. The projected cash flows that exceed this adequate compensation level are capitalized as MSR. The Company has determined that the contractual servicing fee for credit card loans represents adequate compensation and therefore does not recognize a servicing asset or liability in connection with the securitization of these loans.
In evaluating for impairment, the Company stratifies its MSR based on the predominant characteristics of the underlying financial assets. The effect of changes in market interest rates on estimated rates of loan prepayments is the predominant risk characteristic of the MSR. The Company has determined that three interest rate bands are adequate to create strata of loans that will have similar prepayment characteristics. Loans are also grouped according to other characteristics such as whether they have fixed or adjustable rates, whether they have been securitized through government-sponsored enterprises or in private transactions and whether or not they are loans to subprime borrowers, as discount rates, costs to service, and other important valuation factors differ according to those features.
105
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a summary of the MSR strata used by the Company:
Loan Type |
|
|
Rate Band |
|
|
Adjustable |
|
All loans |
Government-sponsored enterprises |
|
6.00% and below |
Government-sponsored enterprises |
|
6.01% to 7.49% |
Government-sponsored enterprises |
|
7.50% and above |
Government |
|
6.00% and below |
Government |
|
6.01% to 7.49% |
Government |
|
7.50% and above |
Private |
|
6.00% and below |
Private |
|
6.01% to 7.49% |
Private |
|
7.50% and above |
Master servicing |
|
All loans |
Subprime |
|
All loans |
Multi-family |
|
All loans |
The Company began applying fair value hedge accounting treatment, as prescribed by Statement No. 133, as amended, as of April 1, 2004 to most of its MSR. Applying fair value hedge accounting to the MSR allows for the changes in fair value of the hedging derivatives to be netted against the changes in fair value of the hedged MSR, if the hedge relationship is determined to be highly effective. The portion of the MSR in which the hedging relationship is determined not to be highly effective, as well as the portion in which the Company did not attempt to achieve fair value hedge accounting treatment, is accounted for at the lower of cost or fair value. Under lower of cost or fair value accounting, impairment is recognized through a valuation allowance for each individual stratum. The valuation allowance is adjusted for impairment to reflect the amount, if any, by which the cost basis of the MSR for a given stratum exceeds its fair value. Unlike fair value hedge accounting, any fair value in excess of the cost basis of MSR for a given stratum is not recognized. Ineffectiveness from fair value hedge accounting adjustments applied to the MSR as well as any provision for impairment or reversal of such provision recognized on the MSR that are accounted for at the lower of cost or fair value are reported in the Consolidated Statements of Income under the noninterest income caption “Revenue from sales and servicing of home mortgage loans.”
The Company records an other-than-temporary impairment of the MSR for any loss in value that is not expected to recover in the foreseeable future. The amount of the other-than-temporary impairment is determined by selecting an appropriate interest rate shock to estimate the amount of MSR fair value that might be expected to recover in the foreseeable future. To the extent that the gross carrying value of the MSR exceeds the estimated recoverable amount, that portion of the gross carrying value of MSR and the related portion of valuation reserve would be written off as other-than-temporary impairment.
Because quoted market prices from active markets are not readily available, a present value cash flow model is used to estimate the value at which the MSR could be sold in the open market as of the valuation date. The most important assumptions used in the MSR valuation model are the anticipated rate of loan prepayments and discount rates. Other assumptions such as the cost to service the underlying loans, foreclosure costs and ancillary income are also used in determining the value of the MSR.
All assumptions are based on standards used by market participants in valuing MSR. The reasonableness of these assumptions is evaluated through quarterly independent broker surveys. Independent appraisals of the fair value of the servicing portfolio are obtained periodically, but not less
106
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
frequently than quarterly, and are used by management to evaluate the reasonableness of the fair value estimates.
Premises and Equipment
Buildings, leasehold improvements and equipment are carried at amortized cost. Buildings and equipment are depreciated over their estimated useful lives using the straight-line method. The estimated useful life of newly constructed buildings is 40 years. The lives of new assets that are added to existing buildings are based on the remaining life of the original building. The estimated useful life for equipment is 3-10 years. Leasehold improvements are amortized over the shorter of their useful lives or lease terms. The Company reviews buildings, leasehold improvements, and equipment for impairment whenever events or changes in circumstances in the business activities related to these assets indicate that such activities may not generate enough income to recover the asset’s carrying value. Impairment is measured by the amount of which the carrying value exceeds its fair value.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets represent the excess of the purchase price over the fair value of net assets acquired in business combinations under the purchase method of accounting. Other intangible assets include purchased credit card relationships, core deposits and other finite-life intangible assets; these assets are amortized over their estimated useful lives ranging from 2-10 years. Goodwill is not amortized, but instead is tested for impairment at the reporting unit level annually or more frequently if the presence of certain circumstances indicates that impairment may have occurred. Impairment testing is also performed periodically on amortizing intangible assets. Other intangible assets are classified as other assets on the Consolidated Statements of Financial Condition.
Securities Sold Under Agreements to Repurchase
The Company pledges certain financial instruments it owns to collateralize the sales of securities that are subject to an obligation to repurchase the same or similar securities (“repurchase agreements”). Under these arrangements, the Company transfers the assets but still retains effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, repurchase agreements are accounted for as collateralized financing arrangements and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Consolidated Statements of Financial Condition while the securities underlying the agreements remain in the respective asset accounts.
Stock-Based Compensation
In accordance with the transitional guidance of Statement No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123 , the Company elected to prospectively apply the fair value method of accounting for stock-based awards granted subsequent to December 31, 2002. For such awards, fair value is estimated using a binomial model, with compensation expense recognized in earnings over the required service period. Stock-based awards granted prior to January 1, 2003, and not modified after December 31, 2002, continued to be accounted for under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees through December 31, 2005.
Had compensation cost for the Company’s stock-based compensation plans been determined using the fair value method consistent with Statement No. 123 for all periods presented, the Company’s net
107
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
income attributable to common stock and net income per common share would have been reduced to the pro forma amounts indicated below:
|
|
Year Ended December 31, |
|
|||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
(dollars in millions,
|
|
|||||||
Net income attributable to common stock |
|
$ |
3,432 |
|
$ |
2,878 |
|
$ |
3,880 |
|
Add back: Stock-based employee compensation expense included in reported net income, net of related tax effects |
|
99 |
|
68 |
|
56 |
|
|||
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects |
|
(123 |
) |
(113 |
) |
(127 |
) |
|||
Pro forma net income attributable to common stock |
|
$ |
3,408 |
|
$ |
2,833 |
|
$ |
3,809 |
|
Net income per common share: |
|
|
|
|
|
|
|
|||
Basic: |
|
|
|
|
|
|
|
|||
As reported |
|
$ |
3.84 |
|
$ |
3.34 |
|
$ |
4.29 |
|
Pro forma |
|
3.81 |
|
3.29 |
|
4.21 |
|
|||
Diluted: |
|
|
|
|
|
|
|
|||
As reported |
|
3.73 |
|
3.26 |
|
4.21 |
|
|||
Pro forma |
|
3.71 |
|
3.21 |
|
4.13 |
|
In December 2004, the FASB issued a revised version of the original Statement No. 123, Accounting for Stock-Based Compensation . Statement No. 123R, Share-Based Payment , supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees . This Statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This Statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair value-based measurement method in accounting for share-based payment transactions with employees, except for equity instruments held by employee stock ownership plans. The Company will prospectively apply Statement No. 123R to its financial statements as of January 1, 2006. However, as the Company has already adopted Statement No. 148 and substantially all stock-based awards granted prior to its adoption have fully vested as of December 31, 2005, Statement No. 123R will not have a significant effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax bases of existing assets and liabilities are expected to be reported in the Company’s income tax returns. The comprehensive deferred tax provision for the year is equal to the change in the deferred tax asset or liability from the beginning to the end of the year. The effect on deferred taxes of a change in tax rates is recognized in the tax provision in the period that the change is enacted.
For tax reporting purposes, the Company reports income and expenses using the accrual method of accounting and files a consolidated tax return on that basis as well. The Company’s federal tax filings generally include all subsidiaries.
108
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Earnings Per Share
Earnings per share are presented under two formats: basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted EPS is computed by dividing net income by the weighted average number of common shares outstanding during the year, plus the dilutive effect of common share equivalents, such as stock options.
Recently Adopted Accounting Standards
In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 03-3 (“SOP 03-3”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer . SOP 03-3 addresses the accounting for differences between the contractual cash flows and the cash flows expected to be collected from purchased loans or debt securities if those differences are attributable, in part, to credit quality. SOP 03-3 does not permit the carryover of any specific valuation allowances previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows expected to be collected. To the extent that the purchased loans experience subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash flows that are not expected to be received. However, if more cash flows subsequently are expected to be received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 is effective for loans and debt securities acquired after December 31, 2004. The adoption of SOP 03-3 did not have a material effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition .
In March 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position Emerging Issues Task Force 85-24-1 (“FSP EITF 85-24-1”), Distribution Fees by Distributors of Mutual Funds That Do Not Have a Front-End Sales Charge . FSP EITF 85-24-1 considers the appropriate accounting for cash received from a third party for a distributor’s right to future cash flows relating to distribution fees for shares previously sold. The FASB staff concluded that revenue recognition is appropriate when cash is received from a third party if the distributor no longer has any continuing involvement or recourse associated with the rights. The Company applied FSP EITF 85-24-1 as of April 1, 2005. The adoption of FSP EITF 85-24-1 did not have a material effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.
In March 2005, the FASB issued Interpretation No. 47 (“FIN 47”), Accounting for Conditional Asset Retirement Obligations , an interpretation of FASB Statement No. 143, Accounting for Asset Retirement Obligations . FIN 47 generally applies to long-lived assets and requires a liability to be recognized for a conditional asset retirement obligation if the fair value of that liability can be reasonably estimated. A conditional asset retirement obligation is defined as a legal obligation to perform an activity associated with an asset retirement in which the timing and/or method of settlement are conditional on a future event that may or may not occur or be within the control of the company. A liability should be recognized when incurred (based on its fair value at that date), which generally would be upon acquisition or construction of the related asset. Upon recognition, the offset to the liability would be capitalized as part of the cost of the asset and depreciated over the estimated useful life of that asset. The Interpretation is effective no later than December 31, 2005, with early application encouraged. The adoption of FIN 47 did not have a material effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.
109
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In December 2004, the FASB issued Statement No. 153, Exchange of Nonmonetary Assets . Statement No. 153 addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets of APB Opinion No. 29, Accounting for Nonmonetary Transactions , and replaces it with an exception for exchanges that do not have commercial substance. The Statement is effective for nonmonetary asset exchanges occurring after the second quarter of 2005. The adoption of Statement No. 153 did not have a material effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.
In November 2005, the FASB issued FSP FAS 140-2, Clarification of the Application of Paragraphs 40(b) and 40(c) of FASB Statement No. 140. This FSP clarifies that the requirements of paragraphs 40(b) and 40(c) must be met only at the date a qualified special purpose-entity (“QSPE”) issues beneficial interests or when a passive derivative financial instrument needs to be replaced upon the occurrence of a specified event outside the control of the transferor. This FSP is effective as of November 9, 2005. The guidance regarding unexpected events is applied prospectively to all qualifying QSPEs for unexpected events that occur after the FSP’s effective date. The guidance regarding a transferor’s purchases of beneficial interests from outside parties is effective as of November 9, 2005, for such purchases and for transferors’ previous purchases that were consistent with the guidance in this FSP. The adoption of FSP FAS 140-2 did not have a material effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.
In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amends FASB Statements No. 115, Accounting for Certain Investments in Debt and Equity Securities, and No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations, and APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. This FSP is effective for reporting periods beginning after December 15, 2005. The adoption of FSP FAS 115-1 and FAS 124-1 did not have a material effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.
In December 2005, the FASB issued FSP SOP 94-6-1, Terms of Loan Products That May Give Rise to a Concentration of Credit Risk. This FSP addresses their circumstances in which the terms of loan products give rise to a concentration of credit risk as used in FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, and what disclosures apply for entities that originate, hold, guarantee, service or invest in loan products whose terms may give rise to a concentration of credit risk. The FSP is intended to emphasize the requirement to assess the adequacy of disclosures for all lending products and the effect of changes in market or economic conditions on the adequacy of those disclosures. Possible shared characteristics on which significant concentrations may be determined include, but are not limited to, borrowers subject to significant payment increases, loans with terms that permit negative amortization, and loans with high loan-to-value ratios. An entity should consider AICPA Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties, for guidance on disclosure requirements as well as other existing effective literature. The guidance is effective as of December 31, 2005; accordingly, the Company applied this guidance to the development of its loan portfolio disclosure in Note 4 to the Consolidated Financial Statements.
110
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recently Issued Accounting Standards
In December 2004, the FASB issued a revised version of the original Statement No. 123, Accounting for Stock-Based Compensation . Statement No. 123R, Share-Based Payment , supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees . This Statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This Statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair value-based measurement method in accounting for share-based payment transactions with employees, except for equity instruments held by employee stock ownership plans. Effective January 1, 2003 and in accordance with the transitional guidance of Statement No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure , the Company elected to prospectively apply the fair value method of accounting for stock-based awards granted subsequent to December 31, 2002. The Company will prospectively apply Statement No. 123R to its financial statements as of January 1, 2006. However, as the Company has already adopted Statement No. 148 and substantially all stock-based awards granted prior to its adoption have fully vested as of December 31, 2005, Statement No. 123R will not have a significant effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.
In March 2005, Securities and Exchange Commission (‘‘SEC’’) Staff Accounting Bulletin No. 107 (‘‘SAB 107’’) was issued, which expresses views of the staff regarding the interaction between Statement No. 123R, Share-Based Payment , and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. The Company will consider the guidance provided by SAB 107 as part of its adoption of Statement No. 123R.
In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3 . This Statement replaces APB Opinion No. 20, Accounting Changes , and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements , and changes the requirements for the accounting and reporting of a change in accounting principle. This Statement requires changes in accounting principles to be retrospectively applied to the prior periods presented in the financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This Statement applies to all voluntary changes in accounting principles and also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This Statement also carries forward, without substantive change, the provisions for the correction of an error from APB Opinion No. 20. Statement No. 154 is effective for accounting changes and corrections of errors made after December 31, 2005. The Company does not expect the application of this Statement to have a significant effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.
In February 2006, the FASB issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments . This Statement amends Statements No. 133, Accounting for Derivative Instruments and Hedging Activities and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities to simplify and make more consistent the accounting for certain financial instruments. This Statement permits fair value remeasurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. This Statement also allows a qualifying special purpose entity
111
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to hold a derivative financial instrument that pertains to a beneficial interest. Statement No. 155 is effective for all financial instruments acquired or issued after December 31, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements for any interim period for that fiscal year. The Company is currently evaluating the impact this guidance will have on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.
To broaden the Company’s array of retail banking products and services, the Company acquired 100 percent of the outstanding stock of Providian Financial Corporation (“Merger”) on October 1, 2005 for a total purchase price of approximately $5.8 billion, which included approximately $635 million of cash and approximately 127 million shares of Washington Mutual common stock valued at $39.60 per share. For each share of Providian common stock, Providian stockholders received .4005 shares of Washington Mutual common stock and $2.00 in cash. For purposes of this Merger, the Company’s common stock was valued based upon its average price for a 3-day trading period from September 28-30, 2005. This Merger was accounted for under the purchase method of accounting in accordance with FASB Statement No. 141, Business Combinations . Accordingly, the purchase price of the acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the Merger date, with the difference between the purchase price and the fair value of the net assets acquired recorded as goodwill. Results of operations for the business combination are included from the date of acquisition.
The purchase price and the fair value of the net assets acquired in the Merger were as follows:
|
|
October 1, 2005 |
|
|||
|
|
(in millions) |
|
|||
Purchase price |
|
|
$ |
5,806 |
|
|
Fair value of net assets acquired: |
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
Cash |
|
|
99 |
|
|
|
Federal funds sold |
|
|
337 |
|
|
|
Trading assets |
|
|
1,608 |
|
|
|
Available-for-sale securities |
|
|
2,390 |
|
|
|
Loans held in portfolio, net of allowance for loan and lease losses |
|
|
8,164 |
|
|
|
Other intangible assets |
|
|
560 |
|
|
|
Other assets |
|
|
793 |
|
|
|
Liabilities: |
|
|
|
|
|
|
Deposits |
|
|
(8,598 |
) |
|
|
Borrowings |
|
|
(924 |
) |
|
|
Other liabilities |
|
|
(727 |
) |
|
|
Fair value of net assets acquired |
|
|
3,702 |
|
|
|
Estimated goodwill resulting from acquisition |
|
|
$ |
2,104 |
|
|
Other intangible assets are substantially comprised of purchased credit card relationship intangibles with an estimated useful life of ten years. The amount of goodwill recorded, as well as the estimated fair values assigned to the assets acquired and liabilities assumed, may change as certain estimates are finalized. None of the goodwill is expected to be deductible for tax purposes.
The unaudited pro forma combined amounts presented below give effect to the Merger with Providian as if it had been consummated at the beginning of each period. The unaudited pro forma
112
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
information is not necessarily indicative of the results of operations that would have resulted had the Merger been completed at the beginning of the applicable period presented, nor is it necessarily indicative of the results of operations in future periods.
|
|
Year Ended December 31, |
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in millions, except per share amounts) |
|
||||
Net interest income |
|
$ |
8,361 |
|
$ |
7,618 |
|
Provision for loan and lease losses |
|
741 |
|
726 |
|
||
Noninterest income |
|
6,996 |
|
6,217 |
|
||
Noninterest expense |
|
8,719 |
|
8,683 |
|
||
Income from continuing operations before income taxes |
|
5,897 |
|
4,426 |
|
||
Income taxes |
|
2,128 |
|
1,629 |
|
||
Income from continuing operations, net of taxes |
|
3,769 |
|
2,797 |
|
||
Income from discontinued operations, net of taxes |
|
– |
|
399 |
|
||
Net income |
|
3,769 |
|
3,196 |
|
||
Weighted average number of common shares outstanding (in thousands) |
|
|
|
|
|
||
Basic |
|
989,457 |
|
989,260 |
|
||
Diluted |
|
1,014,261 |
|
1,011,095 |
|
||
Net income per common share |
|
|
|
|
|
||
Basic |
|
$ |
3.81 |
|
$ |
3.23 |
|
Diluted |
|
3.72 |
|
3.16 |
|
The following table presents the amortized cost, unrealized gains, unrealized losses, and fair value of securities as of the dates indicated. As of the years ended 2005, 2004 and 2003, there were no securities classified as held to maturity.
|
|
December 31, 2005 |
|
||||||||||||||||
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
||||||||||
|
|
(in millions) |
|
||||||||||||||||
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Agency |
|
|
$ |
14,138 |
|
|
|
$ |
55 |
|
|
|
$ |
(112 |
) |
|
$ |
14,081 |
|
Private issue |
|
|
6,633 |
|
|
|
18 |
|
|
|
(84 |
) |
|
6,567 |
|
||||
Total mortgage-backed securities |
|
|
20,771 |
|
|
|
73 |
|
|
|
(196 |
) |
|
20,648 |
|
||||
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government |
|
|
408 |
|
|
|
– |
|
|
|
(1 |
) |
|
407 |
|
||||
Agency |
|
|
2,550 |
|
|
|
– |
|
|
|
(36 |
) |
|
2,514 |
|
||||
Other debt securities |
|
|
988 |
|
|
|
12 |
|
|
|
(4 |
) |
|
996 |
|
||||
Equity securities |
|
|
93 |
|
|
|
2 |
|
|
|
(1 |
) |
|
94 |
|
||||
Total investment securities |
|
|
4,039 |
|
|
|
14 |
|
|
|
(42 |
) |
|
4,011 |
|
||||
Total available-for-sale securities |
|
|
$ |
24,810 |
|
|
|
$ |
87 |
|
|
|
$ |
(238 |
) |
|
$ |
24,659 |
|
113
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December 31, 2004 |
|
||||||||||||||||
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
||||||||||
|
|
(in millions) |
|
||||||||||||||||
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government |
|
|
$ |
149 |
|
|
|
$ |
– |
|
|
|
$ |
(1 |
) |
|
$ |
148 |
|
Agency |
|
|
12,938 |
|
|
|
133 |
|
|
|
(24 |
) |
|
13,047 |
|
||||
Private issue |
|
|
1,702 |
|
|
|
27 |
|
|
|
(1 |
) |
|
1,728 |
|
||||
Total mortgage-backed securities |
|
|
14,789 |
|
|
|
160 |
|
|
|
(26 |
) |
|
14,923 |
|
||||
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government |
|
|
994 |
|
|
|
– |
|
|
|
(18 |
) |
|
976 |
|
||||
Agency |
|
|
2,796 |
|
|
|
36 |
|
|
|
(4 |
) |
|
2,828 |
|
||||
Other debt securities |
|
|
373 |
|
|
|
18 |
|
|
|
– |
|
|
391 |
|
||||
Equity securities |
|
|
95 |
|
|
|
7 |
|
|
|
(1 |
) |
|
101 |
|
||||
Total investment securities |
|
|
4,258 |
|
|
|
61 |
|
|
|
(23 |
) |
|
4,296 |
|
||||
Total available-for-sale securities |
|
|
$ |
19,047 |
|
|
|
$ |
221 |
|
|
|
$ |
(49 |
) |
|
$ |
19,219 |
|
|
|
December 31, 2003 |
|
||||||||||||||||
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
||||||||||
|
|
(in millions) |
|
||||||||||||||||
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government |
|
|
$ |
117 |
|
|
|
$ |
– |
|
|
|
$ |
– |
|
|
$ |
117 |
|
Agency |
|
|
8,570 |
|
|
|
140 |
|
|
|
(26 |
) |
|
8,684 |
|
||||
Private issue |
|
|
1,849 |
|
|
|
46 |
|
|
|
(1 |
) |
|
1,894 |
|
||||
Total mortgage-backed securities |
|
|
10,536 |
|
|
|
186 |
|
|
|
(27 |
) |
|
10,695 |
|
||||
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government |
|
|
18,950 |
|
|
|
– |
|
|
|
(294 |
) |
|
18,656 |
|
||||
Agency |
|
|
7,000 |
|
|
|
5 |
|
|
|
(46 |
) |
|
6,959 |
|
||||
Other debt securities |
|
|
247 |
|
|
|
17 |
|
|
|
(2 |
) |
|
262 |
|
||||
Equity securities |
|
|
125 |
|
|
|
11 |
|
|
|
(1 |
) |
|
135 |
|
||||
Total investment securities |
|
|
26,322 |
|
|
|
33 |
|
|
|
(343 |
) |
|
26,012 |
|
||||
Total available-for-sale securities |
|
|
$ |
36,858 |
|
|
|
$ |
219 |
|
|
|
$ |
(370 |
) |
|
$ |
36,707 |
|
114
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The unrealized losses and fair value of securities that have been in a continuous unrealized loss position for less than 12 months and 12 months or greater were as follows:
|
|
December 31, 2005 |
|
||||||||||||||||||||||
|
|
Less than 12 months |
|
12 months or greater |
|
Total |
|
||||||||||||||||||
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
||||||||||||
|
|
(in millions) |
|
||||||||||||||||||||||
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Agency |
|
|
$ |
(93 |
) |
|
$ |
8,479 |
|
|
$ |
(19 |
) |
|
$ |
746 |
|
|
$ |
(112 |
) |
|
$ |
9,225 |
|
Private issue |
|
|
(84 |
) |
|
5,018 |
|
|
– |
(1) |
|
1 |
|
|
(84 |
) |
|
5,019 |
|
||||||
Total mortgage-backed securities |
|
|
(177 |
) |
|
13,497 |
|
|
(19 |
) |
|
747 |
|
|
(196 |
) |
|
14,244 |
|
||||||
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. Government and agency |
|
|
(37 |
) |
|
2,907 |
|
|
– |
(1) |
|
10 |
|
|
(37 |
) |
|
2,917 |
|
||||||
Other debt securities |
|
|
(3 |
) |
|
320 |
|
|
(1 |
) |
|
37 |
|
|
(4 |
) |
|
357 |
|
||||||
Equity securities |
|
|
(1 |
) |
|
4 |
|
|
– |
|
|
– |
|
|
(1 |
) |
|
4 |
|
||||||
Total investment securities |
|
|
(41 |
) |
|
3,231 |
|
|
(1 |
) |
|
47 |
|
|
(42 |
) |
|
3,278 |
|
||||||
Total available-for-sale securities |
|
|
$ |
(218 |
) |
|
$ |
16,728 |
|
|
$ |
(20 |
) |
|
$ |
794 |
|
|
$ |
(238 |
) |
|
$ |
17,522 |
|
(1) Amount of unrealized loss rounds to zero.
The Company does not consider any of the unrealized losses presented in the table above to represent an other than temporary impairment condition as it expects to hold the affected securities for the period of time necessary to recover these unrealized losses.
The realized gross gains and losses on securities for the periods indicated were as follows:
|
|
Year Ended December 31, |
|
|||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
(in millions) |
|
|||||||
Available-for-sale securities |
|
|
|
|
|
|
|
|||
Realized gross gains |
|
$ |
506 |
|
$ |
251 |
|
$ |
1,171 |
|
Realized gross losses |
|
(547 |
) |
(199 |
) |
(175 |
) |
|||
Realized net gain (loss) |
|
$ |
(41 |
) |
$ |
52 |
|
$ |
996 |
|
115
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair value of debt securities by contractual maturity was as follows:
|
|
December 31, 2005 |
|
||||||||||||||||||||||||||||||||||||
|
|
Total
|
|
Yield (1) |
|
Due
|
|
Yield (1) |
|
After
|
|
Yield (1) |
|
After
|
|
Yield (1) |
|
After
|
|
Yield (1) |
|
||||||||||||||||||
|
|
(dollars in millions) |
|
||||||||||||||||||||||||||||||||||||
Available-for-sale debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities (2) : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
$ |
14,081 |
|
|
|
5.05 |
% |
|
|
$ |
– |
|
|
|
– |
% |
|
|
$ |
34 |
|
|
|
4.88 |
% |
|
|
$ |
1,294 |
|
|
|
5.36 |
% |
|
$ |
12,753 |
|
|
5.02 |
% |
|
Private issue |
|
|
6,567 |
|
|
|
4.89 |
|
|
|
– |
|
|
|
– |
|
|
|
122 |
|
|
|
5.30 |
|
|
|
668 |
|
|
|
3.42 |
|
|
5,777 |
|
|
5.05 |
|
|
|||||
Total mortgage-backed securities |
|
|
20,648 |
|
|
|
5.00 |
|
|
|
– |
|
|
|
– |
|
|
|
156 |
|
|
|
5.21 |
|
|
|
1,962 |
|
|
|
4.69 |
|
|
18,530 |
|
|
5.03 |
|
|
|||||
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
U.S. Government and agency |
|
|
2,921 |
|
|
|
5.05 |
|
|
|
4 |
|
|
|
4.89 |
|
|
|
1,060 |
|
|
|
5.15 |
|
|
|
1,857 |
|
|
|
4.99 |
|
|
– |
|
|
– |
|
|
|||||
Other debt securities |
|
|
996 |
|
|
|
5.05 |
|
|
|
4 |
|
|
|
4.60 |
|
|
|
145 |
|
|
|
4.22 |
|
|
|
277 |
|
|
|
5.14 |
|
|
570 |
|
|
5.21 |
|
|
|||||
Total investment securities |
|
|
3,917 |
|
|
|
5.05 |
|
|
|
8 |
|
|
|
4.76 |
|
|
|
1,205 |
|
|
|
5.04 |
|
|
|
2,134 |
|
|
|
5.01 |
|
|
570 |
|
|
5.21 |
|
|
|||||
Total fair value of debt securities |
|
|
$ |
24,565 |
|
|
|
5.01 |
|
|
|
$ |
8 |
|
|
|
4.76 |
|
|
|
$ |
1,361 |
|
|
|
5.06 |
|
|
|
$ |
4,096 |
|
|
|
4.85 |
|
|
$ |
19,100 |
|
|
5.04 |
|
|
(1) Weighted average yield at end of year is based on the amortized cost of the securities.
(2) Mortgage-backed securities were allocated based on contractual principal maturities assuming no prepayments.
At December 31, 2005, the Company had pledged available-for-sale securities having a fair value of $6.72 billion and an amortized cost of $6.79 billion, which are subject to certain agreements that may allow the secured party to either sell or rehypothecate the securities. In addition, the Company pledged securities with a fair value of $6.37 billion and an amortized cost of $6.39 billion under agreements whereby the secured party does not have the right to sell or repledge the securities. At December 31, 2005 and 2004, the Company had accepted as collateral, with rights to repledge, securities with a fair value of $49 million and $139 million.
At December 31, 2005, there were no securities of any single issuer, other than agency securities, which exceeded 10% of stockholders’ equity.
116
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4: Loans and Allowance for Loan and Lease Losses
Loans held in portfolio consisted of the following:
|
|
December 31, |
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in millions) |
|
||||
Loans secured by real estate: |
|
|
|
|
|
||
Home: |
|
|
|
|
|
||
Short-term adjustable-rate loans (1) : |
|
|
|
|
|
||
Option ARMs (2) |
|
$ |
70,191 |
|
$ |
66,310 |
|
Other ARMs |
|
14,666 |
|
9,065 |
|
||
Total short-term adjustable-rate loans |
|
84,857 |
|
75,375 |
|
||
Medium-term adjustable-rate loans (3) |
|
41,511 |
|
45,197 |
|
||
Fixed-rate loans |
|
8,922 |
|
8,562 |
|
||
Total home loans (4) |
|
135,290 |
|
129,134 |
|
||
Home equity loans and lines of credit |
|
50,851 |
|
43,650 |
|
||
Home construction (5) |
|
2,037 |
|
2,344 |
|
||
Multi-family |
|
25,601 |
|
22,282 |
|
||
Other real estate |
|
5,035 |
|
5,664 |
|
||
Total loans secured by real estate |
|
218,814 |
|
203,074 |
|
||
Consumer: |
|
|
|
|
|
||
Credit card |
|
8,043 |
|
– |
|
||
Other |
|
638 |
|
792 |
|
||
Commercial business |
|
2,137 |
|
3,205 |
|
||
Total loans held in portfolio (6) |
|
$ |
229,632 |
|
$ |
207,071 |
|
(1) Short-term is defined as adjustable-rate loans that reprice within one year or less.
(2) At December 31, 2005, the total amount by which the unpaid principal balance (“UPB”) of Option ARM loans exceeded their original principal amount was $157 million.
(3) Medium-term is defined as adjustable-rate loans that reprice after one year.
(4) Includes specialty mortgage finance loans, which are comprised of purchased subprime home loans and subprime home loans originated by Long Beach Mortgage Company and held in its investment portfolio. Specialty mortgage finance loans were $21.15 billion and $19.18 billion at December 31, 2005 and 2004.
(5) Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.
(6) Includes net unamortized deferred loan origination costs of $1.53 billion at December 31, 2005 and $1.25 billion at December 31, 2004.
Certain residential loans have features that may result in increased credit risk when compared to residential loans without those features. Categories of loans within the Company’s portfolio that have such features include loans with an option to defer the payment of interest (i.e., Option ARM home loans), home loans where the loan-to-value ratio is greater than 80 percent, home equity loans and lines of credit where the combined loan-to-value ratio is greater than 80 percent, and interest-only payment loans. The loan-to-value ratio measures the ratio of the original loan amount to the appraised value of the collateral at origination. The combined loan-to-value ratio measures the ratio of the original loan amount of the first lien product (typically a first lien mortgage loan) and the original loan amount of the second lien product (typically a second lien home equity loan or line of credit) to the appraised value of the collateral that underlies the loan the Company is originating. In the underwriting of these loans, the Company usually considers compensating factors and mitigating circumstances that may serve to reduce the potential for increased credit risk arising from these features.
117
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Loans held in portfolio with the aforementioned features consisted of the following:
|
|
December 31, |
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in millions) |
|
||||
Option ARM home loans |
|
$ |
70,191 |
|
$ |
66,310 |
|
Home loans without private mortgage insurance or government guarantees where the loan-to-value ratio at origination is greater than 80 percent |
|
9,012 |
|
9,825 |
|
||
Home equity loans and lines of credit where the combined loan-to-value ratio at origination is greater than 80 percent |
|
12,312 |
|
8,927 |
|
||
Interest-only home loans. |
|
10,660 |
|
8,907 |
|
||
The geographic distribution of the Company’s Option ARM portfolio is set forth in the table below:
|
|
December 31, |
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in millions) |
|
||||
California |
|
$ |
33,875 |
|
$ |
34,237 |
|
Florida |
|
7,253 |
|
6,358 |
|
||
New York/New Jersey |
|
7,043 |
|
5,898 |
|
||
Washington/Oregon |
|
2,615 |
|
2,580 |
|
||
Illinois. |
|
1,972 |
|
1,785 |
|
||
Texas. |
|
735 |
|
722 |
|
||
Other. |
|
16,698 |
|
14,730 |
|
||
Total home loan Option ARMs held in portfolio |
|
$ |
70,191 |
|
$ |
66,310 |
|
The recorded investment in impaired loans at December 31, 2005 and 2004 amounted to $474 million and $656 million. Included in the allowance for loan and lease losses was $10 million related to $27 million of impaired loans at December 31, 2005, and $16 million related to $55 million of impaired loans at December 31, 2004. The average recorded investment in impaired loans in 2005, 2004 and 2003 was $568 million, $820 million and $1,193 million. Interest income recognized on impaired loans in 2005, 2004 and 2003 was $24 million, $35 million and $57 million.
Loans totaling $103.28 billion and $111.10 billion at December 31, 2005 and 2004 were pledged to secure advances from FHLBs.
118
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in the allowance for loan and lease losses were as follows:
|
|
Year Ended December 31, |
|
|||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
(in millions) |
|
|||||||
Balance, beginning of year |
|
$ |
1,301 |
|
$ |
1,250 |
|
$ |
1,503 |
|
Allowance transferred to loans held for sale |
|
(270 |
) |
(23 |
) |
(3 |
) |
|||
Allowance acquired through business combinations |
|
592 |
|
– |
|
– |
|
|||
Other |
|
– |
|
– |
|
17 |
|
|||
Provision for loan and lease losses (1) |
|
316 |
|
209 |
|
42 |
|
|||
|
|
1,939 |
|
1,436 |
|
1,559 |
|
|||
Loans charged off: |
|
|
|
|
|
|
|
|||
Loans secured by real estate: |
|
|
|
|
|
|
|
|||
Home |
|
(38 |
) |
(39 |
) |
(65 |
) |
|||
Specialty mortgage finance (2) |
|
(50 |
) |
(39 |
) |
(39 |
) |
|||
Total home loan charge-offs |
|
(88 |
) |
(78 |
) |
(104 |
) |
|||
Home equity loans and lines of credit |
|
(30 |
) |
(22 |
) |
(14 |
) |
|||
Home construction (3) |
|
(1 |
) |
(1 |
) |
(2 |
) |
|||
Multi-family |
|
(1 |
) |
(2 |
) |
(5 |
) |
|||
Other real estate |
|
(8 |
) |
(11 |
) |
(97 |
) |
|||
Total loans secured by real estate |
|
(128 |
) |
(114 |
) |
(222 |
) |
|||
Consumer: |
|
|
|
|
|
|
|
|||
Credit card |
|
(138 |
) |
– |
|
– |
|
|||
Other |
|
(38 |
) |
(53 |
) |
(69 |
) |
|||
Commercial business |
|
(34 |
) |
(21 |
) |
(79 |
) |
|||
Total loans charged off |
|
(338 |
) |
(188 |
) |
(370 |
) |
|||
Recoveries of loans previously charged off: |
|
|
|
|
|
|
|
|||
Loans secured by real estate: |
|
|
|
|
|
|
|
|||
Home |
|
– |
|
– |
|
10 |
|
|||
Specialty mortgage finance (2) |
|
3 |
|
3 |
|
3 |
|
|||
Total home loan recoveries |
|
3 |
|
3 |
|
13 |
|
|||
Home equity loans and lines of credit |
|
9 |
|
4 |
|
1 |
|
|||
Multi-family |
|
3 |
|
3 |
|
1 |
|
|||
Other real estate |
|
13 |
|
10 |
|
17 |
|
|||
Total loans secured by real estate |
|
28 |
|
20 |
|
32 |
|
|||
Consumer: |
|
|
|
|
|
|
|
|||
Credit card |
|
40 |
|
– |
|
– |
|
|||
Other |
|
19 |
|
19 |
|
15 |
|
|||
Commercial business |
|
7 |
|
14 |
|
14 |
|
|||
Total recoveries of loans previously charged off |
|
94 |
|
53 |
|
61 |
|
|||
Net charge-offs |
|
(244 |
) |
(135 |
) |
(309 |
) |
|||
Balance, end of year |
|
$ |
1,695 |
|
$ |
1,301 |
|
$ |
1,250 |
|
(1) Includes a $202 million reversal of provision for loan and lease losses recorded in the fourth quarter of 2003.
(2) Represents purchased subprime home loan portfolios and subprime home loans originated by Long Beach Mortgage Company and held in its investment portfolio.
(3) Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.
119
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The total amount of loans held in portfolio, excluding credit card loans, which were 90 days or more contractually past due and still accruing interest was $107 million and $85 million at December 31, 2005 and 2004. The majority of these loans are either VA- or FHA-insured with little or no risk of loss of principal or interest. Credit card loans held in portfolio that were 90 days or more contractually past due and still accruing interest was $87 million at December 31, 2005.
As a result of regulatory guidelines issued in 2003, delinquent mortgages contained within GNMA servicing pools that are repurchased or are eligible to be repurchased by the Company must be reported as loans on the Consolidated Statements of Financial Condition. As the Company sells most of these repurchased loans to secondary market participants, they are classified as loans held for sale on the Consolidated Statements of Financial Condition. Substantially all of these loans are either guaranteed or insured by agencies of the federal government and, therefore, do not expose the Company to significant risk of credit loss. The Company’s held for sale portfolio contained $1.06 billion and $1.60 billion of such loans that were 90 or more days contractually past due and still accruing interest at December 31, 2005 and 2004.
The total amount of nonaccrual loans held in portfolio at December 31, 2005 and 2004 was $1.69 billion and $1.53 billion. The total amount of nonaccrual loans held for sale at December 31, 2005 and 2004 was $245 million and $76 million.
Securitization of Assets
During 2005 and 2004, the Company sold loans and retained servicing responsibilities as well as senior and subordinated interests from securitization transactions. The Company receives servicing fees equal to a percentage of the outstanding principal balance of mortgage loans being serviced and servicing fees for credit card loans being serviced. The Company also receives the right to cash flows remaining after the investors in the securitization trusts have received their contractual payments. The allocated carrying values of mortgage loans securitized and sold during the years ended December 31, 2005 and 2004 were $130.81 billion and $92.23 billion, which included loans sold with recourse of $680 million and $1.37 billion during the same periods. The allocated carrying value of credit card loans securitized and sold during the three months ended December 31, 2005 (since the completion of the merger of Providian Financial Corporation on October 1, 2005) was $1.90 billion.
The Company realized pretax gains of $949 million, $734 million and $2.32 billion on mortgage loan securitizations for 2005, 2004 and 2003 and pretax gains of $103 million on credit card securitizations during the three months ended December 31, 2005.
120
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below summarizes certain cash flows received from and paid to securitization trusts, except as footnoted below:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2005 |
|
2004 |
|
|||||||
|
|
Mortgages |
|
Credit
|
|
Mortgages |
|
|||||
|
|
(in millions) |
|
|||||||||
Proceeds from new securitization sales |
|
$ |
135,271 |
|
$ |
1,700 |
|
|
$ |
93,528 |
|
|
Proceeds from collections reinvested in new receivables |
|
– |
|
2,624 |
|
|
– |
|
|
|||
Principal and interest received on retained interests |
|
623 |
|
289 |
|
|
1,154 |
|
|
|||
Servicing fees received (1) |
|
1,929 |
|
78 |
|
|
1,971 |
|
|
|||
Loan repurchases (1)(2) |
|
(4,863 |
) |
– |
|
|
(4,376 |
) |
|
|||
(1) Amounts include cash received/paid related to all transfers of loans, including securitizations accounted for as sales, securitizations retained and whole loan sales.
(2) During 2005 and 2004, loan repurchases include $1.81 billion and $3.42 billion related to GNMA early buy out repurchases.
(3) Since the merger date of October 1, 2005.
Key economic assumptions used in measuring the initial value of retained interests (excluding MSR) resulting from securitizations completed during the years ended December 31, 2005 and 2004, and accounted for as sales at the date of securitization, were as follows (rates are per annum and are weighted based on the principal amounts securitized):
|
|
Mortgage Loans |
|
|
|
||||||||||||||
|
|
Fixed-Rate Government-
|
|
Adjustable-Rate
|
|
|
|
|
|
||||||||||
|
|
Home |
|
Multi-Family |
|
Home |
|
Subprime |
|
Credit Card
|
|
||||||||
Year Ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment rate (1) |
|
|
8.66 |
% |
|
|
– |
|
|
|
24.11 |
% |
|
|
68.30 |
% |
|
8.62 |
% |
Expected weighted-average life (in years) |
|
|
8.6 |
|
|
|
6.0 |
|
|
|
4.1 |
|
|
|
3.8 |
|
|
0.5 |
|
Discount rate |
|
|
5.45 |
% |
|
|
5.57 |
% |
|
|
9.08 |
% |
|
|
47.32 |
% |
|
6.65-15.00 |
% |
Year Ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Constant prepayment rate (1) |
|
|
17.43 |
% |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
– |
|
Expected weighted-average life (in years) |
|
|
5.6 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
– |
|
Discount rate |
|
|
4.90 |
% |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
– |
|
(1) Represents the expected lifetime average payment rate, which is based on the constant annualized prepayment rate for mortgage related loans and represents the average monthly expected principal payment rate for credit card related loans.
121
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 2005, key economic assumptions and the sensitivity of the current fair value of retained interests (excluding MSR) to immediate changes in those assumptions were as follows:
|
|
Mortgage Loans |
|
|
|
|||||||||||||||||
|
|
Fixed-Rate Government-
|
|
Adjustable-Rate
|
|
|
|
|
|
|||||||||||||
|
|
Home |
|
Multi-Family |
|
Home |
|
Subprime |
|
Credit Card
|
|
|||||||||||
|
|
(dollars in millions) |
|
|||||||||||||||||||
Fair value of retained interests |
|
$ |
702 |
|
|
$ |
654 |
|
|
|
$ |
1,390 |
|
|
|
$ |
52 |
|
|
$ |
1,639 |
|
Expected weighted-average life (in years) |
|
7.0 |
|
|
5.7 |
|
|
|
3.5 |
|
|
|
5.3 |
|
|
0.5 |
|
|||||
Payment rate (1) |
|
10.85 |
% |
|
– |
|
|
|
25.89 |
% |
|
|
51.75 |
% |
|
8.56 |
% |
|||||
Impact on fair value of 10% adverse change |
|
(1 |
) |
|
– |
|
|
|
(35 |
) |
|
|
– |
|
|
(22 |
) |
|||||
Impact on fair value of 25% adverse change |
|
– |
|
|
– |
|
|
|
(79 |
) |
|
|
1 |
|
|
(48 |
) |
|||||
Discount rate |
|
5.71 |
% |
|
4.99 |
% |
|
|
9.23 |
% |
|
|
35.27 |
% |
|
5.63 – 15.00 |
% |
|||||
Impact on fair value of 25% adverse change |
|
(32 |
) |
|
(8 |
) |
|
|
(42 |
) |
|
|
(5 |
) |
|
(48 |
) |
|||||
Impact on fair value of 50% adverse change |
|
(65 |
) |
|
(16 |
) |
|
|
(84 |
) |
|
|
(9 |
) |
|
(95 |
) |
|||||
(1) Represents the expected lifetime average based on the constant prepayment rate for mortgage related loans and represents the average monthly expected principal payment rate for credit card related loans.
These sensitivities are hypothetical and should be used with caution. As the table above demonstrates, the Company’s methodology for estimating the fair value of retained interests is highly sensitive to changes in assumptions. For example, the Company’s determination of fair value uses anticipated payment speeds. Actual payment experience may differ and any difference may have a material effect on retained interests’ fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interests is calculated without changing any other assumptions; in reality, changes in one factor may be associated with changes in another, which may magnify or counteract the sensitivities. Thus, any measurement of the fair value of retained interests is limited by the conditions existing and assumptions made as of a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.
122
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The tables below present information about delinquencies, net charge-offs and components of reported and securitized financial assets at December 31, 2005 and 2004:
|
|
Total Loans |
|
Loans on
|
|
Net Charge-offs |
|
||||||||||||
|
|
December 31, |
|
Year Ended
|
|
||||||||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||||
|
|
(in millions) |
|
||||||||||||||||
Home mortgage loans |
|
$ |
245,581 |
|
$ |
196,785 |
|
$ |
3,099 |
|
$ |
2,439 |
|
$ |
376 |
|
$ |
306 |
|
Other loans secured by real estate |
|
89,823 |
|
79,615 |
|
225 |
|
352 |
|
15 |
|
19 |
|
||||||
Credit card loans |
|
19,964 |
|
2 |
|
– |
|
– |
|
357 |
(2) |
– |
|
||||||
Other loans |
|
2,929 |
|
4,139 |
|
56 |
|
50 |
|
46 |
|
41 |
|
||||||
Total loans managed (3) |
|
358,297 |
|
280,541 |
|
$ |
3,380 |
|
$ |
2,841 |
|
$ |
794 |
|
$ |
366 |
|
||
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Loans sold, including securitizations |
|
72,763 |
|
26,216 |
|
|
|
|
|
|
|
|
|
||||||
Loans securitized and retained |
|
22,320 |
|
4,511 |
|
|
|
|
|
|
|
|
|
||||||
Loans held for sale |
|
33,582 |
|
42,743 |
|
|
|
|
|
|
|
|
|
||||||
Total loans held in portfolio |
|
$ |
229,632 |
|
$ |
207,071 |
|
|
|
|
|
|
|
|
|
(1) Refer to Note 1 to the Consolidated Financial Statements – “Summary of Significant Accounting Policies” for further discussion of loans on nonaccrual status.
(2) Since the merger date of October 1, 2005.
(3) Represents both loans on the Consolidated Statements of Financial Condition and loans that have been securitized, but excludes loans for which the Company’s only continuing involvement is servicing of the assets.
Note 6: Mortgage Banking Activities
Revenue from sales and servicing of home mortgage loans consisted of the following:
|
|
Year Ended December 31, |
|
|||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
(in millions) |
|
|||||||
Revenue from sales and servicing of home mortgage loans: |
|
|
|
|
|
|
|
|||
Sales activity: |
|
|
|
|
|
|
|
|||
Gain from home mortgage loans and originated mortgage-backed securities |
|
$ |
850 |
|
$ |
651 |
|
$ |
1,570 |
|
Revaluation gain (loss) from derivatives |
|
99 |
|
80 |
|
(159 |
) |
|||
Gain from home mortgage loans and originated mortgage-backed securities, net of hedging and risk management instruments |
|
949 |
|
731 |
|
1,411 |
|
|||
Servicing activity: |
|
|
|
|
|
|
|
|||
Home mortgage loan servicing revenue, net (1) |
|
2,123 |
|
1,943 |
|
2,080 |
|
|||
Amortization of MSR |
|
(2,170 |
) |
(2,521 |
) |
(3,269 |
) |
|||
MSR valuation adjustments (2) |
|
965 |
|
(235 |
) |
712 |
|
|||
Revaluation gain from derivatives |
|
163 |
|
1,469 |
|
1,040 |
|
|||
Home mortgage loan servicing revenue, net of hedging and derivative risk management instruments (3) |
|
1,081 |
|
656 |
|
563 |
|
|||
Total revenue from sales and servicing of home mortgage loans |
|
$ |
2,030 |
|
$ |
1,387 |
|
$ |
1,974 |
|
(1) Includes late charges, prepayment fees and loan pool expenses (the shortfall of the scheduled interest required to be remitted to investors compared to what is collected from the borrowers upon payoff).
(2) Net of fair value hedge ineffectiveness as well as any impairment/reversal recognized on MSR that results from the application of the lower of cost or fair value accounting methodology.
(3) Does not include the effects of other non-derivative instruments used by the Company as part of its overall MSR risk management program.
123
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Key economic assumptions used in measuring the initial value of all capitalized MSR created during the years ended December 31, 2005 and 2004, from securitizations recorded as sales, securitizations entirely retained, and loan sales with retained servicing, were as follows:
|
|
Fixed-Rate
|
|
Adjustable-Rate
|
|
|
|
||||||||||
|
|
Government and
|
|
Privately
|
|
All Types |
|
Subprime
|
|
||||||||
|
|
(rates per annum) |
|
||||||||||||||
Year Ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Constant prepayment rate (1) |
|
|
12.52 |
% |
|
|
14.15 |
% |
|
|
28.08 |
% |
|
|
36.13 |
% |
|
Discount rate |
|
|
8.42 |
|
|
|
9.60 |
|
|
|
10.07 |
|
|
|
19.92 |
|
|
Year Ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Constant prepayment rate (1) |
|
|
15.75 |
% |
|
|
22.43 |
% |
|
|
25.71 |
% |
|
|
28.01 |
% |
|
Discount rate |
|
|
8.56 |
|
|
|
9.64 |
|
|
|
9.78 |
|
|
|
19.72 |
|
|
(1) Represents the expected lifetime average.
At December 31, 2005, key economic assumptions and the sensitivity of the current fair value for home loans MSR to immediate changes in those assumptions were as follows:
|
|
December 31, 2005 |
|
||||||||||||||||||
|
|
Mortgage Servicing Rights |
|
||||||||||||||||||
|
|
Fixed-Rate
|
|
Adjustable-Rate
|
|
|
|
||||||||||||||
|
|
Government and
|
|
Privately |
|
|
|
Subprime |
|
||||||||||||
|
|
Enterprise |
|
Issued |
|
All Types |
|
Loans |
|
||||||||||||
|
|
(dollars in millions) |
|
||||||||||||||||||
Fair value of home loan MSR |
|
|
$ |
5,256 |
|
|
|
$ |
874 |
|
|
|
$ |
1,607 |
|
|
|
$ |
201 |
|
|
Expected weighted-average life (in years) |
|
|
5.7 |
|
|
|
5.9 |
|
|
|
2.7 |
|
|
|
1.9 |
|
|
||||
Constant prepayment rate (1) |
|
|
12.06 |
% |
|
|
12.44 |
% |
|
|
30.17 |
% |
|
|
40.29 |
% |
|
||||
Impact on fair value of 25% decrease |
|
|
$ |
715 |
|
|
|
$ |
110 |
|
|
|
$ |
313 |
|
|
|
$ |
46 |
|
|
Impact on fair value of 50% decrease |
|
|
1,635 |
|
|
|
252 |
|
|
|
793 |
|
|
|
111 |
|
|
||||
Impact on fair value of 25% increase |
|
|
(569 |
) |
|
|
(58 |
) |
|
|
(220 |
) |
|
|
(39 |
) |
|
||||
Impact on fair value of 50% increase |
|
|
(1,030 |
) |
|
|
(161 |
) |
|
|
(386 |
) |
|
|
(56 |
) |
|
||||
Discounted cash flow rate |
|
|
8.31 |
% |
|
|
10.32 |
% |
|
|
10.23 |
% |
|
|
20.26 |
% |
|
||||
Impact on fair value of 25% decrease |
|
|
$ |
453 |
|
|
|
$ |
84 |
|
|
|
$ |
77 |
|
|
|
$ |
11 |
|
|
Impact on fair value of 50% decrease |
|
|
998 |
|
|
|
189 |
|
|
|
165 |
|
|
|
25 |
|
|
||||
Impact on fair value of 25% increase |
|
|
(381 |
) |
|
|
(69 |
) |
|
|
(68 |
) |
|
|
(10 |
) |
|
||||
Impact on fair value of 50% increase |
|
|
(706 |
) |
|
|
(126 |
) |
|
|
(130 |
) |
|
|
(18 |
) |
|
(1) Represents the expected lifetime average.
These sensitivities are hypothetical and should be used with caution. As the table above demonstrates, the Company’s methodology for estimating the fair value of MSR is highly sensitive to changes in assumptions. For example, the Company’s determination of fair values uses anticipated prepayment speeds. Actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the MSR is calculated
124
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, increases in market interest rates may result in lower prepayments, but credit losses may increase), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made as of a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time. Refer to “Market Risk Management” for discussion of how MSR prepayment risk is managed and to Note 1 to the Consolidated Financial Statements – “Summary of Significant Accounting Policies” for further discussion of how MSR impairment is measured.
Changes in the balance of MSR, net of the valuation allowance, were as follows:
|
|
Year Ended December 31, |
|
|||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
(in millions) |
|
|||||||
Balance, beginning of year |
|
$ |
5,906 |
|
$ |
6,354 |
|
$ |
5,341 |
|
Home loans: |
|
|
|
|
|
|
|
|||
Additions |
|
2,353 |
|
1,834 |
|
4,203 |
|
|||
Amortization |
|
(2,170 |
) |
(2,521 |
) |
(3,269 |
) |
|||
(Impairment) reversal |
|
943 |
|
(466 |
) |
712 |
|
|||
Statement No. 133 MSR accounting valuation adjustments |
|
999 |
|
699 |
|
– |
|
|||
Sales |
|
– |
|
– |
|
(638 |
) |
|||
Net change in commercial real estate MSR |
|
10 |
|
6 |
|
5 |
|
|||
Balance, end of year (1) |
|
$ |
8,041 |
|
$ |
5,906 |
|
$ |
6,354 |
|
(1) At December 31, 2005, 2004 and 2003, aggregate MSR fair value was $8.10 billion, $5.91 billion and $6.39 billion.
Changes in the valuation allowance for MSR were as follows:
|
|
Year Ended December 31, |
|
|||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
(in millions) |
|
|||||||
Balance, beginning of year |
|
$ |
1,981 |
|
$ |
2,435 |
|
$ |
4,521 |
|
Impairment (reversal) |
|
(943 |
) |
466 |
|
(712 |
) |
|||
Other-than-temporary impairment |
|
(106 |
) |
(895 |
) |
(1,115 |
) |
|||
Sales |
|
– |
|
– |
|
(259 |
) |
|||
Other |
|
(18 |
) |
(25 |
) |
– |
|
|||
Balance, end of year |
|
$ |
914 |
|
$ |
1,981 |
|
$ |
2,435 |
|
At December 31, 2005, the expected weighted average life of the Company’s MSR was 5.0 years. Projected amortization expense for the gross carrying value of MSR at December 31, 2005 is estimated to be as follows (in millions):
2006 |
|
$ |
1,722 |
|
2007 |
|
1,323 |
|
|
2008 |
|
1,031 |
|
|
2009 |
|
823 |
|
|
2010 |
|
668 |
|
|
After 2010 |
|
3,388 |
|
|
Gross carrying value of MSR |
|
8,955 |
|
|
Less: valuation allowance |
|
(914 |
) |
|
Net carrying value of MSR |
|
$ |
8,041 |
|
125
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The projected amortization expense of MSR is an estimate and should be used with caution. The amortization expense for future periods was calculated by applying the same quantitative factors, such as projected MSR prepayment estimates and discount rates, as were used to determine amortization expense at the end of 2005. These factors are inherently subject to significant fluctuations, primarily due to the effect that changes in mortgage rates have on loan prepayment experience. Accordingly, any projection of MSR amortization in future periods is limited by the conditions that existed at the time the calculations were performed, and may not be indicative of actual amortization expense that will be recorded in future periods.
Changes in the portfolio of mortgage loans serviced for others were as follows:
|
|
Year E n ded December 31, |
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in millions) |
|
||||
Balance, beginning of year |
|
$ |
540,392 |
|
$ |
582,669 |
|
Home loans: |
|
|
|
|
|
||
Additions |
|
165,767 |
|
133,127 |
|
||
Loan payments and other |
|
(144,800 |
) |
(178,010 |
) |
||
Net change in commercial real estate loans serviced for others |
|
1,849 |
|
2,606 |
|
||
Balance, end of year |
|
$ |
563,208 |
|
$ |
540,392 |
|
Note 7: Goodwill and Other Intangible Assets
The Company performs an impairment assessment in the third quarter of each year or more frequently if circumstances necessitate. During the third quarter of 2005 and 2004, the Company concluded there was no impairment to the book value of the Company’s goodwill.
The carrying amount of goodwill for the years ended December 31, 2005 and 2004, by reporting unit were as follows:
|
|
Retail Banking
|
|
Home
|
|
Commercial
|
|
Card Services
|
|
Total |
|
|||||||||||
|
|
(in millions) |
|
|||||||||||||||||||
Balance at December 31, 2005 |
|
|
$ |
3,795 |
|
|
$ |
1,528 |
|
|
$ |
871 |
|
|
|
$ |
2,104 |
|
|
$ |
8,298 |
|
Balance at December 31, 2004 |
|
|
3,795 |
|
|
1,528 |
|
|
873 |
|
|
|
– |
|
|
6,196 |
|
|||||
As a result of the acquisition of Providian Financial Corporation during the fourth quarter of 2005, the Company recorded $2.10 billion of goodwill and $560 million of other intangible assets, substantially all of which are comprised of purchase credit card relationship intangibles.
At December 31, 2005 the Company’s purchased credit card relationship intangible balance was $496 million, net of accumulated amortization of $24 million. The purchased credit card relationship intangible asset is being amortized over ten years using an accelerated amortization method. Annual amortization expense for the net carrying amount of the purchased credit card relationship intangibles is estimated to be $92 million in 2006, $83 million in 2007, $73 million in 2008, $64 million in 2009 and $54 million in 2010.
At December 31, 2005 and 2004, the Company’s core deposit intangible balances were $142 million and $195 million, net of accumulated amortization of $490 million and $438 million. Amortization expense for the net carrying amount of the core deposit intangibles at December 31, 2005 is estimated to be approximately $50 million over each of the next three years.
The Company has no identifiable intangible assets with indefinite useful lives.
126
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other assets consisted of the following:
|
|
December 31, |
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in millions) |
|
||||
Premises and equipment |
|
$ |
3,262 |
|
$ |
3,140 |
|
Investment in bank-owned life insurance |
|
3,056 |
|
2,678 |
|
||
Accrued interest receivable |
|
1,914 |
|
1,428 |
|
||
Foreclosed assets |
|
276 |
|
261 |
|
||
Identifiable intangible assets |
|
677 |
|
195 |
|
||
Derivatives |
|
821 |
|
893 |
|
||
Accounts receivable |
|
4,859 |
|
3,917 |
|
||
Other |
|
2,850 |
|
1,388 |
|
||
Total other assets |
|
$ |
17,715 |
|
$ |
13,900 |
|
Depreciation expense for 2005, 2004 and 2003 was $521 million, $564 million and $492 million.
The Company leases various financial center offices, office facilities and equipment under capital and noncancelable operating leases which expire at various dates through 2036. Some leases contain escalation provisions for adjustments in the consumer price index and provide for renewal options for five- to ten-year periods. Rental expense, including amounts paid under month-to-month cancelable leases, amounted to $508 million in 2005 and 2004 and $458 million in 2003.
Future minimum net rental commitments, including maintenance and other associated costs, for all noncancelable leases were as follows:
|
|
Operating Lease |
|
Capital Lease |
|
||||||||||||||||
|
|
Land
|
|
Furniture
|
|
Land
|
|
Furniture
|
|
||||||||||||
|
|
(in millions) |
|
||||||||||||||||||
Year ending December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
2006 |
|
|
$ |
384 |
|
|
|
$ |
72 |
|
|
|
$ |
6 |
|
|
|
$ |
10 |
|
|
2007 |
|
|
333 |
|
|
|
44 |
|
|
|
6 |
|
|
|
10 |
|
|
||||
2008 |
|
|
289 |
|
|
|
18 |
|
|
|
6 |
|
|
|
9 |
|
|
||||
2009 |
|
|
245 |
|
|
|
5 |
|
|
|
6 |
|
|
|
5 |
|
|
||||
2010 |
|
|
204 |
|
|
|
– |
|
|
|
6 |
|
|
|
– |
|
|
||||
Thereafter |
|
|
537 |
|
|
|
– |
|
|
|
27 |
|
|
|
– |
|
|
||||
Total |
|
|
$ |
1,992 |
|
|
|
$ |
139 |
|
|
|
$ |
57 |
|
|
|
$ |
34 |
|
|
Certain operating leases contain escalation clauses, which correspond with increased real estate taxes and other operating expenses, and renewal options calling for increased rents as the leases are renewed.
127
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deposits consisted of the following:
|
|
December 31, |
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in millions) |
|
||||
Checking deposits: |
|
|
|
|
|
||
Noninterest bearing |
|
$ |
33,919 |
|
$ |
31,363 |
|
Interest bearing |
|
42,356 |
|
51,265 |
|
||
Total checking deposits |
|
76,275 |
|
82,628 |
|
||
Savings deposits |
|
29,318 |
|
28,035 |
|
||
Money market deposits |
|
13,586 |
|
16,515 |
|
||
Time deposits: |
|
|
|
|
|
||
Due in 2006 |
|
63,433 |
|
35,634 |
|
||
Due in 2007 |
|
5,944 |
|
5,031 |
|
||
Due in 2008 |
|
1,965 |
|
3,007 |
|
||
Due in 2009 |
|
1,315 |
|
983 |
|
||
Due in 2010 |
|
595 |
|
1,116 |
|
||
Thereafter |
|
736 |
|
709 |
|
||
Total time deposits |
|
73,988 |
|
46,480 |
|
||
Total deposits |
|
$ |
193,167 |
|
$ |
173,658 |
|
Accrued but unpaid interest on deposits totaled $252 million and $79 million at December 31, 2005 and 2004.
Time deposit accounts in amounts of $100,000 or more totaled $17.00 billion and $9.18 billion at December 31, 2005 and 2004. At December 31, 2005, $4.70 billion of these deposits have a remaining maturity of three months or less, $5.47 billion mature in more than three through six months, $3.39 billion mature in more than six months through one year, and $3.44 billion mature thereafter.
Note 10: Securities Sold Under Agreements to Repurchase
Scheduled maturities of securities sold under agreements to repurchase (“repurchase agreements”) were as follows:
|
|
December 31, |
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in millions) |
|
||||
Due in 30 days or less |
|
$ |
9,562 |
|
$ |
8,702 |
|
After 30 through 90 days |
|
1,200 |
|
– |
|
||
After 90 through 180 days |
|
2,500 |
|
2,140 |
|
||
After 180 days through one year |
|
400 |
|
2,710 |
|
||
Thereafter |
|
1,870 |
|
2,392 |
|
||
Total repurchase agreements |
|
$ |
15,532 |
|
$ |
15,944 |
|
128
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial data pertaining to repurchase agreements were as follows:
|
|
Year Ended December 31, |
|
|||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
(dollars in millions) |
|
|||||||
Weighted average interest rate, end of year |
|
4.20 |
% |
2.36 |
% |
1.23 |
% |
|||
Weighted average interest rate during the year |
|
3.40 |
|
2.26 |
|
2.44 |
|
|||
Average balance of repurchase agreements |
|
$ |
15,365 |
|
$ |
16,660 |
|
$ |
22,318 |
|
Maximum amount outstanding at any month end |
|
18,366 |
|
24,432 |
|
30,052 |
|
|||
The total interest expense on repurchase agreements was $523 million, $377 million and $545 million for the years ended December 31, 2005, 2004 and 2003.
At December 31, 2005 there were no interest rate derivative contracts embedded in repurchase agreements.
Note 11: Advances from Federal Home Loan Banks
As members of the FHLBs, the Company’s two federal savings associations, Washington Mutual Bank, a member of the San Francisco FHLB, and Washington Mutual Bank fsb (“WMBfsb”), a member of the Seattle FHLB, maintain credit lines that are percentages of their total regulatory assets, subject to collateralization requirements. Advances on these lines are collateralized in the aggregate by certain mortgages or deeds of trust, by securities of the U.S. Government and its agencies, and by all owned stock of the FHLBs. The maximum amount of credit that the FHLBs will extend for purposes other than meeting withdrawals varies from time to time in accordance with their policies. The interest rates charged by the FHLBs for advances vary depending on maturity and the cost of funds of the particular FHLB.
On January 1, 2005, the Company’s state savings bank, the former Washington Mutual Bank, merged into Washington Mutual Bank, FA (“WMBFA”), and ceased to exist; subsequently, WMBFA changed its name to Washington Mutual Bank (“WMB”). As a result of this reorganization, all Seattle FHLB advances held by the former Washington Mutual Bank were assumed by WMBfsb.
Although the Company acquired advances from the FHLBs of Dallas and New York during its acquisitions of Bank United in 2001 and Dime Bancorp, Inc. in 2002, the Company does not have continuing borrowing privileges at these FHLBs.
Scheduled maturities of advances from FHLBs were as follows:
|
|
December 31, |
|
||||||||||||
|
|
2005 |
|
2004 |
|
||||||||||
|
|
Amount |
|
Ranges of
|
|
Amount |
|
Ranges of
|
|
||||||
|
|
(dollars in millions) |
|
||||||||||||
Due within one year |
|
$ |
32,621 |
|
|
2.75 – 5.32 |
% |
|
$ |
37,083 |
|
|
1.15 – 7.45 |
% |
|
After one through two years |
|
18,982 |
|
|
2.99 – 6.60 |
|
|
27,471 |
|
|
1.97 – 5.32 |
|
|
||
After two through three years |
|
16,246 |
|
|
3.11 – 6.93 |
|
|
3,835 |
|
|
1.96 – 6.60 |
|
|
||
After three through four years |
|
591 |
|
|
1.78 – 8.27 |
|
|
801 |
|
|
2.01 – 6.93 |
|
|
||
After four through five years |
|
50 |
|
|
2.80 – 8.05 |
|
|
599 |
|
|
1.78 – 8.27 |
|
|
||
Thereafter |
|
281 |
|
|
3.99 – 8.57 |
|
|
285 |
|
|
2.80 – 8.57 |
|
|
||
Total advances from FHLBs |
|
$ |
68,771 |
|
|
|
|
|
$ |
70,074 |
|
|
|
|
|
129
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial data pertaining to advances from FHLBs were as follows:
|
|
Year Ended December 31, |
|
|||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
(dollars in millions) |
|
|||||||
Weighted average interest rate, end of year |
|
4.28 |
% |
2.21 |
% |
1.28 |
% |
|||
Weighted average interest rate during the year |
|
3.46 |
|
2.16 |
|
2.62 |
|
|||
Average balance of advances from FHLBs |
|
$ |
68,713 |
|
$ |
58,622 |
|
$ |
49,441 |
|
Maximum amount outstanding at any month end |
|
71,534 |
|
70,074 |
|
61,323 |
|
|||
The total interest expense on advances from FHLBs was $2.38 billion, $1.27 billion and $1.30 billion for the years ended December 31, 2005, 2004 and 2003.
Other borrowings consisted of the following:
|
|
December 31, |
|
||||||||||
|
|
2005 |
|
2004 |
|
||||||||
|
|
Amount |
|
Interest
|
|
Amount |
|
Interest
|
|
||||
|
|
(dollars in millions) |
|
||||||||||
Washington Mutual, Inc. (Parent) |
|
|
|
|
|
|
|
|
|
|
|
||
Senior notes (1)(2) : |
|
|
|
|
|
|
|
|
|
|
|
||
Fixed rate: |
|
|
|
|
|
|
|
|
|
|
|
||
Due in 2005 |
|
$ |
– |
|
– |
% |
|
$ |
400 |
|
|
2.40 – 7.25 |
% |
Due in 2006 |
|
1,011 |
|
7.50 |
|
|
1,052 |
|
|
7.50 |
|
||
Due in 2007 |
|
999 |
|
5.63 |
|
|
998 |
|
|
5.63 |
|
||
Due in 2008 |
|
731 |
|
4.38 |
|
|
747 |
|
|
4.38 |
|
||
Due in 2009 |
|
963 |
|
4.00 |
|
|
988 |
|
|
4.00 |
|
||
Due in 2010 |
|
577 |
|
4.20 |
|
|
594 |
|
|
4.20 |
|
||
Due in 2012 |
|
395 |
|
5.00 |
|
|
– |
|
|
– |
|
||
Due in 2017 |
|
723 |
|
5.25 |
|
|
– |
|
|
– |
|
||
Floating rate: |
|
|
|
|
|
|
|
|
|
|
|
||
Due in 2005 |
|
– |
|
– |
|
|
400 |
|
|
Various |
|
||
Due in 2008 |
|
250 |
|
Various |
|
|
– |
|
|
– |
|
||
Due in 2010 |
|
249 |
|
Various |
|
|
249 |
|
|
Various |
|
||
Due in 2012 |
|
947 |
|
Various |
|
|
– |
|
|
– |
|
||
Subordinated notes (1)(2) : |
|
|
|
|
|
|
|
|
|
|
|
||
Fixed rate: |
|
|
|
|
|
|
|
|
|
|
|
||
Due in 2007 |
|
219 |
|
8.88 |
|
|
224 |
|
|
8.88 |
|
||
Due in 2010 |
|
551 |
|
8.25 |
|
|
582 |
|
|
8.25 |
|
||
Due in 2014 |
|
701 |
|
4.63 |
|
|
716 |
|
|
4.63 |
|
||
Due in 2026 |
|
150 |
|
8.36 |
|
|
149 |
|
|
8.36 |
|
||
Due in 2027 |
|
922 |
|
8.21 – 9.33 |
|
|
938 |
|
|
8.21 – 9.33 |
|
||
Due in 2041 |
|
733 |
|
5.38 |
|
|
734 |
|
|
5.38 |
|
||
Total Washington Mutual, Inc. (Parent) |
|
$ |
10,121 |
|
|
|
|
$ |
8,771 |
|
|
|
|
(1) Includes capitalized issuance costs and Statement No. 133, as amended, hedge adjustments.
(2) Maturities listed are based on contractual terms and do not include redemption or call dates.
(This table is continued on the next page.)
130
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(This table is continued from previous page.)
|
|
December 31, |
|
||||||||
|
|
2005 |
|
2004 |
|
||||||
|
|
Amount |
|
Interest
|
|
Amount |
|
Interest
|
|
||
|
|
(dollars in millions) |
|
||||||||
Washington Mutual Bank and its Subsidiaries |
|
|
|
|
|
|
|
|
|
||
Senior notes (1)(2) : |
|
|
|
|
|
|
|
|
|
||
Fixed rate: |
|
|
|
|
|
|
|
|
|
||
Due in 2008 |
|
247 |
|
4.50 |
|
– |
|
– |
|
||
Floating rate: |
|
|
|
|
|
|
|
|
|
||
Due in 2006 |
|
824 |
|
Various |
|
824 |
|
Various |
|
||
Due in 2007 |
|
1,499 |
|
Various |
|
– |
|
– |
|
||
Due in 2008 |
|
1,000 |
|
Various |
|
– |
|
– |
|
||
Subordinated notes (1)(2) : |
|
|
|
|
|
|
|
|
|
||
Fixed rate: |
|
|
|
|
|
|
|
|
|
||
Due in 2006 |
|
100 |
|
6.63 |
|
100 |
|
6.63 |
|
||
Due in 2009 |
|
147 |
|
8.00 |
|
152 |
|
8.00 |
|
||
Due in 2011 |
|
1,053 |
|
6.88 |
|
1,100 |
|
6.88 |
|
||
Due in 2013 |
|
727 |
|
5.50 |
|
748 |
|
5.50 |
|
||
Due in 2014 |
|
1,003 |
|
5.65 |
|
1,029 |
|
5.65 |
|
||
Due in 2015 |
|
964 |
|
5.13 |
|
983 |
|
5.13 |
|
||
Floating rate: |
|
|
|
|
|
|
|
|
|
||
Due in 2015 |
|
498 |
|
Various |
|
498 |
|
Various |
|
||
Other |
|
2,372 |
|
Various |
|
302 |
|
Various |
|
||
Total Washington Mutual Bank and subsidiaries |
|
$ |
10,434 |
|
|
|
$ |
5,736 |
|
|
|
Other Consolidated Subsidiaries |
|
|
|
|
|
|
|
|
|
||
Senior notes (1)(2) : |
|
|
|
|
|
|
|
|
|
||
Fixed rate: |
|
|
|
|
|
|
|
|
|
||
Due in 2008 |
|
246 |
|
4.00 |
|
– |
|
– |
|
||
Due in 2021 |
|
29 |
|
– |
|
– |
|
– |
|
||
Subordinated notes (1)(2) : |
|
|
|
|
|
|
|
|
|
||
Fixed rate: |
|
|
|
|
|
|
|
|
|
||
Due in 2027 |
|
121 |
|
9.53 |
|
– |
|
– |
|
||
Secured lines of credit: |
|
|
|
|
|
|
|
|
|
||
Floating rate: |
|
|
|
|
|
|
|
|
|
||
Due in 2005 |
|
– |
|
– |
|
3,991 |
|
Various |
|
||
Due in 2006 |
|
2,826 |
|
Various |
|
– |
|
– |
|
||
Total other consolidated subsidiaries |
|
$ |
3,222 |
|
|
|
$ |
3,991 |
|
|
|
Total other borrowings |
|
$ |
23,777 |
|
|
|
$ |
18,498 |
|
|
|
(1) Includes capitalized issuance costs and Statement No. 133, as amended, hedge adjustments.
(2) Maturities listed are based on contractual terms and do not include redemption or call dates.
131
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income taxes (benefits) from continuing operations consisted of the following:
|
|
Year Ended December 31, |
|
|||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
(in millions) |
|
|||||||
Current: |
|
|
|
|
|
|
|
|||
Federal |
|
$ |
(499 |
) |
$ |
1,475 |
|
$ |
1,417 |
|
Foreign |
|
75 |
|
– |
|
– |
|
|||
State and local |
|
(139 |
) |
254 |
|
256 |
|
|||
Payments in lieu |
|
35 |
|
32 |
|
32 |
|
|||
Total current |
|
(528 |
) |
1,761 |
|
1,705 |
|
|||
Deferred: |
|
|
|
|
|
|
|
|||
Federal |
|
2,158 |
|
(113 |
) |
504 |
|
|||
State and local |
|
411 |
|
(111 |
) |
55 |
|
|||
Payments in lieu |
|
(35 |
) |
(32 |
) |
(28 |
) |
|||
Total deferred |
|
2,534 |
|
(256 |
) |
531 |
|
|||
Total income taxes |
|
$ |
2,006 |
|
$ |
1,505 |
|
$ |
2,236 |
|
The Company’s retained earnings at December 31, 2005 and 2004 include base year bad debt reserves which amounted to approximately $2.22 billion, for which no federal income tax liability has been recognized. The amount of unrecognized deferred tax liability at December 31, 2005 and 2004 is approximately $777 million. This represents the balance of bad debt reserves created for tax purposes as of December 31, 1987. These amounts are subject to recapture in the event that the Company’s banking subsidiaries (1) make distributions in excess of current and accumulated earnings and profits, as calculated for federal income tax purposes, (2) redeem their stock, or (3) liquidate.
132
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company is subject to ongoing tax examinations and assessments in various jurisdictions. The Internal Revenue Service (the “IRS”) is currently examining the Company’s federal income tax returns for the years 2001 through 2003 and federal income tax returns for certain acquired subsidiaries for periods prior to acquisition. In 2005, the IRS completed the examination of the Company’s federal income tax returns for the years 1998 through 2000 and certain issues have been referred to the IRS Appeals Division for review. Resolution of these issues is not expected to have a significant impact on the Company’s financial position or results of operations.
The significant components of the Company’s net deferred tax asset (liability) were as follows:
|
|
December 31, |
|
||||
|
|
2005 |
|
2004 |
|
||
|
|
(in millions) |
|
||||
Deferred tax assets: |
|
|
|
|
|
||
Provision for loan and lease losses and foreclosed assets |
|
$ |
717 |
|
$ |
489 |
|
Mortgage servicing rights, net of valuation reserves |
|
– |
|
226 |
|
||
Loan fees and costs |
|
– |
|
479 |
|
||
Net operating loss carryforwards |
|
6 |
|
133 |
|
||
Accruals and compensation differences |
|
175 |
|
232 |
|
||
Unrealized loss from securities and cash flow hedging instruments |
|
128 |
|
33 |
|
||
Other |
|
57 |
|
500 |
|
||
Total deferred tax assets |
|
1,083 |
|
2,092 |
|
||
Payments in lieu |
|
(4 |
) |
(39 |
) |
||
Valuation allowance |
|
– |
|
(65 |
) |
||
Deferred tax asset, net of payments in lieu and valuation allowance |
|
1,079 |
|
1,988 |
|
||
Deferred tax liabilities: |
|
|
|
|
|
||
Stock dividends from FHLBs |
|
(711 |
) |
(623 |
) |
||
Mortgage servicing rights, net of valuation reserves |
|
(1,050 |
) |
– |
|
||
Loan fees and costs |
|
(596 |
) |
– |
|
||
Basis difference on premises and equipment |
|
(409 |
) |
(684 |
) |
||
Other |
|
(195 |
) |
(78 |
) |
||
Total deferred tax liabilities |
|
(2,961 |
) |
(1,385 |
) |
||
Net deferred tax asset (liability) |
|
$ |
(1,882 |
) |
$ |
603 |
|
The income taxes (benefits) from continuing operations and the summary of deferred tax assets and liabilities above reflect a reclassification of certain deferred tax asset amounts to the current tax receivable account during 2005. This reclassification is a result of amendments to certain prior year tax returns filed during the year ended December 31, 2005.
On October 1, 2005, the Company acquired Providian Financial Corporation, which resulted in a net increase in the Company’s deferred tax liability of $44 million.
The Company establishes a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. The valuation allowance of $65 million at December 31, 2004 relates to the realizability of deferred tax assets from certain acquisitions by the Company.
As a result of the Keystone acquisition in December 1996, the Company and certain of its affiliates are parties to an agreement with a predecessor of the Federal Deposit Insurance Corporation (“FDIC”), which generally provides that 75% of the federal tax savings and approximately 19.5% of the California tax
133
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
savings attributable to the Company’s utilization of certain tax loss carryovers of New West Federal Savings and Loan Association, are to be paid by the Company to the Federal Savings and Loan Insurance Corporation Resolution Fund (“Resolution Fund”). These amounts are considered “payments in lieu.” The FDIC has a variety of review and audit rights, including the right to review and audit computations of payments in lieu of taxes.
At December 31, 2005, the Company had federal income tax net operating loss carryforwards of $16 million due to expire in 2008 under current law.
The table below reconciles the statutory federal income tax expense and rate to the effective income tax expense and rate:
|
|
Year Ended December 31, |
|
|||||||||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||||||||||||||
|
|
Amount |
|
Rate |
|
Amount |
|
Rate |
|
Amount |
|
Rate |
|
|||||||||
|
|
(dollars in millions) |
|
|||||||||||||||||||
|
|
$ |
1,903 |
|
|
35.00 |
% |
|
$ |
1,394 |
|
|
35.00 |
% |
|
$ |
2,110 |
|
|
35.00 |
% |
|
Tax effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
State income tax, net of federal tax benefit |
|
|
177 |
|
|
3.25 |
|
|
93 |
|
|
2.33 |
|
|
202 |
|
|
3.35 |
|
|||
Other |
|
|
(74 |
) |
|
(1.36 |
) |
|
18 |
|
|
0.45 |
|
|
(76 |
) |
|
(1.26 |
) |
|||
Effective income tax expense and rate |
|
|
$ |
2,006 |
|
|
36.89 |
|
|
$ |
1,505 |
|
|
37.78 |
|
|
$ |
2,236 |
|
|
37.09 |
|
Note 14: Commitments, Guarantees and Contingencies
Commitments
Commitments to extend credit are agreements to lend to customers in accordance with predetermined amounts and other contractual provisions. These commitments may be for specific periods or may contain clauses permitting termination or reduction of the commitment by the Company and may require the payment of a fee by the customer. The total amounts of unused commitments do not necessarily represent future credit exposure or cash requirements, in that commitments often expire without being drawn upon. At December 31, 2005 and 2004, unfunded commitments to extend credit totaled $121.80 billion and $70.56 billion. The Company reserved $24 million and $38 million as of December 31, 2005 and 2004 to cover its loss exposure to unfunded commitments.
Guarantees
In the ordinary course of business, the Company sells loans to third parties but retains credit risk exposure on those loans. When loans are sold with retained credit risk provisions attached to the sale, the Company commits to stand ready to perform, if the loan defaults, by making payments to remedy the default or repurchasing the loan. The Company also sells loans without retained credit risk that it may be required to repurchase for violation of a representation or warranty made in connection with the sale of the loan that has a material adverse effect on the value of the loan, or if the Company agreed to repurchase the loan in the event of a first payment or early payment default. When a loan sold to an investor without retained credit risk fails to perform according to its contractual terms, the investor will typically review the loan file to search for errors that may have been made in the process of originating the loan. If errors are discovered and it is determined that such errors constitute a violation of a representation or warranty made to the investor in connection with the loan’s sale, then the Company will be required to either repurchase the loan or indemnify the investor for losses sustained if the violation had a material adverse effect on the value of the loan. As of December 31, 2005 and December 31, 2004, the amount of loans sold without retained credit risk totaled $555.51 billion and $533.51 billion, which substantially represents the unpaid principal balance of the Company’s loans serviced for others portfolio. The
134
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company has accrued $130 million as of December 31, 2005 and $148 million as of December 31, 2004 to cover the estimated loss exposure related to loan origination process errors that are inherent within this portfolio.
In 2004 and 2005, the Company’s Long Beach Mortgage Company subsidiary engaged in whole loan sale transactions of originated subprime loans in which it agreed to repurchase from the investor each “early payment default” loan at a price equal to the loan’s face value plus the amount of any premium paid by the investor. An early payment default occurs when the borrower fails to make the first post-sale payment due on the loan by a contractually specified date. Usually when such an event occurs, the fair value of the loan at the time of its repurchase is lower than the face value. In the fourth quarter of 2005, the Company experienced increased incidents of repurchases of early payment default loans sold by Long Beach Mortgage Company. The Company has accrued $40 million as of December 31, 2005 to cover estimated loss exposure related to such loan sales.
In order to meet the needs of its customers, the Company issues direct-pay, standby and other letters of credit. Letters of credit are conditional commitments issued by the Company generally to guarantee the performance of a customer to a third party in borrowing arrangements, such as commercial paper issuances, bond financing, construction and similar transactions. Collateral may be required to support letters of credit in accordance with management’s evaluation of the creditworthiness of each customer. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. At December 31, 2005 and 2004, outstanding letters of credit issued by Washington Mutual totaled $461 million and $602 million, which included $10 million and $11 million in participations sold to other institutions.
At December 31, 2005, the Company is the guarantor of six separate issues of trust preferred securities including an issue for which the Company became guarantor on October 1, 2005 in connection with its acquisition of Providian Financial Corporation. The Company has issued subordinated debentures to wholly-owned special purpose trusts. Each trust has issued preferred securities. The sole assets of each trust are the subordinated debentures issued by the Company. The Company guarantees the accumulated and unpaid distributions of each trust, to the extent the Company provided funding to the trust per the Company’s obligations under subordinated debentures, but the trust then failed to fulfill its distribution requirements to the security holders. The maximum potential amount of future payments the Company could be required to make under this guarantee is the expected principal and interest each trust is obligated to remit under the issuance of trust preferred securities, which totaled $2.34 billion as of December 31, 2005 and $2.23 billion as of December 31, 2004. No liability has been recorded as the Company does not expect it will be required to perform under this guarantee.
The Company is a party to and from time to time enters into agreements that contain general indemnification provisions, primarily in connection with agreements to sell and service loans or other assets. These provisions typically require the Company to make payments to the purchasers or other third parties to indemnify them against losses they may incur due to actions taken by the Company prior to entering into the agreement or due to a breach of representations, warranties, and covenants made in connection with the agreement or possible changes in or interpretations of tax law.
Contingencies
In the ordinary course of business, the Company and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. In certain of these actions and proceedings, claims for substantial monetary damages are asserted against the Company and its subsidiaries. Certain of these actions and
135
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
proceedings are based on alleged violations of consumer protection, banking and other laws. In addition, the Company is a defendant in a class action securities fraud lawsuit currently pending against the Company and certain of its senior executive officers in the U.S. District Court, Western Division of Washington.
In view of the inherent difficulty of predicting the outcome of pending legal actions and proceedings, the Company cannot state what the eventual outcome of the foregoing pending lawsuits will be. Based on current knowledge, management does not believe that liabilities, if any, arising from any single ordinary course proceeding will have a material adverse effect on the consolidated financial condition, operations, results of operations or liquidity of the Company. However, the possibility of a material adverse impact on the Company’s operating results for a particular quarterly period exists in the event that an unfavorable outcome were to occur in the class action securities fraud litigation or in the event that unfavorable outcomes were to occur in multiple ordinary course proceedings within the same quarterly reporting period, depending, among other factors, on the level of the Company’s income for such period or periods.
The Company is a party to goodwill litigation that may result in a gain. The ultimate outcome is uncertain and there can be no assurance that the Company will benefit from the future results of this litigation and no benefit has been recorded as of December 31, 2005. On February 7, 2006, the Company received approximately $134 million from the Federal Deposit Insurance Corporation FSLIC Resolution Fund as payment of a partial judgment entered by the Court of Federal Claims in the Company’s Home Savings goodwill litigation.
136
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15: Trust Preferred Securities
The Company had previously established special purpose trusts for the purpose of issuing trust preferred securities. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts, were invested by the trusts in junior subordinated deferrable interest debentures issued by Washington Mutual, Inc. Prior to FIN 46, these trusts were consolidated subsidiaries of the Company. As a result of the adoption of FIN 46, the Company deconsolidated all such special purpose trusts, as the Company is not considered to be the primary beneficiary under this accounting standard. Accordingly, on the Company’s Consolidated Statements of Financial Condition, the trust preferred securities that were issued by the trusts have been supplanted by the junior subordinated deferrable interest debentures issued to the trusts by Washington Mutual, Inc. Financial data pertaining to the previously consolidated special purpose trusts at December 31, 2005 and 2004 were as follows:
Name of Trust |
|
|
|
Aggregate
|
|
Aggregate
|
|
Aggregate
|
|
Stated
|
|
Per
|
|
Extension
|
|
Redemption
|
|
|||||||||||||
|
|
(dollars in millions) |
|
|||||||||||||||||||||||||||
Great Western Financial Trust II |
|
|
$ |
300 |
|
|
|
$ |
9 |
|
|
|
$ |
309 |
|
|
|
2027 |
|
|
|
8.21 |
% |
|
Ten consecutive
|
|
On or after
|
|
||
Washington Mutual Capital I |
|
|
400 |
|
|
|
12 |
|
|
|
412 |
|
|
|
2027 |
|
|
|
8.38 |
|
|
Ten consecutive
|
|
On or after
|
|
|||||
Ahmanson Capital Trust I |
|
|
150 |
|
|
|
5 |
|
|
|
155 |
|
|
|
2026 |
|
|
|
8.36 |
|
|
Ten consecutive
|
|
On or after
|
|
|||||
Washington Mutual Capital Trust 2001 |
|
|
1,150 |
|
|
|
35 |
|
|
|
1,185 |
|
|
|
2041 |
|
|
|
5.38 |
|
|
20 consecutive
|
|
On or after
|
|
|||||
Dime Capital Trust I |
|
|
200 |
|
|
|
6 |
|
|
|
206 |
|
|
|
2027 |
|
|
|
9.33 |
|
|
Ten consecutive
|
|
On or after
|
|
|||||
Providian Capital I |
|
|
104 |
|
|
|
5 |
|
|
|
109 |
|
|
|
2027 |
|
|
|
9.53 |
|
|
Ten consecutive
|
|
On or after
|
|
|||||
Total trust preferred securities |
|
|
$ |
2,304 |
|
|
|
$ |
72 |
|
|
|
$ |
2,376 |
|
|
|
|
|
|
|
7.00 |
|
|
|
|
|
|
In the second quarter of 2001, Washington Mutual Capital Trust 2001 issued 23 million units, totaling $1.15 billion, of Trust Preferred Income Equity Redeemable Securities SM , through the issuance of $1.19 billion of 5.38% subordinated debentures, due in 2041. Each unit consists of a preferred security having a stated liquidation amount of $50 and a current yield of 5.38%, and a warrant to purchase at any time prior to the close of business on May 3, 2041, 1.2081 shares of common stock of Washington Mutual. At any time after issuance of the units, the preferred security and warrant components of each unit may be separated by the holder and transferred separately. Thereafter, a separated preferred security and warrant may be combined to form a unit.
The initial warrant exercise price was $32.33 and the warrant exercise price on the expiration date of the warrants will equal $50. As of December 31, 2005, the warrant exercise price was $32.63.
137
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information used to calculate earnings per share was as follows:
|
|
Year Ended December 31, |
|
||||
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
(in thousands) |
|
||||
Weighted average shares: |
|
|
|
|
|
|
|
Basic weighted average number of common shares outstanding |
|
894,434 |
|
862,215 |
|
903,666 |
|
Dilutive effect of potential common shares from: |
|
|
|
|
|
|
|
Awards granted under equity incentive programs |
|
12,994 |
|
12,414 |
|
9,411 |
|
Trust Preferred Income Equity Redeemable Securities SM |
|
9,526 |
|
9,421 |
|
8,680 |
|
Convertible debt (1) |
|
1,955 |
|
– |
|
– |
|
Accelerated Share Repurchase Program |
|
329 |
|
– |
|
– |
|
Diluted weighted average number of common shares outstanding |
|
919,238 |
|
884,050 |
|
921,757 |
|
(1) Acquired on October 1, 2005 through the merger of Providian Financial Corporation.
For the years ended December 31, 2005, 2004 and 2003, options to purchase an additional 12,113,582, 1,530,631 and 9,831,974 shares of common stock were outstanding, but were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.
Additionally, as part of the 1996 business combination with Keystone Holdings, Inc. (the parent of American Savings Bank, F.A.), 6 million shares of common stock, with an assigned value of $18.4944 per share, are being held in escrow for the benefit of certain of the former investors in Keystone Holdings and their transferees. During 2003, the number of escrow shares was reduced from 18 million to 6 million as a result of the return and cancellation of 12 million shares to the Company. The escrow will expire on December 20, 2008, subject to certain limited extensions. 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 December 31, 2005, the conditions for releasing the shares from escrow had not occurred, and therefore, none of the shares in the escrow were included in the above computations.
138
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the components of other comprehensive income and the related tax effect allocated to each component:
|
|
Before
|
|
Tax
|
|
Net of
|
|
|||
|
|
(in millions) |
|
|||||||
2003 |
|
|
|
|
|
|
|
|||
Unrealized loss from securities: |
|
|
|
|
|
|
|
|||
Net unrealized loss from securities
available-for-sale arising during the
|
|
$ |
(567 |
) |
$ |
(218 |
) |
$ |
(349 |
) |
Reclassification of net gain from securities available-for-sale included in net income |
|
(995 |
) |
(383 |
) |
(612 |
) |
|||
Amortization of market adjustment for mortgage-backed securities transferred in 1997 from available-for-sale to held-to-maturity |
|
(6 |
) |
(2 |
) |
(4 |
) |
|||
Net unrealized loss from securities, net of reclassification adjustments |
|
(1,568 |
) |
(603 |
) |
(965 |
) |
|||
Net unrealized gain from cash flow hedging instruments |
|
439 |
|
169 |
|
270 |
|
|||
Minimum pension liability adjustment |
|
(7 |
) |
(3 |
) |
(4 |
) |
|||
Other comprehensive loss |
|
$ |
(1,136 |
) |
$ |
(437 |
) |
$ |
(699 |
) |
2004 |
|
|
|
|
|
|
|
|||
Unrealized gain from securities: |
|
|
|
|
|
|
|
|||
Net unrealized gain from securities available-for-sale arising during the year |
|
$ |
386 |
|
$ |
149 |
|
$ |
237 |
|
Reclassification of net gain from securities available-for-sale included in net income |
|
(57 |
) |
(22 |
) |
(35 |
) |
|||
Amortization of market adjustment for mortgage-backed securities transferred in 1997 from available-for-sale to held-to-maturity |
|
(7 |
) |
(3 |
) |
(4 |
) |
|||
Net unrealized gain from securities, net of reclassification adjustments |
|
322 |
|
124 |
|
198 |
|
|||
Net unrealized gain from cash flow hedging instruments |
|
415 |
|
159 |
|
256 |
|
|||
Minimum pension liability adjustment |
|
(10 |
) |
(4 |
) |
(6 |
) |
|||
Other comprehensive income |
|
$ |
727 |
|
$ |
279 |
|
$ |
448 |
|
2005 |
|
|
|
|
|
|
|
|||
Unrealized loss from securities: |
|
|
|
|
|
|
|
|||
Net unrealized loss from securities available-for-sale arising during the year |
|
$ |
(357 |
) |
$ |
(137 |
) |
$ |
(220 |
) |
Reclassification of net loss from securities available-for-sale included in net income |
|
42 |
|
16 |
|
26 |
|
|||
Amortization of market adjustment for mortgage-backed securities transferred in 1997 from available-for-sale to held-to-maturity |
|
(6 |
) |
(2 |
) |
(4 |
) |
|||
Net unrealized loss from securities, net of reclassification adjustments |
|
(321 |
) |
(123 |
) |
(198 |
) |
|||
Net unrealized gain from cash flow hedging instruments |
|
65 |
|
25 |
|
40 |
|
|||
Minimum pension liability adjustment |
|
(1 |
) |
– |
|
(1 |
) |
|||
Other comprehensive loss |
|
$ |
(257 |
) |
$ |
(98 |
) |
$ |
(159 |
) |
(1) Includes net unrealized loss from securities available-for-sale arising during the year from discontinued operations, net of tax, of $1 million for the year ended December 31, 2003.
139
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents accumulated other comprehensive income (loss) balances:
|
|
|
|
Net
|
|
Amortization
|
|
|
|
|
|
|||||||||||||||
|
|
(in millions) |
|
|||||||||||||||||||||||
Balance, December 31, 2003 |
|
|
$ |
(95 |
) |
|
|
$ |
(430 |
) |
|
|
$ |
11 |
|
|
|
$ |
(10 |
) |
|
|
$ |
(524 |
) |
|
Net change |
|
|
202 |
|
|
|
256 |
|
|
|
(4 |
) |
|
|
(6 |
) |
|
|
448 |
|
|
|||||
Balance, December 31, 2004 |
|
|
107 |
|
|
|
(174 |
) |
|
|
7 |
|
|
|
(16 |
) |
|
|
(76 |
) |
|
|||||
Net change |
|
|
(194 |
) |
|
|
40 |
|
|
|
(4 |
) |
|
|
(1 |
) |
|
|
(159 |
) |
|
|||||
Balance, December 31, 2005 |
|
|
$ |
(87 |
) |
|
|
$ |
(134 |
) |
|
|
$ |
3 |
|
|
|
$ |
(17 |
) |
|
|
$ |
(235 |
) |
|
(1) Includes net unrealized gain from securities from discontinued operations of $1 million at December 31, 2003.
Note 18: Regulatory Capital Requirements and Dividend Restrictions
Washington Mutual, Inc. is not currently subject to any regulatory capital requirements, but each of its subsidiary depository banking institutions is subject to Office of Thrift Supervision (“OTS”) capital requirements. The former Washington Mutual Bank, as a state savings bank, was subject to FDIC capital requirements as of and prior to December 31, 2004. On January 1, 2005 the former Washington Mutual Bank merged into Washington Mutual Bank, FA (“WMBFA”), and ceased to exist; subsequently, WMBFA changed its name to Washington Mutual Bank (“WMB”). The capital adequacy requirements are quantitative measures established by regulation that require WMB and WMBfsb to maintain minimum amounts and ratios of capital. The FDIC required the former Washington Mutual Bank to maintain minimum ratios of Tier 1 and total capital to risk-weighted assets as well as Tier 1 capital to average assets. The OTS requires WMB and WMBfsb to maintain minimum ratios of Tier 1 and total capital to risk-weighted assets, as well as Tier 1 capital to adjusted total assets and tangible capital to adjusted total assets.
Federal law and regulations establish minimum capital standards, and under the OTS and FDIC regulations, an institution (that is not in the most highly-rated category) is required to have a leverage ratio of core capital to adjusted total assets of at least 4.00%, a Tier 1 risk-based capital ratio of at least 4.00% and a total risk-based ratio of at least 8.00%. In addition, the Company’s federal savings associations are required to have a tangible capital ratio of at least 1.50%. Federal law and regulations also establish five capital categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution is treated as well-capitalized if its ratio of total capital to risk-weighted assets is 10.00% or more, its ratio of Tier 1 capital to risk-weighted assets is 6.00% or more, its leverage ratio is 5.00% or more, and it is not subject to any federal supervisory order or directive to meet a specific capital level. In order to be adequately capitalized, an institution must have a total risk-based capital ratio of not less than 8.00%, a Tier 1 risk-based capital ratio of not less than 4.00%, and (unless it is in the most highly-rated category) a leverage ratio of not less than 4.00%. Any institution that is neither well-capitalized nor adequately capitalized will be considered undercapitalized. Any institution with a tangible equity ratio of 2.00% or less will be considered critically undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions, which become more extensive as an institution becomes more severely undercapitalized. Failure by any of the Company’s depository institutions to comply with applicable capital requirements would, if unremedied, result in restrictions on its activities and lead to regulatory enforcement actions against such institutions including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels. The Federal Deposit Insurance Corporation
140
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Improvement Act of 1991 requires the federal banking regulators to take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. Additionally, FDIC or OTS approval of any regulatory application filed for their review may be dependent on compliance with capital requirements.
The regulatory capital ratios calculated for WMB, the former Washington Mutual Bank and WMBfsb, along with the capital amounts and ratios for the minimum regulatory requirement and the minimum amounts and ratios required to be categorized as well-capitalized under the regulatory framework for prompt corrective action were as follows:
|
|
December 31, 2005 |
|
|||||||||||||||||||||||
|
|
Actual |
|
Minimum
|
|
Minimum to be
|
|
|||||||||||||||||||
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|||||||||||||
|
|
(dollars in millions) |
|
|||||||||||||||||||||||
WMB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total risk-based capital to total risk-weighted assets |
|
|
$ |
26,530 |
|
|
11.62 |
% |
|
$ |
18,260 |
|
|
|
8.00 |
% |
|
|
$ |
22,825 |
|
|
|
10.00 |
% |
|
Adjusted tier 1 capital to total risk-weighted assets |
|
|
19,661 |
|
|
8.61 |
|
|
9,130 |
|
|
|
4.00 |
|
|
|
13,695 |
|
|
|
6.00 |
|
|
|||
Tier 1 capital to adjusted total assets (leverage) |
|
|
21,098 |
|
|
6.56 |
|
|
12,860 |
|
|
|
4.00 |
(1) |
|
|
16,075 |
|
|
|
5.00 |
|
|
|||
Tangible capital to tangible assets (tangible equity) |
|
|
20,642 |
|
|
6.43 |
|
|
4,816 |
|
|
|
1.50 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|||
WMBfsb |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total risk-based capital to total risk-weighted assets |
|
|
29,902 |
|
|
383.91 |
|
|
623 |
|
|
|
8.00 |
|
|
|
779 |
|
|
|
10.00 |
|
|
|||
Adjusted tier 1 capital to total risk-weighted assets |
|
|
29,900 |
|
|
383.89 |
|
|
312 |
|
|
|
4.00 |
|
|
|
467 |
|
|
|
6.00 |
|
|
|||
Tier 1 capital to adjusted total assets (leverage) |
|
|
29,936 |
|
|
85.21 |
|
|
1,405 |
|
|
|
4.00 |
(1) |
|
|
1,757 |
|
|
|
5.00 |
|
|
|||
Tangible capital to tangible assets (tangible equity) |
|
|
29,936 |
|
|
85.21 |
|
|
527 |
|
|
|
1.50 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|||
(1) The minimum leverage ratio guideline is 3% for financial institutions that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings, effective management and monitoring of market risk and, in general, are considered top-rate, strong banking organizations.
141
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December 31, 2004 |
|
|||||||||||||||||||||||
|
|
|
|
Minimum
|
|
Minimum to be
|
|
|||||||||||||||||||
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|||||||||||||
|
|
(dollars in millions) |
|
|||||||||||||||||||||||
WMB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total risk-based capital to total risk-weighted assets |
|
|
$ |
20,698 |
|
|
11.68 |
% |
|
$ |
14,174 |
|
|
|
8.00 |
% |
|
|
$ |
17,718 |
|
|
|
10.00 |
% |
|
Adjusted tier 1 capital to total risk-weighted assets |
|
|
14,392 |
|
|
8.12 |
|
|
7,087 |
|
|
|
4.00 |
|
|
|
10,631 |
|
|
|
6.00 |
|
|
|||
Tier 1 capital to adjusted total assets (leverage) |
|
|
14,530 |
|
|
5.46 |
|
|
10,635 |
|
|
|
4.00 |
(1) |
|
|
13,294 |
|
|
|
5.00 |
|
|
|||
Tangible capital to tangible assets (tangible equity) |
|
|
14,530 |
|
|
5.46 |
|
|
3,988 |
|
|
|
1.50 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|||
Former Washington Mutual Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total risk-based capital to total risk-weighted assets |
|
|
2,233 |
|
|
12.35 |
|
|
1,447 |
|
|
|
8.00 |
|
|
|
1,809 |
|
|
|
10.00 |
|
|
|||
Adjusted tier 1 capital to total risk-weighted assets |
|
|
1,974 |
|
|
10.92 |
|
|
723 |
|
|
|
4.00 |
|
|
|
1,085 |
|
|
|
6.00 |
|
|
|||
Tier 1 capital to adjusted total assets (leverage) |
|
|
1,988 |
|
|
7.44 |
|
|
1,069 |
|
|
|
4.00 |
(1) |
|
|
1,336 |
|
|
|
5.00 |
|
|
|||
Tangible capital to tangible assets (tangible equity) |
|
|
1,988 |
|
|
7.44 |
|
|
401 |
|
|
|
1.50 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|||
WMBfsb |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total risk-based capital to total risk-weighted assets |
|
|
27,029 |
|
|
393.56 |
|
|
549 |
|
|
|
8.00 |
|
|
|
687 |
|
|
|
10.00 |
|
|
|||
Adjusted tier 1 capital to total risk-weighted assets |
|
|
27,027 |
|
|
393.52 |
|
|
275 |
|
|
|
4.00 |
|
|
|
412 |
|
|
|
6.00 |
|
|
|||
Tier 1 capital to adjusted total assets (leverage) |
|
|
27,055 |
|
|
93.67 |
|
|
1,155 |
|
|
|
4.00 |
(1) |
|
|
1,444 |
|
|
|
5.00 |
|
|
|||
Tangible capital to tangible assets (tangible equity) |
|
|
27,055 |
|
|
93.67 |
|
|
433 |
|
|
|
1.50 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|||
(1) The minimum leverage ratio guideline is 3% for financial institutions that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings, effective management and monitoring of market risk and, in general, are considered top-rate, strong banking organizations.
WMB and WMBfsb met all capital adequacy requirements as of December 31, 2005 to which they were subject. Additionally, as of the most recent notifications from the OTS, the OTS individually categorized WMB and WMBfsb as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, a bank must maintain minimum total risk-based, adjusted Tier 1 risk-based and Tier 1 or leverage ratios as set forth in the table above. There are no conditions or events since those notifications that management believes have changed the well-capitalized status of WMB and WMBfsb.
Washington Mutual, Inc.’s principal sources of funds are cash dividends received from its banking and other subsidiaries, investment income and borrowings. Washington Mutual, Inc.’s ability to pay dividends is also predicated on the ability of its subsidiaries to declare and pay dividends to Washington Mutual, Inc. Federal law limits the ability of a depository institution, such as WMB or WMBfsb, to pay dividends or make other capital distributions.
OTS regulations limit the ability of savings associations to pay dividends and make other capital distributions. WMB and WMBfsb file notice with the OTS at least 30 days before the proposed payment of a dividend or payment of a proposed capital distribution because they are subsidiaries of a savings and loan holding company. In addition, a savings association must obtain prior approval from the OTS if it fails to meet certain regulatory conditions, if, after giving effect to the proposed distribution, the association’s capital distributions in a calendar year would exceed its year-to-date net income plus retained net income for the preceding two years or the association would not be at least adequately capitalized or if the distribution would violate a statute, regulation, regulatory agreement or a regulatory condition to which the association is subject.
142
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s retained earnings at December 31, 2005 included a pre-1988 thrift bad debt reserve for tax purposes of $2.22 billion for which no federal income taxes have been provided. In the future, if the thrift bad debt reserve is used for any purpose other than to absorb bad debt losses, or if any of the banking subsidiaries no longer qualifies as a bank, the Company will incur a federal income tax liability, at the then prevailing corporate income tax rate, to the extent of such subsidiaries’ pre-1988 thrift bad debt reserve. As a result, the Company’s ability to pay dividends in excess of current earnings may be limited.
Note 19: Stock-Based Compensation Plans and Shareholder Rights Plan
Washington Mutual maintains an equity incentive plan and an employee stock purchase plan. The following information is disclosed on a continuing and discontinued operations basis.
2003 Equity Incentive Plan
In February 2003, the Board of Directors adopted the 2003 Equity Incentive Plan (“2003 EIP”). On April 15, 2003, the shareholders approved the adoption of the 2003 EIP, which replaced the 1994 Stock Option Plan (“1994 Plan”) and the Company’s Equity Incentive Plan. Under the 2003 EIP, all of the Company’s employees, officers, directors and certain consultants, agents, advisors and independent contractors are eligible to receive awards. Awards which may be granted under the 2003 EIP include stock options, stock appreciation rights, restricted stock and stock units, performance shares and performance units and other stock or cash-based awards. The 2003 EIP is generally similar to the 1994 Plan and the Equity Incentive Plan, and does not affect the terms of any option granted under the 1994 Plan or stock or shares awarded under the Equity Incentive Plan. The maximum number of shares of Washington Mutual common stock available for grant under the 2003 EIP is 44,919,426, which includes authorized shares not issued or subject to outstanding awards under the Company’s 1994 Plan or Equity Incentive Plan.
Under the 2003 EIP, the exercise price of the option must at least equal the fair market value of Washington Mutual’s common stock on the date of the grant. The options generally vest on a phased-in schedule over one to three years, depending on the terms of the grant, and expire 10 years from the grant date.
The 2003 EIP permits awards of restricted stock and stock units, and performance shares and performance units with or without performance-based vesting restrictions. The maximum aggregate number of such shares that may be issued under the 2003 EIP (other than options and stock appreciation rights) is 13,000,000, and the maximum number of shares that may be issued under the 2003 EIP pursuant to awards (other than options and stock appreciation rights) that have no restrictions or have restrictions based solely on service for less than three years is 4,350,000.
Under the 2003 EIP, 4,229,831, 2,088,806 and 2,912,134 restricted shares were granted in 2005, 2004 and 2003 with a weighted-average grant-date per share value of $40.54, $42.83 and $40.88, respectively. As of December 31, 2005, 2004 and 2003, there were 6,364,721, 3,831,627 and 2,886,818 restricted shares outstanding. Upon the grant of restricted stock awards, shares are issued to a trustee who releases them to recipients when the restrictions lapse. At the date of grant, unearned compensation is recorded as an offset to stockholders’ equity and is amortized as compensation expense over the restricted period. The balance of unearned compensation related to these restricted shares was $163 million at December 31, 2005, $112 million at December 31, 2004 and $104 million at December 31, 2003. Restricted stock and stock units accrue or pay dividends. All canceled or forfeited shares become available for future grants.
Certain executives participate in the Company’s Performance Shares Program. Under this program, executives are notified of target awards and the performance criteria that determine actual awards at the end of the three-year measurement period. The actual awards may be between 0% and 250% of the target
143
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
award, depending on the Company’s performance. After the three-year performance cycle has been completed, actual awards may be made in cash or in the Company’s common stock. Common stock awards will be made from the 2003 EIP.
The total compensation expense recognized for the 2003 EIP was $149 million in 2005, $97 million in 2004 and $18 million in 2003.
1994 Stock Option Plan
On April 19, 1994, the Company’s shareholders approved the adoption of the 1994 Stock Option Plan, which was subsequently amended and restated as of February 15, 2000. Under the 1994 Plan, options to purchase common stock of Washington Mutual were granted to officers, directors, consultants and advisors of the Company. The 1994 Plan was generally similar to a plan adopted in 1983 that was terminated according to its terms in 1993; however the 1994 Plan did not affect the terms of any options granted under the 1983 plan. All options granted under the 1983 plan have been exercised. Under the 1994 Plan, the exercise price of the option was equal to the fair market value of Washington Mutual’s common stock on the date of the grant. The options generally vest on a phased-in schedule over one to three years, depending upon the terms of the grant, and expire five to ten years from the grant date. The 1994 Plan originally provided for the granting of options to purchase a maximum of 27,000,000 shares of common stock. During 2000, the Board of Directors amended, and the Company’s shareholders approved, an increase in the maximum number of shares of common stock available for grant to 45,000,000. The 1994 Plan was replaced on April 15, 2003 with the 2003 EIP. The total compensation expense recognized for the 1994 Plan resulting from the adoption of Statement No. 148 to prospectively apply the fair value method of accounting was $371,000 in 2005, $1 million in 2004 and $11 million in 2003.
WAMU Shares Stock Option Plans
From time to time, the Board of Directors approves grants of nonqualified stock options to certain groups of employees. The grants have been made pursuant to a series of plans, collectively known as “WAMU Shares.” In 1997, the Board of Directors approved a plan under which eligible employees were granted nonqualified options to purchase the Company’s common stock. On December 15, 1998, the Board adopted a new plan to grant additional nonqualified stock options to eligible employees (“1999 WAMU Shares”). On February 13, 2001, the Board adopted a third plan and granted nonqualified options to eligible employees (“2001 WAMU Shares”). On September 17, 2002, the Board amended the 2001 WAMU Shares Plan to provide for an additional grant of nonqualified options to eligible employees effective September 3, 2002. The aggregate number of shares authorized by the Board of Directors for grants under the WAMU Shares Plans was 14,511,900. On October 16, 2002, the Board amended the 1999 WAMU Shares and the 2001 WAMU Shares plans to allow grants to a broader group of employees, including management, so that some of the authorized but unissued options could be granted to eligible employees as part of the annual grant in December 2002. Generally, eligible full-time and part-time employees on the award dates were granted options to purchase shares of Washington Mutual common stock. The exercise price for all grants is the fair market value of Washington Mutual’s common stock on designated dates, and all options vest one to three years after the award date and expire five to ten years from the award date.
144
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the status, and changes, of all plans at December 31, 2005, 2004 and 2003 during the years then ended:
|
|
1983
|
|
1994
|
|
WAMU Shares
|
|
|||||||||||||||
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|||||||||
Outstanding at December 31, 2002 |
|
124,875 |
|
|
$ |
9.89 |
|
|
40,078,528 |
|
|
$ |
30.06 |
|
|
13,059,058 |
|
|
$ |
35.54 |
|
|
Granted |
|
– |
|
|
– |
|
|
105,093 |
|
|
35.08 |
|
|
22,088 |
|
|
36.53 |
|
|
|||
Exercised |
|
(124,875 |
) |
|
9.89 |
|
|
(6,489,335 |
) |
|
25.12 |
|
|
(1,410,483 |
) |
|
29.82 |
|
|
|||
Forfeited |
|
– |
|
|
– |
|
|
(1,281,776 |
) |
|
33.47 |
|
|
(1,494,478 |
) |
|
36.49 |
|
|
|||
Outstanding at December 31, 2003 |
|
– |
|
|
– |
|
|
32,412,510 |
|
|
30.94 |
|
|
10,176,185 |
|
|
36.20 |
|
|
|||
Granted |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
|||
Exercised |
|
– |
|
|
– |
|
|
(5,411,077 |
) |
|
29.30 |
|
|
(1,238,526 |
) |
|
34.33 |
|
|
|||
Forfeited |
|
– |
|
|
– |
|
|
(1,580,577 |
) |
|
34.50 |
|
|
(1,968,143 |
) |
|
36.38 |
|
|
|||
Outstanding at December 31, 2004 |
|
– |
|
|
– |
|
|
25,420,856 |
|
|
31.06 |
|
|
6,969,516 |
|
|
36.48 |
|
|
|||
Granted |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
|||
Exercised |
|
– |
|
|
– |
|
|
(5,270,912 |
) |
|
29.38 |
|
|
(1,533,436 |
) |
|
36.03 |
|
|
|||
Forfeited |
|
– |
|
|
– |
|
|
(559,377 |
) |
|
34.92 |
|
|
(566,670 |
) |
|
36.72 |
|
|
|||
Outstanding at December 31, 2005 |
|
– |
|
|
– |
|
|
19,590,567 |
|
|
31.40 |
|
|
4,869,410 |
|
|
36.59 |
|
|
|||
Outstanding options exercisable as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
December 31, 2003 |
|
– |
|
|
– |
|
|
22,259,329 |
|
|
29.29 |
|
|
3,684,178 |
|
|
34.43 |
|
|
|||
December 31, 2004 |
|
– |
|
|
– |
|
|
22,644,707 |
|
|
30.43 |
|
|
5,769,967 |
|
|
36.47 |
|
|
|||
December 31, 2005 |
|
– |
|
|
– |
|
|
19,585,363 |
|
|
31.40 |
|
|
4,869,410 |
|
|
36.59 |
|
|
|
|
|
|
2003
|
|
||||||||||
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
||||||
Outstanding at December 31, 2002 |
|
4,582,419 |
|
|
$ |
17.65 |
|
|
– |
|
|
– |
|
|
|
Granted |
|
– |
|
|
– |
|
|
9,919,629 |
|
|
$ |
39.54 |
|
|
|
Exercised |
|
(1,813,815 |
) |
|
17.55 |
|
|
(2,375 |
) |
|
39.50 |
|
|
||
Forfeited |
|
(124,276 |
) |
|
21.79 |
|
|
(39,192 |
) |
|
39.78 |
|
|
||
Outstanding at December 31, 2003 |
|
2,644,328 |
|
|
17.52 |
|
|
9,878,062 |
|
|
39.54 |
|
|
||
Granted |
|
– |
|
|
– |
|
|
2,800,198 |
|
|
41.93 |
|
|
||
Exercised |
|
(549,750 |
) |
|
16.62 |
|
|
(45,288 |
) |
|
39.49 |
|
|
||
Forfeited |
|
(13,956 |
) |
|
21.64 |
|
|
(1,501,903 |
) |
|
40.31 |
|
|
||
Outstanding at December 31, 2004 |
|
2,080,622 |
|
|
17.73 |
|
|
11,131,069 |
|
|
40.04 |
|
|
||
Granted |
|
10,402,350 |
|
|
45.19 |
|
|
8,536,707 |
|
|
41.97 |
|
|
||
Exercised |
|
(4,137,121 |
) |
|
17.28 |
|
|
(588,974 |
) |
|
39.58 |
|
|
||
Forfeited |
|
(128,465 |
) |
|
64.88 |
|
|
(1,807,263 |
) |
|
40.96 |
|
|
||
Outstanding at December 31, 2005 |
|
8,217,386 |
|
|
51.98 |
|
|
17,271,539 |
|
|
40.91 |
|
|
||
Outstanding options exercisable as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
December 31, 2003 |
|
2,642,456 |
|
|
17.51 |
|
|
– |
|
|
– |
|
|
||
December 31, 2004 |
|
2,080,622 |
|
|
17.73 |
|
|
3,109,932 |
|
|
39.57 |
|
|
||
December 31, 2005 |
|
8,217,386 |
|
|
51.98 |
|
|
5,647,638 |
|
|
39.84 |
|
|
||
145
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of the options granted under the Company’s stock options plans was estimated on the date of the grant using a binomial model with the following weighted average assumptions:
|
|
Year Ended December 31, |
|
|||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
Per share fair value of options granted: |
|
|
|
|
|
|
|
|||
1994 Stock Option Plan |
|
– |
|
– |
|
$ |
10.28 |
|
||
WAMU Shares Stock Option Plan |
|
– |
|
– |
|
9.53 |
|
|||
2003 Equity Incentive Plan |
|
$ |
8.29 |
|
$ |
8.99 |
|
9.72 |
|
|
Dividend yield |
|
4.15 – 4.32 |
% |
2.41 – 2.80 |
% |
2.53 – 3.50 |
% |
|||
Expected volatility |
|
20.85 – 30.74 |
|
27.11 – 30.41 |
|
30.41 – 35.02 |
|
|||
Risk free interest rate |
|
3.55 – 4.50 |
|
2.33 – 4.16 |
|
2.45 – 3.60 |
|
|||
Expected life |
|
2.5 – 7 years |
|
4 – 7 years |
|
4 – 7.5 years |
|
|||
Financial data pertaining to outstanding stock options were as follows:
|
|
|
|
December 31, 2005 |
|
||||||||||||||||||||
Ranges of Exercise Prices |
|
|
|
Number of
|
|
Weighted
|
|
Weighted
|
|
|
|
Weighted Average
|
|
||||||||||||
1994 Stock Option Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
$ 12.33 – $21.42 |
|
|
1,930,782 |
|
|
|
2.99 |
|
|
|
$ |
16.79 |
|
|
|
1,930,782 |
|
|
|
$ |
16.79 |
|
|
||
21.92 – 29.94 |
|
|
1,809,336 |
|
|
|
2.57 |
|
|
|
25.05 |
|
|
|
1,809,336 |
|
|
|
25.05 |
|
|
||||
30.74 – 33.96 |
|
|
8,651,496 |
|
|
|
5.25 |
|
|
|
31.93 |
|
|
|
8,651,496 |
|
|
|
31.93 |
|
|
||||
34.00 – 40.52 |
|
|
7,198,953 |
|
|
|
6.27 |
|
|
|
36.29 |
|
|
|
7,193,749 |
|
|
|
36.29 |
|
|
||||
WAMU Shares Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
$ 34.00 |
|
|
665,775 |
|
|
|
0.12 |
|
|
|
34.00 |
|
|
|
665,775 |
|
|
|
34.00 |
|
|
||||
36.53 |
|
|
2,645,998 |
|
|
|
6.75 |
|
|
|
36.53 |
|
|
|
2,645,998 |
|
|
|
36.53 |
|
|
||||
37.81 |
|
|
1,557,637 |
|
|
|
1.67 |
|
|
|
37.81 |
|
|
|
1,557,637 |
|
|
|
37.81 |
|
|
||||
Acquired Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
$ 7.79 – $14.80 |
|
|
649,926 |
|
|
|
2.94 |
|
|
|
10.88 |
|
|
|
649,926 |
|
|
|
10.88 |
|
|
||||
15.13 – 23.72 |
|
|
2,098,765 |
|
|
|
5.39 |
|
|
|
17.33 |
|
|
|
2,098,765 |
|
|
|
17.33 |
|
|
||||
23.80 – 32.89 |
|
|
1,354,078 |
|
|
|
4.52 |
|
|
|
26.42 |
|
|
|
1,354,078 |
|
|
|
26.42 |
|
|
||||
36.73 – 43.63 |
|
|
1,484,944 |
|
|
|
5.39 |
|
|
|
40.51 |
|
|
|
1,484,944 |
|
|
|
40.51 |
|
|
||||
52.89 – 99.32 |
|
|
1,115,469 |
|
|
|
4.35 |
|
|
|
90.75 |
|
|
|
1,115,469 |
|
|
|
90.75 |
|
|
||||
103.00 – 141.96 |
|
|
1,514,204 |
|
|
|
4.47 |
|
|
|
123.17 |
|
|
|
1,514,204 |
|
|
|
123.17 |
|
|
||||
2003 Equity Incentive Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
$ 37.05 – $40.67 |
|
|
8,641,502 |
|
|
|
7.85 |
|
|
|
39.52 |
|
|
|
5,165,897 |
|
|
|
39.54 |
|
|
||||
40.72 – 43.11 |
|
|
8,465,747 |
|
|
|
8.91 |
|
|
|
42.26 |
|
|
|
461,854 |
|
|
|
42.96 |
|
|
||||
43.58 – 46.35 |
|
|
164,290 |
|
|
|
9.37 |
|
|
|
44.37 |
|
|
|
19,887 |
|
|
|
45.17 |
|
|
||||
Total |
|
|
49,948,902 |
|
|
|
|
|
|
|
38.58 |
|
|
|
38,319,797 |
|
|
|
37.72 |
|
|
||||
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (“ESPP”) was amended effective January 1, 2004, and the Plan Administrator exercised its discretion under the Plan to change certain terms. The ESPP no longer permits lump sum contributions, excludes employees who work for less than 5 months per year, has twelve monthly
146
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
offering periods, and provides for purchase of stock at a 5% discount from the price at the end of the offering period. The Company pays for the program’s administrative expenses. The plan is open to all employees who are at least 18 years old and work at least 20 hours per week. Participation is through payroll deductions with a maximum annual contribution of 10% of each employee’s eligible cash compensation. Under the ESPP, dividends may be automatically reinvested at the discretion of the participant. The Company sold 484,703 shares, 537,210 shares and 1,144,025 shares to employees in 2005, 2004 and 2003. The total compensation expense recognized for the ESPP resulting from the adoption of Statement No. 148 to prospectively apply the fair value method of accounting was zero in 2005 and 2004 and $11 million in 2003.
Equity Incentive Plan
The Equity Incentive Plan (previously named the Restricted Stock Plan) permitted grants of restricted stock, and awards denominated in units of stock (“performance units”), with or without performance-based vesting restrictions, for the benefit of all employees, officers, directors, consultants and advisors of the Company. The Equity Incentive Plan was replaced on April 15, 2003 by the 2003 EIP; therefore, the 2003 balances represent restricted stock and awards granted under the Equity Incentive Plan during the period January 1, 2003 to April 14, 2003. The 2003 EIP does not affect the terms of any shares granted under the Equity Incentive Plan. In 2003, 59,953 restricted shares were granted with a weighted-average grant-date per share fair value of $34.51. As of December 31, 2005, 2004 and 2003, there were 24,021, 263,456 and 720,347 restricted shares outstanding. Restricted stock and units of stock accrue dividends. Upon the grant of restricted stock awards, shares are issued to a trustee who releases them to recipients when the restrictions lapse. At the date of grant, unearned compensation is recorded as an offset to stockholders’ equity and is amortized as compensation expense over the restricted period. The balance of unearned compensation related to these restricted shares was $587,000 at December 31, 2005, $3 million at December 31, 2004 and $14 million at December 31, 2003.
The total compensation expense recognized for the Equity Incentive Plan was $(18) million in 2005, $11 million in 2004 and $52 million in 2003. During 2005, a portion of previously accrued expense for the 2001 and 2002 grants was reversed as actual payments were less than the expected expense.
Providian Financial Corporation Plans
In connection with the acquisition of Providian Financial Corporation, the Company assumed the Providian Financial Corporation 2000 Stock Incentive Plan and 1999 Non-Officer Equity Incentive Plan (collectively “Providian Plans”). Under the 2000 Stock Incentive Plan, incentive options and nonqualified options to purchase common stock, stock appreciation rights and stock grants may be made to employees, directors and consultants. Under the 1999 Non-Officer Equity Incentive Plan, nonqualified options to purchase common stock, stock appreciation rights, stock bonuses and restricted stock grants may be granted to employees and consultants.
Options under the Providian Plans generally expire ten years from the date of the grant and vest over varying periods that were determined at the grant date.
With the Company’s acquisition of Providian, it assumed approximately 10.4 million options to purchase Providian common stock, which were converted into options to purchase Washington Mutual common stock. As of December 31, 2005, approximately 3.7 million of the options assumed were exercised leaving approximately 6.7 million options remaining to be exercised.
147
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Shareholder Rights Plan
In October 2000, the 1994 Shareholder Rights Plan
expired in accordance with its terms. On December 19, 2000, the Company’s
Board of Directors adopted a new Shareholder Rights Plan and
declared a dividend of one right for each outstanding share of common stock to
shareholders of record on January 4, 2001. The rights have certain
anti-takeover effects. They are intended to discourage coercive or unfair
takeover tactics and to encourage any potential acquirer to negotiate a price
fair to all shareholders. The rights may cause substantial dilution to an
acquiring party that attempts to acquire the Company on terms not approved by
the Board of Directors, but they will not interfere with any friendly merger or
other business combination. The plan was not adopted in response to any
specific effort to acquire control of the Company.
Note 20: Employee Benefits Programs and Other Expense
Pension Plan
Washington Mutual maintains a noncontributory cash balance defined benefit pension plan (the “Pension Plan”) for eligible employees. Benefits earned for each year of service are based primarily on the level of compensation in that year, plus a stipulated rate of return on the cash balance. It is the Company’s policy to contribute funds to the Pension Plan on a current basis to the extent the amounts are sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws, plus such additional amounts the Company determines to be appropriate.
Nonqualified Defined Benefit Plans and Other Postretirement Benefit Plans
The Company, as successor to previously acquired companies, has assumed responsibility for a number of nonqualified, noncontributory, unfunded postretirement benefit plans, including retirement restoration plans for certain employees, supplemental retirement plans for certain officers and multiple outside directors’ retirement plans. Benefits under the retirement restoration plans are generally determined by the Company. Benefits under the supplemental retirement plans and outside directors’ retirement plans are generally based on years of service.
The Company, as successor to previously acquired companies, maintains unfunded defined benefit postretirement plans that make medical and life insurance coverage available to eligible retired employees and their beneficiaries and covered dependents. The expected cost of providing these benefits to retirees, their beneficiaries and covered dependents was accrued during the years each employee provided services. A 1% change in assumed health care cost trend rates would not have a material impact on the service and interest cost or postretirement benefit obligation.
Washington Mutual uses December 31 as the measurement date for a majority of its plans.
148
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Obligations and funded status for the Pension Plan, Nonqualified Defined Benefit Plans and Other Postretirement Benefit Plans were as follows:
|
|
Year Ended December 31, |
|
|||||||||||||||||||||||||||||||
|
|
2005 |
|
2004 |
|
|||||||||||||||||||||||||||||
|
|
Pension
|
|
Nonqualified
|
|
Other
|
|
Pension
|
|
Nonqualified
|
|
Other
|
|
|||||||||||||||||||||
|
|
(in millions) |
|
|||||||||||||||||||||||||||||||
Change in benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Benefit obligation, beginning of year (1) |
|
|
$ |
1,423 |
|
|
|
$ |
138 |
|
|
|
$ |
65 |
|
|
|
$ |
1,283 |
|
|
|
$ |
129 |
|
|
|
$ |
68 |
|
|
|||
Interest cost |
|
|
86 |
|
|
|
8 |
|
|
|
4 |
|
|
|
84 |
|
|
|
8 |
|
|
|
4 |
|
|
|||||||||
Service cost |
|
|
79 |
|
|
|
2 |
|
|
|
1 |
|
|
|
80 |
|
|
|
2 |
|
|
|
1 |
|
|
|||||||||
Plan participants’ contributions |
|
|
– |
|
|
|
– |
|
|
|
5 |
|
|
|
– |
|
|
|
– |
|
|
|
5 |
|
|
|||||||||
Medicare Part D subsidy |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(1 |
) |
|
|||||||||
Amendments |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
110 |
|
|
|
9 |
|
|
|
– |
|
|
|||||||||
Actuarial loss (gain) |
|
|
21 |
|
|
|
1 |
|
|
|
(2 |
) |
|
|
(38 |
) |
|
|
1 |
|
|
|
(3 |
) |
|
|||||||||
Curtailment gain |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(22 |
) |
|
|
– |
|
|
|
– |
|
|
|||||||||
Benefits paid |
|
|
(97 |
) |
|
|
(11 |
) |
|
|
(9 |
) |
|
|
(74 |
) |
|
|
(11 |
) |
|
|
(9 |
) |
|
|||||||||
Benefit obligation, end of year (1) |
|
|
1,512 |
|
|
|
138 |
|
|
|
64 |
|
|
|
1,423 |
|
|
|
138 |
|
|
|
65 |
|
|
|||||||||
Change in plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Fair value of plan assets, beginning of year |
|
|
1,459 |
|
|
|
– |
|
|
|
– |
|
|
|
1,307 |
|
|
|
– |
|
|
|
– |
|
|
|||||||||
Actual return on plan assets |
|
|
110 |
|
|
|
– |
|
|
|
– |
|
|
|
117 |
|
|
|
– |
|
|
|
– |
|
|
|||||||||
Employer contributions |
|
|
149 |
|
|
|
11 |
|
|
|
4 |
|
|
|
109 |
|
|
|
11 |
|
|
|
4 |
|
|
|||||||||
Plan participants’ contributions |
|
|
– |
|
|
|
– |
|
|
|
5 |
|
|
|
– |
|
|
|
– |
|
|
|
5 |
|
|
|||||||||
Benefits paid |
|
|
(97 |
) |
|
|
(11 |
) |
|
|
(9 |
) |
|
|
(74 |
) |
|
|
(11 |
) |
|
|
(9 |
) |
|
|||||||||
Fair value of plan assets, end of year |
|
|
1,621 |
|
|
|
– |
|
|
|
– |
|
|
|
1,459 |
|
|
|
– |
|
|
|
– |
|
|
|||||||||
Funded status |
|
|
109 |
|
|
|
(138 |
) |
|
|
(64 |
) |
|
|
36 |
|
|
|
(138 |
) |
|
|
(65 |
) |
|
|||||||||
Unrecognized net actuarial loss (gain) |
|
|
303 |
|
|
|
26 |
|
|
|
(17 |
) |
|
|
288 |
|
|
|
26 |
|
|
|
(15 |
) |
|
|||||||||
Unrecognized prior service cost (credit) |
|
|
75 |
|
|
|
8 |
|
|
|
– |
|
|
|
85 |
|
|
|
8 |
|
|
|
(6 |
) |
|
|||||||||
Remaining unamortized, unrecognized net obligation |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
6 |
|
|
|||||||||
Net amount recognized |
|
|
$ |
487 |
|
|
|
$ |
(104 |
) |
|
|
$ |
(81 |
) |
|
|
$ |
409 |
|
|
|
$ |
(104 |
) |
|
|
$ |
(80 |
) |
|
|||
(1) The Pension Plan and Nonqualified Defined Benefit Plans benefit obligation represents the projected benefit obligation. The accumulated benefit obligation for the Pension Plan and Nonqualified Defined Benefit Plans was $1.30 billion and $133 million at December 31, 2005 and $1.20 billion and $132 million at December 31, 2004. The Other Postretirement Benefit Plans benefit obligation represents the accumulated benefit obligation.
149
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amounts recognized in the Consolidated Statements of Financial Condition consist of:
|
|
Year Ended December 31, |
|
||||||||||||||||||||||||||||
|
|
2005 |
|
2004 |
|
||||||||||||||||||||||||||
|
|
Pension
|
|
Nonqualified
|
|
Other
|
|
Pension
|
|
Nonqualified
|
|
Other
|
|
||||||||||||||||||
|
|
(in millions) |
|
||||||||||||||||||||||||||||
Prepaid benefit cost |
|
|
$ |
487 |
|
|
|
$ |
– |
|
|
|
$ |
– |
|
|
|
$ |
409 |
|
|
|
$ |
– |
|
|
|
$ |
– |
|
|
Accrued benefit cost |
|
|
– |
|
|
|
(104 |
) |
|
|
(81 |
) |
|
|
– |
|
|
|
(104 |
) |
|
|
(80 |
) |
|
||||||
Additional minimum liability |
|
|
– |
|
|
|
(30 |
) |
|
|
– |
|
|
|
– |
|
|
|
(28 |
) |
|
|
– |
|
|
||||||
Intangible asset |
|
|
– |
|
|
|
1 |
|
|
|
– |
|
|
|
– |
|
|
|
2 |
|
|
|
– |
|
|
||||||
Other comprehensive income |
|
|
– |
|
|
|
29 |
|
|
|
– |
|
|
|
– |
|
|
|
26 |
|
|
|
– |
|
|
||||||
Net amount recognized |
|
|
$ |
487 |
|
|
|
$ |
(104 |
) |
|
|
$ |
(81 |
) |
|
|
$ |
409 |
|
|
|
$ |
(104 |
) |
|
|
$ |
(80 |
) |
|
The accumulated benefit obligation for all defined benefit plans was $1.50 billion and $1.40 billion at December 31, 2005 and 2004.
Additional information due to the benefit obligation in excess of or (less than) plan assets:
|
|
Year Ended December 31, |
|
||||||||||||||||||||||||||||
|
|
2005 |
|
2004 |
|
||||||||||||||||||||||||||
|
|
Pension
|
|
Nonqualified
|
|
Other
|
|
Pension
|
|
Nonqualified
|
|
Other
|
|
||||||||||||||||||
|
|
(in millions) |
|
||||||||||||||||||||||||||||
Projected benefit obligation |
|
|
$ |
(109 |
) |
|
|
$ |
138 |
|
|
|
$ |
64 |
|
|
|
$ |
(36 |
) |
|
|
$ |
138 |
|
|
|
$ |
65 |
|
|
Accumulated benefit obligation |
|
|
(322 |
) |
|
|
133 |
|
|
|
64 |
|
|
|
(259 |
) |
|
|
132 |
|
|
|
65 |
|
|
Components of net periodic benefit cost for the Pension Plan, Nonqualified Defined Benefit Plans and Other Postretirement Benefit Plans were as follows:
|
|
Year Ended December 31, |
|
||||||||||||||||||||||||||||
|
|
2005 |
|
2004 |
|
||||||||||||||||||||||||||
|
|
Pension
|
|
Nonqualified
|
|
Other
|
|
Pension
|
|
Nonqualified
|
|
Other
|
|
||||||||||||||||||
|
|
(in millions) |
|
||||||||||||||||||||||||||||
Interest cost |
|
|
$ |
86 |
|
|
|
$ |
8 |
|
|
|
$ |
4 |
|
|
|
$ |
84 |
|
|
|
$ |
8 |
|
|
|
$ |
4 |
|
|
Service cost |
|
|
79 |
|
|
|
1 |
|
|
|
1 |
|
|
|
80 |
|
|
|
2 |
|
|
|
1 |
|
|
||||||
Expected return on plan assets |
|
|
(118 |
) |
|
|
– |
|
|
|
– |
|
|
|
(100 |
) |
|
|
– |
|
|
|
– |
|
|
||||||
Amortization of prior service cost (credit) |
|
|
9 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
8 |
|
|
|
1 |
|
|
|
(1 |
) |
|
||||||
Amortization of net loss |
|
|
– |
|
|
|
– |
|
|
|
1 |
|
|
|
– |
|
|
|
– |
|
|
|
1 |
|
|
||||||
Recognized net actuarial loss (gain) |
|
|
15 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
26 |
|
|
|
1 |
|
|
|
– |
|
|
||||||
Net periodic benefit cost |
|
|
$ |
71 |
|
|
|
$ |
11 |
|
|
|
$ |
4 |
|
|
|
$ |
98 |
|
|
|
$ |
12 |
|
|
|
$ |
5 |
|
|
150
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Year Ended December 31, |
|
|||||||||||||
|
|
2003 |
|
|||||||||||||
|
|
Pension
|
|
Nonqualified
|
|
Other
|
|
|||||||||
|
|
(in millions) |
|
|||||||||||||
Interest cost |
|
|
$ |
73 |
|
|
|
$ |
8 |
|
|
|
$ |
4 |
|
|
Service cost |
|
|
56 |
|
|
|
– |
|
|
|
1 |
|
|
|||
Expected return on plan assets |
|
|
(83 |
) |
|
|
– |
|
|
|
– |
|
|
|||
Amortization of prior service credit |
|
|
(5 |
) |
|
|
– |
|
|
|
(1 |
) |
|
|||
Amortization of net (gain) loss |
|
|
(1 |
) |
|
|
– |
|
|
|
1 |
|
|
|||
Recognized net actuarial loss (gain) |
|
|
28 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|||
Net periodic benefit cost |
|
|
$ |
68 |
|
|
|
$ |
9 |
|
|
|
$ |
4 |
|
|
Additional information for the Pension Plan, Nonqualified Defined Benefit Plans and Other Postretirement Benefit Plans was as follows:
|
|
Year Ended December 31, |
|
||||||||||||||||||||||||||
|
|
2005 |
|
2004 |
|
||||||||||||||||||||||||
|
|
Pension
|
|
Nonqualified
|
|
Other
|
|
Pension
|
|
Nonqualified
|
|
Other
|
|
||||||||||||||||
|
|
(in millions) |
|
||||||||||||||||||||||||||
Increase in minimum liability included in other comprehensive income |
|
|
$ |
– |
|
|
|
$ |
2 |
|
|
|
n/a |
|
|
|
$ |
– |
|
|
|
$ |
1 |
|
|
|
n/a |
|
|
|
|
Year Ended December 31, |
|
||||||||||||
|
|
2003 |
|
||||||||||||
|
|
Pension
|
|
Nonqualified
|
|
Other
|
|
||||||||
|
|
(in millions) |
|
||||||||||||
Increase in minimum liability included in other comprehensive income |
|
|
$ |
– |
|
|
|
$ |
10 |
|
|
|
n/a |
|
|
Weighted-average assumptions used to determine benefit obligations for the Pension Plan, Nonqualified Defined Benefit Plans and Other Postretirement Benefit Plans were as follows:
|
|
Year Ended December 31, |
|
||||||||||||||||||||||
|
|
2005 |
|
2004 |
|
||||||||||||||||||||
|
|
Pension
|
|
Nonqualified
|
|
Other
|
|
Pension
|
|
Nonqualified
|
|
Other
|
|
||||||||||||
Discount rate |
|
|
5.70 |
% |
|
|
5.70 |
% |
|
|
5.70 |
% |
|
|
5.90 |
% |
|
|
5.90 |
% |
|
|
5.90 |
% |
|
Rate of compensation increase |
|
|
5.50 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
5.50 |
|
|
|
n/a |
|
|
|
n/a |
|
|
151
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Weighted-average assumptions used to determine net periodic benefit cost for the Pension Plan, Nonqualified Defined Benefit Plans and Other Postretirement Benefit Plans were as follows:
|
|
Year Ended December 31, |
|
||||||||||||||||||||||
|
|
2005 |
|
2004 |
|
||||||||||||||||||||
|
|
Pension
|
|
Nonqualified
|
|
Other
|
|
Pension
|
|
Nonqualified
|
|
Other
|
|
||||||||||||
Discount rate |
|
|
5.90 |
% |
|
|
5.90 |
% |
|
|
5.90 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
|
Rate of compensation increase |
|
|
5.50 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
5.50 |
|
|
|
n/a |
|
|
|
n/a |
|
|
Expected long-term return on plan assets |
|
|
8.00 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
8.00 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
|
Year Ended December 31, |
|
||||||||||
|
|
2003 |
|
||||||||||
|
|
Pension
|
|
Nonqualified
|
|
Other
|
|
||||||
Discount rate |
|
|
6.50 |
% |
|
|
6.50 |
% |
|
|
6.50 |
% |
|
Rate of compensation increase |
|
|
5.50 |
|
|
|
n/a |
|
|
|
n/a |
|
|
Expected long-term return on plan assets |
|
|
8.00 |
|
|
|
n/a |
|
|
|
n/a |
|
|
The expected long-term rate of return assumption was developed using a policy framework that includes an annual review of several factors including an analysis of historical asset returns, gauging market consensus, historical returns of the Pension Plan’s portfolio, reviewing longer term historical asset returns and incorporating the results of asset return models.
It is policy that the asset return assumptions chosen for the upcoming year are maintained so long as the actual long-term asset return experience is not significantly different from the past assumed asset rate of return and that there is no significant change in the targeted asset allocation or in the selection of investment managers.
The Pension Plan’s weighted-average asset allocation at December 31, 2005 and 2004 by asset category was as follows:
(1) The Nonqualified Defined Benefit Plans and Other Postretirement Benefit Plans had no plan assets at December 31, 2005 and 2004.
The total portfolio will be managed on a balanced basis, with the primary asset categories to include: domestic large capitalization equities, domestic small/mid capitalization equities, fixed income securities (primarily U.S.), and international equity investments.
152
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
It is the Company’s intention to allow the investment managers full discretion within the scope of the Company’s Investment Policy Statement to allocate the Pension Plan assets within each of the asset classes. The Company’s Investment Policy Statement is established by the Company’s Plan Investment Committee.
The portfolio strategy will seek total return, defined as all income, gains and losses, whether realized or unrealized, over a long-term basis and defined as five years or more. At a minimum, the total return objective for all managers in the aggregate will be to exceed the Plan’s interest assumption.
Given the investment objectives of the Pension Plan and the Plan Investment Committee’s risk tolerance, the Committee has set the following “target” asset allocation percentages:
|
|
Target |
|
Minimum |
|
Maximum |
|
||||||
Fixed income securities and cash equivalents |
|
|
35 |
% |
|
|
28 |
% |
|
|
42 |
% |
|
Domestic equities |
|
|
43 |
|
|
|
39 |
|
|
|
47 |
|
|
International equities |
|
|
12 |
|
|
|
11 |
|
|
|
13 |
|
|
Alternative investments |
|
|
10 |
|
|
|
– |
|
|
|
15 |
|
|
It is anticipated that the overall allocation will stay within the target ranges noted above.
The Pension Plan assets include Washington Mutual, Inc.’s common stock and fixed income securities of $9 million, or 0.53% of total plan assets, and $9 million, or 0.61% of total plan assets at December 31, 2005 and 2004.
Washington Mutual expects to contribute $85 million, $11 million and $6 million to the Pension Plan, Nonqualified Defined Benefit Plans and Other Postretirement Benefit Plans in 2006.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
|
|
Pension Plan |
|
Nonqualified
|
|
Other
|
|
|||||||||
|
|
(in millions) |
|
|||||||||||||
2006 |
|
|
$ |
86 |
|
|
|
$ |
11 |
|
|
|
$ |
6 |
|
|
2007 |
|
|
91 |
|
|
|
11 |
|
|
|
6 |
|
|
|||
2008 |
|
|
98 |
|
|
|
12 |
|
|
|
6 |
|
|
|||
2009 |
|
|
102 |
|
|
|
15 |
|
|
|
5 |
|
|
|||
2010 |
|
|
107 |
|
|
|
11 |
|
|
|
5 |
|
|
|||
2011 – 2015 |
|
|
619 |
|
|
|
64 |
|
|
|
23 |
|
|
Account Balance Plans
WaMu Savings Plan. The Company sponsors a defined contribution plan for all eligible employees that allows participants to make contributions by salary deduction equal to 75% or less of their salary pursuant to Section 401(k) of the Internal Revenue Code. Employee contributions vest immediately. Prior to January 1, 2004, the Company’s matching contributions and any profit sharing contributions made to employees vested based on years of service. Company contributions made on or after January 1, 2004 vest immediately.
In connection with the acquisition of Providian, the Company assumed Providian Financial Corporation 401(k) Plan, which was available to substantially all Card Services employees. Providian’s 401(k) Plan offers safe-harbor matching contributions and discretionary retirement contributions to eligible plan participants. Providian’s 401(k) Plan will be merged into WaMu Savings Plan on April 1, 2006.
153
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company contributions to savings plans were $77 million, $64 million and $114 million in 2005, 2004 and 2003.
Other Account Balance Plans. The Company sponsors supplemental employee and executive retirement plans for the benefit of certain officers. The plans are designed to supplement the benefits that are accrued under the Pension Plans.
Other Expense
Postage expense exceeded 1% of total interest income and noninterest income and is not otherwise shown separately in the Consolidated Financial Statements or the Notes to Consolidated Financial Statements. For the year ended December 31, 2005, 2004 and 2003, postage expense was $293 million, $232 million and $220 million.
Note 21: Derivative Financial Instruments
The Company uses a variety of derivative financial instruments to manage interest rate risk and reduce the effects that changing interest rates may have on net income. These instruments include interest rate swaps, caps and floors, option contracts, financial futures and forward settlement agreements. From time to time, interest rate derivative instruments may be embedded within certain adjustable- and fixed-rate borrowings. Swaps are agreements between two parties to exchange cash flows of different types based on notional amounts. Caps and floors are agreements in which payments are made when a reference rate rises above (for caps) or falls below (for floors) the strike rate. Option contracts give the option buyer the right, but not the obligation, to buy or sell a financial asset at the exercise price within or at the end of a specified time period. Financial futures and forward settlements allow the contract holder to buy or sell a quantity of a financial instrument at a predetermined price and date. Settlements of derivative financial instruments affecting net income are recorded as operating activities within the Consolidated Statements of Cash Flows.
Fair value hedges
The risk of holding assets or liabilities that have a fixed element (price, rate or index) creates exposure to changes in fair value due to changes in interest rates. As part of its asset/liability management activities, the Company holds certain investment securities and fixed-rate borrowings. The Company uses pay-fixed and receive-fixed swaps to synthetically convert these instruments to floating rate and reduce the risk of interest rate changes impacting fair value. The fair values of these derivatives are reported in other assets and other liabilities. Changes in the fair value of the hedging derivative and offsetting changes in fair value attributable to the hedged risk of the hedged item are reported in interest income or interest expense. For the year ended December 31, 2005, the net gain recognized in earnings due to hedge ineffectiveness of the fair value hedges of investment securities and borrowings was $1 million. For the years ended December 31, 2004 and 2003, the amounts were de minimis .
The Company enters into a combination of derivatives to manage changes in fair value of its MSR. The Company began applying fair value hedge accounting treatment, as prescribed by Statement No. 133, as amended, as of April 1, 2004 to most of its MSR. These derivatives may include interest rate futures, forwards, options, swaps, swaptions, caps, floors, forward commitments and options on forward commitments. The fair value of these derivatives, which qualify for fair value hedge accounting treatment, is reported in other assets and other liabilities. The changes in the fair value of these derivatives are reported in net mortgage servicing rights valuation adjustments. For the years ended December 31, 2005
154
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and 2004, the net gains recognized in earnings due to hedge ineffectiveness of the fair value hedges of MSR were $22 million and $231 million.
The Company also mitigates the interest rate risks associated with fixed-rate mortgage-backed securities with interest rate swap agreements where the Company pays a fixed rate of interest (pay-fixed swaps) and swaptions where the Company will enter into pay-fixed swaps if the swaptions are exercised. These pay-fixed swaps and swaptions are accounted for as fair value hedges of mortgage-backed securities. The fair value of these interest rate swaps and swaptions is reported in other assets and other liabilities. Changes in the fair value of the hedging derivative and offsetting changes in fair value attributable to the hedged risk of the hedged item are reported in other noninterest income. For the years ended December 31, 2005 and 2004, the amount the Company recognized in earnings due to hedge ineffectiveness of fair value hedges of mortgage-backed securities was de minimis , as compared with a net loss of $3 million in 2003.
Home loans held for sale expose the Company to interest rate risk. The Company manages the interest rate risk associated with home loans held for sale predominantly by entering into forward sales agreements and, to a lesser extent, interest rate swaps, swaptions and interest rate futures contracts. Certain of these forward sales agreements are accounted for as fair value hedges of loans held for sale. The fair value of these forward sales agreements is reported in other assets and other liabilities. Changes in the fair value of the hedging derivative and offsetting changes in fair value attributable to the hedged risk of the hedged item are reported in gain from mortgage loans. Changes in the value of derivative instruments for which the Company did not achieve or did not attempt to achieve hedge accounting treatment are reported in revaluation gain/loss from derivatives. For the years ended December 31, 2005, 2004 and 2003, the Company recognized net losses of $11 million, $65 million and $125 million in earnings due to hedge ineffectiveness of fair value hedges of home loans held for sale.
The Company also originates fixed-rate multi-family and commercial real estate loans for sale in the secondary market to investors. To mitigate the interest rate risks associated with this loan portfolio, the Company enters into interest rate swap agreements where the Company pays a fixed rate of interest. These pay-fixed swaps are accounted for as fair value hedges of loans held for sale. The fair value of these interest rate swaps is reported in other assets and other liabilities. Changes in the fair value of the hedging derivative and offsetting changes in fair value attributable to the hedged risk of the hedged item are reported in other noninterest income. For the years ended December 31, 2005 and 2004, the net gains recognized in earnings due to hedge ineffectiveness of fair value hedges of multi-family and commercial real estate loans held for sale were $12 million and $11 million. For the year ended December 31, 2003, the amount was de minimis .
All components of each derivative instrument’s gain or loss are included in the assessment of hedge effectiveness.
Cash flow hedges
The risk of holding assets and liabilities that have a variable element (price, cost or interest rate) creates exposure to the variability or uncertainty of future cash flows due to changes in interest rates. As part of its asset/liability management activities, the Company holds certain adjustable-rate loans and borrowings. The Company uses pay-fixed swaps to synthetically convert these instruments to fixed rate and reduce the variability or uncertainty of future cash flows due to changes in interest rates. The fair values of these derivatives are reported in other assets and other liabilities and the effective portion of the derivative’s gain or loss is recorded in other comprehensive income. For hedges against adjustable-rate
155
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
loans and borrowings, amounts reported in accumulated other comprehensive income are subsequently reclassified to interest income or expense during the same period in which the hedged item affects earnings.
The Company will also enter into cash flow hedges to hedge the forecasted sale of a portfolio of fixed-rate multi-family and non-residential loans using interest rate swaps. The fair values of these derivatives are also reported in other assets and other liabilities. For the hedges against the forecasted sale of loans, amounts recorded in accumulated other comprehensive income are subsequently reclassified into other noninterest income during the same period in which the hedged item affects earnings.
For the years ended December 31, 2005, 2004 and 2003, the Company recognized net losses of $6 million, zero and $5 million in earnings due to hedge ineffectiveness of cash flow hedges.
As of December 31, 2005, accumulated other comprehensive income included $102 million of deferred after-tax net losses related to derivative instruments designated as cash flow hedges of adjustable-rate liabilities and the forecasted sale of a portfolio of fixed-rate multi-family and non-residential loans that are expected to be reclassified into earnings during the next twelve months, as compared to $82 million and $299 million of deferred after-tax net losses related to derivative instruments designated as cash flow hedges at December 31, 2004 and 2003.
All components of each derivative instrument’s gain or loss are included in the assessment of hedge effectiveness.
Risk management derivatives
In addition to investment securities that are held for MSR risk management purposes, the Company enters into a combination of derivatives to manage changes in fair value of its MSR. These derivatives include interest rate swaps, swaptions, floors and forward purchase commitments. The Company began applying fair value hedge accounting treatment, as prescribed by Statement No. 133, as amended, as of April 1, 2004 to most of its MSR and the related derivatives. The fair value of certain derivatives, for which the Company either did not achieve or did not attempt to achieve fair value hedge accounting treatment, is reported in other assets and other liabilities. The changes in the fair value of these derivatives are reported in revaluation gain/loss from derivatives.
Occasionally, the Company utilizes derivative instruments for asset/liability interest rate risk management which do not qualify for hedge accounting treatment. These risk management derivatives include interest rate swaps, swaptions, caps and corridors. The fair value of these derivatives is reported in other assets and other liabilities. The changes in the fair value of these derivatives are reported in other noninterest income.
The Company occasionally purchases or originates financial instruments that contain an embedded derivative instrument. At inception of the financial instrument, the Company determines whether an embedded derivative is required to be accounted for separately as a derivative. As of December 31, 2005 and 2004, the Company’s embedded derivatives are considered clearly and closely related to the host contract and are not required to be separated from their host contracts.
156
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivative Counterparty Credit Risk
Derivative financial instruments expose the Company to credit risk in the event of nonperformance by counterparties to such agreements. This risk consists primarily of the termination value of agreements where the Company is in a favorable position. Credit risk related to derivative financial instruments is considered and provided for separately from the allowance for loan and lease losses. The Company manages the credit risk associated with its various derivative agreements through counterparty credit review, counterparty exposure limits and monitoring procedures. The Company obtains collateral from certain counterparties for amounts in excess of exposure limits and monitors all exposure and collateral requirements daily. The fair value of collateral received from a counterparty is continually monitored and the Company may request additional collateral from counterparties or return collateral pledged as deemed appropriate. The Company’s agreements generally include master netting agreements whereby the counterparties are entitled to settle their positions “net.” At December 31, 2005 and 2004, the gross positive fair value of the Company’s derivative financial instruments used for risk management purposes was $792 million and $899 million. The Company’s master netting agreements at December 31, 2005 and 2004 reduced this gross positive fair value by $561 million and $266 million. The Company’s collateral against derivative financial instruments was $82 million and $280 million at December 31, 2005 and 2004. Accordingly, the Company’s net exposure to derivative counterparty credit risk at December 31, 2005 and 2004 was $149 million and $353 million.
Note 22: Fair Value of Financial Instruments
The following estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because an active secondary market does not exist for a portion of the Company’s financial instruments, fair value estimates were based on management’s judgment concerning future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. In addition, considerable judgment was required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The Company did not attempt to estimate the value of certain assets and liabilities that are not considered financial instruments. Significant assets that are not considered financial instruments include premises and equipment, net tax assets/liabilities, real estate held for investment, foreclosed assets and other intangible assets. In addition, the value of the servicing rights for loans sold in which the MSR has not been capitalized was excluded from the valuation. Finally, the tax ramifications related to the realization of the unrealized gains and losses could have a significant effect on fair value estimates and have not been considered in any of the valuations.
Assets and liabilities whose carrying amounts approximate fair value include cash and cash equivalents, federal funds sold and securities purchased under resale agreements, trading assets, available-for-sale securities, investment in FHLBs, checking accounts, savings accounts and money market deposit accounts, federal funds purchased and commercial paper and derivative financial instruments.
157
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following methods and assumptions were used to estimate the fair value of each class of financial instrument as of December 31, 2005 and 2004:
Federal funds sold and securities purchased under agreements to resell – The carrying amount represented fair value. Federal funds sold and securities purchased under resale agreements are investments of high liquidity and have characteristics similar to cash.
Trading assets – Fair values were based on quoted market prices or internal valuation models that utilize market data inputs and other assumptions.
Available-for-sale securities – Fair values were based on quoted market prices. If a quoted market price was not available, fair value was estimated using market prices for similar securities, as well as internal analysis, using an option-adjusted cash flow valuation methodology.
Investment in FHLBs – The carrying amount represented fair value. FHLB stock does not have a readily determinable fair value and is required to be sold back at its par value.
Loans held for sale – Fair values were derived from quoted market prices, internal estimates and pricing of similar instruments.
Loans held in portfolio – Fair values were derived from quoted market prices, internal estimates and the pricing of similar instruments.
MSR – The fair value of MSR was estimated using projected cash flows, adjusted for the effects of anticipated prepayments, using a market discount rate. The fair value estimates exclude the value of the servicing rights for loans sold in which the MSR has not been capitalized.
Deposits – The fair value of checking accounts, savings accounts and money market deposit accounts was the amount payable on demand at the reporting date. For time deposit accounts, the fair value was determined using projected cash flows, adjusted for the effects of anticipated retention. The discount rate was derived from the rate currently offered on alternate funding sources with similar maturities.
Other financial liabilities – These liabilities include federal funds purchased, commercial paper, repurchase agreements, advances from FHLBs and other borrowings. Fair values were derived from the market prices for similar instruments, internal estimates and quoted market prices. The discount rate for the respective financial liabilities was derived from the rate currently offered on similar borrowings.
Derivative financial instruments – The carrying value of these financial instruments represents their fair value and approximates the amount that the Company would pay or receive to settle the position. The Company determined fair value by using valuation models incorporating current market information or by obtaining market or dealer quotes for instruments with similar characteristics.
158
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The estimated fair value of the Company’s financial instruments was as follows:
|
|
December 31, |
|
||||||||||
|
|
2005 |
|
2004 |
|
||||||||
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
||||
|
|
(in millions) |
|
||||||||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
||||
Loans held for sale |
|
$ |
33,582 |
|
$ |
33,699 |
|
$ |
42,743 |
|
$ |
43,019 |
|
Loans held in portfolio, net of allowance for loan and lease losses |
|
227,937 |
|
227,223 |
|
205,770 |
|
206,716 |
|
||||
MSR |
|
8,041 |
|
8,098 |
|
5,906 |
|
5,906 |
|
||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
||||
Time deposits |
|
73,988 |
|
73,825 |
|
46,480 |
|
46,784 |
|
||||
Securities sold under agreements to repurchase |
|
15,532 |
|
15,526 |
|
15,944 |
|
15,963 |
|
||||
Advances from FHLBs |
|
68,771 |
|
68,704 |
|
70,074 |
|
70,027 |
|
||||
Other borrowings |
|
23,777 |
|
23,589 |
|
18,498 |
|
18,862 |
|
||||
159
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 23: Condensed Consolidating Financial Statements
The following are the condensed consolidating financial statements of the parent companies of Washington Mutual, Inc. and New American Capital, Inc.
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
|
|
Year Ended December 31, 2005 |
|
|||||||||||||||||||||||
|
|
Washington
|
|
New American
|
|
All Other
|
|
Eliminations |
|
|
|
|||||||||||||||
|
|
(in millions) |
|
|||||||||||||||||||||||
Interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Notes receivable from subsidiaries |
|
|
$ |
27 |
|
|
|
$ |
140 |
|
|
|
$ |
61 |
|
|
|
$ |
(228 |
) |
|
|
$ |
– |
|
|
Other interest income |
|
|
5 |
|
|
|
6 |
|
|
|
15,729 |
|
|
|
(152 |
) |
|
|
15,588 |
|
|
|||||
Total interest income |
|
|
32 |
|
|
|
146 |
|
|
|
15,790 |
|
|
|
(380 |
) |
|
|
15,588 |
|
|
|||||
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Borrowings |
|
|
482 |
|
|
|
26 |
|
|
|
3,858 |
|
|
|
(392 |
) |
|
|
3,974 |
|
|
|||||
Other interest expense |
|
|
– |
|
|
|
– |
|
|
|
3,730 |
|
|
|
(2 |
) |
|
|
3,728 |
|
|
|||||
Total interest expense |
|
|
482 |
|
|
|
26 |
|
|
|
7,588 |
|
|
|
(394 |
) |
|
|
7,702 |
|
|
|||||
Net interest income
|
|
|
(450 |
) |
|
|
120 |
|
|
|
8,202 |
|
|
|
14 |
|
|
|
7,886 |
|
|
|||||
Provision for loan and lease losses |
|
|
– |
|
|
|
– |
|
|
|
316 |
|
|
|
– |
|
|
|
316 |
|
|
|||||
Net interest income (expense) after provision for loan and lease losses |
|
|
(450 |
) |
|
|
120 |
|
|
|
7,886 |
|
|
|
14 |
|
|
|
7,570 |
|
|
|||||
Noninterest Income |
|
|
32 |
|
|
|
4 |
|
|
|
5,755 |
|
|
|
(53 |
) |
|
|
5,738 |
|
|
|||||
Noninterest Expense |
|
|
125 |
|
|
|
10 |
|
|
|
7,781 |
|
|
|
(46 |
) |
|
|
7,870 |
|
|
|||||
Net income (loss) before income taxes, dividends from subsidiaries and equity in undistributed income of subsidiaries |
|
|
(543 |
) |
|
|
114 |
|
|
|
5,860 |
|
|
|
7 |
|
|
|
5,438 |
|
|
|||||
Income tax expense (benefit) |
|
|
(180 |
) |
|
|
28 |
|
|
|
2,158 |
|
|
|
– |
|
|
|
2,006 |
|
|
|||||
Dividends from subsidiaries |
|
|
1,005 |
|
|
|
2,857 |
|
|
|
– |
|
|
|
(3,862 |
) |
|
|
– |
|
|
|||||
Equity in undistributed income of subsidiaries |
|
|
2,790 |
|
|
|
718 |
|
|
|
– |
|
|
|
(3,508 |
) |
|
|
– |
|
|
|||||
Net Income |
|
|
$ |
3,432 |
|
|
|
$ |
3,661 |
|
|
|
$ |
3,702 |
|
|
|
$ |
(7,363 |
) |
|
|
$ |
3,432 |
|
|
160
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Year Ended December 31, 2004 |
|
|||||||||||||||||||||||
|
|
Washington
|
|
New American
|
|
All Other
|
|
Eliminations |
|
Washington
|
|
|||||||||||||||
|
|
(in millions) |
|
|||||||||||||||||||||||
Interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Notes receivable from subsidiaries |
|
|
$ |
13 |
|
|
|
$ |
55 |
|
|
|
$ |
35 |
|
|
|
$ |
(103 |
) |
|
|
$ |
– |
|
|
Other interest income |
|
|
5 |
|
|
|
3 |
|
|
|
11,502 |
|
|
|
(160 |
) |
|
|
11,350 |
|
|
|||||
Total interest income |
|
|
18 |
|
|
|
58 |
|
|
|
11,537 |
|
|
|
(263 |
) |
|
|
11,350 |
|
|
|||||
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Borrowings |
|
|
305 |
|
|
|
26 |
|
|
|
2,127 |
|
|
|
(267 |
) |
|
|
2,191 |
|
|
|||||
Other interest expense |
|
|
– |
|
|
|
– |
|
|
|
2,044 |
|
|
|
(1 |
) |
|
|
2,043 |
|
|
|||||
Total interest expense |
|
|
305 |
|
|
|
26 |
|
|
|
4,171 |
|
|
|
(268 |
) |
|
|
4,234 |
|
|
|||||
Net interest income
|
|
|
(287 |
) |
|
|
32 |
|
|
|
7,366 |
|
|
|
5 |
|
|
|
7,116 |
|
|
|||||
Provision for loan and lease losses |
|
|
– |
|
|
|
– |
|
|
|
209 |
|
|
|
– |
|
|
|
209 |
|
|
|||||
Net interest income (expense) after provision for loan and lease losses |
|
|
(287 |
) |
|
|
32 |
|
|
|
7,157 |
|
|
|
5 |
|
|
|
6,907 |
|
|
|||||
Noninterest Income |
|
|
7 |
|
|
|
1 |
|
|
|
4,652 |
|
|
|
(48 |
) |
|
|
4,612 |
|
|
|||||
Noninterest Expense |
|
|
119 |
|
|
|
4 |
|
|
|
7,460 |
|
|
|
(48 |
) |
|
|
7,535 |
|
|
|||||
Net income (loss) before income taxes, dividends from subsidiaries and equity in undistributed income of subsidiaries |
|
|
(399 |
) |
|
|
29 |
|
|
|
4,349 |
|
|
|
5 |
|
|
|
3,984 |
|
|
|||||
Income tax expense (benefit) |
|
|
(58 |
) |
|
|
18 |
|
|
|
1,545 |
|
|
|
– |
|
|
|
1,505 |
|
|
|||||
Dividends from subsidiaries |
|
|
75 |
|
|
|
2,093 |
|
|
|
– |
|
|
|
(2,168 |
) |
|
|
– |
|
|
|||||
Equity in undistributed income of subsidiaries |
|
|
3,144 |
|
|
|
988 |
|
|
|
– |
|
|
|
(4,132 |
) |
|
|
– |
|
|
|||||
Income
from continuing operations, net of
|
|
|
2,878 |
|
|
|
3,092 |
|
|
|
2,804 |
|
|
|
(6,295 |
) |
|
|
2,479 |
|
|
|||||
Discontinued operations, net of taxes |
|
|
– |
|
|
|
– |
|
|
|
399 |
|
|
|
– |
|
|
|
399 |
|
|
|||||
Net Income |
|
|
$ |
2,878 |
|
|
|
$ |
3,092 |
|
|
|
$ |
3,203 |
|
|
|
$ |
(6,295 |
) |
|
|
$ |
2,878 |
|
|
161
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Year Ended December 31, 2003 |
|
|||||||||||||||||||||||
|
|
Washington
|
|
New American
|
|
All Other
|
|
Eliminations |
|
Washington
|
|
|||||||||||||||
|
|
(in millions) |
|
|||||||||||||||||||||||
Interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Notes receivable from subsidiaries |
|
|
$ |
13 |
|
|
|
$ |
5 |
|
|
|
$ |
34 |
|
|
|
$ |
(52 |
) |
|
|
$ |
– |
|
|
Other interest income |
|
|
5 |
|
|
|
– |
|
|
|
12,320 |
|
|
|
(162 |
) |
|
|
12,163 |
|
|
|||||
Total interest income |
|
|
18 |
|
|
|
5 |
|
|
|
12,354 |
|
|
|
(214 |
) |
|
|
12,163 |
|
|
|||||
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Borrowings |
|
|
262 |
|
|
|
26 |
|
|
|
2,301 |
|
|
|
(220 |
) |
|
|
2,369 |
|
|
|||||
Other interest expense |
|
|
– |
|
|
|
– |
|
|
|
2,166 |
|
|
|
(1 |
) |
|
|
2,165 |
|
|
|||||
Total interest expense |
|
|
262 |
|
|
|
26 |
|
|
|
4,467 |
|
|
|
(221 |
) |
|
|
4,534 |
|
|
|||||
Net interest income
|
|
|
(244 |
) |
|
|
(21 |
) |
|
|
7,887 |
|
|
|
7 |
|
|
|
7,629 |
|
|
|||||
Provision for loan and lease losses |
|
|
– |
|
|
|
– |
|
|
|
42 |
|
|
|
– |
|
|
|
42 |
|
|
|||||
Net interest income (expense) after provision for loan and lease losses |
|
|
(244 |
) |
|
|
(21 |
) |
|
|
7,845 |
|
|
|
7 |
|
|
|
7,587 |
|
|
|||||
Noninterest Income |
|
|
13 |
|
|
|
1 |
|
|
|
5,855 |
|
|
|
(19 |
) |
|
|
5,850 |
|
|
|||||
Noninterest Expense |
|
|
124 |
|
|
|
3 |
|
|
|
7,306 |
|
|
|
(25 |
) |
|
|
7,408 |
|
|
|||||
Net income (loss) before income taxes, dividends from subsidiaries and equity in undistributed loss of subsidiaries |
|
|
(355 |
) |
|
|
(23 |
) |
|
|
6,394 |
|
|
|
13 |
|
|
|
6,029 |
|
|
|||||
Income tax expense (benefit) |
|
|
(184 |
) |
|
|
(7 |
) |
|
|
2,427 |
|
|
|
– |
|
|
|
2,236 |
|
|
|||||
Dividends from subsidiaries |
|
|
4,833 |
|
|
|
3,883 |
|
|
|
– |
|
|
|
(8,716 |
) |
|
|
– |
|
|
|||||
Equity in undistributed loss of subsidiaries |
|
|
(782 |
) |
|
|
(22 |
) |
|
|
– |
|
|
|
804 |
|
|
|
– |
|
|
|||||
Income from continuing operations, net of taxes |
|
|
3,880 |
|
|
|
3,845 |
|
|
|
3,967 |
|
|
|
(7,899 |
) |
|
|
3,793 |
|
|
|||||
Discontinued operations, net of taxes |
|
|
– |
|
|
|
– |
|
|
|
87 |
|
|
|
– |
|
|
|
87 |
|
|
|||||
Net Income |
|
|
$ |
3,880 |
|
|
|
$ |
3,845 |
|
|
|
$ |
4,054 |
|
|
|
$ |
(7,899 |
) |
|
|
$ |
3,880 |
|
|
162
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL CONDITION
|
|
December 31, 2005 |
|
|||||||||||||||||||||||
|
|
Washington
|
|
New American
|
|
All Other
|
|
Eliminations |
|
Washington
|
|
|||||||||||||||
|
|
(in millions) |
|
|||||||||||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and cash equivalents |
|
|
$ |
781 |
|
|
|
$ |
108 |
|
|
|
$ |
6,693 |
|
|
|
$ |
(1,368 |
) |
|
|
$ |
6,214 |
|
|
Available-for-sale securities |
|
|
55 |
|
|
|
– |
|
|
|
24,604 |
|
|
|
– |
|
|
|
24,659 |
|
|
|||||
Loans, net of allowance for loan and lease losses |
|
|
1 |
|
|
|
8 |
|
|
|
261,510 |
|
|
|
– |
|
|
|
261,519 |
|
|
|||||
Notes receivable from subsidiaries |
|
|
1,354 |
|
|
|
3,550 |
|
|
|
1,790 |
|
|
|
(6,694 |
) |
|
|
– |
|
|
|||||
Investment in subsidiaries |
|
|
35,018 |
|
|
|
30,267 |
|
|
|
– |
|
|
|
(65,285 |
) |
|
|
– |
|
|
|||||
Other assets |
|
|
1,404 |
|
|
|
605 |
|
|
|
51,995 |
|
|
|
(2,557 |
) |
|
|
51,447 |
|
|
|||||
Total assets |
|
|
$ |
38,613 |
|
|
|
$ |
34,538 |
|
|
|
$ |
346,592 |
|
|
|
$ |
(75,904 |
) |
|
|
$ |
343,839 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Notes payable to subsidiaries |
|
|
$ |
266 |
|
|
|
$ |
549 |
|
|
|
$ |
8,244 |
|
|
|
$ |
(9,059 |
) |
|
|
$ |
– |
|
|
Borrowings |
|
|
10,194 |
|
|
|
705 |
|
|
|
104,262 |
|
|
|
– |
|
|
|
115,161 |
|
|
|||||
Other liabilities |
|
|
537 |
|
|
|
34 |
|
|
|
202,088 |
|
|
|
(1,597 |
) |
|
|
201,062 |
|
|
|||||
Total liabilities |
|
|
10,997 |
|
|
|
1,288 |
|
|
|
314,594 |
|
|
|
(10,656 |
) |
|
|
316,223 |
|
|
|||||
Stockholders’ Equity |
|
|
27,616 |
|
|
|
33,250 |
|
|
|
31,998 |
|
|
|
(65,248 |
) |
|
|
27,616 |
|
|
|||||
Total liabilities and stockholders’ equity |
|
|
$ |
38,613 |
|
|
|
$ |
34,538 |
|
|
|
$ |
346,592 |
|
|
|
$ |
(75,904 |
) |
|
|
$ |
343,839 |
|
|
163
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
December 31, 2004 |
|
|||||||||||||||||||||||
|
|
Washington
|
|
New American
|
|
All Other
|
|
Eliminations |
|
Washington
|
|
|||||||||||||||
|
|
(in millions) |
|
|||||||||||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and cash equivalents |
|
|
$ |
1,517 |
|
|
|
$ |
71 |
|
|
|
$ |
4,882 |
|
|
|
$ |
(2,015 |
) |
|
|
$ |
4,455 |
|
|
Available-for-sale securities |
|
|
60 |
|
|
|
– |
|
|
|
19,155 |
|
|
|
4 |
|
|
|
19,219 |
|
|
|||||
Loans, net of allowance for loan and lease losses |
|
|
1 |
|
|
|
10 |
|
|
|
248,502 |
|
|
|
– |
|
|
|
248,513 |
|
|
|||||
Notes receivable from subsidiaries |
|
|
1,580 |
|
|
|
2,400 |
|
|
|
1,817 |
|
|
|
(5,797 |
) |
|
|
– |
|
|
|||||
Investment in subsidiaries |
|
|
26,488 |
|
|
|
23,533 |
|
|
|
– |
|
|
|
(50,021 |
) |
|
|
– |
|
|
|||||
Other assets |
|
|
810 |
|
|
|
426 |
|
|
|
37,561 |
|
|
|
(3,066 |
) |
|
|
35,731 |
|
|
|||||
Total assets |
|
|
$ |
30,456 |
|
|
|
$ |
26,440 |
|
|
|
$ |
311,917 |
|
|
|
$ |
(60,895 |
) |
|
|
$ |
307,918 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Notes payable to subsidiaries |
|
|
$ |
258 |
|
|
|
$ |
1,183 |
|
|
|
$ |
6,623 |
|
|
|
$ |
(8,064 |
) |
|
|
$ |
– |
|
|
Borrowings |
|
|
8,516 |
|
|
|
309 |
|
|
|
99,736 |
|
|
|
– |
|
|
|
108,561 |
|
|
|||||
Other liabilities |
|
|
456 |
|
|
|
14 |
|
|
|
180,461 |
|
|
|
(2,800 |
) |
|
|
178,131 |
|
|
|||||
Total liabilities |
|
|
9,230 |
|
|
|
1,506 |
|
|
|
286,820 |
|
|
|
(10,864 |
) |
|
|
286,692 |
|
|
|||||
Stockholders’ Equity |
|
|
21,226 |
|
|
|
24,934 |
|
|
|
25,097 |
|
|
|
(50,031 |
) |
|
|
21,226 |
|
|
|||||
Total liabilities and stockholders’ equity |
|
|
$ |
30,456 |
|
|
|
$ |
26,440 |
|
|
|
$ |
311,917 |
|
|
|
$ |
(60,895 |
) |
|
|
$ |
307,918 |
|
|
164
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
Year Ended December 31, 2005 |
|
||||||||||||||||||
|
|
Washington
|
|
New American
|
|
All Other
|
|
Washington
|
|
||||||||||||
|
|
(in millions) |
|
||||||||||||||||||
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
|
$ |
3,432 |
|
|
|
$ |
3,661 |
|
|
|
$ |
(3,661 |
) |
|
|
$ |
3,432 |
|
|
Adjustments to reconcile net income to net cash provided (used) by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity in undistributed (income) loss of subsidiaries |
|
|
(2,790 |
) |
|
|
(718 |
) |
|
|
3,508 |
|
|
|
– |
|
|
||||
(Increase) decrease in other assets |
|
|
(574 |
) |
|
|
8 |
|
|
|
(6,748 |
) |
|
|
(7,314 |
) |
|
||||
Increase (decrease) in other liabilities |
|
|
75 |
|
|
|
112 |
|
|
|
3,191 |
|
|
|
3,378 |
|
|
||||
Other |
|
|
(1 |
) |
|
|
(187 |
) |
|
|
2,457 |
|
|
|
2,269 |
|
|
||||
Net cash provided (used) by operating activities |
|
|
142 |
|
|
|
2,876 |
|
|
|
(1,253 |
) |
|
|
1,765 |
|
|
||||
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Purchase of securities |
|
|
– |
|
|
|
– |
|
|
|
(22,501 |
) |
|
|
(22,501 |
) |
|
||||
Proceeds from sales and maturities of securities |
|
|
2 |
|
|
|
– |
|
|
|
19,824 |
|
|
|
19,826 |
|
|
||||
Origination of loans, net of principal payments |
|
|
– |
|
|
|
2 |
|
|
|
(10,385 |
) |
|
|
(10,383 |
) |
|
||||
Decrease (increase) in notes receivable from subsidiaries |
|
|
226 |
|
|
|
(1,150 |
) |
|
|
924 |
|
|
|
– |
|
|
||||
Investment in subsidiaries |
|
|
(745 |
) |
|
|
(615 |
) |
|
|
1,360 |
|
|
|
– |
|
|
||||
Other |
|
|
– |
|
|
|
– |
|
|
|
(1,560 |
) |
|
|
(1,560 |
) |
|
||||
Net cash provided (used) by investing activities |
|
|
(517 |
) |
|
|
(1,763 |
) |
|
|
(12,338 |
) |
|
|
(14,618 |
) |
|
||||
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Proceeds from borrowings, net |
|
|
1,878 |
|
|
|
(238 |
) |
|
|
4,290 |
|
|
|
5,930 |
|
|
||||
Cash dividends paid on preferred and common stock |
|
|
(1,709 |
) |
|
|
(925 |
) |
|
|
925 |
|
|
|
(1,709 |
) |
|
||||
Repurchase of common stock |
|
|
(921 |
) |
|
|
– |
|
|
|
– |
|
|
|
(921 |
) |
|
||||
Other |
|
|
391 |
|
|
|
87 |
|
|
|
10,834 |
|
|
|
11,312 |
|
|
||||
Net cash provided (used) by financing activities |
|
|
(361 |
) |
|
|
(1,076 |
) |
|
|
16,049 |
|
|
|
14,612 |
|
|
||||
Increase (decrease) in cash and cash equivalents |
|
|
(736 |
) |
|
|
37 |
|
|
|
2,458 |
|
|
|
1,759 |
|
|
||||
Cash and cash equivalents, beginning of year |
|
|
1,517 |
|
|
|
71 |
|
|
|
2,867 |
|
|
|
4,455 |
|
|
||||
Cash and cash equivalents, end of year |
|
|
$ |
781 |
|
|
|
$ |
108 |
|
|
|
$ |
5,325 |
|
|
|
$ |
6,214 |
|
|
(1) Includes intercompany eliminations.
165
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Year Ended December 31, 2004 |
|
||||||||||||||||||
|
|
Washington
|
|
New American
|
|
All Other
|
|
|
|
||||||||||||
|
|
(in millions) |
|
||||||||||||||||||
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
|
$ |
2,878 |
|
|
|
$ |
3,092 |
|
|
|
$ |
(3,092 |
) |
|
|
$ |
2,878 |
|
|
Adjustments to reconcile net income to net cash provided (used) by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity in undistributed (income) loss of subsidiaries |
|
|
(3,144 |
) |
|
|
(988 |
) |
|
|
4,132 |
|
|
|
– |
|
|
||||
(Increase) decrease in other assets |
|
|
363 |
|
|
|
(309 |
) |
|
|
(3,606 |
) |
|
|
(3,552 |
) |
|
||||
Increase (decrease) in other liabilities |
|
|
(437 |
) |
|
|
(282 |
) |
|
|
(341 |
) |
|
|
(1,060 |
) |
|
||||
Other |
|
|
1 |
|
|
|
– |
|
|
|
(17,982 |
) |
|
|
(17,981 |
) |
|
||||
Net cash provided (used) by operating activities |
|
|
(339 |
) |
|
|
1,513 |
|
|
|
(20,889 |
) |
|
|
(19,715 |
) |
|
||||
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Purchase of securities |
|
|
– |
|
|
|
– |
|
|
|
(5,586 |
) |
|
|
(5,586 |
) |
|
||||
Proceeds from sales and maturities of securities |
|
|
1 |
|
|
|
– |
|
|
|
27,605 |
|
|
|
27,606 |
|
|
||||
Origination of loans, net of principal payments |
|
|
1 |
|
|
|
3 |
|
|
|
(39,312 |
) |
|
|
(39,308 |
) |
|
||||
Decrease (increase) in notes receivable from subsidiaries |
|
|
943 |
|
|
|
(2,200 |
) |
|
|
1,257 |
|
|
|
– |
|
|
||||
Investment in subsidiaries |
|
|
286 |
|
|
|
(438 |
) |
|
|
152 |
|
|
|
– |
|
|
||||
Other |
|
|
– |
|
|
|
– |
|
|
|
1,315 |
|
|
|
1,315 |
|
|
||||
Net cash provided (used) by investing activities |
|
|
1,231 |
|
|
|
(2,635 |
) |
|
|
(14,569 |
) |
|
|
(15,973 |
) |
|
||||
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Proceeds from borrowings, net |
|
|
1,721 |
|
|
|
1,143 |
|
|
|
11,696 |
|
|
|
14,560 |
|
|
||||
Cash dividends paid on preferred and common stock |
|
|
(1,510 |
) |
|
|
(75 |
) |
|
|
75 |
|
|
|
(1,510 |
) |
|
||||
Repurchase of common stock |
|
|
(712 |
) |
|
|
– |
|
|
|
– |
|
|
|
(712 |
) |
|
||||
Other |
|
|
310 |
|
|
|
79 |
|
|
|
20,398 |
|
|
|
20,787 |
|
|
||||
Net cash provided (used) by financing activities |
|
|
(191 |
) |
|
|
1,147 |
|
|
|
32,169 |
|
|
|
33,125 |
|
|
||||
Increase (decrease) in cash and cash equivalents |
|
|
701 |
|
|
|
25 |
|
|
|
(3,289 |
) |
|
|
(2,563 |
) |
|
||||
Cash and cash equivalents, beginning of year |
|
|
816 |
|
|
|
46 |
|
|
|
6,156 |
|
|
|
7,018 |
|
|
||||
Cash and cash equivalents, end of year |
|
|
$ |
1,517 |
|
|
|
$ |
71 |
|
|
|
$ |
2,867 |
|
|
|
$ |
4,455 |
|
|
(1) Includes intercompany eliminations.
166
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Year Ended December 31, 2003 |
|
||||||||||||||||||
|
|
Washington
|
|
New American
|
|
All Other
|
|
|
|
||||||||||||
|
|
(in millions) |
|
||||||||||||||||||
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
|
$ |
3,880 |
|
|
|
$ |
3,845 |
|
|
|
$ |
(3,845 |
) |
|
|
$ |
3,880 |
|
|
Adjustments to reconcile net income to net cash provided (used) by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity in undistributed (income) loss of subsidiaries |
|
|
782 |
|
|
|
22 |
|
|
|
(804 |
) |
|
|
– |
|
|
||||
(Increase) decrease in other assets |
|
|
(143 |
) |
|
|
400 |
|
|
|
(1,365 |
) |
|
|
(1,108 |
) |
|
||||
Increase (decrease) in other liabilities |
|
|
564 |
|
|
|
423 |
|
|
|
(2,025 |
) |
|
|
(1,038 |
) |
|
||||
Other |
|
|
(3 |
) |
|
|
– |
|
|
|
9,337 |
|
|
|
9,334 |
|
|
||||
Net cash provided (used) by operating activities |
|
|
5,080 |
|
|
|
4,690 |
|
|
|
1,298 |
|
|
|
11,068 |
|
|
||||
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Purchase of securities |
|
|
(3 |
) |
|
|
– |
|
|
|
(41,049 |
) |
|
|
(41,052 |
) |
|
||||
Proceeds from sales and maturities of securities |
|
|
1 |
|
|
|
– |
|
|
|
50,586 |
|
|
|
50,587 |
|
|
||||
Origination of loans, net of principal payments |
|
|
– |
|
|
|
2 |
|
|
|
(31,008 |
) |
|
|
(31,006 |
) |
|
||||
Decrease (increase) in notes receivable from subsidiaries |
|
|
(2,240 |
) |
|
|
(200 |
) |
|
|
2,440 |
|
|
|
– |
|
|
||||
Investment in subsidiaries |
|
|
(520 |
) |
|
|
269 |
|
|
|
251 |
|
|
|
– |
|
|
||||
Other |
|
|
– |
|
|
|
– |
|
|
|
4,021 |
|
|
|
4,021 |
|
|
||||
Net cash provided (used) by investing activities |
|
|
(2,762 |
) |
|
|
71 |
|
|
|
(14,759 |
) |
|
|
(17,450 |
) |
|
||||
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Proceeds from borrowings, net |
|
|
1,573 |
|
|
|
(3 |
) |
|
|
10,632 |
|
|
|
12,202 |
|
|
||||
Cash dividends paid on preferred and common stock |
|
|
(1,206 |
) |
|
|
(4,817 |
) |
|
|
4,817 |
|
|
|
(1,206 |
) |
|
||||
Repurchase of common stock |
|
|
(2,699 |
) |
|
|
– |
|
|
|
– |
|
|
|
(2,699 |
) |
|
||||
Other |
|
|
420 |
|
|
|
58 |
|
|
|
(2,459 |
) |
|
|
(1,981 |
) |
|
||||
Net cash provided (used) by financing activities |
|
|
(1,912 |
) |
|
|
(4,762 |
) |
|
|
12,990 |
|
|
|
6,316 |
|
|
||||
Increase (decrease) in cash and cash equivalents |
|
|
406 |
|
|
|
(1 |
) |
|
|
(471 |
) |
|
|
(66 |
) |
|
||||
Cash and cash equivalents, beginning of year |
|
|
410 |
|
|
|
47 |
|
|
|
6,627 |
|
|
|
7,084 |
|
|
||||
Cash and cash equivalents, end of year |
|
|
$ |
816 |
|
|
|
$ |
46 |
|
|
|
$ |
6,156 |
|
|
|
$ |
7,018 |
|
|
(1) Includes intercompany eliminations.
167
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 24: Discontinued Operations
During the first quarter of 2004 the Company sold its consumer finance subsidiary, Washington Mutual Finance Corporation. Accordingly, this former subsidiary has been accounted for as a discontinued operation and its results of operations and cash flows have been removed from the Company’s results of continuing operations for years ended December 31, 2004 and 2003 on the Consolidated Statements of Income, Cash Flows and Notes to the Consolidated Financial Statements, unless otherwise noted. The results from discontinued operations in 2004 amounted to $399 million net of tax, which includes a pretax gain of $676 million ($420 million, net of tax) that was recorded upon the sale of Washington Mutual Finance Corporation.
Results of operations for Washington Mutual Finance Corporation, excluding the gain recognized upon its sale, were as follows:
|
|
Year Ended
|
|
||||||||
|
|
2004 |
|
2003 |
|
||||||
|
|
(in millions) |
|
||||||||
Net interest income |
|
|
$ |
– |
|
|
|
$ |
433 |
|
|
Provision for loan and lease losses |
|
|
– |
|
|
|
153 |
|
|
||
Noninterest income |
|
|
– |
|
|
|
24 |
|
|
||
Noninterest expense |
|
|
32 |
|
|
|
167 |
|
|
||
Income tax expense (benefit) |
|
|
(11 |
) |
|
|
50 |
|
|
||
Net income (loss) |
|
|
$ |
(21 |
) |
|
|
$ |
87 |
|
|
Note 25: Operating Segments
The Company has four operating segments for the purpose of management reporting: the Retail Banking and Financial Services Group, the Home Loans Group (previously called the “Mortgage Banking Group”), the Card Services Group and the Commercial Group. The results of these operating segments are based on the Company’s management accounting process. Unlike financial accounting, there is no comprehensive, authoritative guidance for management accounting. 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 the products and services they offer.
The principal activities of the Retail Banking and Financial Services Group include: (1) offering a comprehensive line of deposit and other retail banking products and services to consumers and small businesses; (2) originating, managing and servicing home equity loans and lines of credit; (3) providing investment advisory and brokerage services, sales of annuities, mutual fund management and other financial services; and (4) holding the Company’s portfolio of home loans held for investment, excluding loans originated by Long Beach Mortgage Company (which are held by the Commercial Group).
Deposit products offered by the segment in all its stores include the Company’s signature free checking and interest-bearing Platinum checking accounts, as well as other personal checking, savings, money market deposit and time deposit accounts.
Financial consultants provide investment advisory and securities brokerage services to the public while licensed bank employees offer fixed annuities. The Company’s mutual fund management business offers investment advisory and mutual fund distribution services.
168
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
This segment’s home loan portfolio consists of home loans purchased from both the Home Loans Group and secondary market participants. The segment also purchases and re-underwrites loans to subprime borrowers which are held in the home loan portfolio. Loans held in portfolio generate interest income and loan-related noninterest income, such as late fees and prepayment fees.
The principal activities of the Home Loans Group include: (1) originating and servicing home loans; (2) buying and selling home loans in the secondary market; and (3) selling insurance-related products and participating in reinsurance activities with other insurance companies.
Home loans are either originated in the retail and wholesale channels or are purchased from other lenders through the correspondent channel. The profitability of each channel varies over time and the Company’s emphasis on each channel varies accordingly. The segment offers a wide variety of home loans, including: fixed-rate home loans; adjustable-rate home loans or “ARMs” (where the interest rate may be adjusted as frequently as every month); hybrid home loans (where the interest rate is fixed for a predetermined time period, typically 3 to 5 years, and then converts to an ARM that reprices monthly or annually, depending on the product); Option ARM loans (for more details on Option ARMs, refer to Management’s Discussion and Analysis – “Credit Risk Management”); and government insured or guaranteed home loans.
From an enterprise-wide perspective, loans are either retained or sold. Loans which are sold generate gain or loss on sale as well as interest income from the time they are funded until the time they are sold, while loans held in portfolio generate interest income and ancillary noninterest income. Fixed-rate home loans, which subject the Company to more interest rate risk than other types of home loans, are generally sold as part of the Company’s overall asset/liability risk management process. The decision to retain or sell other home loan products requires balancing the combination of additional interest income and the interest rate and credit risks inherent with holding loans in portfolio, with the size of the gain or loss that would be realized if the loans were sold. Such decisions are elements of the Company’s capital management process.
For management reporting purposes, home loans originated by this segment are either transferred through inter-segment sales to the Retail Banking and Financial Services Group or are sold to secondary market participants, including the housing government-sponsored enterprises – such as the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the regional branches of the Federal Home Loan Banks. The premium received on inter-segment sales to the Retail Banking and Financial Services Group is based on prices available in the secondary market, adjusted for hedging costs.
The Home Loans Group typically retains the right to service all home loans, whether held for sale, sold to secondary market participants or held in portfolio by the Retail Banking and Financial Services Group. Mortgage servicing involves the administration and collection of home loan payments. In servicing home loans, the Company collects and remits loan payments, responds to borrower inquiries, applies the collected principal and interest to the individual loans, collects, holds and disburses escrow funds for payment of property taxes and insurance premiums, counsels delinquent customers, supervises foreclosures and property dispositions and generally administers the loans. In return for performing these functions, the Company receives servicing fees and other remuneration.
In addition to selling loans to secondary market participants, the Home Loans Group generates both interest income and noninterest income by acquiring home loans from a variety of sources, pooling and securitizing those loans, selling the resulting mortgage-backed securities to secondary market participants and providing ongoing servicing and bond administration for all securities issued.
169
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Home Loans Group makes insurance products available to its customers that complement the mortgage process, including private mortgage insurance, mortgage life insurance, flood, homeowners’, earthquake and other property and casualty insurance. Other types of insurance products made available include accidental death and dismemberment and term and whole life insurance. This segment also manages the Company’s captive reinsurance activities.
The principal activities of the Card Services Group include: (1) originating and servicing of credit card loans; and (2) providing other cardholder services. The Card Services Group manages the Company’s credit card operations, which target customers by leveraging the Company’s retail banking distribution network and through direct mail solicitations, which serve as the Group’s primary new customer acquisition channel, augmented by direct mail solicitation, online and telemarketing activities and other marketing programs. In addition to credit cards, this segment markets a variety of cardholder service products to its customer base. These products, which may be originated within the Company or jointly marketed with others, include debt suspension, auto- and health-related services, credit-related services, and selected insurance products.
The principal activities of the Commercial Group include: (1) providing financing to developers and investors for the acquisition or construction of multi-family dwellings and, to a lesser extent, other commercial properties; (2) originating and servicing multi-family and other commercial real estate loans and either holding such loans in portfolio as part of its commercial asset management business or selling them in the secondary market; (3) providing financing and other banking services to mortgage bankers for the origination of residential mortgage loans; and (4) originating and servicing home loans made to subprime borrowers through the Company’s subsidiary, Long Beach Mortgage Company.
The multi-family lending business, which accounts for a majority of the Group’s revenues, is comprised of three key activities: originating and managing loans retained in the loan portfolio, servicing all originated loans, whether they are retained or sold, and providing ancillary banking services to enhance customer retention. Combining these three activities into one integrated business model has allowed the Commercial Group to become a leading originator and holder of multi-family loans. The Group’s multi-family lending program has a market share of more than 20% in certain key cities along the west coast, is rapidly gaining market share in certain key cities on the east coast and is targeting similar success in other selected target markets.
As part of the Company’s specialty mortgage finance operations, the Group also originates home loans to subprime borrowers through the broker network maintained by Long Beach Mortgage Company, a wholly-owned subsidiary of the Company. Such loans may be held in the Company’s specialty mortgage finance home loan portfolio or sold to secondary market participants. The Company generally retains the servicing relationship on loans which it has sold.
The Corporate Support/Treasury and Other category includes enterprise-wide management of the Company’s interest rate risk, liquidity, capital, borrowings, and a majority of the Company’s investment securities. As part of the Company’s asset and liability management process, the Treasury function provides oversight and direction across the enterprise over matters that impact the profile of the Company’s balance sheet, such as product composition of loans that the Company holds in the portfolio, the appropriate mix of wholesale and capital markets borrowings at any given point in time, and the allocation of capital resources to the business segments. This category also includes the costs of the Company’s technology services, facilities, legal, human resources, and accounting and finance functions to the extent not allocated to the business segments and the community lending and investment operations. Community lending and investment programs help fund the development of affordable housing units in
170
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
traditionally underserved communities. Also reported in this category is the net impact of funds transfer pricing for loan and deposit balances, lower of cost or fair value adjustments and the write-off of inter-segment premiums associated with transfers of loans from the Retail Banking and Financial Services Group to the Home Loans Group when home loans previously designated as held for investment are moved to held for sale and all charges incurred from the Company’s cost containment initiative, which was a key initiative during 2004.
The Company uses various management accounting methodologies, which are enhanced from time to time, to assign certain balance sheet and income statement items to the responsible operating segment. In order to more closely align the segments’ operating results with other internal profitability measures, the Company has discontinued the practice of allocating a goodwill cost of capital charge to the operating segments. Prior periods have been conformed to reflect this change in methodology. Methodologies that are applied to the measurement of segment profitability include: (1) a funds transfer pricing system, which allocates interest income funding credits and funding charges between the operating segments and the Treasury Division. A segment will receive a funding credit from the Treasury Division for its liabilities and its share of risk-adjusted economic capital. Conversely, a segment is assigned a charge by the Treasury Division to fund its assets. The system takes into account the interest rate risk profile of the Company’s assets and liabilities and concentrates their sensitivities within the Treasury Division, where it is centrally managed. Certain basis and other residual risk remains in the operating segments; (2) a calculation of the provision for loan and lease losses based on management’s current assessment of the long-term, normalized net charge-off ratio for loan products within each segment, which is recalibrated periodically to the latest available loan loss experience data. This process differs from the “losses inherent in the loan portfolio” methodology that is used to measure the allowance for loan and lease losses for consolidated reporting purposes. This methodology is used to provide segment management with provision information for strategic decision making; (3) the allocation of certain operating expenses that are not directly charged to the segments (i.e., corporate overhead), which generally are based on each segment’s consumption patterns; (4) the allocation of goodwill and other intangible assets to the operating segments based on benefits received from each acquisition; and (5) inter-segment activities which include the transfer of originated mortgage loans that are to be held in portfolio from the Home Loans Group to the Retail Banking and Financial Services Group and a broker fee arrangement between Home Loans and Retail Banking and Financial Services. When originated mortgage loans are transferred, the Home Loans Group records a gain on the sale of the loans based on an assumed profit factor. This profit factor is included as a premium to the value of the transferred loans, which is amortized as an adjustment to the net interest income recorded by the Retail Banking and Financial Services Group while the loan is held for investment. If a loan that was designated as held for investment is subsequently transferred to held for sale, the inter-segment premium is written off through Corporate Support/Treasury and Other. Inter-segment broker fees are recorded by the Retail Banking and Financial Services Group when home loans are initiated through retail banking stores, while the Home Loans Group records a broker fee when the origination of home equity loans and lines of credit are initiated through home loan stores. The results of all inter-segment activities are eliminated as reconciling adjustments that are necessary to conform the presentation of management accounting policies to the accounting principles used in the Company’s consolidated financial statements.
During the fourth quarter of 2005 the Company began integrating the Card Services Group into its management accounting process. During this period only the funds transfer pricing methodology was applied to this segment.
171
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial highlights by operating segment were as follows:
|
|
Year Ended December 31, 2005 |
|
|||||||||||||||||||||||||||||||
|
|
Retail
|
|
Home Loans
|
|
Card
|
|
Commercial
|
|
Corporate
|
|
Reconciling
|
|
Total |
|
|||||||||||||||||||
|
|
(dollars in millions) |
|
|||||||||||||||||||||||||||||||
Condensed income statement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net interest income (expense) |
|
|
$ |
5,478 |
|
|
|
$ |
1,181 |
|
|
|
$ |
637 |
|
|
|
$ |
1,371 |
|
|
|
$ |
(831 |
) |
|
|
$ |
50 |
(3) |
|
$ |
7,886 |
|
Provision for loan and lease losses |
|
|
165 |
|
|
|
– |
|
|
|
454 |
|
|
|
7 |
|
|
|
1 |
|
|
|
(311 |
) (4) |
|
316 |
|
|||||||
Noninterest income (expense) |
|
|
3,049 |
|
|
|
2,192 |
|
|
|
352 |
|
|
|
478 |
|
|
|
(118 |
) |
|
|
(215 |
) (5) |
|
5,738 |
|
|||||||
Inter-segment revenue (expense) |
|
|
42 |
|
|
|
(42 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
– |
|
|||||||
Noninterest expense |
|
|
4,444 |
|
|
|
2,140 |
|
|
|
268 |
|
|
|
637 |
|
|
|
381 |
|
|
|
– |
|
|
7,870 |
|
|||||||
Income (loss) before income taxes |
|
|
3,960 |
|
|
|
1,191 |
|
|
|
267 |
|
|
|
1,205 |
|
|
|
(1,331 |
) |
|
|
146 |
|
|
5,438 |
|
|||||||
Income taxes (benefit) |
|
|
1,495 |
|
|
|
449 |
|
|
|
101 |
|
|
|
455 |
|
|
|
(536 |
) |
|
|
42 |
(6) |
|
2,006 |
|
|||||||
Net income (loss) |
|
|
$ |
2,465 |
|
|
|
$ |
742 |
|
|
|
$ |
166 |
|
|
|
$ |
750 |
|
|
|
$ |
(795 |
) |
|
|
$ |
104 |
|
|
$ |
3,432 |
|
Performance and other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Efficiency ratio (7) |
|
|
51.85 |
% |
|
|
64.23 |
% |
|
|
27.08 |
% |
|
|
34.46 |
% |
|
|
n/a |
|
|
|
n/a |
|
|
57.76 |
% |
|||||||
Average loans |
|
|
$ |
180,556 |
|
|
|
$ |
30,898 |
|
|
|
$ |
4,908 |
|
|
|
$ |
47,147 |
|
|
|
$ |
1,088 |
|
|
|
$ |
(4,316 |
) (8) |
|
$ |
260,281 |
|
Average assets |
|
|
193,342 |
|
|
|
52,915 |
|
|
|
5,595 |
|
|
|
51,594 |
|
|
|
27,319 |
|
|
|
(4,088 |
) (8)(9) |
|
326,677 |
|
|||||||
Average deposits |
|
|
136,894 |
|
|
|
14,036 |
|
|
|
n/a |
|
|
|
7,872 |
|
|
|
27,221 |
|
|
|
n/a |
|
|
186,023 |
|
|||||||
Loan volume |
|
|
46,951 |
|
|
|
172,928 |
|
|
|
n/a |
|
|
|
41,000 |
|
|
|
278 |
|
|
|
n/a |
|
|
261,157 |
|
|||||||
Employees at end of period |
|
|
30,437 |
|
|
|
13,256 |
|
|
|
3,124 |
|
|
|
4,182 |
|
|
|
9,799 |
|
|
|
n/a |
|
|
60,798 |
|
(1) On October 1, 2005, the Company completed its acquisition of Providian Financial Corporation. As such, the financial results for 2005 only include the operating results for the final three months of that year. Operating results for the Card Services Group are presented on a managed basis as the Company treats securitized and sold credit card receivables as if they were still on the balance sheet in evaluating the overall performance of this operating segment.
(2) The managed basis presentation of Card Services excludes the impact of securitizations, including their effect on income, the provision for credit losses and average loans and assets. Securitization adjustments to arrive at the reported GAAP results for the fourth quarter of 2005 were: a decrease of $409 million in net interest income; an increase of $150 million in noninterest income; a decrease of $259 million in the provision for credit losses; a decrease of $11.01 billion in average loans; and a decrease of $9.27 billion in average assets, all of which are eliminated within Reconciling Adjustments.
(3) Represents the difference between home loan premium amortization recorded by the Retail Banking and Financial Services Group and the amount recognized in the Company’s Consolidated Statements of Income. For management reporting purposes, loans that are held in portfolio by the Retail Banking and Financial Services Group are treated as if they are purchased from the Home Loans Group. Since the cost basis of these loans includes an assumed profit factor paid to the Home Loans Group, the amortization of loan premiums recorded by the Retail Banking and Financial Services Group includes this assumed profit factor and must therefore be eliminated as a reconciling adjustment.
(4) Represents the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the “losses inherent in the loan portfolio” methodology used by the Company.
(5) Represents the difference between gain from mortgage loans primarily recorded by the Home Loans Group and the gain from mortgage loans recognized in the Company’s Consolidated Statements of Income. As the Home Loans Group holds no loans in portfolio, all loans originated or purchased by this segment are considered to be salable for management reporting purposes.
(6) Represents the tax effect of reconciling adjustments.
(7) The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
(8) Includes the inter-segment offset for inter-segment loan premiums that the Retail Banking and Financial Services Group recognized from the transfer of portfolio loans from the Home Loans Group.
(9) Includes the impact to the allowance for loan and lease losses of $211 million that results from the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the “losses inherent in the loan portfolio” methodology used by the Company.
172
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Year Ended December 31, 2004 |
|
||||||||||||||||||||||||||
|
|
Retail
|
|
Home Loans
|
|
Commercial
|
|
Corporate
|
|
Reconciling
|
|
Total |
|
||||||||||||||||
|
|
(dollars in millions) |
|
||||||||||||||||||||||||||
Condensed income statement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net interest income (expense) |
|
|
$ |
4,999 |
|
|
|
$ |
1,240 |
|
|
|
$ |
1,314 |
|
|
|
$ |
(869 |
) |
|
|
$ |
432 |
(1) |
|
$ |
7,116 |
|
Provision for loan and lease losses |
|
|
164 |
|
|
|
– |
|
|
|
41 |
|
|
|
4 |
|
|
|
– |
(2) |
|
209 |
|
||||||
Noninterest income (expense) |
|
|
2,758 |
|
|
|
2,228 |
|
|
|
379 |
|
|
|
(145 |
) |
|
|
(608 |
) (3) |
|
4,612 |
|
||||||
Inter-segment revenue (expense) |
|
|
23 |
|
|
|
(23 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
– |
|
||||||
Noninterest expense |
|
|
4,123 |
|
|
|
2,411 |
|
|
|
594 |
|
|
|
407 |
|
|
|
– |
|
|
7,535 |
|
||||||
Income (loss) from continuing operations before income taxes |
|
|
3,493 |
|
|
|
1,034 |
|
|
|
1,058 |
|
|
|
(1,425 |
) |
|
|
(176 |
) |
|
3,984 |
|
||||||
Income taxes (benefit) |
|
|
1,305 |
|
|
|
386 |
|
|
|
395 |
|
|
|
(569 |
) |
|
|
(12 |
) (4) |
|
1,505 |
|
||||||
Income (loss) from continuing operations |
|
|
2,188 |
|
|
|
648 |
|
|
|
663 |
|
|
|
(856 |
) |
|
|
(164 |
) |
|
2,479 |
|
||||||
Income from discontinued operations, net of taxes |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
399 |
|
|
|
– |
|
|
399 |
|
||||||
Net income (loss) |
|
|
$ |
2,188 |
|
|
|
$ |
648 |
|
|
|
$ |
663 |
|
|
|
$ |
(457 |
) |
|
|
$ |
(164 |
) |
|
$ |
2,878 |
|
Performance and other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Efficiency ratio (5) |
|
|
53.00 |
% |
|
|
69.99 |
% |
|
|
35.06 |
% |
|
|
n/a |
|
|
|
n/a |
|
|
64.25 |
% |
||||||
Average loans |
|
|
$ |
163,328 |
|
|
|
$ |
23,591 |
|
|
|
$ |
37,916 |
|
|
|
$ |
889 |
|
|
|
$ |
(1,570 |
) (6) |
|
$ |
224,154 |
|
Average assets |
|
|
175,713 |
|
|
|
41,934 |
|
|
|
42,474 |
|
|
|
25,753 |
|
|
|
(1,796 |
) (6)(7) |
|
284,078 |
|
||||||
Average deposits |
|
|
130,337 |
|
|
|
16,299 |
|
|
|
7,108 |
|
|
|
11,664 |
|
|
|
n/a |
|
|
165,408 |
|
||||||
Loan volume |
|
|
55,282 |
|
|
|
182,212 |
|
|
|
28,978 |
|
|
|
261 |
|
|
|
n/a |
|
|
266,733 |
|
||||||
Employees at end of period |
|
|
27,341 |
|
|
|
13,838 |
|
|
|
3,385 |
|
|
|
8,015 |
|
|
|
n/a |
|
|
52,579 |
|
(1) Represents the difference between home loan premium amortization recorded by the Retail Banking and Financial Services Group and the amount recognized in the Company’s Consolidated Statements of Income. For management reporting purposes, loans that are held in portfolio by the Retail Banking and Financial Services Group are treated as if they are purchased from the Home Loans Group. Since the cost basis of these loans includes an assumed profit factor paid to the Home Loans Group, the amortization of loan premiums recorded by the Retail Banking and Financial Services Group includes this assumed profit factor and must therefore be eliminated as a reconciling adjustment.
(2) Represents the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the “losses inherent in the loan portfolio” methodology used by the Company.
(3) Represents the difference between gain from mortgage loans primarily recorded by the Home Loans Group and the gain from mortgage loans recognized in the Company’s Consolidated Statements of Income. As the Home Loans Group holds no loans in portfolio, all loans originated or purchased by this segment are considered to be salable for management reporting purposes.
(4) Represents the tax effect of reconciling adjustments.
(5) The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
(6) Includes the inter-segment offset for inter-segment loan premiums that the Retail Banking and Financial Services Group recognized from the transfer of portfolio loans from the Home Loans Group.
(7) Includes the impact to the allowance for loan and lease losses of $226 million that results from the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the “losses inherent in the loan portfolio” methodology used by the Company.
173
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Year Ended December 31, 2003 |
|
||||||||||||||||||||||||
|
|
Retail
|
|
Home
|
|
Commercial
|
|
Corporate
|
|
Reconciling
|
|
Total |
|
||||||||||||||
|
|
(dollars in millions) |
|
||||||||||||||||||||||||
Condensed income statement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net interest income (expense) |
|
|
$ |
3,851 |
|
|
$ |
2,382 |
|
|
$ |
1,307 |
|
|
|
$ |
(267 |
) |
|
|
$ |
356 |
(1) |
|
$ |
7,629 |
|
Provision for loan and lease losses |
|
|
175 |
|
|
14 |
|
|
99 |
|
|
|
8 |
|
|
|
(254 |
) (2) |
|
42 |
|
||||||
Noninterest income |
|
|
2,500 |
|
|
2,926 |
|
|
528 |
|
|
|
648 |
|
|
|
(752 |
) (3) |
|
5,850 |
|
||||||
Inter-segment revenue (expense) |
|
|
179 |
|
|
(179 |
) |
|
– |
|
|
|
– |
|
|
|
– |
|
|
– |
|
||||||
Noninterest expense |
|
|
3,576 |
|
|
2,915 |
|
|
511 |
|
|
|
406 |
|
|
|
– |
|
|
7,408 |
|
||||||
Income (loss) from continuing operations before income taxes |
|
|
2,779 |
|
|
2,200 |
|
|
1,225 |
|
|
|
(33 |
) |
|
|
(142 |
) |
|
6,029 |
|
||||||
Income taxes (benefit) |
|
|
1,065 |
|
|
839 |
|
|
468 |
|
|
|
(36 |
) |
|
|
(100 |
) (4) |
|
2,236 |
|
||||||
Income from continuing operations |
|
|
1,714 |
|
|
1,361 |
|
|
757 |
|
|
|
3 |
|
|
|
(42 |
) |
|
3,793 |
|
||||||
Income from discontinued operations, net of taxes |
|
|
– |
|
|
– |
|
|
87 |
|
|
|
– |
|
|
|
– |
|
|
87 |
|
||||||
Net income |
|
|
$ |
1,714 |
|
|
$ |
1,361 |
|
|
$ |
844 |
|
|
|
$ |
3 |
|
|
|
$ |
(42 |
) |
|
$ |
3,880 |
|
Performance and other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Efficiency ratio (5) |
|
|
54.76 |
% |
|
56.83 |
% |
|
27.82 |
% |
|
|
n/a |
|
|
|
n/a |
|
|
54.96 |
% |
||||||
Average loans |
|
|
$ |
120,705 |
|
|
$ |
42,990 |
|
|
$ |
34,731 |
|
|
|
$ |
759 |
|
|
|
$ |
(1,260 |
) (6) |
|
$ |
197,925 |
|
Average assets |
|
|
132,411 |
|
|
70,305 |
|
|
42,853 |
|
|
|
39,371 |
|
|
|
(1,821 |
) (6)(7) |
|
283,119 |
|
||||||
Average deposits |
|
|
125,440 |
|
|
27,112 |
|
|
5,384 |
|
|
|
5,649 |
|
|
|
n/a |
|
|
163,585 |
|
||||||
Loan volume |
|
|
29,717 |
|
|
374,004 |
|
|
28,356 |
|
|
|
168 |
|
|
|
n/a |
|
|
432,245 |
|
||||||
Employees at end of period |
|
|
26,564 |
|
|
22,287 |
|
|
5,824 |
(8) |
|
|
9,045 |
|
|
|
n/a |
|
|
63,720 |
|
(1) Represents the difference between home loan premium amortization recorded by the Retail Banking and Financial Services Group and the amount recognized in the Company’s Consolidated Statements of Income. For management reporting purposes, loans that are held in portfolio by the Retail Banking and Financial Services Group are treated as if they are purchased from the Home Loans Group. Since the cost basis of these loans includes an assumed profit factor paid to the Home Loans Group, the amortization of loan premiums recorded by the Retail Banking and Financial Services Group includes this assumed profit factor and must therefore be eliminated as a reconciling adjustment.
(2) Represents the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the “losses inherent in the loan portfolio” methodology used by the Company.
(3) Represents the difference between gain from mortgage loans primarily recorded by the Home Loans Group and the gain from mortgage loans recognized in the Company’s Consolidated Statements of Income. As the Home Loans Group holds no loans in portfolio, all loans originated or purchased by this segment are considered to be salable for management reporting purposes.
(4) Represents the tax effect of reconciling adjustments.
(5) The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
(6) Includes the inter-segment offset for inter-segment loan premiums that the Retail Banking and Financial Services Group recognized from the transfer of portfolio loans from the Home Loans Group.
(7) Includes the impact to the allowance for loan and lease losses of $561 million that results from the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the “losses inherent in the loan portfolio” methodology used by the Company.
(8) Includes 2,346 employees reported as part of discontinued operations.
174
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
Quarterly Results of Operations (Unaudited)
Results of operations on a quarterly basis were as follows:
|
|
Year Ended December 31, 2005 |
|
||||||||||||||||||
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
||||||||||||
|
|
(dollars in millions, except per share amounts) |
|
||||||||||||||||||
Interest income |
|
|
$ |
4,581 |
|
|
|
$ |
3,940 |
|
|
|
$ |
3,706 |
|
|
|
$ |
3,360 |
|
|
Interest expense |
|
|
2,427 |
|
|
|
2,024 |
|
|
|
1,780 |
|
|
|
1,470 |
|
|
||||
Net interest income |
|
|
2,154 |
|
|
|
1,916 |
|
|
|
1,926 |
|
|
|
1,890 |
|
|
||||
Provision for loan and lease losses |
|
|
217 |
|
|
|
52 |
|
|
|
31 |
|
|
|
16 |
|
|
||||
Noninterest income |
|
|
1,689 |
|
|
|
1,374 |
|
|
|
1,267 |
|
|
|
1,408 |
|
|
||||
Noninterest expense |
|
|
2,278 |
|
|
|
1,925 |
|
|
|
1,828 |
|
|
|
1,839 |
|
|
||||
Income before income taxes |
|
|
1,348 |
|
|
|
1,313 |
|
|
|
1,334 |
|
|
|
1,443 |
|
|
||||
Income taxes |
|
|
483 |
|
|
|
492 |
|
|
|
490 |
|
|
|
541 |
|
|
||||
Net income |
|
|
$ |
865 |
|
|
|
$ |
821 |
|
|
|
$ |
844 |
|
|
|
$ |
902 |
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
|
$ |
0.88 |
|
|
|
$ |
0.95 |
|
|
|
$ |
0.98 |
|
|
|
$ |
1.04 |
|
|
Diluted |
|
|
0.85 |
|
|
|
0.92 |
|
|
|
0.95 |
|
|
|
1.01 |
|
|
||||
Common stock price per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
High |
|
|
44.54 |
|
|
|
43.60 |
|
|
|
42.73 |
|
|
|
42.55 |
|
|
||||
Low |
|
|
36.92 |
|
|
|
39.22 |
|
|
|
37.78 |
|
|
|
38.96 |
|
|
||||
Dividends declared per common share |
|
|
0.49 |
|
|
|
0.48 |
|
|
|
0.47 |
|
|
|
0.46 |
|
|
175
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
|
|
Year Ended December 31, 2004 |
|
||||||||||||||||||
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
||||||||||||
|
|
(dollars in millions, except per share amounts) |
|
||||||||||||||||||
Interest income |
|
|
$ |
3,066 |
|
|
|
$ |
2,811 |
|
|
|
$ |
2,752 |
|
|
|
$ |
2,721 |
|
|
Interest expense |
|
|
1,216 |
|
|
|
1,071 |
|
|
|
958 |
|
|
|
989 |
|
|
||||
Net interest income |
|
|
1,850 |
|
|
|
1,740 |
|
|
|
1,794 |
|
|
|
1,732 |
|
|
||||
Provision for loan and lease losses |
|
|
37 |
|
|
|
56 |
|
|
|
60 |
|
|
|
56 |
|
|
||||
Noninterest income |
|
|
1,217 |
|
|
|
1,264 |
|
|
|
894 |
|
|
|
1,237 |
|
|
||||
Noninterest expense |
|
|
1,938 |
|
|
|
1,869 |
|
|
|
1,848 |
|
|
|
1,880 |
|
|
||||
Income from continuing operations before income taxes |
|
|
1,092 |
|
|
|
1,079 |
|
|
|
780 |
|
|
|
1,033 |
|
|
||||
Income taxes |
|
|
424 |
|
|
|
405 |
|
|
|
291 |
|
|
|
385 |
|
|
||||
Income from continuing operations, net of taxes |
|
|
668 |
|
|
|
674 |
|
|
|
489 |
|
|
|
648 |
|
|
||||
Income from discontinued operations, net of taxes |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
399 |
|
|
||||
Net income |
|
|
$ |
668 |
|
|
|
$ |
674 |
|
|
|
$ |
489 |
|
|
|
$ |
1,047 |
|
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income from continuing operations |
|
|
$ |
0.77 |
|
|
|
$ |
0.78 |
|
|
|
$ |
0.57 |
|
|
|
$ |
0.75 |
|
|
Income from discontinued operations, net |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
0.46 |
|
|
||||
Net income |
|
|
0.77 |
|
|
|
0.78 |
|
|
|
0.57 |
|
|
|
1.21 |
|
|
||||
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income from continuing operations |
|
|
0.76 |
|
|
|
0.76 |
|
|
|
0.55 |
|
|
|
0.73 |
|
|
||||
Income from discontinued operations, net |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
0.45 |
|
|
||||
Net income |
|
|
0.76 |
|
|
|
0.76 |
|
|
|
0.55 |
|
|
|
1.18 |
|
|
||||
Common stock price per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
High |
|
|
42.32 |
|
|
|
40.19 |
|
|
|
44.25 |
|
|
|
45.28 |
|
|
||||
Low |
|
|
37.85 |
|
|
|
37.63 |
|
|
|
38.47 |
|
|
|
39.61 |
|
|
||||
Dividends declared per common share |
|
|
0.45 |
|
|
|
0.44 |
|
|
|
0.43 |
|
|
|
0.42 |
|
|
176
WASHINGTON
MUTUAL, INC.
INDEX OF EXHIBITS
DESCRIPTION
EXHIBIT
|
|
DESCRIPTION |
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. 0-25188). |
3.3 |
|
Restated Bylaws of the Company, as amended (Filed herewith). |
4.1 |
|
Rights Agreement dated December 20, 2000 between Washington Mutual, Inc. and Mellon Investor Services, LLC (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. |
4.3 |
|
Warrant Agreement dated as of April 30, 2001 (Incorporated by reference to the Company’s Registration Statement on Form S-3, File No. 333-63976). |
4.4 |
|
2003 Amended and Restated Warrant Agreement dated March 11, 2003 by and between Washington Mutual, Inc. and Mellon Investor Services LLC (Incorporated by reference to the Company’s Current Report on Form 8-K dated March 12, 2003, File No. 1-14667). |
10.1 |
|
Five-Year Credit Agreement dated as of August 4, 2005 among Washington Mutual, Inc., as borrower, the lenders party thereto, Bank of America, N.A., Barclays Bank PLC and Citibank, N.A., as the syndication agents, J.P. Morgan Securities, Inc. as sole lead arranger and sole bookrunner and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”) (Filed herewith). |
10.2 |
|
Agreement and Plan of Merger, dated as of June 5, 2005 by and between Washington Mutual, Inc. and Providian Financial Corporation (Incorporated by reference to the Company’s Current Report on Form 8-K filed June 9, 2005, File No. 1-14667). |
E- 1
E- 2
10.12 |
|
Washington Mutual, Inc. Executive Target Retirement Income Plan effective January 1, 2004 (Incorporated by reference to the 2004 10-K). |
10.13 |
|
HR Committee establishment of 2006 Leadership Bonus Plan Criteria (Incorporated by reference to the Company’s Current Report on Form 8-K filed January 23, 2006, File No. 1-14667). |
10.14 |
|
Washington Mutual, Inc. 2006 Director Compensation Arrangements (Incorporated by reference to the Company’s Current Report on Form 8-K filed December 20, 2005, File No. 1-14667). |
10.15 |
|
The 1988 Stock Option and Incentive Plan (as amended effective July 26, 1994) (Incorporated by reference to the Quarterly Report of Great Western Financial Corporation (“Great Western”), on Form 10-Q for the quarter ended September 30, 1994, File No. 001-04075), as amended by (i) Amendment No. 1996-1 to the Great Western 1988 Stock Option and Incentive Plan effective December 10, 1996 (Incorporated by reference to Great Western Annual Report on Form 10-K for the year ended December 31, 1996 (the “Great Western’s 1996 10-K”) File No. 001-04075) including (ii) a Form of Director Stock Option Agreement (Incorporated by reference to Great Western’s Registration Statement on Form S-8 Registration No. 33-21469 pertaining to Great Western’s 1988 Stock Option and Incentive Plan), and (iii) a Form of Director Stock Option Agreement effective January 3, 1994 (Incorporated by reference to Great Western’s Annual Report on Form 10-K for the year ended December 31, 1993, File No. 001-04075). |
10.16 |
|
Great Western Financial Corporation Directors’ Deferred Compensation Plan (1992 Restatement) (Incorporated by reference to Great Western’s Annual Report on Form 10-K for the year ended December 31, 1991, File No. 001-04075), as amended by (i) an Amendment to Great Western Financial Corporation Directors’ Senior Officers’ and basic Deferred Compensation Plans (1992 Restatement) (Incorporated by reference to Great Western’s Annual Report on Form 10-K for the year ended December 31, 1994, File No. 001-04075), (ii) an Amendment No. 2 to Directors’ Deferred Compensation Plan (1992 Restatement) (Incorporated by reference to Great Western’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, File No. 001-04075), and (iii) an Amendment No. 1996-2 to Directors’ Deferred Compensation Plan, dated December 10, 1996 (Incorporated by reference to Great Western’s 1996 10-K). |
10.17 |
|
Restated Retirement Plan for Directors (Incorporated by reference to Great Western’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 (the “Great Western’s 2Q 1993 10-Q”), File No. 001-04075). |
10.18 |
|
Employee Home Loan Program (Incorporated by reference to Great Western’s 2Q 1993 10-Q), as amended by (i) Amendment No. 1996-1 to Employee Home Loan Program effective December 10, 1996 (Incorporated by reference to Great Western’s 1996 10-K). |
10.19 |
|
Omnibus Amendment 1997-1 amending the definition of change in control in the Great Western Financial Corporation 1988 Stock Option and Incentive Plan, as amended December 10, 1996, the Great Western Financial Corporation Directors’ Deferred Compensation Plan (1992 Restatement), as amended December 10, 1996, and the Employee Home Loan Program (revised and restated as of April 27, 1993), as amended December 10, 1996 (Incorporated by reference to Great Western’s 1996 10-K). |
10.20 |
|
H.F. Ahmanson & Company 1993 Stock Incentive Plan as amended (Incorporated by reference to H.F. Ahmanson & Company (“Ahmanson”) Annual Report on Form 10-K for the year ended December 31, 1996 (the “Ahmanson’s 1996 10-K”), File No. 1-08930). |
E- 3
10.21 |
|
H.F. Ahmanson & Company 1996 Nonemployee Directors’ Stock Incentive Plan (Incorporated by reference to Ahmanson’s Annual Report on Form 10-K for the year ended December 31, 1995 (the “Ahmanson’s 1995 10-K”), File No. 1-08930). |
10.22 |
|
Executive Life Insurance Plan of H.F. Ahmanson & Company (Incorporated by reference to Ahmanson’s Annual Report on Form 10-K for the year ended December 31, 1989 (the “Ahmanson’s 1989 10-K”), File No. 1-08930), as amended by (i) First Amendment to Executive Life Insurance Plan of H.F. Ahmanson & Company (Incorporated by reference to Ahmanson’s 1995 10-K), and (ii) Second Amendment to Executive Life Insurance Plan of H.F. Ahmanson & Company (Incorporated by reference to Ahmanson’s 1996 10-K). |
10.23 |
|
Senior Executive Life Insurance Plan of H.F. Ahmanson & Company, as amended and restated (Incorporated by reference to Ahmanson’s 1995 10-K). |
10.24 |
|
H.F. Ahmanson & Company Supplemental Long Term Disability Plan (Incorporated by reference to Ahmanson’s 1989 10-K). |
10.25 |
|
Amended Form of Indemnity Agreement between H.F. Ahmanson & Company and directors and executive officers (Incorporated by reference to Ahmanson’s 1989 10-K). |
10.26 |
|
Deferred Compensation Plan for Board Members of The Dime Savings Bank of New York, FSB (the “DSB Director Deferred Compensation Plan”) as amended and restated effective as of July 24, 1997 (Incorporated by reference to the Dime Bancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 1997 (the “Dime’s 1997 10-K”) as amended by an Amendment to the DSB Director Deferred Compensation Plan effective May 18, 2000 (Incorporated by reference to the 14d-9 Amendment No. 11). |
10.27 |
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Retainer Continuation Plan for Independent Directors of The Dime Savings Bank of New York, FSB (the “Retainer Continuation Plan”) (Incorporated by reference to The Dime Savings Bank of New York, FSB Annual Report on Form 10-K for the fiscal year ended December 31, 1993, filed on September 16, 1994 as Exhibit A to Dime Bancorp, Inc. (the “Dime”) Report on Form 8-K dated that date, File No. 001-13094), as amended by (i) an Amendment effective as of January 13, 1995, to the Retainer Continuation Plan (Incorporated by reference to Dime’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 001-13094), (ii) an Amendment effective as of December 31, 1996, to the Retainer Continuation Plan (Incorporated by reference to Dime’s Annual Report on Form 10-K for the year ended December 31, 1996 (the “Dime’s 1996 10-K”), (iii) an Amendment effective March 1, 1997, to the Retainer Continuation Plan (Incorporated by reference to Dime’s 1996 10-K), (iv) an Amendment effective July 24, 1997, to the Retainer Continuation Plan (Incorporated by reference to Dime’s 1997 10-K), and (v) an Amendment to the Retainer Continuation Plan effective May 18, 2000 (Incorporated by reference to the 14d-9 Amendment No. 11). |
10.28 |
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Dime Voluntary Deferred Compensation Plan for Directors (the “Bancorp Director Deferred Compensation Plan”), as amended and restated effective as of July 24, 1997 (Incorporated by reference to Dime’s 1997 10-K), as amended by (i) an Amendment effective March 26, 1998, to the Bancorp Director Deferred Compensation Plan (Incorporated by reference to Dime’s Annual Report on Form 10-K for the year ended December 31, 1998 (the “Dime’s 1998 10-K”), (ii) an Amendment effective October 1, 1999, to the Bancorp Director Deferred Compensation Plan (Incorporated by reference to Dime’s 1999 10-K), and (iii) an Amendment to the Bancorp Director Deferred Compensation Plan effective May 18, 2000 (Incorporated by reference to the 14d-9 Amendment No. 11). |
E- 4
10.29 |
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February 2001 WAMU Shares Plan (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-14667), as amended by (i) Amendment No. 1 to February 2001 WAMU Shares Plan (Incorporated by reference to the 2003 10-K/A), (ii) Amendment No. 3 to February 2001 WAMU Shares Plan (Incorporated by reference to the 2003 10-K/A), and (iii) Amendments to the January 1999 WAMU Shares Plan and the February 2001 WAMU Shares Plan (collectively, the “Plans”) (Incorporated by reference to the 2003 10-K/A). |
10.30 |
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Employment Agreement of Kerry K. Killinger (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997, (the “1997 10-K”), File No. 0-25188). |
10.31 |
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Employment Agreement of Stephen J. Rotella (Incorporated by reference to the Company’s Current Report on Form 8-K filed December 27, 2004, File No. 1-14667). |
10.32 |
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Restricted Stock Award Agreement, by and between the Company and Stephen J. Rotella, dated January 10, 2005 (Incorporated by reference to the Company’s Current Report on Form 8-K filed January 14, 2005, File No. 1-14667). |
10.33 |
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Employment Offer Letter of David C. Schneider (Incorporated by reference to the Company’s Current Report on Form 8-K filed July 6, 2005, File No. 1-14667). |
10.34 |
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Employment Offer Letter of John Woods (Incorporated by reference to the Company’s Current Report on Form 8-K filed October 27, 2005, File No. 1-14667). |
10.35 |
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Employment Offer Letter of Ronald J. Cathcart (Incorporated by reference to the Company’s Current Report on Form 8-K filed November 2, 2005, File No. 1-14667). |
10.36 |
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Form of Employment Agreement for Executive Officers (Incorporated by reference to the 1997 10-K). |
10.37 |
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Form of Employment Agreement for Senior Vice Presidents (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998, File No. 0-25188). |
12.1 |
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Computation of Ratios of Earnings to Fixed Charges (Filed herewith). |
12.2 |
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Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends (Filed herewith). |
21 |
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List of Subsidiaries of the Registrant (Filed herewith). |
23 |
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Consent of Deloitte & Touche LLP (Filed herewith). |
31.1 |
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Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith). |
31.2 |
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Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith). |
32.1 |
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Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished herewith). |
32.2 |
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Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished herewith). |
E- 5
Exhibit 3.3
WASHINGTON MUTUAL, INC.
AMENDMENTS TO RESTATED BYLAWS
(Amendments after the most recent (effective as of June 17, 2003 ) restatement of the bylaws, organized according to the affected article and, within each article, organized chronologically)
Article/Sec. |
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Date of
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ARTICLE II |
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NUMBER OF DIRECTORS The board of directors of this corporation shall consist of fourteen (14) directors. |
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07/19/2005 |
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ARTICLE II |
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NUMBER OF DIRECTORS The board of directors of this corporation shall consist of thirteen (13) directors. |
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09/16/2003 |
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ARTICLE V
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Section 5.3 Chairman . The Chairman shall preside over all meetings of the board of directors. In accordance with Section 3.13 of these bylaws, the Chairman shall preside over all meetings of the shareholders, which duty shall include the authority to adjourn such meetings without any action or vote by the shareholders present at 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 these bylaws. Except as set forth in Section 3.13 of these bylaws, 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. |
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09/16/2003 |
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ARTICLE V
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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 or a committee of directors. |
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09/16/2003 |
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ARTICLE V
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Section 5.6 Chief Financial Officer . The Chief Financial Officer of the corporation shall have the power and duty of supervising and managing the corporation’s acquisition, retention and disposition of securities, loans and financial instruments (including but not limited to the corporation’s investments in and loans to the corporation’s subsidiaries), the power and duty of supervising the corporation’s financial reporting, and the |
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09/16/2003 |
Article/Sec. |
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Date of
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other general powers and duties of supervision and management usually vested in the Chief Financial Officer of a corporation, subject to the Bylaws and, subject to these Bylaws and to such limits as may from time to time be established by the board of directors or by a committee of directors or officers that the board of directors has authorized to establish such limits. The Chief Financial Officer shall perform such other duties as may be assigned by the board of directors or by the Chief Executive Officer or by a committee of directors or officers that the board of directors has authorized to assign such duties. In the absence of the Chief Financial Officer, the duties of the Chief Financial Officer shall be assumed by the Controller 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. |
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ARTICLE V
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Section 5.7 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 a committee of directors or officers that the board of directors has authorized to assign such duties or 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, only to the extent that such other duties do not compromise the independence of audit control. |
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09/16/2003 |
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ARTICLE V
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Section 5.8 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 a committee of directors or officers that the board of directors has authorized to assign such duties or by the Chief Executive Officer or the President of the Corporation. |
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09/16/2003 |
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ARTICLE V
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Section 5.9 Senior Vice Presidents, First Vice Presidents and Vice Presidents . Senior Vice Presidents, First Vice Presidents and Vice Presidents |
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09/16/2003 |
Article/Sec. |
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shall perform such duties as may be assigned from time to time by a committee of directors or officers that the board of directors has authorized to assign such duties or 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. |
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ARTICLE V
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Section 5.10 Secretary and Assistant Secretary . Except as otherwise set forth in these bylaws, the Secretary of the corporation shall keep the minutes of all meetings of the board of directors and of the shareholders and give such notices to the directors or shareholders as may be required by law or by these Bylaws. The Secretary shall have the custody of the corporate seal, if any, and the contracts, papers and documents belonging to the corporation. The Secretary shall also perform such other duties as may be assigned from time to time by a committee of directors or officers that the board of directors has authorized to assign such duties or 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. Except as otherwise set forth in these bylaws, 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. |
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09/16/2003 |
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ARTICLE V
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Section 5.12 Other Officers . The other Officers shall perform such duties as may be assigned by a committee of directors or officers that the board of directors has authorized to assign such duties or 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. The Chief Executive Officer may designate such functional titles to an officer, as the Chief Executive Officer deems appropriate from time to time. |
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09/16/2003 |
RESTATED(1)
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 sixteen (16) 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 board of directors or by the written request of 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.
(1) Reflects amendments adopted by the Board of Directors through and including the June 2003 meeting of the Board of Directors.
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 . Notice, in tangible written or printed form, in electronic form, or in any other form then allowed under the Washington Business Corporations Act or other applicable law, 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 of the
corporation 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.
Only such business shall be conducted at a special meeting of shareholders as shall be specified in the applicable notice of meeting given pursuant to this Section 3.6. If an annual or special shareholders’ meeting is adjourned or postponed to a different date, time or place, notice need not be given of the new date, time or place of the adjourned or postponed meeting if the new date, time or place is announced at the meeting before adjournment or postponement unless a new record date is or, under the Washington Business Corporation Act or other applicable law, must be fixed. If a new record date for the adjourned or postponed meeting is or, under the Washington Business Corporation Act or other applicable law, must be fixed, however, notice of the adjourned or postponed 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 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 of such revocation has been given to the secretary of the corporation by the shareholder appointing the proxy. Any proxy appointment or any revocation of a proxy appointment may be executed in tangible written form, may be by means of an electric transmission
or may be by any other means then allowed by the Washington Business Corporations Act or other applicable law.
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. 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. Conduct of Meetings . The Chairman shall serve as chairman of a meeting of the shareholders. In the absence of the Chairman, the Chief Executive Officer or any other person designated by the board of directors shall serve as chairman of a meeting of shareholders. The Secretary or in his absence an Assistant Secretary or in the absence of the Secretary and all Assistant Secretaries a person whom the chairman of the meeting shall appoint shall act as secretary of the meeting and keep a record of the proceedings thereof.
The chairman of a meeting of shareholders, determined in accordance with this Section 3.13, shall have discretion to establish the rules, regulations and procedures for the conduct of such meeting of shareholders and shall have the authority to adjourn or postpone such meeting from time to time whether or not there is a quorum present, subject to any specific rules, regulations and procedures established by the board of directors.
Section 3.14. Notice of Nomination . Nominations for the election of directors and proposals for any new business to be taken up at any annual or, subject to Section 3.6 of these bylaws, 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 shareholders in connection with the previous year’s annual meeting of
shareholders, 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 later than the later of the 90 th day prior to such special meeting or the 10 th day following the day on which public announcement of the date of such special meeting is made by the corporation. 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, and the number of shares of stock of the corporation concerning which there is a right to acquire, directly or indirectly, by (A) each such nominee, and (B) by each associate of such person, determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
For purposes of this Section 3.14, “public announcement” means disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Sections 13, 14, or 15(d) of the Exchange Act.
In no event shall the public announcement of an adjournment or postponement of an annual or special meeting commence a new time period (or extend any time period) for the giving of a shareholder’s notice of a proposal or a nomination for director at such meeting as described above.
Section 3.15. 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 consents setting forth the action so taken, shall be executed by all the directors, either before or after the action taken, and delivered to the corporation. Such consents may be set forth in a tangible written form, in an electronic transmission or in any other form then allowed under the Washington Business Corporations Act or other applicable law. Action taken by consent is effective when the last director executes 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 Human Resources Committee . The board of directors at any regular meeting of the board, shall elect from their number a Human Resources Committee which committee shall have not less than three members, none of whom shall be employed by the corporation. The Human Resources Committee shall have the authorities and responsibilities and shall perform the functions specified in the Charter of the Human Resources Committee, as approved by the Board, and in any supplemental statement or resolution that the Board may adopt with regard to the functions of the Committee.
Section 4.13. Governance Committee . The board of directors, at any regular meeting of the board, shall elect from their number a Governance Committee, none of the members of which shall be employed by the corporation. The Governance Committee shall have the composition, authorities and responsibilities and shall perform the functions specified in the Charter of the Governance Committee, as approved by the Board, and in any supplemental statement or resolution that the Board may adopt with regard to the functions of the Committee.
Section 4.14. Finance Committee . The board of directors, at any regular meeting of the board, shall elect from their number a Finance Committee. A majority of the members of the Finance Committee shall not be officers of the corporation. The board, upon the recommendation of the Governance Committee in consultation with the Chief Executive Officer, shall appoint a chairman who is not an officer of the corporation. The Finance Committee shall have the authorities and responsibilities and shall perform the functions specified in the Charter of the Finance Committee, as approved by the board, and in any supplemental statement or resolution that the board may adopt with regard to the functions of the Committee.
Section 4.15. Corporate Relations Committee . The board of directors, at any regular meeting of the board, may elect from among their number a Corporate Relations Committee which shall consist of no fewer than two Directors. The Corporate Relations Committee shall have the composition, authorities and responsibilities and shall perform the functions specified in the Charter of the Corporate Relations Committee, as approved by the Board, and in any supplemental statement or resolution that the Board may adopt with regard to the functions of the Committee.
Section 4.16. Corporate Development Committee . The board of directors, at any regular meeting of the board, may elect from among their number 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 have the composition, authorities and responsibilities and shall perform the functions specified in the Charter of the Corporate Development Committee, as approved by the Board, and in any supplemental statement or resolution that the Board may adopt with regard to the functions of the Committee.
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 a majority of the remaining directors whether or not 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 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 Chief Financial Officer, a Controller, and such Vice Chairmen, Group Presidents, Senior Executive Vice Presidents, Executive Vice Presidents, Senior Vice Presidents or First 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. Other than the General Auditor, 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 perform such other duties as may be assigned by the board of directors. In the absence of the Chief Executive Officer, the duties of the Chief Executive Officer 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. In accordance with Section 3.13 of these bylaws, the Chairman shall preside over all meetings of the shareholders, which duty shall include the authority to adjourn such meetings without any action or vote by the shareholders present at 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. Except as set forth in Section 3.13 of these bylaws, 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. Chief Financial Officer . The Chief Financial Officer of the corporation shall have the power and duty of supervising and managing the corporation’s acquisition, retention and disposition of securities, loans and financial instruments (including but not limited to the corporation’s investments in and loans to the corporation’s subsidiaries), the power and duty of supervising the corporation’s financial reporting, and the other general powers and duties of supervision and management usually vested in the Chief Financial Officer of a corporation, subject to the Bylaws and policies of the corporation. The Chief Financial Officer shall perform such other duties as may be assigned by the board of directors or by the Chief Executive Officer. In the absence of the Chief Financial Officer, the duties of the Chief Financial Officer shall be assumed by the Controller 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 5.7. 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 5.8. 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 5.9. 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 5.10. Secretary and Assistant Secretary . Except as otherwise set forth in these bylaws, the Secretary of the corporation shall keep the minutes of all meetings of the board of directors and of the shareholders and give such notices to the directors or shareholders as may be required by law or by these Bylaws. The Secretary shall have the custody of the corporate seal, if any, and the contracts, papers and documents belonging to the corporation. The Secretary 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. Except as otherwise set forth in these bylaws, 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 5.11. 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 5.12. 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 5.13. 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 5.14. 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 5.15. 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 5.16. 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 5.17. 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.
Section 6.7. Uncertificated Shares . The shares of the Corporation may be issued in uncertificated or book entry form in the manner prescribed by the board of directors. Without limiting the foregoing, shares of the Corporation may be issued in uncertificated or book entry form in connection with new share issuances, the transfer of shares as provided in Section 6.4 of these bylaws and the replacement of shares represented by lost, destroyed or mutilated certificates as provided in Section 6.5 of these bylaws.
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. Without limiting the situations in which a person shall be considered to be serving at the request of the corporation, a director who serves as a director, officer, employee or agent of another corporation or other enterprise that is a subsidiary of the corporation shall be deemed to be serving at the request of the corporation, where “subsidiary” means a corporation or other enterprise in which a majority of the voting stock or other voting power is owned or controlled by the corporation directly or through one or more subsidiaries, or a corporation or other enterprise which is consolidated on the corporation’s financial statements or is reported using the equity method. 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 . The corporation shall provide indemnification and pay expenses in advance of the final disposition of a proceeding to officers and employees of the corporation with the same scope and effect (including without limitation coverage when serving at the request of the corporation as directors, officers, employees or agents of other corporations, partnerships, joint ventures, trusts or other enterprises), and observing the same procedures, as the provisions of this Article with respect to the indemnification and advancement of expenses to directors of the corporation, except that determinations and authorizations described in RCW 23B.08.550(2) and (3) may also be made by a committee of officers authorized by the board of directors. Without limiting the situations in which a person shall be considered to be serving at the request of the corporation, an officer or employee who serves as a director, officer, employee or agent of another corporation or other enterprise that is a subsidiary of the corporation shall be deemed to be serving at the request of the corporation, where “subsidiary” has the meaning set forth in Section 8.1. At its sole option, the corporation may provide indemnification and pay expenses in advance of the final disposition of a proceeding to agents of the corporation (including without limitation providing such indemnification or advance to agents serving at the request of the corporation as directors, officers, employees or agents of other corporations, partnerships, joint ventures, trusts or other enterprises), provided that such indemnification or advance (i) is made pursuant to a written contract executed and delivered on behalf of the corporation prior to the occurrence of the conduct giving rise to the liability or expense for which indemnification or payment is being sought or (ii) is approved or ratified by the board of directors, a committee thereof, or a committee of officers authorized by the board of directors.
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.
Exhibit 10.1
EXECUTION COPY
FIVE-YEAR CREDIT AGREEMENT
dated as of
August 4, 2005
between
WASHINGTON MUTUAL, INC.,
as Borrower
The LENDERS Party Hereto
BANK OF AMERICA, N.A.,
BARCLAYS BANK PLC and
CITIBANK, N.A.,
as Syndication Agents,
J.P. MORGAN SECURITIES INC.,
as Sole Lead Arranger and Sole Bookrunner
and
JPMORGAN CHASE BANK, N.A.,
as Administrative Agent
$800,000,000
TABLE OF CONTENTS
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ARTICLE I |
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DEFINITIONS |
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SECTION 1.01. |
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Defined Terms |
1 |
SECTION 1.02. |
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Classification of Loans and Borrowings |
17 |
SECTION 1.03. |
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Terms Generally |
17 |
SECTION 1.04. |
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Accounting Terms; GAAP |
17 |
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ARTICLE II |
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THE CREDITS |
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SECTION 2.01. |
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The Commitments |
18 |
SECTION 2.02. |
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Loans and Borrowings |
18 |
SECTION 2.03. |
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Requests for Syndicated Borrowings |
19 |
SECTION 2.04. |
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Competitive Bid Procedure |
19 |
SECTION 2.05. |
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Swingline Loans |
22 |
SECTION 2.06. |
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Funding of Borrowings |
24 |
SECTION 2.07. |
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Interest Elections |
24 |
SECTION 2.08. |
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Termination and Reduction of the Commitments |
26 |
SECTION 2.09. |
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Repayment of Loans; Evidence of Debt |
26 |
SECTION 2.10. |
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Prepayment of Loans |
28 |
SECTION 2.11. |
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Fees |
28 |
SECTION 2.12. |
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Interest |
29 |
SECTION 2.13. |
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Alternate Rate of Interest |
30 |
SECTION 2.14. |
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Increased Costs |
30 |
SECTION 2.15. |
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Break Funding Payments |
32 |
SECTION 2.16. |
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Taxes |
32 |
SECTION 2.17. |
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Payments Generally; Pro Rata Treatment; Sharing of Set-offs |
33 |
SECTION 2.18. |
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Mitigation Obligations; Replacement of Lenders |
35 |
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ARTICLE III |
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REPRESENTATIONS AND WARRANTIES |
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SECTION 3.01. |
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Organization; Powers |
36 |
SECTION 3.02. |
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Authorization; Enforceability |
36 |
SECTION 3.03. |
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Governmental Approvals; No Conflicts |
36 |
SECTION 3.04. |
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Financial Condition; No Material Adverse Change |
37 |
SECTION 3.05. |
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Properties |
37 |
(i)
SECTION 3.06. |
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Litigation and Environmental Matters |
37 |
SECTION 3.07. |
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Compliance with Laws and Agreements |
38 |
SECTION 3.08. |
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Investment and Holding Company Status |
38 |
SECTION 3.09. |
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Taxes |
38 |
SECTION 3.10. |
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ERISA |
38 |
SECTION 3.11. |
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Disclosure |
38 |
SECTION 3.12. |
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Use of Credit |
39 |
SECTION 3.13. |
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Liens |
39 |
SECTION 3.14. |
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Subsidiaries |
39 |
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ARTICLE IV |
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CONDITIONS |
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SECTION 4.01. |
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Effective Date |
39 |
SECTION 4.02. |
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Each Credit Event |
41 |
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ARTICLE V |
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AFFIRMATIVE COVENANTS |
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SECTION 5.01. |
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Financial Statements and Other Information |
41 |
SECTION 5.02. |
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Notices of Material Events |
43 |
SECTION 5.03. |
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Existence; Conduct of Business |
44 |
SECTION 5.04. |
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Payment of Obligations |
44 |
SECTION 5.05. |
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Maintenance of Properties; Insurance |
44 |
SECTION 5.06. |
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Books and Records; Inspection Rights |
44 |
SECTION 5.07. |
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Compliance with Laws |
44 |
SECTION 5.08. |
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Use of Proceeds |
45 |
SECTION 5.09. |
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Insured Subsidiary Capital |
45 |
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ARTICLE VI |
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NEGATIVE COVENANTS |
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SECTION 6.01. |
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Liens |
45 |
SECTION 6.02. |
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Fundamental Changes |
46 |
SECTION 6.03. |
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Certain Restrictions on Subsidiaries |
47 |
SECTION 6.04. |
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Certain Financial Covenants |
47 |
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ARTICLE VII |
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EVENTS OF DEFAULT |
47 |
(ii)
(iii)
FIVE-YEAR CREDIT AGREEMENT dated as of August 4, 2005 between WASHINGTON MUTUAL, INC. (the “ Borrower ”), the LENDERS party hereto, and JPMORGAN CHASE BANK, N.A., as Administrative Agent.
The Borrower has requested that the Lenders (as defined herein) make loans to it in an aggregate principal amount not exceeding $800,000,000 at any one time outstanding. The Lenders are prepared to make such loans upon the terms and conditions hereof, and, accordingly, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Defined Terms . As used in this Agreement, the following terms have the meanings specified below:
“ ABR ”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans constituting such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate.
“ Acquisition ” shall mean any transaction, or any series of related transactions, consummated after the date of this Agreement, by which the Borrower and/or one or more of its Subsidiaries (in one transaction or as the most recent transaction in a series of related transactions) (a) acquires any going business or all or substantially all of the assets of any Person (or division or operating unit thereof), whether through purchase of assets, merger or otherwise or, (b) directly or indirectly acquires control of securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests of any corporation, limited liability company, partnership, association or other entity.
“ Additional Margin ” means, with respect to any Loan, a rate per annum determined as provided in the definition of the term “Applicable Rate” payable for (i) each day prior to the Commitment Termination Date on which the aggregate outstanding principal amount of the Loans equals or exceeds an amount equal to 50% of the Commitments and (ii) each day on or after the Commitment Termination Date on which any Loans remain outstanding.
“ Adjusted LIBO Rate ” means, for the Interest Period for any Eurodollar Borrowing, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate for such Interest Period.
“ Administrative Agent ” means JPMCB, in its capacity as administrative agent for the Lenders hereunder.
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“ Administrative Questionnaire ” means an Administrative Questionnaire in a form supplied by the Administrative Agent.
“ Affiliate ” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.
“ Alternate Base Rate ” means, for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day and (b) the sum of (i) Federal Funds Effective Rate for such day and (ii) 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, as the case may be.
“ Applicable Percentage ” means, with respect to any Lender, the percentage of the total Commitments represented by such Lender’s Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the aggregate principal amount of the Syndicated Loans held by the Lenders or, if no Syndicated Loans are outstanding and in the case of determining such Lender’s Swingline Exposure, the Commitments most recently in effect, giving effect to any assignments.
“ Applicable Rate ” means, for any day, with respect to any ABR Loan (including any Swingline Loan), zero, or with respect to any Syndicated Eurodollar Loan, or with respect to the facility fees or Additional Margin payable hereunder, as the case may be, the applicable rate per annum set forth below under the caption, “Eurodollar Spread”, “Facility Fee Rate” or “Additional Margin”, respectively, based upon the ratings by Moody’s and S&P, respectively, applicable on such date to the Index Debt:
|
|
Index Debt
|
|
Eurodollar
|
|
Facility Fee
|
|
Additional
|
|
Category 1 |
|
> A+/A1 |
|
.140 |
% |
.060 |
% |
.050 |
% |
Category 2 |
|
A/A2 |
|
.180 |
% |
.070 |
% |
.050 |
% |
Category 3 |
|
A-/A3 |
|
.220 |
% |
.080 |
% |
.100 |
% |
Category 4 |
|
BBB+/Baa1 |
|
.300 |
% |
.100 |
% |
.100 |
% |
Category 5 |
|
BBB/Baa2 |
|
.380 |
% |
.120 |
% |
.100 |
% |
Category 6 |
|
< BBB-/Baa3 |
|
.600 |
% |
.150 |
% |
.100 |
% |
For purposes of the foregoing, (i) if either Moody’s or S&P shall not have in effect a rating for the Index Debt of the Borrower (other than by reason of the circumstances referred to in the last sentence of this paragraph), then such rating agency
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shall be deemed to have established a rating for the Index Debt of the Borrower in Category 6; and (ii) if the ratings established or deemed to have been established by Moody’s and S&P for the Index Debt shall be changed (other than as a result of a change in the rating system of Moody’s or S&P), such change shall be effective as of the date on which it is first announced by the applicable rating agency. Each change in the Applicable Rate shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If the rating system of Moody’s or S&P shall change, or if either such rating agency shall cease to be in the business of rating corporate debt obligations, the Borrower and the Lenders shall negotiate in good faith to amend this definition to reflect such changed rating system or the unavailability of ratings from such rating agency and, pending the effectiveness of any such amendment, the Applicable Rate shall be determined by reference to the rating most recently in effect prior to such change or cessation.
Subject to the foregoing, the Applicable Rate shall be determined by reference to the higher Index Debt rating assigned by Moody’s and S&P to the Borrower; provided that, if there shall be a difference of two or more rating categories between the ratings assigned by Moody’s and S&P to the Index Debt of the Borrower, the Applicable Rate shall be determined by reference to the Index Debt rating that is one category lower than the higher of the two Index Debt ratings assigned by Moody’s and S&P.
“ Approved Fund ” means any Person (other than a natural person) that is engaged in making, purchasing, holding or investing in bank loans and similar extensions of credit in the ordinary course of its business and that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.
“ Asset Securitization ” shall mean either of the following types of transactions, whether on a full recourse, limited recourse or non-recourse basis: (a) a public or private transfer of installment receivables, credit card receivables, lease receivables or any other type of secured or unsecured financial assets which transfer is recorded as a sale on the books of the transferor according to GAAP as of the date of such transfer, or (b) a transfer of installment receivables, credit card receivables, lease receivables or other financial assets to a bankruptcy-remote special purpose entity owned by the transferor, or owned by a parent or Subsidiary of the transferor, which transfer shall be a legal sale and a sale on the books of the transferor for GAAP purposes, with a subsequent granting of an undivided interest in the pool of financial assets held by the special purpose entity to one or more single or multi-seller commercial paper conduits, and accompanying liquidity bank or banks, which subsequent transfer of interest shall be treated as a financing for GAAP purposes.
“ Assignment and Assumption ” means an assignment and assumption entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent.
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“ Availability Period ” means the period from and including the Effective Date to and including the Commitment Termination Date.
“ Bank Regulatory Authority ” means the Board, the Comptroller of the Currency, the Federal Deposit Insurance Corporation and all other relevant bank regulatory authorities (including relevant state bank regulatory authorities).
“ Board ” means the Board of Governors of the Federal Reserve System of the United States of America.
“ Borrowing ” means (a) all ABR Loans made to, or converted or continued by, the Borrower on the same date, (b) all Syndicated Eurodollar Loans or Competitive Loans made to the Borrower of the same Class and Type that have the same Interest Period (or any single Competitive Loan made to the Borrower that does not have the same Interest Period as any other Competitive Loan of the same Type) or (c) a Swingline Loan. For purposes hereof, the date of a Syndicated Borrowing comprising one or more Loans that have been converted or continued shall be the effective date of the most recent conversion or continuation of such Loan or Loans.
“ Borrowing Request ” means a request by the Borrower for a Syndicated Borrowing in accordance with Section 2.03.
“ Business Day ” means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed; provided that, when used in connection with a Eurodollar Loan, the term “Business Day” shall also exclude any day on which banks are not open for dealings in Dollar deposits in the London interbank market.
“ Capital Lease Obligations ” of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP.
“ Change in Control ” shall mean (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the SEC thereunder as in effect on the date hereof), of shares representing more than 25% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Borrower; (b) during any period of 25 consecutive calendar months, a majority of the Board of Directors of the Borrower ceasing to be composed of individuals (i) who were members of said Board on the first day of such period, (ii) whose election or nomination to said Board was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of said Board or (iii) whose election or nomination to said Board was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of said Board; or (c) the
Credit Agreement
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acquisition by any Person or group of direct or indirect possession of the power to direct or cause to direct the management or policies of the Borrower, whether through the ability to exercise voting power, by contract or otherwise.
“ Change in Law ” means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender (or, for purposes of Section 2.14(b), by any lending office of such Lender or by such Lender’s holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement.
“ Class ”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans constituting such Borrowing, are Syndicated Loans, Competitive Loans or Swingline Loans.
“ Code ” means the Internal Revenue Code of 1986, as amended from time to time.
“ Commitments ” means with respect to each Lender, the obligation of such Lender to make Syndicated Loans pursuant to Section 2.01 and to acquire participations in Swingline Loans pursuant to Section 2.05(c), as such commitment may be (a) reduced from time to time pursuant to Section 2.08 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. The initial amount of each Lender’s Commitment is set forth on Schedule I, or in the Assignment and Assumption pursuant to which such Lender shall have assumed such Commitment, as applicable. The initial aggregate amount of the Commitments shall be $800,000,000.
“ Commitment Termination Date ” means August 4, 2010.
“ Competitive ”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans constituting such Borrowing, are made pursuant to Section 2.04.
“ Competitive Bid ” means an offer by a Lender to make a Competitive Loan in accordance with Section 2.04.
“ Competitive Bid Rate ” means, with respect to any Competitive Bid, the Margin or the Fixed Rate, as applicable, offered by the Lender making such Competitive Bid.
“ Competitive Bid Request ” means a request by the Borrower for Competitive Bids in accordance with Section 2.04.
“ Consolidated Assets ” shall mean, at any date, the amount at which the assets of the Borrower and its Subsidiaries are or should be shown on a consolidated statement of financial position prepared in accordance with GAAP as at such date.
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“ Consolidated Equity ” shall mean, at any date, the amount of stockholders’ equity of the Borrower and its Subsidiaries determined on a consolidated basis without duplication in accordance with GAAP (and, for the purposes of Section 6.04 only, shall include Special Preferred Equity Securities, but only to the extent that such Special Preferred Equity Securities could be treated as Tier 1 capital of the Borrower if the Borrower were a bank holding company subject to regulation by the Board).
“ Consolidated Loans Held in Portfolio ” means, at any date, the aggregate amount of “loans held in portfolio” as are or should be shown on a consolidated statement of financial position of the Borrower and its Subsidiaries prepared in accordance with GAAP as at such date.
“ Control ” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “ Controlling ” and “ Controlled ” have meanings correlative thereto.
“ Default ” means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.
“ Disclosed Matters ” means the actions, suits and proceedings disclosed in Schedule III and the environmental matters disclosed in Schedule IV.
“ Dollars ” or “ $ ” refers to lawful money of the United States of America.
“ Double Leverage Ratio ” means, at any date, the ratio of (a) the sum of (i) the aggregate book value of the Investments of the Borrower in the capital notes and stock of its Subsidiaries as at such date plus (ii) the aggregate amount of intangibles (including purchased mortgage servicing rights and purchased credit card relationships) of the Borrower as at such date to (b) Consolidated Equity as at such date.
“ Effective Date ” means the date on which the conditions specified in Section 4.01 are satisfied (or waived in accordance with Section 9.02).
“ Environmental Laws ” means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Material or to health and safety matters.
“ Environmental Liability ” means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower or any of its Subsidiaries directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any
Credit Agreement
- 7 -
Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.
“ Equity Rights ” means, with respect to any Person, any subscriptions, options, warrants, commitments, preemptive rights or agreements of any kind (including any shareholders’ or voting trust agreements) for the issuance, sale, registration or voting of, or securities convertible into, any additional shares of capital stock of any class, or partnership or other ownership interests of any type in, such Person.
“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended from time to time.
“ ERISA Affiliate ” means, with respect to the Borrower, any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code, or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code.
“ ERISA Event ” means (a) any “reportable event”, as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an “accumulated funding deficiency” (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the distribution of or receipt by the Borrower or any of its ERISA Affiliates from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan or the institution of proceedings by from the PBGC or a plan administrator in relation to the foregoing; (f) the incurrence by the Borrower or any of its ERISA Affiliates of any liability (including the obligation to satisfy secondary liability as a result of a purchaser default) with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; (g) the receipt by the Borrower or any of its ERISA Affiliates of any notice, or the receipt by any Multiemployer Plan from the Borrower or any of its ERISA Affiliates of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA; (h) the institution of a proceeding by a fiduciary of any Multiemployer Plan against the Borrower or any of its ERISA Affiliates to enforce Section 515 of ERISA, which proceeding is not dismissed within 30 days; or (i) the adoption of an amendment to any Plan that, pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, would result in the loss of tax-exempt status of the trust of which such Plan is a part if the Borrower or any of its ERISA Affiliates fails to timely provide security to the Plan in accordance with the provisions of said Sections.
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“ Eurodollar ”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans constituting such Borrowing, are bearing interest at a rate determined by reference to (a) in the case of a Syndicated Loan or Borrowing, the Adjusted LIBO Rate, or (b) in the case of a Competitive Loan or Borrowing, the LIBO Rate.
“ Event of Default ” has the meaning assigned to such term in Article VII.
“ Excluded Taxes ” means, with respect to the Administrative Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the Borrower is located and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.18(b)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement or is attributable to such Foreign Lender’s failure or inability to comply with Section 2.16(e), except to the extent that such Foreign Lender’s assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 2.16(a).
“ Existing Credit Agreement ” means the Three-Year Credit Agreement dated as of August 12, 2002 between the Borrower, Washington Mutual Financial Corporation, the lenders party thereto and JPMCB (formerly known as JPMorgan Chase Bank), as administrative agent for such lenders, as heretofore amended.
“ Federal Funds Effective Rate ” means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it.
“ Financial Officer ” means the chief financial officer, principal accounting officer, treasurer or controller of the Borrower.
“ Fixed Rate ” means, with respect to any Competitive Loan (other than a Competitive Eurodollar Loan), the fixed rate of interest per annum specified by the Lender making such Competitive Loan in its related Competitive Bid.
“ Fixed Rate Loan ” means a Competitive Loan bearing interest at a Fixed Rate.
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“ Foreign Lender ” means any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.
“ GAAP ” means generally accepted accounting principles in the United States of America.
“ Governmental Authority ” means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.
“ Guarantee ” of or by any Person (the “ guarantor ”) means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the “ primary obligor ”) in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; provided that the term “Guarantee” shall not include endorsements for collection or deposit in the ordinary course of business.
“ Hazardous Materials ” means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law.
“ Hedging Agreement ” means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement.
“ Indebtedness ” of any Person means, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding
Credit Agreement
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current accounts payable incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty, (j) all obligations, contingent or otherwise, of such Person in respect of bankers’ acceptances and (k) all Asset Securitizations (for which purpose the amount thereof shall be deemed to be equal to the aggregate amount of the proceeds received in connection therewith). The Indebtedness of any Person (x) shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor and (y) shall exclude obligations of such Person in respect of deposits received in the ordinary course of business.
“ Indemnified Taxes ” means Taxes other than Excluded Taxes.
“ Index Debt ” means senior, unsecured, long-term indebtedness for borrowed money of the Borrower that is not guaranteed by any other Person or subject to any other credit enhancement.
“ Insured Subsidiary ” means any insured depositary institution (as defined in 12 U.S.C. § 1813(c) (or any successor provision), as amended, re-enacted or redesignated from time to time, that is controlled (within the meaning of 12 U.S.C. § 1841 (or any successor provision), as amended, re-enacted or redesignated from time to time) by the Borrower.
“ Interest Election Request ” means a request by the Borrower to convert or continue a Syndicated Borrowing in accordance with Section 2.07.
“ Interest Payment Date ” means (a) with respect to any Syndicated ABR Loan, each Quarterly Date, (b) with respect to any Eurodollar Loan, the last day of each Interest Period therefor and, in the case of any Interest Period for a Eurodollar Loan that is more than three months long, each day prior to the last day of such Interest Period that occurs at intervals of three months after the first day of such Interest Period, (c) with respect to any Fixed Rate Loan, the last day of the Interest Period therefor and, in the case of any Interest Period for a Fixed Rate Loan that is more than 90 days long (unless otherwise specified in the applicable Competitive Bid Request), each day prior to the last day of such Interest Period that occurs at intervals of 90 days after the first day of such Interest Period, and any other dates that are specified in the applicable Competitive Bid Request as Interest Payment Dates with respect to such Loan and (d) with respect to any Swingline Loan, the day that such Loan is required to be repaid under Section 2.09(a)(iii).
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“ Interest Period ” means:
(a) for any Borrowing (other than an ABR Borrowing), the Interest Period of the Loan or Loans constituting such Borrowing;
(b) for any Syndicated Eurodollar Loan, the period commencing on the date of such Loan and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as specified in the applicable Borrowing Request or Interest Election Request;
(c) for any Competitive Eurodollar Loan, the period commencing on the date of such Loan and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as specified in the applicable Competitive Bid Request; and
(d) for any Fixed Rate Loan, the period (which shall not be less than 7 days or more than 180 days) commencing on the date of such Loan and ending on the date specified in the applicable Competitive Bid Request;
provided that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of a Eurodollar Borrowing only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (ii) any Interest Period pertaining to a Eurodollar Borrowing that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Loan initially shall be the date on which such Loan is made and, in the case of a Syndicated Loan, thereafter shall be the effective date of the most recent conversion or continuation of such Loan.
“ Investment ” means, for any Person: (a) the acquisition (whether for cash, property, services or securities or otherwise) of capital stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person or any agreement to make any such acquisition (including any “short sale” or any sale of any securities at a time when such securities are not owned by the Person entering into such sale); (b) the making of any deposit with, or advance, loan or other extension of credit to, any other Person (including the purchase of property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such property to such Person); (c) the entering into of any Guarantee of, or other contingent obligation with respect to, Indebtedness or other liability of any other Person and (without duplication) any amount committed to be advanced, lent or extended to such Person; or (d) the entering into of any Hedging Agreement.
“ JPMCB ” means JPMorgan Chase Bank, N.A.
Credit Agreement
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“ Lenders ” means the Persons listed on Schedule I and any other Person that shall have become a party hereto pursuant to an Assignment and Assumption, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Assumption. Unless the context otherwise requires, the term “Lenders” includes the Swingline Lenders.
“ LIBO Rate ” means, for the Interest Period for any Eurodollar Borrowing, the rate appearing on Page 3750 of the Telerate Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to Dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for the offering of Dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the LIBO Rate for such Interest Period shall be the rate at which Dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period.
“ Lien ” means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.
“ Loans ” means the loans made by the Lenders to the Borrower pursuant to this Agreement.
“ Major Subsidiary ” means any Subsidiary of the Borrower that would be a “significant subsidiary” as defined in Article 1, Rule 1-02 of Regulation S-X promulgated under the Securities Act, as such regulation is in effect on the date hereof.
“ Margin ” means, with respect to any Competitive Loan bearing interest at a rate based on the LIBO Rate, the marginal rate of interest, if any, to be added to or subtracted from the LIBO Rate to determine the rate of interest applicable to such Loan, as specified by the Lender making such Loan in its related Competitive Bid.
“ Margin Stock ” means “margin stock” within the meaning of Regulations T, U and X of the Board.
“ Material Adverse Effect ” means a material adverse effect on (a) the business, assets, operations, prospects or condition, financial or otherwise, of the Borrower and its Subsidiaries, taken as a whole, (b) the ability of the Borrower to
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perform any of its obligations under this Agreement or (c) the rights of or benefits available to the Lenders under this Agreement.
“ Material Indebtedness ” means Indebtedness (other than the Loans), or obligations in respect of one or more Hedging Agreements, of any one or more of the Borrower and its Subsidiaries in an aggregate principal amount exceeding $100,000,000. For purposes of determining Material Indebtedness, the “ principal amount ” of the obligations of any Person in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that such Person would be required to pay if such Hedging Agreement were terminated at such time.
“ Moody’s ” means Moody’s Investors Service, Inc.
“ Multiemployer Plan ” means a multiemployer plan as defined in Section 4001(a)(3) of ERISA.
“ Non-Material Subsidiaries ” shall mean, as at any date, Subsidiaries of the Borrower the total assets of which, in the aggregate, do not exceed one percent (1%) of the Consolidated Assets of the Borrower and all of its Subsidiaries, as at such date.
“ Non-Performing Assets ” shall mean, as at any date, the sum, for the Borrower and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP) of the following: (a) non-accrual loans plus (b) accruing loans past due 90 days or more plus (c) other non-performing assets plus (d) other real estate owned plus (e) without duplication for amounts included as other real estate owned, property acquired pursuant to in-substance foreclosures.
“ Other Taxes ” means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement.
“ PBGC ” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions.
“ Permitted Encumbrances ” means:
(a) Liens imposed by law for taxes that are not yet due or are being contested in compliance with Section 5.04;
(b) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 5.04;
(c) pledges and deposits made in the ordinary course of business in compliance with workers’ compensation, unemployment insurance and other social security laws or regulations;
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(d) cash deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business;
(e) judgment liens in respect of judgments that do not constitute an Event of Default under clause (k) of Article VII;
(f) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that in the aggregate are not material in amount and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of any of the Borrower and its Subsidiaries;
(g) security interests granted in the ordinary course of business in securities and cash balances held in clearing accounts of clearing agencies to secure short-term advances made by such clearing agencies; and
(h) pledges in the ordinary course of business of securities to municipalities and other government agencies to secure the payment of the public fund deposits of such municipalities and government agencies;
provided that the term “Permitted Encumbrances” shall not include any Lien securing Indebtedness.
“ Person ” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.
“ Plan ” means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or any of its ERISA Affiliates is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.
“ Prime Rate ” means the rate of interest per annum publicly announced from time to time by JPMCB as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective.
“ Quarterly Dates ” means the last Business Day of March, June, September and December in each year, the first of which shall be the first such day after the date hereof.
“ Register ” has the meaning assigned to such term in Section 9.04(c).
“ Related Parties ” means, with respect to any specified Person, such Person’s Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person’s Affiliates.
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“ Repurchase Arrangements ” shall mean repurchase and reverse repurchase arrangements with respect to securities and financial instruments.
“ Required Lenders ” means, at any time, Lenders having Revolving Credit Exposures and unused Commitments representing more than 50% of the sum of the total Revolving Credit Exposures and unused Commitments at such time ( provided that, for purposes of declaring the Loans to be due and payable pursuant to Article VII, and for all purposes after the Loans become due and payable pursuant to Article VII or the Commitments expire or terminate, the outstanding Competitive Loans of the Lenders shall be included in their respective Revolving Credit Exposures in determining the Required Lenders).
“ Revolving Credit Exposure ” means, with respect to any Lender at any time, the aggregate outstanding principal amount of such Lender’s Syndicated Loans and its Swingline Exposure at such time.
“ SEC ” means the Securities and Exchange Commission or any Governmental Authority succeeding to any or all of the functions of said Commission.
“ Special Preferred Equity Securities ” shall mean preferred equity securities, if any, issued by a direct or indirect wholly-owned Subsidiary of the Borrower.
“ S&P ” means Standard & Poor’s Ratings Services, a Division of The McGraw-Hill Companies, Inc.
“ Statutory Reserve Rate ” means, for any day (or for the Interest Period for any Eurodollar Borrowing), a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject on such day (or, with respect to an Interest Period, the denominator of which is the number one minus the arithmetic mean of such aggregates for the days in such Interest Period) with respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred to as “Eurocurrency liabilities” in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.
“ Subsidiary ” means, with respect to any Person (the “ parent ”) at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent’s consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability
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company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent; provided that the term Subsidiary shall not include any bankruptcy remote special purpose entity used to receive transfers of installment receivables, credit card receivables, lease receivables or any other type of secured or unsecured financial assets in Asset Securitization transactions, except if (i) the accounts of such entity would be consolidated with those of the parent in the parent’s consolidated financial statements if such financial statements were prepared in accordance with GAAP, (ii) such transfer is not a legal sale or a sale on the books of the transferor for GAAP purposes, or (iii) such transfer is treated as a financing for GAAP purposes.
“ Swingline Exposure ” means, at any time, the aggregate principal amount of all Swingline Loans outstanding at such time. The Swingline Exposure of any Lender at any time shall be its Applicable Percentage of the total Swingline Exposure at such time.
“ Swingline Lenders ” means, collectively, JPMCB, Bank of America, N.A., Barclays Bank PLC and Citibank, N.A., in their capacity as lenders of Swingline Loans hereunder.
“ Swingline Loan ” means a Loan made pursuant to Section 2.05.
“ Syndicated Loan ” means a Loan made pursuant to Section 2.01.
“ Tangible Net Worth ” means, as at any date, the sum of:
(a) Consolidated Equity as at such date; minus
(b) the amount of Special Preferred Equity Securities, to the extent otherwise included in Consolidated Equity, as at such date; minus
(c) the sum for the Borrower and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP) of the cost of treasury shares and the book value of all assets that should be classified as intangibles (without duplication of deductions in respect of items already deducted in arriving at Consolidated Equity, it being understood that mortgage servicing rights are not considered to be intangibles for the purposes of this definition) but in any event including goodwill, minority interests, research and development costs, trademarks, trade names, copyrights, patents and franchises, unamortized debt discount and expense, all reserves and any write-up in the book value of assets resulting from a revaluation thereof subsequent to December 31, 2004, all determined as at such date.
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“ Taxes ” means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority.
“ Transactions ” means the execution, delivery and performance by the Borrower of this Agreement, the borrowing of Loans and the use of the proceeds thereof.
“ Type ”, when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans constituting such Borrowing, is determined by reference to the Adjusted LIBO Rate, the Alternate Base Rate or, in the case of a Competitive Loan or Borrowing, the LIBO Rate or a Fixed Rate.
“ Withdrawal Liability ” means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.
SECTION 1.02. Classification of Loans and Borrowings . For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a “Syndicated Loan”), by Type (e.g., a “Eurodollar Loan”) or by any combination thereof. Borrowings also may be classified and referred to by Class (e.g., a “Syndicated Borrowing”), by Type (e.g., a “Eurodollar Borrowing”) or by any combination thereof.
SECTION 1.03. Terms Generally . The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”. The word “will” shall be construed to have the same meaning and effect as the word “shall”. Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person’s successors and assigns, (c) the words “herein”, “hereof’ and “hereunder”, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.
SECTION 1.04. Accounting Terms; GAAP . Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided that, if the Borrower notifies the Administrative Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Borrower that the Required Lenders request an
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amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision is amended in accordance herewith.
ARTICLE II
THE CREDITS
SECTION 2.01. The Commitments . Subject to the terms and conditions set forth herein, each Lender agrees to make Syndicated Loans to the Borrower from time to time during the Availability Period in an aggregate principal amount that will not result in (a) such Lender’s Revolving Credit Exposure exceeding such Lender’s Commitment or (b) the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans exceeding the total Commitments. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Syndicated Loans.
SECTION 2.02. Loans and Borrowings .
(a) Obligations of Lenders . Each Syndicated Loan shall be made as part of a Borrowing consisting of Loans of the same Type made by the Lenders ratably in accordance with their respective Commitments. Each Competitive Loan shall be made in accordance with the procedures set forth in Section 2.04. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments and Competitive Bids of the Lenders are several and no Lender shall be responsible for any other Lender’s failure to make Loans as required.
(b) Type of Loans . Subject to Section 2.13, (i) each Syndicated Borrowing shall be constituted entirely of ABR Loans or Eurodollar Loans as the Borrower may request in accordance herewith, and (ii) each Competitive Borrowing shall be constituted entirely of Eurodollar Loans or Fixed Rate Loans as the Borrower may request in accordance herewith. Each Swingline Loan shall be an ABR Loan. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement.
(c) Minimum Amounts; Limitation on Number of Borrowings . At the commencement of the Interest Period for any Syndicated Eurodollar Borrowing, such Borrowing shall be in an aggregate amount of $10,000,000 or a larger multiple of $1,000,000. At the time that each ABR Borrowing is made, such Borrowing shall be in an aggregate amount equal to $5,000,000 or a larger multiple of $1,000,000; provided that an ABR Borrowing may be in an aggregate amount that is equal to the entire unused
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balance of the total Commitments. Each Swingline Loan shall be in an amount equal to $10,000,000 or a larger multiple of $1,000,000. Borrowings of more than one Type and Class may be outstanding at the same time; provided that there shall not at any time be more than a total of 10 Syndicated Eurodollar Borrowings outstanding.
(d) Limitations on Lengths of Interest Periods . Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert to or continue as a Syndicated Eurodollar Borrowing, any Borrowing if the Interest Period requested therefor would end after the Commitment Termination Date.
SECTION 2.03. Requests for Syndicated Borrowings . To request a Syndicated Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Syndicated Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Borrowing or (b) in the case of a Syndicated ABR Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.02:
(i) the aggregate amount of the requested Borrowing;
(ii) the date of such Borrowing, which shall be a Business Day;
(iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing;
(iv) in the case of a Syndicated Eurodollar Borrowing, the Interest Period therefor, which shall be a period contemplated by the definition of the term “Interest Period”; and
(v) the location and number of the Borrower’s account to which funds are to be disbursed, which shall comply with the requirements of Section 2.06.
If no election as to the Type of Syndicated Borrowing is specified, then the requested Syndicated Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Syndicated Eurodollar Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender’s Loan to be made as part of the requested Borrowing.
SECTION 2.04. Competitive Bid Procedure.
(a) Requests for Bids by the Borrower . Subject to the terms and conditions set forth herein, from time to time during the period from the Effective Date to
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but excluding the Commitment Termination Date the Borrower may request Competitive Bids and may (but shall not have any obligation to) accept Competitive Bids and borrow Competitive Loans; provided that the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans at any time shall not exceed the total Commitments. To request Competitive Bids, the Borrower shall notify the Administrative Agent of such request by telephone, in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, four Business Days before the date of the proposed Borrowing and, in the case of a Fixed Rate Borrowing, not later than 10:00 a.m., New York City time, one Business Day before the date of the proposed Borrowing; provided that the Borrower may submit up to (but not more than) two Competitive Bid Requests on the same day, but a Competitive Bid Request shall not be made within five Business Days after the date of any previous Competitive Bid Request, unless any and all such previous Competitive Bid Requests shall have been withdrawn or all Competitive Bids received in response thereto rejected. Each such telephonic Competitive Bid Request shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Competitive Bid Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Competitive Bid Request shall specify the following information in compliance with Section 2.02:
(i) the aggregate amount of the requested Borrowing;
(ii) the date of such Borrowing, which shall be a Business Day;
(iii) whether such Borrowing is to be a Eurodollar Borrowing or a Fixed Rate Borrowing;
(iv) the Interest Period for such Borrowing, which shall be a period contemplated by the definition of the term “Interest Period; and
(v) the location and number of the Borrower’s account to which funds are to be disbursed, which shall comply with the requirements of Section 2.06.
Promptly following receipt of a Competitive Bid Request in accordance with this Section, the Administrative Agent shall notify the Lenders of the details thereof by telecopy, inviting the Lenders to submit Competitive Bids.
(b) Making of Bids by Lenders . Each Lender may (but shall not have any obligation to) make one or more Competitive Bids to the Borrower in response to a Competitive Bid Request. Each Competitive Bid by a Lender must be in a form approved by the Administrative Agent and must be received by the Administrative Agent by telecopy, in the case of a Competitive Eurodollar Borrowing, not later than 9:30 a.m., New York City time, three Business Days before the proposed date of such Competitive Borrowing, and in the case of a Fixed Rate Borrowing, not later than 9:30 a.m., New York City time, on the proposed date of such Competitive Borrowing. Competitive Bids that do not conform substantially to the form approved by the Administrative Agent may be rejected by the Administrative Agent, and the Administrative Agent shall notify the
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applicable Lender of such rejection as promptly as practicable. Each Competitive Bid shall specify (i) the principal amount (which shall be $10,000,000 or a larger multiple of $1,000,000 and which may equal the entire principal amount of the Competitive Borrowing requested by the Borrower) of the Competitive Loan or Loans that the Lender is willing to make, (ii) the Competitive Bid Rate or Competitive Bid Rates at which the Lender is prepared to make such Loan or Loans (expressed as a percentage rate per annum in the form of a decimal to no more than four decimal places) and (iii) the Interest Period for each such Loan and the last day thereof.
(c) Notification of Bids by Administrative Agent . The Administrative Agent shall promptly notify the Borrower by telecopy of the Competitive Bid Rate and the principal amount specified in each Competitive Bid and the identity of the Lender that shall have made such Competitive Bid.
(d) Acceptance of Bids by the Borrower . Subject only to the provisions of this paragraph, the Borrower may accept or reject any Competitive Bid. The Borrower, shall notify the Administrative Agent by telephone, confirmed by telecopy in a form approved by the Administrative Agent, whether and to what extent it has decided to accept or reject each Competitive Bid, in the case of a Competitive Eurodollar Borrowing, not later than 10:30 a.m., New York City time, three Business Days before the date of the proposed Competitive Borrowing, and in the case of a Fixed Rate Borrowing, not later than 10:30 a.m., New York City time, on the proposed date of the Competitive Borrowing; provided that (x)(i) the failure of the Borrower to give such notice shall be deemed to be a rejection of each Competitive Bid, (ii) the Borrower shall not accept a Competitive Bid made at a particular Competitive Bid Rate if the Borrower rejects a Competitive Bid made at a lower Competitive Bid Rate, (iii) the aggregate amount of the Competitive Bids accepted by the Borrower shall not exceed the aggregate amount of the requested Competitive Borrowing specified in the related Competitive Bid Request, (iv) to the extent necessary to comply with clause (iii) of this proviso, the Borrower may accept Competitive Bids at the same Competitive Bid Rate in part, which acceptance, in the case of multiple Competitive Bids at such Competitive Bid Rate, shall be made pro rata in accordance with the amount of each such Competitive Bid, and (v) except pursuant to clause (iv) of this proviso, no Competitive Bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a principal amount of $10,000,000 or a larger multiple of $1,000,000 and (y) if a Competitive Loan must be in an amount less than $10,000,000 because of the provisions of clause (x)(iv) of this proviso, such Competitive Loan may be in an amount of $1,000,000 or any multiple thereof, and in calculating the pro rata allocation of acceptances of portions of multiple Competitive Bids at a particular Competitive Bid Rate pursuant to such clause (x)(iv) the amounts shall be rounded to multiples of $1,000,000 in a manner determined by the Borrower. A notice given by the Borrower pursuant to this paragraph shall be irrevocable.
(e) Notification of Acceptances by the Administrative Agent . The Administrative Agent shall promptly notify each bidding Lender by telecopy whether or not its Competitive Bid has been accepted (and, if so, the amount and Competitive Bid Rate so accepted), and each successful bidder will thereupon become bound, subject to
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the terms and conditions hereof, to make the Competitive Loan in respect of which its Competitive Bid has been accepted.
(f) Bids by the Administrative Agent . If the Administrative Agent shall elect to submit a Competitive Bid in its capacity as a Lender, it shall submit such Competitive Bid directly to the Borrower at least one quarter of an hour earlier than the time by which the other Lenders are required to submit their Competitive Bids to the Administrative Agent pursuant to paragraph (b) of this Section.
SECTION 2.05. Swingline Loans .
(a) Agreement to Make Swingline Loans . Subject to the terms and conditions set forth herein, each Swingline Lender agrees to make Swingline Loans to the Borrower from time to time during the period from the Effective Date to but excluding the Commitment Termination Date in an aggregate principal amount at any time outstanding that will not result in (i) the aggregate principal amount of outstanding Swingline Loans of all Swingline Lenders exceeding $200,000,000, (ii) the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans exceeding the total Commitments or (iii) the aggregate amount of the Revolving Credit Exposure of any Swingline Lender exceeding the Commitment of such Swingline Lender; provided that no Swingline Lender shall be required to make a Swingline Loan to refinance an outstanding Swingline Loan. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Swingline Loans.
(b) Notice of Swingline Loans by the Borrower . To request a Swingline Loan, the Borrower shall notify the Administrative Agent of such request by telephone (confirmed by telecopy), not later than 1:00 p.m., New York City time, on the day of a proposed Swingline Loan. Each such notice shall be irrevocable and shall specify the requested date (which shall be a Business Day) and amount of the requested Swingline Loan and the Swingline Lender or Lenders from which the Borrower wishes to borrow such Swingline Loans. The Administrative Agent will promptly advise the relevant Swingline Lenders of any such notice received from the Borrower. Each relevant Swingline Lender shall make each Swingline Loan to be made by it available to the Borrower by means of a credit to the general deposit account of the Borrower with such Swingline Lender by 3:00 p.m., New York City time, on the requested date of such Swingline Loan.
(c) Participations by Lenders in Swingline Loans . Any Swingline Lender may by written notice given to the Administrative Agent not later than 10:00 a.m., New York City time, on any Business Day require the Lenders to acquire participations on such Business Day in all or a portion of the Swingline Loans made by such Swingline Lender that are at the time outstanding. Such notice to the Administrative Agent shall specify the aggregate amount of Swingline Loans in which Lenders will participate. Promptly upon receipt of such notice, the Administrative Agent will give notice thereof to each Lender, specifying in such notice such Lender’s Applicable Percentage of such Swingline Loan or Loans.
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Each Lender hereby absolutely and unconditionally agrees, upon receipt of notice as provided above, to pay to the Administrative Agent, for account of the requesting Swingline Lender, such Lender’s Applicable Percentage of such Swingline Loan or Loans. Each Lender acknowledges and agrees that its obligation to acquire participations in Swingline Loans pursuant to this Section 2.05(c) is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Each Lender shall comply with its obligation under this Section 2.05(c) by wire transfer of immediately available funds, in the same manner as provided in Section 2.06 with respect to Loans made by such Lender (and Section 2.06 shall apply, mutatis mutandis , to the payment obligations of the Lenders), and the Administrative Agent shall promptly pay to the requesting Swingline Lender the amounts so received by it from the Lenders. The Administrative Agent shall notify the Borrower of any participations in any Swingline Loan acquired pursuant to this Section 2.05(c), and thereafter payments in respect of such Swingline Loan shall be made to the Administrative Agent and not to the requesting Swingline Lender.
Any amounts received by any Swingline Lender from the Borrower (or other party on behalf of the Borrower) in respect of a Swingline Loan after receipt by such Swingline Lender of the proceeds of a sale of participations therein shall be promptly remitted to the Administrative Agent; any such amounts received by the Administrative Agent shall be promptly remitted by the Administrative Agent to the Lenders that shall have made their payments pursuant to this Section 2.05(c) and to such Swingline Lender, as their interests may appear. The purchase of participations in a Swingline Loan pursuant to this Section 2.05(c) shall not relieve the Borrower of any default in the payment thereof.
Notwithstanding the foregoing, a Lender shall not have any obligation to acquire a participation in a Swingline Loan pursuant to this Section 2.05(c) if a Default shall have occurred and be continuing at the time such Swingline Loan was made and such Lender shall have notified the Swingline Lenders in writing, at least one Business Day prior to the time such Swingline Loan was made, that such Default has occurred and that such Lender will not acquire participations in Swingline Loans made while such Default is continuing (each such notice, a “ Notice of Default ”). Following a Notice of Default by any Lender, no Swingline Lender shall have any obligation to, but may in its absolute discretion, make a Swingline Loan until it has received notice in writing from each such Lender that such Lender has rescinded its Notice of Default (each such notice, a “ Notice of Rescission ”), upon which Notice of Rescission (i) each Swingline Lender’s obligation to make Swingline Loans as described in paragraph (a) of this Section shall be reinstated and (ii) such Lender shall have all the obligations of a Lender to acquire participations in Swingline Loans as described in the foregoing paragraphs of this clause (c). If each such Notice of Rescission described in the foregoing sentence is received by the relevant Swingline Lender not later than 1:00 p.m., New York City time, on any Business Day, such Swingline Lender shall make the relevant Swingline Loan as described in the last sentence of clause (b) of this Section 5.05 on such Business Day.
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SECTION 2.06. Funding of Borrowings .
(a) Funding by Lenders . Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 12:00p.m., New York City time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders; provided that Swingline Loans shall be made as provided in Section 2.05. The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower maintained with the Administrative Agent in New York City and designated by the Borrower in the applicable Borrowing Request or Competitive Bid Request.
(b) Presumption by the Administrative Agent . Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender’s share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the Federal Funds Effective Rate or (ii) in the case of the Borrower, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender’s Loan included, in such Borrowing.
SECTION 2.07. Interest Elections .
(a) Elections by the Borrower for Syndicated Borrowings . Each Syndicated Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Syndicated Eurodollar Borrowing, shall have the Interest Period specified in such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a Borrowing of a different Type or to continue such Borrowing as a Borrowing of the same Type and, in the case of a Syndicated Eurodollar Borrowing, may elect the Interest Period therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans constituting such Borrowing, and the Loans constituting each such portion shall be considered a separate Borrowing. This Section shall not apply to Competitive Borrowings or Swingline Borrowings, which may not be converted or continued.
(b) Notice of Elections . To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.03 if Borrower were
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requesting a Syndicated Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower.
(c) Information in Interest Election Requests . Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02:
(i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) of this paragraph shall be specified for each resulting Borrowing);
(ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day;
(iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and
(iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period therefor after giving effect to such election, which shall be a period contemplated by the definition of the term “Interest Period”.
If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration.
(d) Notice by the Administrative Agent to Lenders . Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender’s portion of each resulting Borrowing.
(e) Failure to Elect; Events of Default . If the Borrower fails to deliver a timely Interest Election Request with respect to a Syndicated Eurodollar Borrowing prior to the end of the Interest Period therefor, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to a Syndicated ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Syndicated Borrowing may be converted to or continued as a Syndicated Eurodollar Borrowing and (ii) unless repaid, each Syndicated Eurodollar Borrowing shall be converted to a Syndicated ABR Borrowing at the end of the Interest Period therefor.
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SECTION 2.08. Termination and Reduction of the Commitments .
(a) Scheduled Termination . Unless previously terminated, the Commitments shall terminate at the close of business on the Commitment Termination Date.
(b) Voluntary Termination or Reduction . The Borrower may at any time terminate, or from time to time reduce, the Commitments; provided that (i) each reduction of the Commitments shall be in an amount that is an integral multiple of $10,000,000 and (ii) the Borrower shall not terminate or reduce the Commitments if, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.10, the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans would exceed the total Commitments.
(c) Notice of Voluntary Termination or Reduction . The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable; provided that a notice of termination of the Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied.
(d) Effect of Termination or Reduction . Any termination or reduction of the Commitments shall be permanent. Each reduction of the Commitments shall be made ratably among the Lenders in accordance with their respective Commitments.
SECTION 2.09. Repayment of Loans; Evidence of Debt .
(a) Repayment . The Borrower hereby unconditionally promises to pay the Loans as follows:
(i) to the Administrative Agent for account of the Lenders, on the Commitment Termination Date, the then unpaid principal amount of the Syndicated Loans that are outstanding at the close of business on the Commitment Termination Date,
(ii) to the Administrative Agent for account of the respective Lender, on the last day of the Interest Period therefor, the then unpaid principal amount of each Competitive Loan of such Lender, and
(iii) to each Swingline Lender, on the earlier of the Commitment Termination Date and the first date after such Swingline Loan is made that is no later than the 15 th or last day of a calendar month and is at least one Business Day after such Swingline Loan is made, the amount of the then unpaid principal
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amount of each Swingline Lender’s Swingline Loan; provided that, on each date that a Syndicated Borrowing or Competitive Borrowing is made, the Borrower shall repay all Swingline Loans then outstanding.
(b) Manner of Payment . Prior to any repayment or prepayment of any Borrowings hereunder, the Borrower shall select the Borrowing or Borrowings to be paid and shall notify the Administrative Agent by telephone (confirmed by telecopy) of such selection not later than 11:00 a.m., New York City time, three Business Days before the scheduled date of such repayment; provided that each repayment of Borrowings by the Borrower shall be applied to repay any outstanding ABR Borrowings of the Borrower before any other Borrowings. If the Borrower fails to make a timely selection of the Borrowing or Borrowings to be repaid or prepaid, such payment shall be applied, first, to pay any outstanding ABR Borrowings of the Borrower and, second, to other Syndicated Borrowings of the Borrower in the order of the remaining duration of their respective Interest Periods (the Borrowing with the shortest remaining Interest Period to be repaid first). Each payment of a Syndicated Borrowing shall be applied ratably to the Loans included in such Borrowing.
(c) Maintenance of Loan Accounts by Lenders . Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder.
(d) Maintenance of Loan Accounts by the Administrative Agent . The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan to the Borrower made hereunder, the Class and Type thereof and each Interest Period therefor, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent from the Borrower hereunder for account of the Lenders and each Lender’s share thereof.
(e) Effect of Entries . The entries made in the accounts maintained pursuant to paragraph (c) or (d) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement.
(g) Promissory Notes . Any Lender may request that Loans made by it be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Administrative Agent. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form
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payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns).
SECTION 2.10. Prepayment of Loans .
(a) Optional Prepayments Right to Prepay Borrowings . The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to the requirements of this Section; provided that the Borrower shall not have the right to prepay any Competitive Loan without the prior consent of the Lender thereof.
(b) Notices, Etc . The Borrower shall notify the Administrative Agent (and, in the case of prepayment of a Swingline Loan, the applicable Swingline Lender) by telephone (confirmed by telecopy) of any optional prepayment hereunder of a Borrowing made by the Borrower (i) in the case of prepayment of a Syndicated Eurodollar Borrowing or of a Competitive Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment, (ii) in the case of prepayment of an ABR Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of prepayment or (iii) in the case of prepayment of a Swingline Loan, not later than 12:00 p.m., New York City time, on the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid; provided that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.08, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.08. Promptly following receipt of any such notice relating to a Syndicated Borrowing or Competitive Borrowing, the Administrative Agent shall advise the relevant Lenders of the contents thereof. Each partial prepayment of any Borrowing shall be in an amount that would be permitted in the case of a Borrowing of the same Type as provided in Section 2.02. Each prepayment of a Syndicated Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.12 and shall be made in the manner specified in Section 2.09(b).
SECTION 2.11. Fees .
(a) Facility Fee . The Borrower agrees to pay to the Administrative Agent for account of each Lender a facility fee, which shall accrue at the Applicable Rate on the daily amount of the Commitment of such Lender (whether used or unused) during the period from and including the date hereof to but excluding the date such Commitment terminates; provided that, if such Lender continues to have any Revolving Credit Exposure after its Commitment terminates, then the Borrower agrees to pay to the Administrative Agent for the account of each Lender a facility fee which shall accrue on the daily aggregate outstanding principal amount of Loans (including Competitive Loans and Swingline Loans) of such Lender made to the Borrower from and including the date on which its Commitment terminates to but excluding the date on which such Lender ceases to have any Loans outstanding. Accrued facility fees shall be payable on each Quarterly Date and on each date the Commitment of any Lender terminates, commencing
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on the first such date to occur after the date hereof; provided that any facility fees accruing after the date on which the Commitments terminate shall be payable on demand. All facility fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day).
(b) Administrative Agent Fees . The Borrower agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times separately agreed upon between the Borrower and the Administrative Agent.
(c) Payment of Fees . All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, in the case of facility fees, to the Lenders entitled thereto. Fees paid shall not be refundable under any circumstances.
SECTION 2.12. Interest .
(a) ABR Loans . The Loans constituting each ABR Borrowing (including each Swingline Loan) shall bear interest at a rate per annum equal to the Alternate Base Rate plus the Applicable Rate plus , if applicable, the Additional Margin.
(b) Eurodollar Loans . The Loans constituting each Eurodollar Borrowing shall bear interest at a rate per annum equal to (i) in the case of a Syndicated Eurodollar Loan, the Adjusted LIBO Rate for the Interest Period for such Borrowing plus the Applicable Rate plus , if applicable, the Additional Margin, or (ii) in the case of a Competitive Eurodollar Borrowing, the LIBO Rate for the Interest Period for such Borrowing plus (or minus , as applicable) the Margin applicable to such Loan plus , if applicable, the Additional Margin.
(c) Fixed Rate Loans . Each Fixed Rate Loan shall bear interest at a rate per annum equal to the Fixed Rate applicable to such Loan plus , if applicable, the Additional Margin.
(d) Default Interest . Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided above or (ii) in the case of any other amount, 2% plus the rate applicable to ABR Loans as provided in paragraph (a) of this Section.
(e) Payment of Interest . Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and, in the case of Syndicated Loans, upon termination of the Commitments; provided that (i) interest accrued pursuant to paragraph (d) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of a Syndicated ABR Loan prior to the Commitment Termination Date), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or
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prepayment and (iii) in the event of any conversion of any Syndicated Eurodollar Borrowing prior to the end of the Interest Period therefor, accrued interest on such Borrowing shall be payable on the effective date of such conversion.
(f) Computation . All interest hereunder shall be computed on the basis of a year of 360 days except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate, Adjusted LIBO Rate or LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error.
SECTION 2.13. Alternate Rate of Interest . If prior to the commencement of the Interest Period for a Eurodollar Borrowing:
(a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period; or
(b) the Administrative Agent is advised by the Required Lenders (or, in the case of a Competitive Eurodollar Loan, the Lender that is required to make such Loan) that the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period will not adequately and fairly reflect the cost to such Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for such Interest Period;
then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Syndicated Borrowing to, or continuation of any Syndicated Borrowing as, a Syndicated Eurodollar Borrowing shall be ineffective, (ii) if any Borrowing Request requests a Syndicated Eurodollar Borrowing, such Borrowing shall be made as a Syndicated ABR Borrowing and (iii) any request by the Borrower for a Competitive Eurodollar Borrowing shall be ineffective; provided that, if the circumstances giving rise to such notice do not affect all the Lenders, then requests by the Borrower for Competitive Eurodollar Borrowings may be made to Lenders that are not affected thereby.
SECTION 2.14. Increased Costs .
(a) Increased Costs Generally . If any Change in Law shall:
(i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for account of, or credit
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extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate); or
(ii) impose on any Lender or the London interbank market any other condition affecting this Agreement or Eurodollar Loans or Fixed Rate Loans made by such Lender;
and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or Fixed Rate Loan (or of maintaining its obligation to make any such Loan) or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise), then the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered.
(b) Capital Requirements . If any Lender determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender’s capital or on the capital of such Lender’s holding company, if any, as a consequence of this Agreement or the Loans made by such Lender to a level below that which such Lender or such Lender’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s policies and the policies of such Lender’s holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender’s holding company for any such reduction suffered.
(c) Certificates from Lenders . A certificate of a Lender setting forth the amount or amounts necessary to compensate such Lender or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof.
(d) Delay in Requests . Failure or delay on the part of any Lender to demand compensation pursuant to this Section shall not constitute a waiver of such Lender’s right to demand such compensation; provided that (i) the Borrower shall not be required to compensate a Lender pursuant to this Section for any increased costs or reductions incurred more than six months prior to the date that such Lender notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender’s intention to claim compensation therefor and (ii) if the Change in Law giving rise to such increased costs or reductions is retroactive, then the six-month period referred to above shall be extended to include the period of retroactive effect thereof.
(e) Competitive Loans . Notwithstanding the foregoing provisions of this Section, a Lender shall not be entitled to compensation pursuant to this Section in respect of any Competitive Loan if the Change in Law that would otherwise entitle it to such compensation shall have been publicly announced prior to submission of the Competitive Bid pursuant to which such Loan was made.
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SECTION 2.15. Break Funding Payments . In the event of (a) the payment of any principal of any Eurodollar Loan or Fixed Rate Loan other than on the last day of an Interest Period therefor (including as a result of an Event of Default), (b) the conversion of any Syndicated Eurodollar Loan other than on the last day of an Interest Period therefor, (c) the failure to borrow, convert, continue or prepay any Syndicated Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice is permitted to be revocable under Section 2.10(b) and is revoked in accordance therewith), (d) the failure to borrow any Competitive Loan after accepting the Competitive Bid to make such Loan, or (e) the assignment of any Eurodollar Loan or Fixed Rate Loan other than on the last day of an Interest Period therefor as a result of a request by the Borrower pursuant to Section 2.18, then, in any such event, the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, the loss to any Lender attributable to any such event shall be deemed to include an amount determined by such Lender to be equal to the excess, if any, of (i) the amount of interest that such Lender would pay for a deposit equal to the principal amount of such Loan for the period from the date of such payment, conversion, failure or assignment to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, convert or continue, the duration of the Interest Period that would have resulted from such borrowing, conversion or continuation) if the interest rate payable on such deposit were equal to the Adjusted LIBO Rate for such Interest Period, over (ii) the amount of interest that such Lender would earn on such principal amount for such period if such Lender were to invest such principal amount for such period at the interest rate that would be bid by such Lender (or an affiliate of such Lender) for Dollar deposits from other banks in the eurodollar market at the commencement of such period. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof.
SECTION 2.16. Taxes .
(a) Payments Free of Taxes . Any and all payments by or on account of any obligation of the Borrower hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that, if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent or Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law.
(b) Payment of Other Taxes by the Borrower . In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.
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(c) Indemnification by the Borrower . The Borrower shall indemnify the Administrative Agent and each Lender, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) paid by the Administrative Agent or such Lender, as the case may be, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender, or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error.
(d) Evidence of Payments . As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.
(e) Foreign Lenders . Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law or reasonably requested by Borrower, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate.
SECTION 2.17. Payments Generally; Pro Rata Treatment; Sharing of Set-offs .
(a) Payments by the Borrower . The Borrower shall make each payment required to be made by it hereunder (whether of principal, interest or fees, or under Section 2.14, 2.15 or 2.16, or otherwise) prior to 12:00 p.m., New York City time, on the date when due, in immediately available funds, without set-off or counterclaim; provided that, if a new Loan is to be made by any Lender to the Borrower on a date the Borrower is to repay any principal of an outstanding Loan of such Lender, such Lender shall apply the proceeds of such new Loan to the payment of the principal to be repaid by the Borrower and only an amount equal to the difference between the principal to be borrowed and the principal to be repaid shall be made available by such Lender to the Administrative Agent as provided in Section 2.06 or paid by the Borrower to the Administrative Agent pursuant to this paragraph, as the case may be. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its offices at 270 Park Avenue, New York, New York, except that payments to be made directly to any Swingline Lender as expressly provided herein, and payments
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pursuant to Sections 2.14, 2.15, 2.16 and 9.03, shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder shall be made in Dollars.
(b) Application of Insufficient Payments . If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied (i) first, to pay interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, to pay principal then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal then due to such parties.
(c) Pro Rata Treatment . Except to the extent otherwise provided herein: (i) each payment of facility fee under Section 2.11 shall be made for account of the Lenders, and each termination or reduction of the amount of the Commitments under Section 2.08 shall be applied to the respective Commitments of the Lenders, pro rata according to the amounts of their respective Commitments; (ii) each Syndicated Borrowing shall be allocated pro rata among the Lenders according to the amounts of their respective Commitments (in the case of the making of Syndicated Loans) or their respective Loans (in the case of conversions and continuations of Loans); (iii) each payment or prepayment of principal of Syndicated Loans by the Borrower shall be made for account of the Lenders pro rata in accordance with the respective unpaid principal amounts of the Syndicated Loans held by them; and (iv) each payment of interest on Syndicated Loans by the Borrower shall be made for account of the Lenders pro rata in accordance with the respective amounts of interest on such Loans then due and payable to such Lenders.
(d) Sharing of Payments by Lenders . If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Syndicated Loans or participations in Swingline Loans resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Syndicated Loans and participations in Swingline Loans and accrued interest thereon then due than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Syndicated Loans and participations in Swingline Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Syndicated Loans and participations in Swingline Loans; provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any
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payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to the Borrower or any of its Subsidiaries or Affiliates (as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation.
(e) Presumptions of Payment . Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for account of the Lenders hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the Federal Funds Effective Rate.
(f) Certain Deductions by the Administrative Agent . If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.05(c), 2.06(b) or 2.17(e), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for account of such Lender to satisfy such Lender’s obligations under such Sections until all such unsatisfied obligations are fully paid.
SECTION 2.18. Mitigation Obligations; Replacement of Lenders .
(a) Designation of a Different Lending Office . If any Lender requests compensation under Section 2.14, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for account of any Lender pursuant to Section 2.16, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.14 or 2.16, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment.
(b) Replacement of Lenders . If any Lender requests compensation under Section 2.14, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for account of any Lender pursuant to Section 2.16, or if any Lender defaults in its obligation to fund Loans hereunder, then the
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Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement (other than any outstanding Competitive Loans held by it) to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Borrower shall have received the prior written consent of the Administrative Agent (and, if a Commitment is being assigned, each Swingline Lender), which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans (other than Competitive Loans) and participations in Swingline Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.14 or payments required to be made pursuant to Section 2.16, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lenders that:
SECTION 3.01. Organization; Powers . The Borrower and each of its Subsidiaries (except Non-Material Subsidiaries) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required.
SECTION 3.02. Authorization: Enforceability . The Transactions are within the Borrower’s corporate powers and have been duly authorized by all necessary corporate and, if required, by all necessary shareholder action. This Agreement has been duly executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditors’ rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
SECTION 3.03. Governmental Approvals; No Conflicts . The Transactions (a) do not require any consent or approval of, registration or filing with, or
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any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of the Borrower or any of its Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon the Borrower or any of its Subsidiaries or assets, or give rise to a right thereunder to require any payment to be made by any such Person, and (d) will not result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries.
SECTION 3.04. Financial Condition; No Material Adverse Change .
(a) Financial Condition . The Borrower has heretofore furnished to the Lenders its consolidated balance sheet and statements of income, stockholders’ equity and cash flows (i) as of and for the fiscal year ended December 31, 2004, reported on by Deloitte & Touche LLP, independent public accountants for the Borrower, and (ii) as of and for the fiscal quarter and the portion of the fiscal year ended March 31, 2005, certified by the president, the chairman, the chief executive officer, a vice-chair, a senior executive vice president, an executive vice president or a Financial Officer of the Borrower. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of the Borrower and its Subsidiaries as of such dates and for such periods in accordance with GAAP, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (ii) of the first sentence of this paragraph.
(b) No Material Adverse Change . From December 31, 2004 to the date of this Agreement, there has been no material adverse change in the business, assets, operations, prospects or condition, financial or otherwise, of the Borrower and its Subsidiaries, taken as a whole.
SECTION 3.05. Properties . The Borrower and each of its Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, except to the extent that failure to have such title could not reasonably be expected to have a Material Adverse Effect.
SECTION 3.06. Litigation and Environmental Matters .
(a) Actions, Suits and Proceedings . There are no (A) actions, suits or proceedings by or before any arbitrator or Governmental Authority now pending against or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any of its Subsidiaries or (B) investigations by or before any arbitrator or Governmental Authority to the knowledge of the Borrower now pending against or threatened against or affecting the Borrower or any of its Subsidiaries (i) as to any of which there is a reasonable likelihood of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters) or (ii) that involve this Agreement or the Transactions.
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(b) Environmental Matters . Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, neither the Borrower nor any of its Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability.
SECTION 3.07. Compliance with Laws and Agreements . The Borrower and each of its Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. No Default has occurred and is continuing.
SECTION 3.08. Investment and Holding Company Status . Neither the Borrower nor any of its Subsidiaries is (a) an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a “holding company” as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935.
SECTION 3.09. Taxes . The Borrower and each of its Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings and for which such Person has set aside on its books adequate reserves or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect.
SECTION 3.10. ERISA . No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed the fair market value of the assets of such Plan, and there were no underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) as of the date of the most recent financial statements in which such underfunded Plans would be reflected.
SECTION 3.11. Disclosure . The Borrower has disclosed to the Lenders all agreements, instruments and corporate or other restrictions to which it or any of its Subsidiaries is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of the reports, financial statements, certificates, schedules or other information furnished by or on behalf of the Borrower to the Lender in connection with the negotiation of this Agreement or delivered hereunder (as modified or supplemented by other information so
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furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time.
SECTION 3.12. Use of Credit . Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying Margin Stock in violation of Regulations T, U or X of the Board, and no part of the proceeds of any Loan hereunder will be used to buy or carry any Margin Stock in violation of Regulations T, U or X of the Board.
SECTION 3.13. Liens . Schedule II is a complete and correct list of each Lien securing Indebtedness of any Person outstanding on the date hereof (other than Liens otherwise permitted by Section 6.01) the aggregate principal or face amount of which equals or exceeds (or may equal or exceed) $10,000,000 and covering any property of the Borrower, and the aggregate Indebtedness secured (or that may be secured) by each such Lien and the property covered by each such Lien is correctly described in Schedule II. Notwithstanding the foregoing, the Borrower shall not be required to set forth Asset Securitizations in said Schedule II.
SECTION 3.14. Subsidiaries .
(a) Major Subsidiaries . Set forth in Schedule V is a complete and correct list of all of the Major Subsidiaries as of the date hereof, together with, for each such Major Subsidiary, (i) the jurisdiction of organization of such Major Subsidiary, (ii) each Person holding ownership interests in such Major Subsidiary and (iii) the nature of the ownership interests held by each such Person and the percentage of ownership of such Major Subsidiary represented by such ownership interests. Except as disclosed in Schedule V, (x) the Borrower and its Major Subsidiaries own, free and clear of Liens, and have the unencumbered right to vote, all outstanding ownership interests in each Person shown to be held by it in Schedule V, (y) all of the issued and outstanding capital stock of each such Person organized as a corporation is validly issued, fully paid and nonassessable and (z) there are no outstanding Equity Rights with respect to such Person.
(b) Restrictions on Subsidiaries . None of the Subsidiaries of the Borrower is, on the date hereof, subject to any indenture, agreement, instrument or other arrangement of the type described in Section 6.03.
ARTICLE IV
CONDITIONS
SECTION 4.01. Effective Date . The obligations of the Lenders to make Loans hereunder shall not become effective until the date on which the Administrative
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Agent shall have received each of the following documents, each of which shall be satisfactory to the Administrative Agent (and to the extent specified below, to each Lender) in form and substance (or such condition shall have been waived in accordance with Section 9.02):
(a) Executed Counterparts . From each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page to this Agreement) that such party has signed a counterpart of this Agreement.
(b) Opinion of Counsel to the Borrower . A favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Effective Date) of Heller Ehrman LLP, counsel for the Borrower, substantially in the form of Exhibit B, and covering such other matters relating to the Borrower, this Agreement or the Transactions as the Required Lenders shall reasonably request, and the Borrower hereby instructs such counsel to deliver such opinion to the Lenders and the Administrative Agent (it being understood that all or a portion of the matters described in paragraph 8 of part IV of Exhibit B may be covered by a separate opinion from the General Counsel of the Borrower).
(c) Opinion of Special New York Counsel to JPMCB . An opinion, dated the Effective Date, of Milbank, Tweed, Hadley & McCloy LLP, special New York counsel to JPMCB, substantially in the form of Exhibit C (and JPMCB hereby instructs such counsel to deliver such opinion to the Lenders).
(d) Corporate Documents . Such documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of the Borrower, the authorization of the Transactions and any other legal matters relating to the Borrower, this Agreement or the Transactions, all in form and substance satisfactory to the Administrative Agent and its counsel.
(e) Officer’s Certificate . A certificate, dated the Effective Date and signed by the president, the chairman, the chief executive officer, a vice-chair, a senior executive vice president, an executive vice president or a Financial Officer of the Borrower, confirming compliance with the conditions set forth in the lettered clauses of the first sentence of Section 4.02.
(f) Cancellation of Existing Credit Agreement . Evidence that the commitments of the lenders under the Existing Credit Agreement shall have been (or shall be simultaneously) terminated and all amounts owing thereunder shall have been paid in full.
(g) Fees and Expenses . Evidence that the Borrower has paid such fees as it has agreed to pay to any Lender or the Administrative Agent or J.P. Morgan Securities Inc. in its capacity as Arranger in connection herewith, including the
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reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy LLP, special New York counsel to JPMCB, in connection with the negotiation, preparation, execution and delivery of this Agreement and the Loans hereunder (to the extent that statements for such fees and expenses have been delivered to the Borrower).
(h) Other Documents . Such other documents as the Administrative Agent or any Lender or special New York counsel to JPMCB may reasonably request.
The Administrative Agent shall notify the Borrower and the Lenders of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 9.02) on or prior to 3:00 p.m., New York City time, on August 5, 2005 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time).
SECTION 4.02. Each Credit Event . The obligation of each Lender to make a Loan to the Borrower on the occasion of any Borrowing is subject to the satisfaction of the following conditions:
(a) the representations and warranties of the Borrower set forth in this Agreement (except, in the case of any Borrowing that does not increase the outstanding aggregate principal amount of the Loans of any Lender, the representations and warranties in Sections 3.06(a), 3.06(b) and 3.10) shall be true and correct on and as of the date of such Borrowing (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); and
(b) at the time of and immediately after giving effect to such Borrowing, no Default or Event of Default shall have occurred and be continuing.
Each Borrowing shall be deemed to constitute a representation and warranty by the Borrower on the date thereof as to the matters specified in the preceding sentence.
ARTICLE V
AFFIRMATIVE COVENANTS
Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full, the Borrower covenants and agrees with the Lenders that:
SECTION 5.01. Financial Statements and Other Information . The Borrower will furnish to the Administrative Agent and each Lender:
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(a) within 105 days after the end of each fiscal year of the Borrower, the audited consolidated balance sheet and related statements of operations, stockholders’ equity and cash flows of the Borrower and its Subsidiaries as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by Deloitte & Touche LLP or other independent public accountants of recognized national standing (without a “going concern” or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of the Borrower and its Subsidiaries on a consolidated basis in accordance with GAAP consistently applied and a statement of such accountants to the effect that, in making the examination necessary for their opinion, nothing came to their attention that caused them to believe that the Borrower was not in compliance with Section 6.04 hereof, insofar as such Section relates to accounting matters (it being understood that delivery to the Lender of the Borrower’s Report on Form 10-K filed with the SEC shall satisfy the financial statement requirements of this Section 5.01(a) so long as the information required to be contained in such Report is substantially the same as that required under this Section 5.01 (a));
(b) within 75 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower, the consolidated balance sheet and related statements of operations, stockholders’ equity and cash flows of the Borrower and its Subsidiaries as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for (or, in the case of the balance sheet, as of the end of) the corresponding period or periods of the previous fiscal year, all certified by a Financial Officer of the Borrower as presenting fairly in all material respects the financial condition and results of operations of the Borrower and its Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes (it being understood that delivery to the Lender of the Borrower’s Report on Form 10-Q filed with the SEC shall satisfy the financial statement requirements of this Section 5.01(b) so long as the information required to be contained in such Report is substantially the same as that required under this Section 5.01(b));
(c) concurrently with any delivery of financial statements under clause (a) or (b) of this Section, a certificate of a Financial Officer of the Borrower (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Section 6.04, and (iii) stating whether any change in GAAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 3.04 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate;
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(d) promptly following any request by the Administrative Agent or any Lender therefor, copies of all periodic and other reports, proxy statements and other materials filed by the Borrower or any of its Subsidiaries with the SEC, or with any national securities exchange or the Office of Thrift Supervision, or distributed by the Borrower to its shareholders generally, as the case may be;
(e) within 75 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower, the balance sheet and related statement of income of the Borrower as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for (or, in the case of the balance sheet, as of the end of) the corresponding period or periods of the previous fiscal year, all certified by a Financial Officer of the Borrower as presenting fairly in all material respects the financial condition and results of operations of the Borrower in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes; and
(f) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of the Borrower or any of its Subsidiaries, or compliance with the terms of this Agreement, as the Administrative Agent or any Lender may reasonably request.
SECTION 5.02. Notices of Material Events . The Borrower will furnish to the Administrative Agent and each Lender prompt written notice of the following:
(a) the occurrence of any Default;
(b) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting the Borrower or any of its Affiliates that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect;
(c) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower and its Subsidiaries in an aggregate amount exceeding $35,000,000;
(d) the assertion of any environmental matter by any Person against, or with respect to the activities of, the Borrower or any of its Subsidiaries and any alleged violation of or non-compliance with any Environmental Laws or any permits, licenses or authorizations, other than any environmental matter or alleged violation that, if adversely determined, would not (either individually or in the aggregate) have a Material Adverse Effect; and
(e) any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect.
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Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the Borrower setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto.
SECTION 5.03. Existence; Conduct of Business . The Borrower will, and will cause each of its Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges and franchises material to the conduct of its business; provided that the foregoing shall not prohibit (a) any merger, consolidation, liquidation, dissolution or other transaction permitted under Section 6.02 and (b) any Subsidiary that is not a Major Subsidiary of the Borrower from entering into any merger or consolidation or amalgamation or from liquidating, winding up or dissolving itself (or suffering any liquidation or dissolution) or prohibit a disposition by or of such Subsidiary.
SECTION 5.04. Payment of Obligations . The Borrower will, and will cause each of its Subsidiaries to, pay its obligations, including Tax liabilities, that, if not paid, could result in a Material Adverse Effect before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) the Borrower or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (c) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect.
SECTION 5.05. Maintenance of Properties; Insurance . The Borrower will, and will cause each of its Subsidiaries to, (a) keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted, and (b) maintain, with financially sound and reputable insurance companies, insurance in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations.
SECTION 5.06. Books and Records; Inspection Rights . The Borrower will, and will cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. The Borrower will, and will cause each of its Subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender, upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested.
SECTION 5.07. Compliance with Laws . The Borrower will, and will cause each of its Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.
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SECTION 5.08. Use of Proceeds . The Borrower will use the proceeds of the Loans hereunder solely for general corporate purposes, including commercial paper back-up, in the ordinary course of business (in compliance with all applicable legal and regulatory requirements, including Regulations U and X and the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and the regulations thereunder); provided that, (i) without the consent of each Lender, the Borrower may not use the proceeds of any of the Loans hereunder to finance or refinance, directly or indirectly, an Acquisition of any Person (or the acquisition of (x) more than 50% of the publicly traded stock (of any class) of any Person or (y) any of the publicly traded stock (of any class) of any Person after the Borrower or any of its Subsidiaries shall have been required to file a Schedule 13D under the Securities Exchange Act of 1934, as amended, with respect to such stock) unless such Acquisition (or acquisition) has been approved by the board of directors of such Person or officers thereof duly authorized to do so and (ii) neither the Administrative Agent nor any Lender shall have any responsibility as to the use of any of such proceeds.
SECTION 5.09. Insured Subsidiary Capital . The Borrower will at all times ensure that each of its Insured Subsidiaries is “well capitalized” for purposes of 12 U.S.C. § 1831o, as amended, re-enacted or redesignated from time to time; and the Borrower and its Insured Subsidiaries will at all times maintain such amount of capital as may be prescribed by all applicable Bank Regulatory Authorities, whether by guideline, regulation, agreement or order.
ARTICLE VI
NEGATIVE COVENANTS
Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full, the Borrower covenants and agrees with the Lenders that:
SECTION 6.01. Liens . The Borrower will not create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it except:
(a) Permitted Encumbrances;
(b) any Lien on any property or asset of the Borrower existing on the date hereof and set forth in Schedule II;
(c) any Lien existing on any property or asset prior to the acquisition thereof by the Borrower; provided that (i) such Lien is not created in contemplation of or in connection with such acquisition, (ii) such Lien shall not apply to any other property or assets of the Borrower and (iii) such Lien shall secure only those obligations which it secures on the date of such acquisition and
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extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof;
(d) Liens on fixed or capital assets acquired, constructed or improved by the Borrower; provided that (i) such security interests and the Indebtedness secured thereby are incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement, (ii) the Indebtedness secured thereby does not exceed 80%of the cost of acquiring, constructing or improving such fixed or capital assets and (iii) such security interests shall not apply to any other property or assets of the Borrower;
(e) Liens arising out of Repurchase Arrangements;
(f) Liens arising out of or securing Hedging Agreements;
(g) Liens arising out of Asset Securitizations and not involving all, or substantially all, of the assets of the Borrower;
(h) Liens involving the pledge by the Borrower of any interest in capital stock of, or other ownership interest in, any Subsidiary of the Borrower (other than a Major Subsidiary); and
(i) Liens involving the pledge of property of the Borrower securing Indebtedness in an aggregate principal amount not exceeding 2% of the Tangible Net Worth of the Borrower.
SECTION 6.02. Fundamental Changes .
(a) Mergers, Consolidations, Disposal of Assets, Etc . The Borrower will not, nor will it permit any of its Major Subsidiaries to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or substantially all of its assets, or all or substantially all of the stock of any of its Major Subsidiaries (in each case, whether now owned or hereafter acquired), or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing (i) any Major Subsidiary may merge into the Borrower in a transaction in which the Borrower is the surviving corporation, (ii) any Major Subsidiary may merge into any Subsidiary of the Borrower in a transaction in which the surviving entity is a wholly owned Subsidiary of the Borrower, (iii) any Major Subsidiary may sell, transfer, lease or otherwise dispose of its assets to the Borrower or to another wholly owned Subsidiary of the Borrower and (iv) the Borrower or any Major Subsidiary of the Borrower may merge or consolidate with any other Person if (x) in the case of a merger or consolidation of the Borrower, the Borrower is the surviving corporation and, in any other case, the surviving corporation is, after giving effect to such merger or consolidation, a wholly owned Subsidiary of the Borrower and (y) after giving effect thereto no Default would exist hereunder.
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(b) Lines of Business . The Borrower will not, nor will it permit any of its Subsidiaries to, engage to any substantial extent in any line or lines of business activity other than (i) the business of owning and operating a depository institution (as defined in 12 U.S.C. § 1813(c)), a consumer finance company, a mortgage company, an insurance company, a trust company, an investment advisor or a securities broker-dealer, (ii) the business of providing other financial services or (iii) any business that may be engaged in by a Washington state chartered savings bank (as defined in RCW 32.04.020), a Federal savings association (as defined in 12 U.S.C. § 1462(5)) or a bank holding company (as defined in 12 U.S.C. § 1841(a)) or a Subsidiary of any of them.
SECTION 6.03. Certain Restrictions on Subsidiaries . The Borrower will not permit any of its Subsidiaries to enter into, after the date hereof, any indenture, agreement, instrument or other arrangement that, directly or indirectly, prohibits or restrains, or has the effect of prohibiting or restraining, or imposes materially adverse conditions upon, the incurrence or payment of Indebtedness, the granting of Liens, the declaration or payment of dividends, the making of loans, advances, guarantees or Investments or the sale, assignment, transfer or other disposition of property if the effect of any such indenture, agreement, instrument or other arrangement could reasonably be expected to result in a Material Adverse Effect.
SECTION 6.04. Certain Financial Covenants .
(a) Double Leverage Ratio . The Borrower will not permit the Double Leverage Ratio to exceed 1.30 to 1 at any time.
(b) Tangible Net Worth . The Borrower will not permit its Tangible Net Worth at any time to be less than the sum of (x) $11,500,000,000 plus (y) 40% of the aggregate net income of the Borrower and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP and for which purpose any net loss shall be deemed to be a net income of zero) for the period commencing on March 31, 2005 and ending at the time of determination plus (z) 40% of the aggregate net proceeds received by the Borrower from the issuance by the Borrower after the date of this Agreement of shares of its capital stock.
(c) Maximum Non-Performing Assets . The Borrower will not permit Non-Performing Assets at any time to constitute more than 4.5% of Consolidated Loans Held in Portfolio.
ARTICLE VII
EVENTS OF DEFAULT
If any of the following events (“ Events of Default ”) shall occur:
(a) the Borrower shall fail to pay any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise;
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(b) the Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under this Agreement, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of three or more Business Days;
(c) any representation or warranty made or deemed made by or on behalf of the Borrower or any of its Subsidiaries in or in connection with this Agreement or any amendment or modification hereof, or in any report, certificate, financial. statement or other document furnished pursuant to or in connection with this Agreement or any amendment or modification hereof, shall prove to have been incorrect in any material respect when made or deemed made;
(d) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in Section 5.02(a), 5.03 (with respect to the Borrower’s existence), 5.08, 5.09 or in Article VI (other than Section 6.02(b));
(e) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in this Agreement (other than those specified in clause (a), (b) or (d) of this Article) and such failure shall continue unremedied for a period of 30 or more days after notice thereof from the Administrative Agent (given at the request of any Lender) to the Borrower;
(f) the Borrower or any of its Subsidiaries shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable;
(g) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; provided that this clause (g) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness;
(h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Borrower or any of its Subsidiaries (other than Non-Material Subsidiaries) or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any of its Subsidiaries (other than Non-Material Subsidiaries) or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue
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undismissed for a period of 60 or more days or an order or decree approving or ordering any of the foregoing shall be entered;
(i) the Borrower or any of its Subsidiaries (other than Non-Material Subsidiaries) shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any of its Subsidiaries (other than Non-Material Subsidiaries) or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing;
(j) the Borrower or any of its Subsidiaries (other than Non-Material Subsidiaries) shall become unable, admit in writing its inability or fail generally to pay its debts as they become due;
(k) one or more judgments for the payment of money in an aggregate amount in excess of $80,000,000 (exclusive of judgment amounts fully covered by insurance where the insurer has admitted liability in respect of such judgment) or $120,000,000 (regardless of insurance coverage) shall be rendered against the Borrower or any of its Subsidiaries or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of the Borrower or any of its Subsidiaries to enforce any such judgment;
(l) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect;
(m) a Change in Control shall occur;
(n) any Insured Subsidiary shall cease accepting deposits on the instruction of any Federal, state or other regulatory body with authority to give such instruction other than pursuant to an instruction generally applicable to banks organized under the jurisdiction of organization of such Insured Subsidiary;
(o) any Insured Subsidiary shall be required (whether or not the time allowed by the appropriate Bank Regulatory Authority for the submission of such plan has been established or elapsed) to submit a capital restoration plan of the type referred to in 12 U.S.C. § 1831o(b)(2)(C), as amended, re-enacted or redesignated from time to time, or any Bank Regulatory Authority shall issue a
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cease and desist order to or in respect of the Borrower or any of its Insured Subsidiaries; or
(p) the Borrower shall Guarantee in writing (voluntarily or otherwise) the capital of any Insured Subsidiary upon the instruction or request of any Bank Regulatory Authority;
then, and in every such event (other than an event with respect to the Borrower described in clause (h) or (i) of this Article), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitments available to the Borrower, and thereupon the Commitments available to the Borrower shall terminate immediately, and (ii) declare the Loans to the Borrower then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and in case of any event with respect to the Borrower described in clause (h) or (i) of this Article, the Commitments available to the Borrower shall automatically terminate and the principal of the Loans to the Borrower then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.
ARTICLE VIII
AGENTS
SECTION 8.01 Administrative Agent .
(a) Appointment . Subject to Section 8.01(f), each of the Lenders hereby irrevocably appoints the Administrative Agent as its agent and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof, together with such actions and powers as are reasonably incidental thereto.
(b) Rights and Powers as Lender . The Person serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent, and such Person and its affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiaries or other Affiliates thereof as if it were not the Administrative Agent hereunder.
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(c) No Implied Duties . The Administrative Agent shall not have any duties or obligations except those expressly set forth herein. Without limiting the generality of the foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Administrative Agent is required to exercise in writing by the Required Lenders, and (c) except as expressly set forth herein, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Subsidiaries that is communicated to or obtained by the bank serving as Administrative Agent or any of its affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders or in the absence of its own gross negligence or willful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by the Borrower or a Lender, and the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement, (ii) the contents of any certificate, report or other document delivered hereunder or in connection herewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent.
(d) Reliance Upon Certificates, Etc . The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and reasonably believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.
(e) Performance Through Sub-Agents . The Administrative Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent.
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(f) Resignation . The Administrative Agent may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent’s resignation shall nonetheless become effective and (1) the retiring Administrative Agent shall be discharged from its duties and obligations hereunder and (2) the Required Lenders shall perform the duties of the Administrative Agent (and all payments and communications provided to be made by, to or through the Administrative Agent shall instead be made by or to each Lender directly) until such time as the Required Lenders appoint a successor agent as provided for above in this paragraph. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring (or retired) Administrative Agent and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder (if not already discharged therefrom as provided above in this paragraph). The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the Administrative Agent’s resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent.
(g) Credit Analysis by Lenders . Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any related agreement or any document furnished hereunder or thereunder.
SECTION 8.02 Syndication Agents . The Syndication Agents named on the cover page of this Agreement, in their capacity as such, shall have no obligation, responsibility or required performance hereunder and shall not become liable in any manner to any party hereto. No party hereto shall have any obligation or liability, or owe any performance, hereunder, to the Syndication Agents in their capacity as such.
ARTICLE IX
MISCELLANEOUS
SECTION 9.01. Notices . Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or
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overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows:
(a) if
to the Borrower, to it at 1201 Third Avenue, WMT0511, Seattle, Washington
98101, Attention of Peter Freilinger (Telecopy No. (206) 554-8655; Telephone
No. (206) 490-2291), with copies to Charles E. Smith, 1201 Third Avenue, WMT1706,
Seattle, Washington 98101 (Telecopy No. (206) 490- 1836; Telephone No. (206)
377-6244) and Bernard L. Russell, Heller Ehrman LLP, 701 Fifth Avenue, Suite
6100, Seattle, Washington 98104 (Telecopy No.
(206) 389- 6217; Telephone No. (206) 389-6238);
(b) if to the Administrative Agent, to JPMorgan Chase Bank, N.A., 1 Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention of Loan and Agency Services Group (Telecopy No. (212) 552-5658; Telephone No. (212) 552-7500), with a copy to JPMorgan Chase Bank, N.A., 1111 Fannin Street, 10th Floor, Houston, Texas 77002, Attention of Eleanor Fiore (Telecopy No. (713) 750-3523; Telephone No. (713) 750-2223); and
(c) if to a Lender (including, if applicable, in its capacity as a Swingline Lender) to it at its address (or telecopy number) set forth in its Administrative Questionnaire.
Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto (or, in the case of any such change by a Lender, by notice to the Borrower and the Administrative Agent). All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt.
SECTION 9.02. Waivers; Amendments .
(a) No Deemed Waivers; Remedies Cumulative . No failure or delay by the Administrative Agent or any Lender in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent or any Lender may have had notice or knowledge of such Default at the time.
(b) Amendments . Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in
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writing entered into by the Borrower and the Required Lenders or by the Borrower and the Administrative Agent with the consent of the Required Lenders; provided that (x) no such agreement shall
(i) increase the Commitment of any Lender without the written consent of each affected Lender,
(ii) reduce the principal amount of any Loan or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each affected Lender,
(iii) postpone the scheduled date of payment of the principal amount of any Loan, or any interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each affected Lender,
(iv) alter the manner in which payments or prepayments of principal, interest or other amounts hereunder shall be applied as among the Lenders or Types or Classes of Loans, without the written consent of each affected Lender, or
(v) change any of the provisions of this Section or the definition of the term “Required Lenders” or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender
and (y) no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent or any Swingline Lender hereunder without the prior written consent of the Administrative Agent or such Swingline Lender, as the case may be.
For purposes of this Section, the “scheduled date of payment” of any amount shall refer to the date of payment of such amount specified in this Agreement, and shall not refer to a date or other event specified for the prepayment of such amount. In addition, whenever a waiver, amendment or modification requires the consent of a Lender “affected” thereby, such waiver, amendment or modification shall, upon consent of such Lender, become effective as to such Lender whether or not it becomes effective as to any other Lender, so long as the Required Lenders consent to such waiver, amendment or modification as provided above.
SECTION 9.03. Expenses; Indemnity; Damage Waiver .
(a) Costs and Expenses . The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent, in connection with the syndication of the credit facilities provided for herein, the
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preparation and administration of this Agreement or any amendments, modifications or waivers of the provisions hereof (whether or not the transactions contemplated hereby or thereby shall be consummated) and (ii) all out-of-pocket expenses incurred by the Administrative Agent or any Lender, including the fees, charges and disbursements of any counsel for the Administrative Agent, or any Lender, in connection with the enforcement or protection of its rights in connection with this Agreement, including its rights under this Section, or in connection with the Loans made hereunder, including in connection with any workout, restructuring or negotiations in respect thereof.
(b) Indemnification by the Borrower . The Borrower shall indemnify the Administrative Agent and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an “ Indemnitee ”) against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the consummation of the Transactions or any other transactions contemplated hereby, (ii) any Loan or the use of the proceeds therefrom, (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned or operated by the Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses resulting from the gross negligence or wilful misconduct of such Indemnitee.
(c) Third Party Claims . If a claim by a third party (a “ Third-Party Claim ”) is made against an Indemnitee, and if such Indemnitee intends to seek indemnity with respect thereto under Section 9.03(b), such Indemnitee shall promptly notify the Borrower of the institution of such claim, action or proceeding and the Borrower shall thereupon be entitled to participate in the defense thereof and shall have the right, at its option, to assume the defense thereof including the employment of counsel (reasonably satisfactory at all times to such Indemnitee) and payment of expenses. Once the Borrower has assumed the defense of any such claim, action or proceeding, the Borrower shall no longer be liable to any such Indemnitee for any expenses subsequently incurred thereby in connection therewith except to the extent provided for in the next sentence. Such Indemnitee shall have the right to employ its own counsel, but the fees and expenses of such counsel shall be for the account of such Indemnitee unless (x) the employment of such counsel shall have been authorized in writing by the Borrower in connection with the defense of such claim, action or proceeding, or (y) such Indemnitee concludes on the basis of advice of counsel that there are legal defenses available to it which are different from or in addition to those available to the Borrower and such different or additional defenses conflict therewith or that there are claims against the Indemnitee which are different to those against the Borrower. If the Borrower so chooses
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to assume the defense it shall do so promptly and diligently. So long as the Borrower is reasonably contesting any such claim in good faith, the Indemnitee shall not pay or settle any such claim without thereby waiving its right to indemnity therefor by the Borrower. Notwithstanding the foregoing, if the Borrower does not notify the Indemnitee in writing within 30 days after the receipt of the Indemnitee’s written notice of a claim of indemnity hereunder that it elects to undertake the defense thereof, the Indemnitee shall have the right to contest, settle or compromise the claim but shall not thereby waive any right to indemnity therefor pursuant to this Agreement. The Borrower shall not, except with the written consent of the Indemnitee, enter into any settlement unless (A) there is no finding or admission of any violation of applicable law, (B) the sole relief provided is monetary damages that are paid in full by the Borrower, (C) the Indemnitee shall have no liability with respect to any compromise or settlement of such Third-Party Claim, and (D) the compromise or settlement provides to the Indemnitee and each Related Party to the Indemnitee an unconditional release from all liability with respect to such Third-Party Claim or the facts underlying such Third-Party Claim. With respect to any Third-Party Claim subject to indemnification under Section 9.03(b), (i) both the Indemnitee and the Borrower, as the case may be, shall keep the other party reasonably informed of the status of such Third-Party Claim and any related proceedings at all stages thereof, (ii) the parties agree to render to each other such assistance as they may reasonably require of each other and to cooperate in good faith with each other in order to ensure the proper and adequate defense of any Third-Party Claim and (iii) with respect to any Third-Party Claim subject to indemnification under Section 9.03(b) the parties agree to cooperate in such a manner as to preserve in full (to the extent reasonably practicable and permitted by applicable law) the confidentiality of all confidential information and the attorney-client and work-product privileges, provided that the Borrower shall pay all expenses incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of such cooperation.
(d) Reimbursement by Lenders . To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent or any Swingline Lender under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent or such Swingline Lender, as the case may be, such Lender’s Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent or such Swingline Lender in its capacity as such.
(e) Waiver of Consequential Damages, Etc . To the extent permitted by applicable law, the Borrower shall not assert, and the Borrower hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or the use of the proceeds thereof. To the extent permitted by applicable law and other than the claims set forth in Section 9.03(b), no Lender shall assert, and each Lender hereby waives, any claim against the Borrower or any Related Party of the Borrower, on any theory of liability, for special,
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indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or the use of the proceeds thereof.
(f) Payments . All amounts due under this Section shall be payable not later than ten days after written demand therefor.
SECTION 9.04. Successors and Assigns .
(a) Assignments Generally . The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that (i) the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void) and (ii) no Lender may assign or otherwise transfer its rights or obligations hereunder except in accordance with this Section. Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.
(b) Assignments by Lenders .
(i) Assignments Generally . Subject to the conditions set forth in clause (ii) below, any Lender may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it) with the prior written consent (such consent not to be unreasonably withheld or delayed) of:
(A) the Borrower, provided that no consent of the Borrower shall be required for an assignment to a Lender, an Affiliate of a Lender, an Approved Fund or, if an Event of Default has occurred and is continuing, any other assignee:
(B) the Administrative Agent, provided that no consent of the Administrative Agent shall be required for an assignment to a Lender, an Affiliate of a Lender or, of any Commitment to an assignee that is a Lender with a Commitment immediately prior to giving effect to such assignment; and
(C) each Swingline Lender.
(ii) Certain Conditions to Assignments . Assignments shall be subject to the following additional conditions:
(A) except in the case of an assignment to a Lender, an Affiliate of a Lender or an Approved Fund or an assignment of the entire remaining amount of the assigning Lender’s Commitment or Loans of any Class, the amount of the
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Commitment or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 unless each of the Borrower and the Administrative Agent otherwise consent, provided that no consent of the Borrower shall be required if an Event of Default has occurred and is continuing;
(B) each partial assignment of any Class of Commitments or Loans shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement in respect of such Class of Commitments and Loans, except that this subclause (B) shall not apply to rights in respect of outstanding Competitive Loans;
(C) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500;
(D) the assignee, if it shall not already be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire; and
(E) in the case of an assignment to an Approved Fund, the assigning Lender shall retain the sole right to approve any amendment, modification or waiver of any provision of this Agreement, provided that the Assignment and Assumption between such Lender and such Approved Fund may provide that such Lender will not, without the consent of such Approved Fund, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such Approved Fund.
(iii) Effectiveness of Assignments . Subject to acceptance and recording thereof pursuant to paragraph (c) of this Section, from and after the effective date specified in each Assignment and Assumption the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.14, 2.15, 2.16 and 9.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 9.04 shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (e) of this Section.
(c) Maintenance of Register by the Administrative Agent . The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices in New York City a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the
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Lenders, and the Commitments of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “ Register ”). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the.Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice.
(d) Effectiveness of Assignments . Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Lender and an assignee, the assignee’s completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Assumption and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph.
(e) Participations . Any Lender may, without the consent of the Borrower, the Administrative Agent or any Swingline Lender, sell participations to one or more banks or other entities (a “ Participant ”) in all or a portion of such Lender’s rights and obligations under this Agreement (including all or a portion of its Commitments and the Loans owing to it); provided that (i) such Lender’s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such Participant. Subject to paragraph (f) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.14, 2.15 and 2.16 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.08 as though it were a Lender, provided such Participant agrees to be subject to Section 2.17(d) as though it were a Lender hereunder.
(f) Limitations on Rights of Participants . A Participant shall not be entitled to receive any greater payment under Section 2.14, 2.15 or 2.16 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower’s prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.16 unless the Borrower is notified of the participation sold to such Participant and such Participant
Credit Agreement
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agrees, for the benefit of the Borrower, to comply with Section 2.16(e) as though it were a Lender.
(g) Certain Pledges . Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any such pledge or assignment to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such assignee for such Lender as a party hereto.
(h) No Assignments to the Borrower or Affiliates . Anything in this Section to the contrary notwithstanding, no Lender may assign or participate any interest in any Loan held by it hereunder to the Borrower or any of its Affiliates or Subsidiaries without the prior consent of each Lender.
SECTION 9.05. Survival . All covenants, agreements, representations and warranties made by the Borrower herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the making of any Loans, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid and so long as the Commitments have not expired or terminated. The provisions of Sections 2.14, 2.15, 2.16 and 9.03 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Commitments or the termination of this Agreement or any provision hereof.
SECTION 9.06. Counterparts; Integration; Effectiveness . This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract between and among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page to this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement.
Credit Agreement
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SECTION 9.07. Severability . Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction.
SECTION 9.08. Right of Setoff . If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have.
SECTION 9.09. Governing Law; Jurisdiction; Etc .
(a) Governing Law . This Agreement shall be construed in accordance with and governed by the law of the State of New York.
(b) Submission to Jurisdiction . The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement against the Borrower or its properties in the courts of any jurisdiction.
(c) Waiver of Venue . The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
Credit Agreement
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(d) Service of Process . Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law.
SECTION 9.10. WAIVER OF JURY TRIAL . EACH PARTY HERETO HEREBY WANES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
SECTION 9.11. Headings . Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.
SECTION 9.12. Treatment of Certain Information; Confidentiality .
(a) Treatment of Certain Information . The Borrower acknowledges that from time to time financial advisory, investment banking and other services may be offered or provided to the Borrower or one or more of its Subsidiaries (in connection with this Agreement or otherwise) by any Lender or by one or more subsidiaries or affiliates of such Lender and the Borrower hereby authorizes each Lender to share any information delivered to such Lender by the Borrower and its Subsidiaries pursuant to this Agreement, or in connection with the decision of such Lender to enter into this Agreement, to any such subsidiary or affiliate, it being understood that any such subsidiary or affiliate receiving such information shall be bound by the provisions of paragraph (b) of this Section as if it were a Lender hereunder. Such authorization shall survive the repayment of the Loans, the expiration or termination of the Commitments or the termination of this Agreement or any provision hereof.
(b) Confidentiality . Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (i) to its and its affiliates’ directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (ii) to the extent requested by any regulatory authority, (iii) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (iv) to any other party to
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this Agreement, (v) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (vi) subject to an agreement containing provisions substantially the same as those of this paragraph, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (vii) with the consent of the Borrower or (viii) to the extent such Information (A) becomes publicly available other than as a result of a breach of this paragraph or (B) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than the Borrower. In the event that the Administrative Agent or a Lender receives a request to disclose any information pursuant to clause (iii) of the previous sentence, the party receiving such request agrees, to the extent reasonably practicable and permitted by applicable law (a) to promptly notify the Borrower of such request in writing, (b) to consult with the Borrower on the advisability of taking steps to resist or narrow such request, and (c) if, based on the advice of counsel to the Administrative Agent or the Lender, as the case may be, disclosure is required, to notify the Borrower and cooperate reasonably with the Borrower in any attempt that the Borrower may make to obtain an order or other reliable assurance that confidential treatment will be accorded to designated portions of such information, provided that the Borrower shall pay all expenses incurred by or asserted against the Administrative Agent or such Lender, as the case may be, arising out of, in connection with, or as a result of such cooperation. Notwithstanding the foregoing, if, based on the advice of counsel to the Administrative Agent or the Lender, as the case may be, disclosure is required in the circumstances described above, disclosure may be made, subject to compliance with the previous sentence. For the purposes of this paragraph, “ Information ” means all information received from the Borrower relating to the Borrower or its business, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by the Borrower; provided that, in the case of information received from the Borrower after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.
SECTION 9.13. USA PATRIOT Act . Each Lender hereby notifies the Borrower that pursuant to the requirements of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26,2001)), it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender to identify the Borrower in accordance with said Act.
Credit Agreement
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.
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WASHINGTON MUTUAL, INC. |
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By: |
/s/ Patricia Schulte |
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Name: |
Patricia Schulte |
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Title: |
Senior Vice President |
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U.S. Federal Tax Identification Number for |
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the Borrower : |
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91-1653725 |
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Address for the Borrower : |
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Washington Mutual, Inc. |
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1201 Third Avenue |
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WMT0511 |
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Seattle, WA 98101 |
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LENDERS |
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JPMORGAN CHASE BANK, N.A., |
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individually and as a Swingline Lender |
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and as Administrative Agent |
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By: |
/s/ Dwight Seacren |
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Name: |
Dwight Seacren |
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Title: |
Vice President |
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BANK OF AMERICA, N.A. |
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By: |
/s/ Carolyn Warren |
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Name: |
Carolyn Warren |
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Title: |
Senior Vice President |
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BARCLAYS BANK PLC |
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By: |
/s/ Alison A. McGuigan |
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Name: |
Alison A. McGuigan |
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Title: |
Associate Director |
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CITIBANK, N.A. |
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By: |
/s/ Yoko Otani |
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Name: |
Yoko Otani |
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Title: |
Managing Director |
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HSBC BANK USA, NATIONAL |
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ASSOCIATION |
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By: |
/s/ Robert V. Masi |
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Name: |
Robert V. Masi |
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Title: |
Senior Vice President #12751 |
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ABN AMRO BANK N.V. |
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By: |
/s/ Sandra R. Bolek |
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Name: |
Sandra R. Bolek |
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Title: |
Vice President |
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By: |
/s/ Bryan Manning |
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Name: |
Bryan Manning |
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Title: |
Vice President |
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BEAR STEARNS CORPORATE |
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LENDING INC. |
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By: |
/s/ Keith Barnish |
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Name: |
Keith Barnish |
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Title: |
Executive Vice President |
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CREDIT SUISSE, CAYMAN ISLANDS |
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BRANCH |
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By: |
/s/ Jay Chall |
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Name: |
Jay Chall |
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Title: |
Director |
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By: |
/s/ Karim Blasetti |
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Name: |
Karim Blasetti |
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Title: |
Associate |
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DEUTSCHE BANK AG NEW YORK |
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BRANCH |
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By: |
/s/ Gayma Z. Shivnarain |
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Name: |
Gayma Z. Shivnarain |
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Title: |
Director |
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By: |
/s/ Kathleen Bowers |
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Name: |
Kathleen Bowers |
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Title: |
Director |
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LEHMAN BROTHERS BANK, FSB |
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By: |
/s/ Janine M. Shugan |
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Name: |
Janine M. Shugan |
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Title: |
Authorized Signatory |
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MERRILL LYNCH BANK USA |
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By: |
/s/ Louis Adler |
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Name: |
Louis Adler |
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Title: |
Director |
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MORGAN STANLEY BANK |
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By: |
/s/ Daniel Twenge |
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Name: |
Daniel Twenge |
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Title: |
Vice President |
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THE BANK OF NEW YORK |
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By: |
/s/ Christopher Thompson |
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Name: |
Christopher Thompson |
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Title: |
Vice President |
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THE ROYAL BANK OF SCOTLAND PLC |
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By: Greenwich Capital Markets, Inc., as agent |
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for the The Royal Bank of Scotland plc |
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By: |
/s/ Diane Ferguson |
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Name: |
Diane Ferguson |
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Title: |
Managing Director |
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UBS LOAN FINANCE LLC |
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By: |
/s/ Wilfred V. Saint |
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Name: |
Wilfred V. Saint |
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Title: |
Director |
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By: |
/s/ Richard L. Tavrow |
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Name: |
Richard L. Tavrow |
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Title: |
Director |
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WACHOVIA BANK, NATIONAL |
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ASSOCIATION |
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By: |
/s/ Genevieve Piche |
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Name: |
Genevieve Piche |
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Title: |
Associate-International Credit Products |
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WELLS FARGO BANK, NATIONAL |
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ASSOCIATION |
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By: |
/s/ Azim Rajan |
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Name: |
Azim Rajan |
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Title: |
Vice President |
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WILLIAMS STREET COMMITMENT |
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CORPORATION (Recourse only to William |
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Street Commitment Corporation) |
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By: |
/s/ Liz Beshel |
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Name: |
Liz Beshel |
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Title: |
Authorized Signatory |
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Exhibit 10.7
WaMu Savings Plan
As
Amended and Restated
Effective January 1, 2006
(Except where other effective dates are specifically set forth herein)
TABLE OF CONTENTS
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Page |
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PREAMBLE |
1 |
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ARTICLE I |
NATURE OF PLAN |
2 |
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1.1 |
Purpose |
2 |
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ARTICLE II |
DEFINITIONS |
3 |
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2.1 |
Account or Accounts |
3 |
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2.2 |
Actual Contribution Percentage Test |
3 |
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2.3 |
Actual Deferral Percentage Test |
3 |
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2.4 |
Alternate Payee |
3 |
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2.5 |
Beneficiary |
3 |
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2.6 |
Break in Service |
4 |
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2.7 |
Benefit Commencement Date |
4 |
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2.8 |
Catch-Up Contribution |
4 |
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2.9 |
Code |
4 |
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2.10 |
Committee or Committees |
4 |
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2.11 |
Company |
4 |
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2.12 |
Compensation |
4 |
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2.13 |
Considered Compensation |
6 |
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2.14 |
Disabled or Disability |
6 |
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2.15 |
Early Retirement Age |
6 |
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2.16 |
Eligible Employee |
6 |
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2.17 |
Employee |
7 |
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2.18 |
Employee After-Tax Contribution |
7 |
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2.19 |
Employment Commencement Date |
7 |
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2.20 |
Employer |
7 |
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2.21 |
Entry Date |
7 |
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2.22 |
ERISA |
7 |
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2.23 |
ESOP |
7 |
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2.24 |
Forfeitures |
7 |
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2.25 |
Highly Compensated Employee |
7 |
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2.26 |
Hour of Service |
8 |
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2.27 |
Human Resources Committee |
9 |
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2.28 |
Inactive Participant |
9 |
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2.29 |
Leased Employee |
9 |
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2.30 |
Leave of Absence |
9 |
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2.31 |
Limitation Year |
10 |
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2.32 |
Matching Contribution |
10 |
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2.33 |
Normal Retirement Age |
10 |
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2.34 |
Parental Leave of Absence |
10 |
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2.35 |
Participant |
10 |
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2.36 |
Participating Employer |
10 |
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2.37 |
Plan |
10 |
i
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2.38 |
Plan Administration Committee |
11 |
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2.39 |
Plan Investment Committee |
11 |
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2.40 |
Plan Year |
11 |
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2.41 |
Profit Sharing Contributions |
11 |
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2.42 |
Qualified Domestic Relations Order (QDRO) |
11 |
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2.43 |
Qualified Employer Contributions |
11 |
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2.44 |
Qualified Non-Elective Contribution (QNEC) |
11 |
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2.45 |
Reemployment Commencement Date |
11 |
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2.46 |
Related Employer |
11 |
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2.47 |
Related Plan |
11 |
|
2.48 |
Required Beginning Date |
12 |
|
2.49 |
Retirement |
12 |
|
2.50 |
Rollover Contribution |
12 |
|
2.51 |
Salary Deferral Contribution |
12 |
|
2.52 |
Service |
12 |
|
2.53 |
Trust |
12 |
|
2.54 |
Trust Agreement |
13 |
|
2.55 |
Trustee |
13 |
|
2.56 |
Valuation Date |
13 |
|
2.57 |
WSP |
13 |
|
2.58 |
Year of Eligibility Service |
13 |
|
2.59 |
Year of Vesting Service |
13 |
|
|
|
|
ARTICLE III |
ELIGIBILITY AND PARTICIPATION |
14 |
|
|
|
|
|
|
3.1 |
Eligibility to Participant in the Plan |
14 |
|
3.2 |
Transfers of Employment |
15 |
|
3.3 |
Resumption of Participation Following Reemployment |
15 |
|
|
|
|
ARTICLE IV |
PARTICIPANT CONTRIBUTIONS |
16 |
|
|
|
|
|
|
4.1 |
Salary Deferral Contributions |
16 |
|
4.2 |
General Rules for Salary Deferral Contributions |
16 |
|
4.3 |
Catch-up Contributions |
16 |
|
4.4 |
Rollover Contributions and Trust Transfers |
17 |
|
|
|
|
ARTICLE V |
EMPLOYER CONTRIBUTIONS |
18 |
|
|
|
|
|
|
5.1 |
Matching Contribution |
18 |
|
5.2 |
Profit Sharing Contributions |
18 |
|
5.3 |
Top Heavy Minimum Contribution |
19 |
|
|
|
|
ARTICLE IV |
BENEFIT LIMITATIONS |
20 |
|
|
|
|
|
|
6.1 |
Section 402(g) Limit on Salary Deferral Contributions |
20 |
|
6.2 |
Safe Harbor |
20 |
|
6.3 |
Nondiscrimination Tests |
21 |
|
6.4 |
Corrective Procedures to Satisfy Nondiscrimination Tests |
23 |
|
6.5 |
Maximum Annual Additions to a Participant’s Account |
24 |
ARTICLE VII |
IN SERVICE WITHDRAWALS AND LOANS |
26 |
|
|
|
|
|
|
7.1 |
In-Service Withdrawal From Accounts |
26 |
|
7.2 |
Age 59½ Withdrawals |
26 |
|
7.3 |
Hardship Withdrawals |
26 |
|
7.4 |
Loans |
28 |
|
|
|
|
ARTICLE VIII |
VESTING AND DISTRIBUTION OF BENEFITS |
31 |
|
|
|
|
|
|
8.1 |
Vesting |
31 |
|
8.2 |
Forfeiture of Contingent Interests |
32 |
|
8.3 |
Distribution Upon Severance from Employment |
33 |
|
8.4 |
Mandatory Distribution At Age 65 |
|
|
85 |
Benefits Upon Disability |
33 |
|
8.6 |
Death Benefits |
34 |
|
8.7 |
Beneficiary Designation |
34 |
|
8.8 |
Forms of Distribution |
34 |
|
8.9 |
Payment Rules |
35 |
|
8.10 |
Small Amounts |
35 |
|
8.11 |
Required Beginning Date |
36 |
|
8.12 |
Required Minimum Distributions |
36 |
|
8.13 |
Direct Rollovers |
40 |
|
|
|
|
ARTICLE IX |
PARTICIPANT ACCOUNTS |
42 |
|
|
|
|
|
|
9.1 |
Individual Accounts |
42 |
|
9.2 |
Allocation of Trust Fund Earnings and Losses to Participant Accounts |
42 |
|
9.3 |
Account Statements |
42 |
|
9.4 |
Finality of Determinations |
43 |
|
|
|
|
ARTICLE X |
INVESTMENT ELECTIONS |
44 |
|
|
|
|
|
|
10.1 |
Permissible Investments |
44 |
|
10.2 |
Investment of Contributions |
44 |
|
10.3 |
Initial Investment Elections |
44 |
|
10.4 |
Changing Future Contributions |
45 |
|
10.5 |
Reinvesting Existing Account Balances |
45 |
|
10.6 |
ESOP Dividend Election |
45 |
|
10.7 |
Diversification Requirements |
46 |
|
10.8 |
Right to Repurchase of Company Stock |
47 |
|
|
|
|
ARTICLE XI |
THE TRUST/FINANCING |
48 |
|
|
|
|
|
|
11.1 |
Purpose of the Trust |
48 |
|
11.2 |
Appointment of Trustee |
48 |
|
11.3 |
Exclusive Benefit of Participants |
48 |
|
11.4 |
Benefits Supported Only By the Trust |
48 |
|
11.5 |
Rights to Trust Assets |
48 |
|
11.6 |
Payment of Expenses |
48 |
|
11.7 |
Deductible Contribution |
49 |
|
11.8 |
Voting |
49 |
|
|
|
|
ARTICLE XII |
ADMINISTRATION |
50 |
|
|
|
|
|
|
12.1 |
Committees |
50 |
|
12.2 |
Administration |
50 |
|
12.3 |
Indemnity |
52 |
|
12.4 |
Bonding and Insurance |
52 |
|
12.5 |
Fiduciaries |
52 |
|
12.6 |
Claims and Appeals Procedures |
54 |
|
12.7 |
Authority of Officers |
55 |
|
|
|
|
ARTICLE XIII |
AMENDMENT AND TERMINATION |
56 |
|
|
|
|
|
|
13.1 |
Amendment – General |
56 |
|
13.2 |
Amendment – Vesting Schedule |
56 |
|
13.3 |
Amendment – Consolidation or Merger |
57 |
|
13.4 |
Termination of the Plan |
57 |
|
13.5 |
Amendment Procedures |
57 |
|
13.6 |
Plan Qualification |
57 |
|
13.7 |
Allocation of the Trust Fund on Termination of Plan |
57 |
|
|
|
|
ARTICLE XIV |
EMPLOYER PARTICIPATION/RELATED EMPLOYERS |
58 |
|
|
|
|
|
|
14.1 |
Adoption by Employer |
58 |
|
14.2 |
Effective Plan Provisions |
58 |
|
14.3 |
Withdrawal by Employer |
58 |
|
14.4 |
Termination by Participation by Participating Employer |
58 |
|
|
|
|
ARTICLE XV |
MISCELLANEOUS PROVISIONS |
59 |
|
|
|
|
|
|
15.1 |
Notices and Communications |
59 |
|
15.2 |
Personal Data to Plan Administration Committee |
59 |
|
15.3 |
Evidence |
60 |
|
15.4 |
Information Available |
60 |
|
15.5 |
Alienation |
60 |
|
15.6 |
Execution of Receipts and Releases |
60 |
|
15.7 |
Facility of Payment |
61 |
|
15.8 |
Correction of Errors |
61 |
|
15.9 |
Missing Persons |
61 |
|
15.10 |
Back Pay Awards |
62 |
|
15.11 |
Exclusive Benefit Rule |
62 |
|
15.12 |
Qualified Domestic Relations Orders |
63 |
|
15.13 |
Mistake of Fact |
63 |
|
15.14 |
No Guarantee of Interests |
63 |
|
15.15 |
Interpretations and Adjustments |
64 |
|
15.16 |
Uniform Rules |
64 |
|
15.17 |
Severability |
64 |
|
15.18 |
Successors |
64 |
|
15.19 |
Headings |
64 |
|
15.20 |
Governing Law |
65 |
|
|
|
|
APPENDIX A - ACQUIRED COMPANY PROVISIONS |
66 |
PREAMBLE
Washington Mutual Savings Bank, predecessor to Washington Mutual Bank, established the Washington Mutual Savings Bank Employee Incentive Savings Plan (the “Plan”) effective July 1, 1973. The Plan was amended and restated in its entirety effective January 1, 1976 and again on July 1, 1981. Effective January 1, 1985, the Plan was amended and restated in its entirety to consolidate prior amendments and to comply with the requirements of the Tax Equity and Fiscal Responsibility Act of 1982, the Deficit Reduction Act of 1984 and the Retirement Equity Act of 1984. The Plan was again amended and restated on January 1, 1987 to consolidate amendments and to make certain other changes.
On June 24, 1991, effective January 1, 1987, the Plan was amended and restated and renamed the Washington Mutual Savings Bank Retirement Savings and Investment Plan. The restated Plan was amended to incorporate a cash or deferred arrangement described in section 401(k) of the Internal Revenue Code and to comply with the requirements of the Tax Reform Act of 1986, the Revenue Act of 1987, the Technical and Miscellaneous Revenue Act of 1988, the Omnibus Budget Reconciliation Act of 1989, and the Omnibus Budget Reconciliation Act of 1990. The Plan was amended from time to time since such restatement.
Effective January 1, 1994, and September 30, 1998, the Plan was again amended and restated to reflect Washington Mutual, Inc. as the Plan sponsor and to comply with certain statutory changes. The Plan was amended April 1, 2002 to include an employee stock ownership program (“ESOP”).
Effective January 1, 2004, the Plan was again amended and restated and renamed the WaMu Savings Plan (“Plan”). The restated Plan was amended to be a safe harbor plan for ADP/ACP testing purposes, to consolidate amendments and to reflect certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) and other statutory changes.
Due to corporate mergers and acquisitions engaged in by Employers hereunder, the Plan has from time to time been merged with the tax-qualified defined contribution plans formerly sponsored by certain entities. To the extent described in Appendix A credit for service with certain acquired or merged entities has been extended under the Plan to employees that have become Participants.
The Company desires to amend and restate the Plan again, in order to reflect statutory and benefits design changes, and to incorporate amendments made since the prior restatement. In consideration of the foregoing, the Plan is hereby amended and restated as follows, to be generally effective as of January 1, 2006, except as otherwise set forth in specific provisions.
1
The Company established and maintains the Plan in order to aid Eligible Employees to accumulate capital for their retirement. The Company intends that the Plan continue to be qualified under Code section 401(a), with a cash or deferred arrangement qualified under Code section 401(k) and a trust exempt from taxation under Code section 501(a). Pursuant to the requirements of Code section 401(a)(27), the Company also intends that the Plan be a profit sharing plan.
Effective April 1, 2002, the Plan consists of the WaMu Savings Program (“WSP”) and the Employee Stock Ownership Program (“ESOP”). The ESOP is designed to invest primarily in qualifying employer securities, and is intended to qualify as an employee stock ownership plan within the meaning of ERISA Section 407(d)(6) and Code Section 4975(e)(7).
The provisions of this Plan (as herein amended and restated) shall generally apply only to an Employee, former Employee, Participant or Inactive Participant whose Service with the Company terminates on or after January 1, 2006, except as otherwise provided herein. For example, amendments with retroactive effective dates prior to January 1, 2006 that are designed to bring the plan document into conformance with the prior operation of the plan (e.g., regarding automatic rollovers) would apply to participants who terminated employment on or after such retroactive effective date. The rights of any Employee, former Employee, Participant or Inactive Participant whose Service with the Employer terminated before January 1, 2006, except as otherwise provided herein, shall be governed by the Plan as it existed prior to this amendment and restatement.
ARTICLE II
Capitalized words and phrases used in this Plan shall have the meanings specified in this Article, unless a different meaning is clearly required by the context. Any words herein used in the masculine shall be read and construed in the feminine where they would so apply. Words in the singular shall be read and construed as though used in the plural in all cases where they would so apply.
Such spousal consent shall not be required if it is established to the satisfaction of the Plan Administration Committee that such consent cannot be obtained because the spouse cannot
be located or because of such other circumstances as the Secretary of the Treasury may prescribe by regulations. Any consent by a spouse hereunder shall be effective only with respect to that spouse.
Solely for purposes of determining whether a Break in Service has occurred, an individual who is absent from work for any unpaid Leave of Absence or Parental Leave of Absence shall receive credit for 8 Hours of Service per day of such absence, provided, however, that the total number of Hours of Service to be so credited on account of any such absence shall not exceed 501. The Hours of Service credited under this provision for any unpaid Leave of Absence shall be credited beginning in the Plan Year in which the absence begins. The Hours of Service credited under this provision in the case of a Parental Leave of Absence shall be credited (1) in the Plan Year in which the absence begins, if crediting is necessary to prevent a Break in Service in that period, or (2) in all other cases, in the following Plan Year.
Compensation as defined in this Section 2.12 shall apply for purposes of determining:
A Participant’s Compensation consists of the Participant’s wages, salaries, fees for personal services, commissions, production incentive compensation, bonuses and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with an Employer as an Employee to the extent that the amounts are includable in gross income. Compensation shall also include any amounts excluded from gross income of an Employee under Code sections 125, 132(f)(4), 402(e)(3), 402(h)(1)(B), or 403(b).
A Participant’s Compensation does not include:
Effective for Plan Years beginning after December 31, 2001, Compensation for all purposes in excess of $200,000 (adjusted as provided in Code section 401(a) (17)(B)) shall be disregarded.
An Employee or former Employee who becomes a Participant solely by virtue of making a Rollover Contribution at a time when he has not satisfied the requirements of Sections 3.1(a), 3.1(b), or 3.1(c) or Section 3.3 shall not (i) be eligible to elect to made Salary Deferral Contributions, (ii) be eligible to receive a Matching Contribution or Profit Sharing Contribution, or (iii) be eligible to receive a forfeiture allocation until such individual satisfies the requirements of Sections 3.1(a), 3.1(b), or 3.1(c) or Section 3.3 and is deemed a Participant for those purposes.
2.36 Participating Employer. “Participating Employer” means a Related Employer which, with the consent of the Board of Directors of the Company, adopts the Plan on behalf of all or a portion of its employees by taking appropriate corporate action. For the purposes of this Section 2.36 the Board of Directors shall be deemed to have consented to the participation of a Related Employer if the document evincing an acquisition provides for participation by the Related Employer.
A Participant contribution of a eligible rollover contribution may only be accepted if the contribution is received by the Plan not later than the 60th day following the date the check was issued to the Participant, unless the 60-day requirement has been waived by the IRS pursuant to Code section 402(c)(3).
If a Participant who has a nonforfeitable interest in Matching Contributions, Profit Sharing Contributions or other amounts that are credited to his Accounts incurs five consecutive Breaks in Service, Service after such Breaks in Service shall not increase the Participant’s nonforfeitable percentage in his Accounts derived from Profit Sharing, Matching Contributions or other contributions subject to vesting schedules that were made prior to such five consecutive Breaks in Service.
An Eligible Employee shall be eligible to commence receiving Matching Contributions as of the first day of the month next following the date he is credited with one Year of Eligibility Service, provided he has elected to commence Salary Deferral Contributions pursuant to Section 3.1(a). Any Matching Contributions will only be made on Salary Deferral Contributions that are made on or after the first day of the month next following the date he is credited with one Year of Eligibility Service.
An Eligible Employee shall be eligible to commence receiving Profit Sharing Contributions, if any, as of the first day of the month next following the date he is credited with one Year of Eligibility Service.
If the Employee has not already become a Participant, an Eligible Employee shall become a Participant on the date a Rollover Contribution is made on his behalf, solely for purposes of such Rollover Contribution. However, such Employee shall not be eligible to make Salary Deferral Contributions or receive an allocation of Matching Contributions and Profit Sharing Contributions until the Employee has satisfied the general requirements of this Article.
If a Participant ceases to be an Eligible Employee, but continues in the employ of an Employer or a Related Employer, such Participant shall become an Inactive Participant until his entire Account balance is forfeited or distributed. An Inactive Participant shall not be entitled to receive an allocation of contributions or forfeitures under the Plan for the period that he is not an Eligible Employee.
If an Employee who is not an Eligible Employee becomes an Eligible Employee, such Eligible Employee shall become a Participant immediately as of his transfer date if such Eligible Employee has already satisfied the eligibility requirements and would have otherwise previously become a Participant in accordance with Section 3.1 except that such Employee was not an Eligible Employee. Otherwise, such Eligible Employee shall become a Participant in accordance with Section 3.1.
Any other Employee who terminates employment with all Employers and all Related Employers and is reemployed by an Employer or a Related Employer shall become a Participant as provided in Section 3.1.
A Participant may elect to make a Catch-up Contribution as follows:
An Eligible Employee may make a Rollover Contribution to the Plan. Rollover Contributions must be made exclusively in cash.
Effective January 1, 2004 the Matching Contribution shall be made on behalf of each eligible Participant as follows:
For any Plan Year in which the Plan is determined to be top heavy within the meaning of Code Section 416(g) and regulations thereunder, the Employer shall make a minimum Employer contribution (taking into account Matching Contributions) of not less than three percent (3%) of Compensation for each Participant who is not a “key employee” as that term is defined in Code Section 416(i)(1). A determination as to whether the Plan is top heavy shall be made as of the last day of the immediately preceding Plan Year (the “determination date”).
All of the plans of Related Employers shall be aggregated, as required or permitted in Code section 416(g)(2), in determining whether or not the Plan is top heavy.
Notwithstanding Section 4.1, Salary Deferral Contributions to this Plan (including any other plans of a Related Employer subject to Code section 402(g), but not including any Catch-up Contributions) for any calendar year, shall not exceed the maximum dollar limitation on elective deferrals under Code section 402(g)(1)(B).
If a Participant is required to include in his gross income for a calendar year elective deferrals (as defined in Code section 402(g)(3)) which exceed the deferral limitation in (a) above, such amounts shall be treated as “excess deferrals” and shall be distributed to the Participant. The Committee shall distribute such excess deferral, adjusted for any income or losses allocable to such amount (determined in accordance with the principles of Section 6.4) for the Plan Year in question not later than the April 15th following the calendar year in which the excess deferrals were made , or such later time as permitted by the Code or in Treasury Regulations. Any distribution made pursuant to this Section may be made notwithstanding any other provision of the Plan.
As the Employer has elected to make the safe harbor cash or deferred arrangement option pursuant to Section 4.1 of this Plan, the provisions of this Article and any provisions relating to the Average Deferral Percentage Test described in Code section 401(k)(3) or the Average Contribution Percentage Test described in Code section 401(m)(2) do not apply, except as required by law or regulation. Aggregation and disaggregation rules provided under Code sections 401(k) and 401(m) will still be applicable.
At least 30 days, but not more than 90 days, before the beginning of the Plan Year, the Employer will provide each Participant a comprehensive notice of the Participant’s rights and obligations under the Plan, written in a manner calculated to be understood by the average Employee. The notice shall describe (i) the safe harbor contribution formula used under the Plan (including a description of the levels of Matching Employer Contributions, if any, available under the Plan), (ii) any other contributions under the Plan (including the potential for discretionary Matching Employer Contributions) and the conditions under which such contributions are made,
(iii) the plan to which safe harbor contributions will be made (if different than this Plan), (iv) the type and amount of Compensation that may be deferred under the Plan, (v) how to make cash or deferred elections, including any administrative requirements that apply to such elections, (vi) the periods available under the Plan for making cash or deferred elections, and (vii) withdrawal and vesting provisions applicable to contributions under the Plan. If an Employee becomes eligible to participate (as provided under Section 3.1) after the 90th day before the beginning of the Plan Year and does not receive the notice for that reason, the notice must be provided no more than 90 days before the Employee becomes eligible but not later than the date the Employee becomes eligible.
Notwithstanding Section 4.1, and in order to fulfill the requirements of this Section 6.3, the Plan Administrator shall have the discretion to limit the Salary Deferral Contributions of a Highly Compensated Employee (HCE) and/or the Matching Contributions for an HCE, in the manner described in Section (d), or to cause the Trustee to distribute contributions which exceed the limitations of this Section as described in Section 6.1.
For purposes of the ADP and ACP tests described in this Article, the definition of “Compensation” may be modified by the Plan Administrator to mean any definition of compensation that complies with Code section 414(s).
For each Plan Year, the Salary Deferral Contributions under the Plan must meet one of the actual deferral percentage tests (hereinafter “ADP Test”) described below to satisfy the nondiscrimination requirements of the Code. For purposes of this ADP Test, Eligible Employees who do not qualify for making Salary Deferral Contributions pursuant to Section 4.1 shall not be considered. To pass the ADP Test, either:
The “ADP” for a specified group of Eligible Employees for a Plan Year means the average of the ratios (calculated separately for each Employee in the group to the nearest one-hundredth of one percent) of (i) his Salary Deferral Contributions to (ii) his Compensation earned during the Plan Year or while a Participant (as determined by the Committee for each Plan Year), determined in accordance with Code section 401(k)(3) and regulations pursuant thereto.
Further, a Participant’s Salary Deferral Contribution to the Plan is included in calculating the ratios for the Participant for a Plan Year if it is allocated to the Participant’s Account as of a date within the Plan Year and was earned for services rendered to an Employer during a pay period ending within the Plan Year.
In calculating the deferral percentage for a Participant, Compensation for the entire Plan Year shall be taken into account even where the Participant was not an Eligible Employee for the entire Plan Year. In determining the ADP of an Eligible Employee who is a Highly Compensated Employee, all such deferrals under plans maintained by any Related Employer that maintain a feature subject to Code section 401(k) in which such a Highly Compensated Employee is eligible to participate shall be aggregated.
Further, in the event that a Related Employer maintains another plan which together with this Plan is treated as a single plan for purposes of section 401(a)(4) or 410(b) Code other than section 410(b)(2)(A)(ii)), then any and all Salary Deferral Contributions and other contributions that are taken into account in determining a Participant’s ADP under either of the plans shall be treated as made under a single plan, and if two or more of such plans are permissively aggregated for purposes of Code section 401(k) they shall be treated as a single plan for purposes of satisfying Code sections 401(a)(4) and 410(b).
For each Plan Year, the Matching Contributions under the Plan must meet one of the actual contribution percentage tests (hereinafter the “ACP Test”) described below to satisfy the nondiscrimination requirements of the Code. To pass the ACP test, either:
The “ACP” for a specified group of Eligible Employees for a Plan Year means the average of the ratios (calculated separately for each Employee in the group to the nearest one-hundredth of one percent) of the Matching Contributions allocated to each such Participant’s Account as of any date within the Plan Year being tested. Compliance with the ACP Test shall be determined in accordance with the rules set forth in Code section 401(m)(2) and regulations thereunder.
In determining the ACP of an Eligible Employee who is a Highly Compensated Employee, contributions allocated to such Highly Compensated Employees under all
plans maintained by any Related Employer that are subject to Code section 401(m) in which such a Highly Compensated Employee is eligible to participate shall be aggregated.
Further, in the event that a Related Employer maintains another plan which together with this Plan is treated as a single plan for purposes of Code sections 401(a)(4) or 410(b) other than Code section 410(b)(2)(A)(ii)), then any and all matching contributions, voluntary employee after-tax contributions and other contributions subject to 401(m) under any and all such plans shall be treated as made under a single plan, and if two or more of such plans are permissively aggregated for purposes of Code section 401(m) they shall be treated as a single plan for purposes of satisfying Code sections 401(a)(4) and 410(b).
If at any time during a Plan Year, the Committee determines on a projected basis that it is necessary to reduce the Salary Deferral Contributions of one or more Participants to satisfy the dollar limit on annual deferrals described in Section 6.1 or the ADP nondiscrimination test described in Section 6.3(a)), it shall have the authority to do so in such amounts and for such periods of time as it deems necessary under the circumstances.
The Committee may, in its sole discretion, elect to aggregate Matching Contributions with Salary Deferral Contributions to the extent necessary to satisfy the ADP nondiscrimination test provided that such aggregation does not itself result in discrimination.
The Committee may, in its sole discretion, elect to make additional non-elective contributions to the Plan on behalf of some or all of the Eligible Employees who are not Highly Compensated Employees to the extent necessary to satisfy the ADP nondiscrimination test. Such additional contributions may be made in accordance with a reasonable methodology acceptable to the Committee that favors non-Highly Compensated Employees.
An ADP excess contribution exists if contributions under this Plan on behalf of Highly Compensated Employees fail to meet the ADP test described in Section 6.3(a). Within twelve months after the end of the Plan Year for which there is an excess, contributions which exceed the ADP limitation, adjusted for earnings and losses during the calendar year, less amounts previously returned pursuant, shall be distributed to Highly Compensated Employees. Each Highly Compensated Employee’s deferral shall
be reduced in the order of those Highly Compensated Employees with the largest dollar amount deferred. Also, if such amount is returned to a Participant within 2½ months after the end of the calendar year, such amount shall be reported as taxable income in the preceding calendar year. Notwithstanding the foregoing, the Plan Administrator may choose any other correction method prescribed by the Secretary of the Treasury, Internal Revenue Service or in the Code or tax regulations to the extent such choice is allowed thereunder.
For purposes of this Article, the Employer and any Related Employer shall be considered a single employer, to the extent required by the Code.
The Annual Additions with respect to a Plan Year to a Participant’s Accounts in this Plan and any other defined contribution plan maintained by the Employer shall not exceed the lesser of
For purposes of this Article, the term “Annual Additions” for any Participant in any Plan Year means the sum of:
Employee Elective Deferrals are treated as Annual Additions in the year in which the contribution would have been paid as taxable Compensation if it had not been designated for contribution to the Plan.
If for any Plan Year the Annual Additions exceed the foregoing limitations because of a reasonable error in determining Compensation or the amount of a Participant’s contribution permitted under Code section 415, or other justified
circumstances, the Committee shall direct the Trustee to distribute the amount of Employee Salary Deferral Contributions in excess of the limits, without earnings.
The limitation shall be satisfied by reducing contributions made on behalf of the Participant to the extent necessary in the following order:
If the Annual Additions exceed the limits for any other reason, the Employer shall allocate the excess to a suspense account. The suspense account shall be credited with investment earnings and losses as of each Valuation Date in the same manner as Participant’s Accounts. Such suspense account is for accounting purposes only and shall remain in the Trust Fund to be reallocated as provided below.
Contents of the suspense account shall be allocated to the affected Participant’s Account in subsequent years when that can be done without exceeding the limitations of this Section 6.5. So long as any amount remains in the suspense account, the Employer shall not contribute to the Plan any amount which would cause an additional allocation to the suspense account. In the event the Participant ceases to be a Participant when any amount remains in a suspense account, such amount shall be reallocated to other Participants who are eligible to receive a contribution as of the end of the Plan Year following the calendar year in which he ceases to be a Participant. In the event the Plan terminates before any amount remaining in the suspense account has been fully allocated to Participant Accounts, the balance of the suspense account shall be distributed to the Employer.
To the extent permitted by this Article, a Participant may withdraw any amount from his Accounts not in excess of his vested Account balance by filing a request for a withdrawal in accordance in such manner as prescribed by the Plan Administration Committee. The payment of the amount to be withdrawn shall occur as soon as administratively feasible on or after the Valuation Date following receipt and approval of such request.
A Participant may elect to receive all or any portion of his Account to the extent of any Rollover Contributions and any earnings thereon, and
A Participant who is employed by an Employer may elect to withdraw all or any portion of his Employee After-Tax Contributions, plus earnings thereon at any time.
Upon attainment of age 59½, a Participant who is employed by an Employer may withdraw all or any portion of his vested Accounts.
A distribution will be made on account of an immediate and heavy financial need of the Participant if the distribution is on account of:
(vi) Effective November 1, 2005, expenses for the repair of damage to the Participant’s principal residence that would qualify for the casualty deduction under Code Section 165 (determined with out regard to whether the loss exceeds 10% of adjusted gross income). Between November 1 and December 31, 2005, the Plan Administrator (or its delegate) must determine, based upon all the relevant facts and circumstances, that the need to pay such repair expenses was an immediate and heavy financial need.
A withdrawal will be deemed necessary to satisfy an immediate and heavy financial need of the Participant if and only if the Participant certifies and agrees that all of the following requirements are satisfied:
A Participant shall not be permitted to re-contribute or redeposit in his Accounts any portion of the amounts withdrawn by reason of hardship.
The portion of a Hardship withdrawal distributed after December 31, 1998 attributable to Elective Deferral Contribution may not be part of an eligible rollover distribution.
Effective October 1, 2004 loans shall be permitted under this Plan for Participants who are currently employed by the Company and the provisions of this Section shall be implemented as the Committee determines in its discretion. When a loan is permitted under the Plan, any such loan shall be subject to the requirements of Code Section 72(p) and regulations thereunder, and such conditions and limitations as the Committee deems necessary for administrative convenience and to preserve the tax-qualified status of the Plan.
The maximum amount of a loan under the Plan shall be the lesser of (i) 50% of the vested portion of the Participant’s Account Balance or (ii) $50,000 reduced by the excess (if any) of (A) the highest aggregate outstanding principal balance of all loans from the Plan during the 1-year period ending on the day before the date of the loan, over (B) the outstanding principal balance of the loan from the Plan to the Participant on the date of the loan. The minimum loan permitted shall be $1,000, or such lower amount that is established in writing by the Plan Administrator. Any administrative fees or expenses incurred by the Plan in connection with any loan shall be charged to the Account of the Participant requesting the loan. In addition, the Committee may, in its discretion establish a lower maximum amount of a loan to ensure that the loan amount does not exceed 50% of the vested portion of the Participants Account Balance due to market fluctuations.
Each Participant may have one loan outstanding at one time under the Plan. A loan must be for a minimum term of one year. In no event may the loan term extend beyond five years. Any renewal or extension of a loan shall be deemed to be a new loan for purposes of this section 7.4.
Loan proceeds will be withdrawn based on funds hierarchy from the Participants’ Accounts with the exception of the BrokerageLink Account. The BrokerageLink Account balance will be used to calculate the available loan amounts, but the loan amounts cannot be charged against the BrokerageLink Account.
The Participant shall be required to repay his loan with payments of principal and interest sufficient to amortize the loan in substantially equal installments over its term. All payment by Employees while employed shall be by means of payroll deductions, which deductions shall be authorized by the Participant as a condition to receipt of the loan. Loans are payable in full upon severance from employment. Payments made by a Participant with respect to a loan shall be invested for the Account of such Participant in the Investment Funds in accordance with the Participant’s Investment directions in effect at the time such payments are made. In the absence of a valid investment election, the loan repayments will be invested in the Standard Plan Option Default Fund.
A participant may repay a loan in full at any time from when the loan repayments begin. Partial loan repayments are not allowed under the Plan provisions.
If a participant is on a bona fide leave of absence (including military leave), loan repayments may be suspended but interest will continue to accrue during the suspension period. If a loan is suspended and the Participant returns to active employment with the Company following a leave of absence, the outstanding principal loan balance and accrued interest will be recalculated with repayment to be extended to the 5 year maximum term, regardless of the length of leave of absence.
A loan shall be deemed in default at the end of the calendar quarter following the calendar quarter in which the repayments were discontinued. Upon default by a Participant in any of the terms of a loan, the loan will be come immediately due and
payable and the Plan Administrator in such case shall charge the unpaid balance of such loan, together with any interest in his Account balance.
Each loan shall be secured by the Participant’s vested account balance.
The Plan Administration Committee may charge a reasonable fee for establishing and administering loans.
From time to time the Plan acquires Participant loans in connection with the transfer of assets from a qualified plan of an acquired entity or the merger of another qualified plan. Such loans are called Acquired Participant Loans. The Acquired Participant Loans are identified in Appendix A hereto.
Acquired Participant Loans shall be governed by an Acquisition Loan Policy adopted by the Plan Administration Committee and any related administrative guidelines to the extent that the policy and guidelines are not inconsistent with the basic terms of the loans or any agreement between the Company and a merged company. For purposes of this Section 7.4(j) the basic terms of the loans shall include principal, interest rate, term and payment.
Years of Vesting Service |
|
Percent Vested |
|
Less than 2 |
|
0 |
% |
2 |
|
25 |
% |
3 |
|
50 |
% |
4 |
|
75 |
% |
5 or more |
|
100 |
% |
If a Participant or Inactive Participant has engaged in “dishonesty,” and terminates prior to completing three Years of Vesting Service, the Profit Sharing Contributions and Matching Contributions allocated to the Participant’s Account and any earnings thereon shall be treated as a forfeiture. A Participant shall not forfeit their interest in their Salary Deferral Contributions or Rollover Contributions. For purposes of this Section, “dishonesty” means that the Participant has engaged in acts of fraud, embezzlement, theft or any other crime of moral turpitude or has otherwise been dishonest in his relationship with the Employer (without necessity of formal criminal proceedings being initiated against him) and his employment terminated by either discharge or resignation, as determined by the Committee. This subsection (g) shall not apply to the extent its application would cause the Plan to fail to be considered a “safe harbor 401(k) plan” in any given Plan Year pursuant to Code section 401(k)(12) and the treasury regulations thereunder.
Matching Contributions and Profit Sharing Contributions allocated to a Participant’s Account that are not vested shall be forfeited on the earlier of the following dates:
If a Participant incurs a forfeiture by reason of Section 8.2(a)(ii) and returns to Service prior to incurring five consecutive Breaks in Service, the amount of the forfeiture shall be restored (unadjusted for any gains or losses) as part of such Participant’s Account
if the Participant repays to the Plan the full amount of the distribution prior to the earlier of
As of the Valuation Date immediately following such repayment, and prior to any allocation of Trust earnings, forfeitures, or Employer Contributions specified in Article V, the amount of a Participant’s previous forfeiture (the “Restoration Amount”) shall be allocated to his Account.
The Restoration Amount shall be credited first against forfeitures arising for the Plan Year, and if such forfeitures are not sufficient to satisfy the Restoration Amount in full, the remainder of such amount shall be satisfied out of Employer Contributions for the Plan Year. The Restoration Amount shall not be deemed an Annual Addition. In addition, the Employer may make an Employer Contribution for the purpose of restoring a forfeiture even thought he Employer has no profits.
The Committee shall give timely notice to any rehired Employee if such Employee is eligible to make a repayment, of his right to make such repayment before the expiration of the periods of the occurrence of the events specified above, and such notice shall also include an explanation of the consequences of not making such repayment.
A Participant may elect to receive a distribution of his Account on account of a severance from employment. The Inactive Participant may elect that the distributions be paid as soon as administratively feasible after the date that the severance from employment occurs. All elections as to the date of payment of the Participant’s Account shall be subject to any earlier payment date required under the rules in Section 8.4, Section 8.10 or Section 8.11.
Notwithstanding any other provisions of this Plan to the contrary, a Participant who has separated from employment shall receive a distribution of his Accounts upon attainment of age 65.
A Participant who is Disabled may elect to receive a distribution of his Account. The Participant may elect that the distributions be paid as soon as administratively feasible after the Valuation Date that coincides with or next follows the determination by the Plan Administration Committee that the Participant is disabled or the time requested by the Participant. All elections
as to the date of payment of the vested balance of the Participant’s Account shall be subject to any earlier payment date required under the rules in Section 8.10 and Section 8.11.
In the event of death, payment of the Participant’s Vested Accrued Benefit shall commence as soon as administratively feasible after the Valuation Date that coincides with or next follows death. The foregoing rule shall apply to regardless of whether or not the Beneficiary is the Participant’s surviving spouse.
Subject to the limitations of Section 2.55, if a Participant fails to name a Beneficiary, or if the Beneficiary named by a Participant predeceases him, the Committee may direct that payment of a Participant’s Account be made to the person or persons in the following priority:
The Committee, in its sole discretion, shall direct the Trustee as to whom the Trustee shall make payment under this Section.
All distributions
made pursuant to this Article VIII shall be paid, at the applicable time
in a single lump sum payment. A Participant, Beneficiary or Alternate
Payee may elect a direct rollover of that payment, to the extent permitted
under
Section 8.12(e)(v).
After all required accounting adjustments, the Trustee, in accord with the direction of the Plan Administration Committee, shall make payment of the Participant’s vested Account in cash or in kind (but only to the extent his Account contains contributions that constitute contributions to the ESOP under Section 10.2 or, with respect to amounts not in the ESOP, the Trustee permits in-kind direct rollovers to an IRA), or a combination thereof. Fractional shares cannot be distributed in-kind.
The Employer may withhold or require the withholding from any payment that is made under this Plan of any federal, state or local taxes required by law to be withheld, with respect to such payment. If an Employer (or other person required to withhold) is unable to withhold the full amount required to be withheld and the Participant (or Beneficiary or Alternate Payee, as applicable) does not make a cash payment to the Employer of the amount required to be withheld, then the Employer may withhold from any other amounts payable to the Participant (or Beneficiary or Alternate Payee, as applicable) by the Employer the additional amount that is required be withheld, with respect to any benefit under this Plan.
The value of the Participant’s Accounts shall be determined as of the Valuation Date coincident with or immediately preceding the date of distribution. However, if Salary Deferral Contributions or Employer Contributions are allocated to the Participant’s Accounts after such Valuation Date for the Plan Year in which the Participant receives a distribution on account of Normal Retirement, Early Retirement, death, or Disability, then the value of the Participant’s Accounts shall be adjusted to reflect such additional allocations.
Notwithstanding the provisions of this Article but subject to the following sentence, if an Inactive Participant’s vested Accounts do not exceed $5,000 (determined without regard to the value attributable to such Participant’s Rollover Contributions plus earnings thereon at the time he would be eligible to receive a distribution due to severance from employment), the Plan Administration Committee shall direct the Trustee to distribute the Participant’s vested Accounts (including a deemed distribution of $0) to the Participant or his Beneficiary in a lump sum as soon as administratively feasible following the Valuation Date that coincides with or next follows the Participant’s severance from employment. Effective March 28, 2005, in the event of a mandatory distribution greater than $1,000 in accordance with the provisions of this Section 8.10 if the Participant does not elect to have such distribution paid directly to an eligible retirement plan specified by the Participant in a direct rollover or to receive the distribution directly, then the Plan Administration Committee will pay the distribution in a direct rollover to an individual retirement plan designated by the Plan Administration Committee. For purposes of
determining whether a distribution is greater than $1,000, rollover contributions (and earnings thereon) within the meaning of Code Sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 457(e)(16) that are being distributed shall be considered part of the distribution that is subject to the $1,000 threshold.
The April 1st of the calendar year following the later of the calendar year in which the Participant attains age 70½ or the calendar year in which the Participant retires, except that in the case of a Participant who is a 5% owner of the Employer, the Required Beginning Date shall mean April 1 of the calendar year following the year in which such Participant attains 70½.
However, for a Participant who is not a 5% owner of the Employer, who attained age 70½ during 1988 and had not retired by January 1, 1989, the Required Beginning Date shall be April 1, 1990. This rule shall have no effect upon any life expectancy calculation for the Participant. In addition, for a Participant who attained age 70½ before January 1, 1988 and is not a 5% owner of the Employer, the Required Beginning Date shall be April 1 of the calendar year following the later of the calendar year in which the Participant attains age 70½ or retires.
Distributions under this Subsection, other than those to which subparagraph (D) applies, are considered to begin on the Participant’s Required Beginning Date. If subparagraph (D) applies, distributions are considered to begin on the date distributions are required to begin to the surviving spouse, under subparagraph (A). If distributions under an annuity purchased from an insurance company irrevocably commence to the Participant before the Participant’s Required Beginning Date (or to the Participant’s surviving spouse before the date distributions are required to begin to the surviving spouse, under subparagraph (A)), the date distributions are considered to begin is the date distributions actually commence.
For purposes of this Section, the following definitions apply.
A Participant may elect at the time and in the manner prescribed by the Plan Administration Committee to make a direct rollover, in accordance with the provisions of this Section 8.13 and Code sections 401(a)(31) and 402(c), of an Eligible Rollover Distribution to an Eligible Retirement Plan.
A surviving spouse Beneficiary or a former spouse who is an Alternate Payee, pursuant to a QDRO under Section 15.12, may direct a rollover under the same terms and conditions as a Participant. A non-spouse Beneficiary may not direct a rollover pursuant to this Section.
Any distribution of all or any portion of the Participant’s Accounts, except that it does not include:
“Eligible Retirement Plan” means an individual retirement account or individual retirement annuity (other than an endowment contract) under Code sections 408(a) or 408(b), a trust qualified under Code section 401(a) and exempt from tax under Code section 501(a), which accepts rollover distributions (as limited by Code section 401(a)(31)(D)), an annuity plan under Code section 403(a), an annuity contract described in Code section 403(b), or an eligible plan under Code section 457 that is maintained by a governmental entity which agrees to separately account for amounts transferred into such plan from this Plan.
In accordance with Code section 402(f), the Committee or Trustee shall furnish each Participant, spousal Beneficiary or Alternate Payee eligible for a directed rollover under this Section 8.13(c) with an explanation of the directed rollover opportunity and related withholding consequences of not choosing a directed rollover within a reasonable period (at least 30 but not more than 90 days) prior to the Participant’s distribution. The explanation shall clearly indicate that the Participant, spousal Beneficiary or Alternate Payee has a right to a 30 day waiting period to consider the election. A Participant, Beneficiary or Alternate Payee may waive the 30 day period by affirmative election on forms provided by the Committee or Trustee.
The Plan Administration Committee shall establish and maintain an Account for each Participant that shall reflect Employer and Participant-directed contributions made on behalf of the Participant and earnings, expenses, gains and losses attributable thereto, and investments made with amounts in the Participant’s Account. The Trustee shall establish and maintain such sub-accounts as it deems advisable from time to time.
As of each Valuation Date, the Plan Administration Committee shall
Each Participant shall be provided with a statement of his Accounts under the Plan showing the Account values at least once each Plan Year. Account statements may be delivered electronically as provided by the Committee.
The Plan Administration Committee shall have exclusive responsibility for determining the balance of each Participant’s Account maintained hereunder. The Plan Administration Committee’s determinations thereof shall be conclusive upon all interested parties.
Each Participant may direct the investment of his Account among the permissible investment funds. An investment direction shall remain effective with regard to all subsequent amounts credited to a Participant’s Accounts, until changed in accordance with the provisions of this Section.
The Plan is intended to constitute a Plan described in ERISA section 404(c) with respect to Participant directed investments. The Plan Administrator shall make available to Participants information concerning the portfolio characteristics of each investment, its historic earnings performance, and other information to assist the Participants in exercising their investment discretion, as contemplated in ERISA section 404(c).
The Participants in the Plan are allowed to allocate contributions to their accounts to various investment funds, including a fund (the “Company Stock Fund”) which will be invested primarily in the common stock of the Company (the “Company Stock”).
All contributions to the Plan which are directed for investment in the Company Stock Fund shall first be considered made to the WSP. To the extent such contributions are eligible to be made to the ESOP, they will immediately be transferred to the ESOP, subject to any limitations or restrictions the Plan Administration Committee adopts, in its sole discretion.
Coincident with an election to commence a Salary Deferral, Matching Contribution, Profit Sharing Contribution or Rollover Contribution to the Plan, a Participant shall make an investment direction election allocating his future contributions among one or more of the permissible investments in increments of one percent (1%). Such an investment election shall be presented in the manner, and in accordance with deadlines, established by the Committee.
The Plan Administration Committee may establish and communicate that, in the absence of any such investment election by the Participant, all such contributions shall be invested in a default fund. In the absence of a timely investment election from the Participant, the Trustee shall invest the Participant’s contributions in such default fund until the effective date of any change in investment election by the Participant. The default fund shall be selected by the Investment Committee.
A Participant may change his investment elections with respect to future contributions, among one or more investment funds, by giving direction in the manner, and in accordance with deadlines and limitations, established by the Plan Administration Committee from time to time. Elections will be implemented in accordance with the administrative procedures of the Plan, and of the underlying investment fund, if any. The Participant’s election shall specify a percentage in increments of one percent (1%), which percentage may not exceed one hundred percent (100%).
A Participant may transfer existing balances of his Account, from one or more of the permissible investments, by giving direction in the manner, and in accordance with deadlines and limitations, established by the Plan Administration Committee from time to time. Elections will be implemented in accordance with the written administrative procedures of the Plan and of the underlying investment fund, if any. The Participant’s transfer election shall specify either (i) a percentage in increments of one percent (1%), which aggregate percentage may not exceed one hundred percent (100%), or (ii) a dollar amount in whole dollars that is to be transferred.
A Participant may transfer a portion of his account between the Company Stock Fund and the WSP at such times, and under such circumstances as are provided by the Plan Administration Committee.
An Inactive Participant may continue to make investment elections, in accordance with Article X, with respect to his Account.
Every Participant in the ESOP may elect whether vested dividends paid with respect to shares of Company Stock allocated to such Participant’s Company Stock Fund shall be paid in cash to the Participant or reinvested in the Company Stock Fund. An election with respect to a particular dividend shall be effective if its is received by the Plan Administration Committee, in the manner prescribed therefore, by the Plan Administration Committee, by the date on which the right to receive such dividend is set for owners of Company Stock generally. The election procedure shall comply with the requirements of Code Section 404(k). If a valid election to receive a dividend in cash is not received from a Participant, the Participant shall be deemed to have elected to have such dividend reinvested in the Company Stock Fund. Dividends other than cash dividends (e.g., stock dividends) are not subject to the election option, and shall instead remain in the Company Stock Fund. The Plan Administration Committee reserves the right to override a Participant’s election to the extent necessary to meet other applicable rules (e.g., where Participant’s eligible for hardship distributions are required to receive all currently
available distributions). If the Participant electing a distribution of cash dividends cannot be located (for example, if the Participant’s current address is not known at the time of the distribution), the dividend shall be held in the investment fund providing a fixed rate of return. If a Participant receives a total distribution of his or her ESOP Account prior to the date a dividend attributable to such ESOP Account is paid to the ESOP, the dividends that are subsequently paid with respect to his or her ESOP Account shall be distributed to him or her as soon as administratively practicable after they are received by the ESOP.
An election under this Section 10.6 shall remain in effect until the Participant revokes the election or makes a new election.
All unvested dividends paid with respect to the Company Stock Fund shall be reinvested in the Company Stock Fund.
If a Participant elects to have vested dividends paid in cash, such amounts shall be paid annually (dividends received by the Plan during a calendar year will be aggregated and paid once a year, in the same year the dividends are received by the Plan). The amount of quarterly dividend which would otherwise be payable to the Participant, if any, shall be reinvested in the Company Stock Fund and the dividend amounts, plus earnings, shall be paid as soon as possible before year end. Except where a Participant becomes entitled to receive a distribution under the terms of this Plan, the dividends shall not be available to the Participant until after year end.
The dividends on Company Stock held in the Company Stock Fund and with respect to which the Participant is allowed to elect to have such dividends paid in cash or reinvested in the Company Stock Fund shall not be considered an employer contribution, Employee After-Tax Contribution or forfeiture and, therefore, shall not constitute:
(a) An annual addition for purposes of Code section 415(c)(2);
(b) An elective deferral for purposes of Code section 402(g);
(c) An elective contribution for purposes of Code section 401(c); or
(d) An Employee After-Tax Contribution for purposes of Code section 401(m).
To the extent permitted by law and the requirements for continued tax-qualified status of the Plan and the deductibility of cash distributions of dividends, the Committee may establish rules regarding the minimum amount of investment in the Company Stock Fund that must be held by an account for an amount to be considered part of the ESOP. Such rules shall be applied in a uniform and nondiscriminatory manner, with the purpose of avoiding the cost and administrative burden of issuing small cash dividend distribution checks.
Participants may elect at any time to have all or any portion of their ESOP Accounts transferred to the WSP and invested in investments other than the Company Stock Fund.
The provisions of this Section 10.7 shall be interpreted and applied in a manner that is consistent with compliance with Code section 401(a)(28).
In the event that Company Stock distributed to a Participant or beneficiary hereunder is not readily tradable on an established market, such participant or beneficiary may require the Company to repurchase such Company Stock as set forth in Code sections 409(a) and 409(h).
A Trust has been created and will be maintained for the purposes of the Plan, and the assets thereof shall be invested in accordance with the terms of the Trust Agreement. All contributions will be paid into the Trust, and all benefits under the Plan will be paid from the Trust.
Trustee shall be appointed by the Company to administer the Trust. The Trustee’s obligations, duties, and responsibilities shall be governed solely by the terms of the Trust Agreement.
Subject to the provisions for the return of contributions, the Trust will be used and applied only in accordance with the provisions of the Plan to provide the benefits thereof, and no part of the corpus or income of the Trust shall be used for or diverted to purposes other than for the exclusive benefit of the Participants and their Beneficiaries and with respect to expenses of administration. The Company reserves the right to recover any amounts held in a suspense account at the termination of the Trust that cannot be used to reduce Employer Contributions in the year of termination because of the limitations contained in Section 6.5 of the Plan and Code section 415.
Any person having any claim under the Plan will look solely to the assets of the Trust for satisfaction.
No Employee shall have any right to, or interest in, any assets of the Trust upon termination of his employment or otherwise, except as provided from time to time under this Plan, and then only to the extent of the benefits payable under the Plan to such Employee out of the assets of the Trust. Except as otherwise may be provided under Title IV of ERISA, all payments of benefits as provided for in this Plan shall be made solely out of the assets of the Trust and none of the Fiduciaries shall be liable therefore in any manner.
Except as provided below, all reasonable costs and expenses incident to the administration and protection of the Plan and Trusts, including but not limited to legal, accounting, and Trustee fees, will be paid from the Trust except to the extent the Employer
chooses in its sole discretion to pay any such expenses, and until paid, shall constitute a first and prior claim and lien against the Trust. Such expenses may be paid out of forfeitures in the Trust that occur each Plan Year. All such costs and expenses paid from the Trust shall, unless allocable to the Accounts of particular Participants, be charged against the Accounts of all Participants on a pro rata basis or in such other reasonable manner as may be directed by the Employer and disclosed to the Participants. However, any and all expenses relating to settlor functions that arise from the creation, design or termination of the Plan must be paid by the Employer and may not be paid from the Trust. Notwithstanding the foregoing, the Human Resources Committee may, in its discretion, authorize the Trustee to allocate certain expenses to particular Participant’s Accounts, including but not limited to distribution fees, loan fees, QDRO and hardship distribution fees, and BrokerageLink account fees, but only to the extent permitted by law and related regulations.
Notwithstanding anything herein to the contrary, any contribution by the Employer to the Trust Fund is conditioned upon the deductibility of the contribution by the Employer under the Code and, to the extent any such deduction is disallowed, the Employer may within one year following a final determination of the disallowance, demand repayment of such disallowed contribution and the Trustee shall return such contribution less any losses attributable thereto to the Employer within one year following the disallowance.
(a) The Plan Administration Committee will have complete control of the administration of the Plan, subject to the provisions hereof, with all powers necessary to enable it to carry out its duties properly in that respect. Not in limitation, but in amplification of the foregoing, it will have the power and discretion to construe the terms of the Plan and to determine all questions that may arise hereunder, including all questions relating to the eligibility of Employees to participate in the Plan and the amount of benefit to which any Participant or Beneficiary may become entitled. Its decisions upon all matters within the scope of its authority will be final. No person shall be entitled to any benefits under this Plan except to the extent the Plan Administration Committee determines in its discretion they are entitled to benefits.
(b) The Plan Administration Committee shall administer the Plan in a nondiscriminatory manner for the exclusive benefit of Participants and their Beneficiaries. The persons or entities to whom the Plan Administration Committee delegates any of its discretion, authority, duties and responsibilities, shall have the discretion in the performance of – and shall perform – all such duties as are necessary to supervise the administration of the Plan and to control its operation in accordance with the terms thereof, including, but not limited to, the following:
Except as otherwise indicated, the Plan Administration Committee may delegate any of these powers and duties to employees of the Company or committees consisting of employees.
The Plan Investment Committee shall have the following powers and duties with respect to the investment of the Trust:
The Company shall indemnify and hold harmless the Committees, and their members, and each of them, from and against any and all loss resulting from liability to which the Committee, or its members, may be subjected by reason of any act or conduct (except willful or reckless misconduct), in their official capacities in the administration of the Plan or Trust or both, including all expenses reasonably incurred in their defense, in case the Company fails to provide such defense.
To the extent required by law, every member, every fiduciary of the Plan and every person handling Plan funds shall be bonded. The Plan Administration Committee shall take such steps as are necessary to assure compliance with applicable bonding requirements. The Plan Administration Committee may apply for and obtain fiduciary liability insurance insuring the Plan against damages by reason of breach of fiduciary responsibility at the Plan’s expense and insuring each fiduciary against liability to the extent permissible by law.
To the extent permitted by law, no Participant shall have any claim against the Company, Employer, any Committee, Trustee or any other fiduciary or service provider to the Plan, or against the directors, officers, members, agents or representatives of any of them (collectively “parties in interest”), for any benefits under the Plan, and such benefits shall be payable solely from the Trust Fund; nor shall any of the parties in interest incur any liability to any person for any action taken or suffered or omitted to be taken by them under the Plan in good faith. The Company intends that neither the Plan nor any party in interest shall be liable for any loss due to a Participant exercising control over the investment of assets in his Account.
In the event that there is a judgment, order or decree issued against a Participant by a Court, or a settlement agreement entered into with a Participant, where the subject of the judgment, order, decree or settlement consists of a proven or admitted violation of fiduciary duty against the Plan, the Plan Administrator shall have the discretion to direct a forfeiture of some or all of the balance of the Accounts of the Participant, in an amount up to but not greater than the amount stated in such legal instrument, for purposes of making a recovery on behalf of the Plan and Trust Fund.
The decision by the Appeals Committee shall be the final and conclusive administrative review proceeding under the Plan. No person shall be entitled to any benefits under this Plan as a result of the review of a denied claim except to the extent the Appeals Committee determines in its discretion that such person is entitled to such benefits.
Any act which the Human Resources Committee is permitted or required to perform under the terms of the Plan may be performed by an officer of the Company duly authorized by the Human Resources Committee.
It is the Company’s intention that the Plan will continue indefinitely. However, the Company, by action of either the Board of Directors or the Human Resources Committee of the Board of Directors, may amend the Plan at any time, including any remedial retroactive changes (within the specified period of time as may be determined pursuant to Internal Revenue Service regulations from time to time) to comply with the requirements of any law or regulation issued by any governmental agency to which the Company is subject. The Board of Directors and the Human Resources Committee may delegate to the Plan Administration Committee, Plan Investment Committee, or a senior executive of the Company authority to amend the Plan with respect to the following:
No amendment made to this Plan pursuant to this Article XIII shall decrease any Participant’s Account balance (determined in accordance with Code section 411(d)(6)) as of the date of such amendment.
Any amendment to (including a termination of) the Plan shall be made in writing. Upon the execution of the amendment by a duly authorized officer or individual, the Plan shall be deemed amended as of the date provided in the instrument of amendment. If no effective date is specified, the amendment shall be effective as of the date the instrument is executed.
The Company reserves the right to amend the vesting schedule at any time; however, no such amendment shall reduce the nonforfeitable percentage of a Participant’s Account determined as of the date immediately preceding the later of the date on which such amendment is adopted or effective, to a percentage that is less than the Participant’s nonforfeitable percentage as computed under the Plan without regard to the amendment.
In the event the Company amends the vesting schedule, each Participant having at least three years of Service shall have his nonforfeitable Account balance computed under the Plan in accordance with the pre-amendment or post-amendment vesting schedule, whichever provides the more favorable result for the Participant as of the Benefit Commencement Date. For
purposes of this Section 12.2, an amendment to the vesting schedule includes any Plan amendment that directly or indirectly affects the nonforfeitable percentage of a Participant’s right to his Account balance .
The termination of the Plan shall not cause or permit any part of the Trust Fund to be diverted to purposes other than for the exclusive benefit of the Participants and payment of reasonable Plan expenses, or cause or permit any portion of the Trust Fund to revert to or become the property of the Company at any time prior to the satisfaction of all liabilities with respect to the Plan and Participants.
Upon termination of this Plan, the Plan Administration Committee shall continue to act for the purpose of complying with the preceding paragraph and shall have all power necessary or convenient to the winding up and dissolution of the Plan as herein provided. While so acting, the Plan Administration Committee shall be in the same status and position with respect to other persons as if the Plan remained in existence.
Any modification or amendment of the Plan may be made retroactive, as necessary or appropriate, to establish and maintain a “qualified plan” pursuant to Code section 401(a), and ERISA and regulations thereunder and exempt status of the Trust Fund under Code section 501.
In the event of a complete or partial termination of the Plan, or upon complete discontinuance of contributions under the Plan, with respect to all Participants or a specified group or groups of Participants, the Trustee shall allocate and segregate a proportionate interest in the Trust Fund for the benefit of affected Participants.
All Participant Accounts shall be one hundred percent (100%) vested and nonforfeitable. The Plan Administration Committee shall direct the Trustee to allocate the assets of the Trust Fund to those affected Participants.
Any entity which is a Related Employer shall become a Participating Employer effective as of the date on which such entity becomes a Related Employer, unless such Related Employer:
A Related Employer that adopts the Plan shall be bound by the provisions of the Plan in effect at the time of the adoption and as subsequently in effect because of any amendment to the Plan.
Any Employer by action of its Board of Directors and notice to the Company and the Trustees, may withdraw from the Plan and Trust at any time without affecting other Employers not withdrawing, by complying with the provisions of the Plan. Termination of the Plan as it relates to an Employer upon its withdrawal shall be governed by the provisions of Article XIII. A withdrawing Employer may arrange for the continuation by itself or its successor of this Plan and Trust in separate form for its own Employees or it may arrange for continuation of the Plan and Trust by merger with an existing plan and trust qualified under Code sections 401(a) and 501(a) and transfer of such portion of the Trust assets as the Committee determines are allocable to the Employer and its employees who are Participants.
The Company may in its absolute discretion, by resolution of the Board of Directors, terminate an Employer’s participation at any time when (i) the Employer ceases to be a Related Employer, (ii) in the Company’s judgment such Employer fails or refuses to discharge its obligations under the Plan following such prior notice and opportunity to cure as may be appropriate under the circumstances, or (iii) in the Company’s judgment, such Employer should not be allowed to continue to participate.
All applications, notices, designations, elections, investment directions, statements and other communications from and to Participants shall be on forms prescribed or approved by the Committee. A notice or communication to a Participant shall be deemed to have been delivered and received by the Participant or Beneficiary at his last address of record with the Committee. Notwithstanding the foregoing, to the extent permitted by applicable law, and not inconsistent with the terms of the Plan, the Plan Administration Committee may make telephonic or other electronic communication or filing methods available for certain elections, designations, investment directions or applications for benefits by Participants and for certain notices, statements or other communications to Participants. Any person entitled to notice under the Plan may waive the notice.
Each Participant and Beneficiary must furnish to the Committee evidence, data, or information, as the Committee considers necessary or desirable for the purpose of administering the Plan.
Each Participant or Beneficiary shall file with the Committee his address, and each subsequent change of such address. Any payment or distribution hereunder, and any communication addressed to a Participant or Beneficiary, at the last address filed with the Committee, or if no address has been filed, then the last address indicated on the records of the Employer shall be deemed to have been delivered to the Participant or his Beneficiary on the date that such distribution or communication is deposited in the United States mail, postage prepaid.
Any check representing payment hereunder and any communication addressed to an Employee, a former Employee, a retired Employee, or Beneficiary at his last address filed with the Committee shall be deemed to have been delivered to such person on the date on which such check or communication is deposited in the United States mail. If the Committee, for any reason, is in doubt as to whether benefit payments are being received by the person entitled thereto, it shall, by registered mail addressed to the person concerned, at his address last known to the Committee, notify such person that all unmailed and future retirement income payments shall be henceforth withheld until he provides the Committee with evidence of his continued life and his proper mailing address.
Records of an Employer as to an Employee’s or Participant’s period of employment, termination of employment and the reason therefore, leaves of absence, reemployment, and Compensation will be conclusive on all persons, unless determined to be incorrect.
Evidence required of anyone under the Plan may be by certificate, affidavit, document, or other information that the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties.
Any Participant in the Plan or any Beneficiary may examine copies of the Plan description, latest annual report, this Plan and Trust, contract, or any other instrument under which the Plan was established or is operated. The Committee will maintain all of the items listed in this Section in its office, or in such other place or places as it may designate from time to time in order to comply with the regulations issued under ERISA, for examination during reasonable business hours. Upon the request of a Participant or Beneficiary the Committee shall furnish him with a copy of any item listed in this Section. The Committee may make a reasonable charge to the requesting person for the copy so furnished. A beneficiary’s right to (and the Committees’, or a Trustee’s duty to provide to the Beneficiary) information or data concerning the Plan shall not arise until he first becomes entitled to receive a benefit under the Plan.
Except as provided under a Qualified Domestic Relations Order, no benefit payable under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary prior to actually being received by the person entitled to the benefit under the terms of the Plan. The Trust shall not in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements, or torts of any person entitled to benefits hereunder, except to the extent that under a Qualified Domestic Relations Order the Trustee is required to pay a portion of a Participant’s Accounts to an Alternate Payee. In the event an Employer or the Trustee receives notice of an adverse claim to a benefit distributable to a Participant, Inactive Participant or Beneficiary, the Trustee may suspend payment(s) of such benefit until such matter is resolved to the satisfaction of the Trustee.
Any payment to any Participant, or to his legal representative or Beneficiary, in accordance with the provisions of the Plan, shall to the extent thereof be in full satisfaction of all claims hereunder against the Plan and Trust. The Plan Administration Committee may require such Participant, legal representative, or Beneficiary, as a condition precedent to such payment, to execute a receipt and release therefore in such form as it shall determine.
In the event any benefit under this Plan shall be payable to a person who is under legal disability or is in any way incapacitated so as to be unable to manage his financial affairs, the Committee may direct payment of such benefit to a duly appointed guardian or other legal representative of such person or in the absence of a guardian or legal representative, to a custodian for such person under a Uniform Gift to Minors Act or to any relative of such person by blood or marriage, for such person’s benefit. Any payment made in good faith pursuant to this provision shall fully discharge the Company and the Plan of any liability to the extent of such payment.
Any Employer contribution to the Trust Fund made under a mistake of fact (or investment proceeds of such contribution if a lesser amount) shall be returned to the Employer within one year after payment of the contribution. In the event an incorrect amount is paid to a Participant or Beneficiary, any remaining payments may be adjusted to correct the error. The Committee may take such other action it deems necessary and equitable to correct any such error. Notwithstanding the foregoing, the Plan Administrator need not correct errors that involve a deminimis amount.
In the event a distribution is required to commence on a Required Beginning Date under Section 8.11 and the Participant or Beneficiary cannot be located, the Participant’s Account shall be forfeited on the last day of the Plan Year following the Plan Year in which distribution was supposed to commence. Such forfeiture shall be used to reduce Employer profit sharing contributions.
If the affected Participant or Beneficiary later contacts the Committee, his Account shall be reinstated and distributed as soon as practical. The Committee shall reinstate the amount forfeited by directing a special Employer contribution to be made in an amount equal to such amount and allocating it to the affected Participant’s or Beneficiary’s Account. Such reinstatement shall not be considered an annual addition for purposes of the limitations on contributions pursuant to Code section 415.
Prior to forfeiting any Account, the Committee shall attempt to contact the Participant or Beneficiary by return receipt mail at his last known address according to the Employer’s records, and by the letter forwarding services offered through the Internal Revenue Service, the Social Security Administration, or such other means as the Committee deems appropriate.
Alternatively, the Committee may transfer such amounts to an IRA set up by the Committee, unless the Participant directs otherwise. The Participant will be notified that the Participant may transfer the distribution to another IRA. Any default rollover shall be made in accordance with any final regulations issued by the Department of Labor.
The provisions of this Section shall apply only to an Employee or former Employee who becomes entitled to back pay by an award or agreement of an Employer without regard to mitigation of damages. If a person to whom this Section applies was or would have become an Eligible Employee after such back pay award or agreement has been effected, and if any such person who had not previously elected to make Employee Elective Deferrals pursuant to Section 3.1 shall within 30 days of the date he receives notice of the provisions of this Section make an election to make Employee Elective Deferrals in accordance with such Section 3.1 (retroactive to any Entry Date as of which he was or has become eligible to do so), then such Participant may elect that any Employee Elective Deferrals not previously made on his behalf but which, after application of the foregoing provisions of this Section, would have been made under the provisions of Article III, shall be made out of the proceeds of such back pay award or agreement.
In addition, if any such Employee or former Employee would have been eligible to participate in the allocation of Employer Contributions under the provisions of Article V for any prior Plan Year after such back pay award or agreement has been effected, his Employer shall make a Employer Contribution equal to the amount of the Employer Contribution which would have been allocated to such Participant under the provisions of Article V as in effect during each such Plan Year. The amounts of such additional contributions shall be credited to the Account of such Participant. Any additional contributions made by such Participant and by an Employer pursuant to this Section shall be made in accordance with, and subject to the limitations of the applicable provisions of Articles IV, V, and VI.
Anything in this Plan to the contrary notwithstanding, it shall be impossible at any time for contributions or any part of the Trust Fund to revert to the Employer or to be used for or diverted to any purpose other then the exclusive benefit of Participants, their spouses and Beneficiaries (which purpose include payment of reasonable expenses incurred to maintain, invest, value and administer the Trust Fund and to maintain and administer the Plan), except that:
If the amount of contribution made to the Plan by the Employer for any Plan Year is in excess of the amount required under Article V, and such excess payment is due to mistake of fact, the Employer shall have the right to recover such excess contribution within one year after the date the contribution is made to the Trustee. The return of a contribution shall be permitted hereunder only if the amount so returned (i) is the excess of the amount actually contributed over the amount which would have otherwise been contributed, (ii) does not include the earnings attributable to such contribution, and (iii) is reduced by any losses attributable to such contribution.
The Trustee, the Plan Administration Committee, the Plan Investment Committee, and the Company do not guarantee the Trust from loss or depreciation. The Company does not
guarantee the payment of any money that may be or becomes due to any person from the Trust. The liability of the Committee and the Trustee to make any payment from the Trust is limited to the then available assets of the Trust.
To the extent permitted by law, an interpretation of the Plan and a decision on any matter within a Fiduciary’s discretion made in good faith is binding on all persons. A misstatement or other mistake of fact shall be corrected when it becomes known and the person responsible shall make such adjustment on account thereof as he considers equitable and practicable.
In the administration of the Plan, uniform rules will be applied to all Participants similarly situated.
In the event any provision of the Plan shall be held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions of the Plan, but shall be fully severable and the Plan shall be construed and enforced as if the illegal or invalid provision had never been included herein.
The Plan shall be binding upon all persons entitled to benefits under the Plan, their respective heirs and legal representatives, upon each Employer, its successors and assigns, and upon the Trustee, the Plan Administration Committee, and their successors.
The titles and headings of Articles and Sections are included for convenience of reference only and are not to be considered in construction of the provisions hereof.
All questions arising with respect to the provisions of this Agreement shall be determined by application of the laws of the State of Washington except to the extent Washington law is preempted by federal law.
IN WITNESS WHEREOF, Washington Mutual, Inc. has caused this instrument to be executed on this 27th day of December, 2005 but to be effective as of the dates first written above.
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WASHINGTON MUTUAL INC. |
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By: |
/s/ Daryl D. David |
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Daryl David |
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Its: Executive Vice President – Human Resources |
APPENDIX A - ACQUIRED COMPANY PROVISIONS
To the extent a special provisions set out in this Appendix A is inconsistent with any of the prior general provisions of the Plan, the special provisions of this Appendix A will control:
TABLE OF CONTENTS FOR APPENDIX A
ACQUIRED COMPANY |
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ACQUISITION
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PAGE (in
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Somers, Grove & Co., Inc. |
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01/01/87 |
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4 |
Participating Employers listed in Attachment A of the Plan as restated effective January 1, 1987 (i.e. Washington Mutual Financial, Inc, Murphy Favre, Inc., Composite Research & Management Co., Murphy Favre Properties, Inc., Washington Mutual Insurance Services, Inc., E.J. Life Insurance Co., and Benefit Service Corporation |
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01/01/87 |
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5 |
IPC Pension Services Company, Inc. of Alaska |
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07/01/88 |
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6 |
Shoreline Federal Savings Bank |
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07/01/88 |
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7 |
Columbia Federal Savings Bank |
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07/01/88 |
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8 |
Mutual Travel, Inc. |
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12/31/88 |
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9 |
Old Stone Bank |
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05/31/90 |
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10 |
Benefit Service Corporation (Tacoma) |
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01/01/91 |
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11 |
Frontier Savings and Loan |
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07/01/91 |
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12 |
Williamsburg Federal Savings Bank |
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10/01/91 |
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13 |
Vancouver Federal Savings and Loan |
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10/01/91 |
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14 |
Sound Savings and Loan |
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01/01/92 |
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15 |
Great Northwest Bank |
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04/01/92 |
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16 |
Crossland Federal Savings Bank |
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01/01/93 |
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17 |
World Savings and Loan |
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04/01/93 |
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18 |
Pioneer Savings Bank |
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04/01/93 |
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19 |
Pacific First Financial Corporation, Pacific First Bank, a Federal Savings Bank or their affiliates (“Pacific First”) |
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05/01/93 |
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20 |
Great Western Bank |
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05/01/93 |
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21 |
Tri-City Cosmopolitan Travel Services, Inc. |
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01/01/94 |
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22 |
Global Express Travel |
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01/01/94 |
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23 |
Summit Savings and Loan |
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01/01/95 |
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24 |
Olympus Savings Bank Olympus Capital Corporation |
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07/01/95 |
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25 |
Enterprise Bank |
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01/01/96 |
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26 |
Western Bank |
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04/01/96 |
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27 |
Utah Federal Savings Bank |
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04/01/97 |
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28 |
American Savings Bank, FA |
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04/01/97 |
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29 |
United Western Financial Group, Inc. |
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04/01/97 |
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30 |
Great Western Financial Corporation and Great Western Financial Services Corp. |
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01/01/98 |
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31 |
H. F. Ahmanson & Company |
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07/01/99 |
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32 |
Peoples Security Finance Company, Inc. (“Peoples”) |
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01/01/00 |
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33 |
Alta Residential Mortgage, Inc. (“Alta”) |
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04/01/00 |
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34 |
Long Beach Mortgage Company |
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07/01/00 |
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35 |
PNC Mortgage Corp. of America and a subsidiary of PNC Bank, National Association (“PNC”) |
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02/01/01 |
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36 |
Bank United Corp. |
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05/01/01 |
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37 |
Fleet Mortgage Corp. |
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06/01/01 |
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38 |
Dime Bancorp, Inc. |
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04/01/02 |
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39 |
HomeSide Lending, Inc. |
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07/01/02 |
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40 |
Providian Financial Corporation and Providian National Bank |
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10/1/05 |
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41 |
APPENDIX A
Provisions Related to Employees of Acquired Companies
This Appendix contains provisions that apply to certain former employees of companies acquired by Washington Mutual, Inc. These provisions relate to entry dates, service credit, service for eligibility, participation and vesting, and participant loans. To the extent any provisions in this Appendix A are inconsistent with provisions in other sections of the Plan, the provisions in this Appendix will prevail. This Appendix may be amended from time to time by the Plan Administration Committee in connection with the acquisition of another company, whether by asset or stock purchase.
Appendix A
Company: Somers, Grove & Co., Inc.
Service, In General: |
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Each Eligible Employee who (i) was an employee with Somers, Grove & Co., Inc. on December 31, 1986 and who had at least six months of service (as that term is defined in the former Somers, Grove & Co., Inc. 401(k) Savings Plan) on that date, or (ii) was a participant in said 401(k) Plan on December 31, 1986 shall be credited with Service for years of service with Somers, Grove & Co., Inc. |
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Vesting: |
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Each former employee of Somers, Grove & Co., Inc. who had six months of service (as defined under the Somers, Grove & Co., Inc. 401(k) Savings Plan) as of December 31, 1986 shall be 100% vested in his or her Matching Account and Profit Sharing Account |
Appendix A
Company: Participating Employers listed in Attachment A of the Plan as
restated effective
January 1, 1987 (i.e. Washington Mutual Financial, Inc, Murphy Favre, Inc.,
Composite
Research & Management Co., Murphy Favre Properties, Inc., Washington Mutual
Insurance Services, Inc., E.J. Life Insurance Co., and Benefit Service
Corporation
Vesting: |
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Each participant shall be 100% vested in his Matching Account and Profit Sharing Account who (i) was a Participant on 1/1/87 and (ii) was 100% vested under the predecessor plan of those participating Employers listed in Attachment A of the Plan as restated Effective January 1, 1987 or who had one Year of Eligibility Service as of December 31, 1986 |
Appendix A
Company: IPC Pension Services Company, Inc. of Alaska
Service, In General: |
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Employees who were employed by IPC at the time it was acquired by WM Financial, Inc. on May 17, 1988 shall be credited with Service for service performed with IPC. |
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Eligibility for Participation Service |
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Service shall include service with IPC effective January 1, 1988. |
Appendix A
Company: Shoreline Federal Savings Bank
Service, In General: |
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Employees who were employed by Shoreline Federal Savings Bank at the time it was acquired by the Company on May 2, 1988 shall be credited with Service for service performed with Shoreline Federal Savings Bank. |
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Eligibility for Participation Service |
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Service shall include service with Shoreline Savings Bank, effective January 1, 1988. |
Appendix A
Company: Columbia Federal Savings Bank
Service, In General: |
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Employees who were employed by Columbia Federal Savings Bank at the time it was acquired by the Company on May 2, 1988 shall be credited with Service for service performed with Columbia Federal Savings Bank. |
Appendix A
Company: Mutual Travel, Inc.
Appendix A
Company: Old Stone Bank
Service, In General: |
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Former employees of Old Stone Bank (i) employed in a “regular” position as defined by the Company (or the prior sponsor of the Plan) as of May 31, 1990, or (ii) originally employed in a “temporary” position as defined by the Company (or the prior sponsor of the Plan) as of May 31, 1990, and subsequently transferred to a “regular” position with the Company (or the prior sponsor of the Plan) shall be credited with Service for years of service with Old Stone Bank (or its predecessor) upon completion of one Year of Eligibility Service measured from May 31, 1990. |
Eligibility for Participation Service |
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Former employees of Old Stone Bank employed with the Company in a “regular” position (as defined by the Company) as of May 31, 1990, will be credited with Service for service performed with Old Stone Bank (or its predecessor). Former employees of Old Stone Bank employed with the Company in a “temporary” position (as defined by the Company) as of May 31, 1990, will be credited with Service for service performed with Old Stone Bank (or its predecessor) as of the date such employee transfers to a “regular” position with the Employer. |
Appendix A
Company: Benefit Service Corporation (Tacoma)
Service, In General: |
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Service Corporation (Tacoma) at the time it was acquired by WM Financial, Inc. shall be credited with Service for service performed with Benefit Service Corporation (Tacoma). |
Appendix A
Company: Frontier Savings and Loan
Appendix A
Company: Vancouver Federal Savings and Loan
Service, In General: |
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Employees who were employed by Vancouver Federal Savings and Loan at the time it was acquired by the Company on August 1, 1991 shall be credited with Service for service performed with Vancouver Federal Savings and Loan. |
Appendix A
Company: Sound Savings and Loan
Service, In General: |
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Employees who were employed by Sound Savings and Loan at the time it was acquired by the Company on January 1, 1992 shall be credited with Service for service performed with Sound Savings and Loan. |
Appendix A
Company: Great Northwest Bank
Service, In General: |
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Employees who were employed by Great Northwest Bank at the time it was acquired by the Company on April 1, 1992 shall be credited with Service for service performed with Great Northwest Bank. |
Appendix A
Company: Pioneer Savings Bank
Service, In General: |
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Employees who were employed by Pioneer Savings Bank at the time it was acquired by the Company on March 1, 1993 shall be credited with Service for service performed with Pioneer Savings Bank. |
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Treatment of Pioneer ESOP Participants |
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The Company acquired Pioneer Savings Bank and Pioneer merged into the Company as of March 1, 1993. As a result, the Company became the successor sponsor of the Pioneer Savings Bank Employee Stock Ownership Plan as amended and restated, generally effective as of January 1, 1998, (the “Pioneer ESOP”). The Company continued to maintain the Pioneer ESOP but has made no contributions to the Pioneer ESOP. Prior Pioneer Participants continued to accrue vesting service under the Pioneer ESOP for their service with the Company.
Effective October 1, 2003, each person who was entitled to a benefit under the Pioneer ESOP that had not been distributed in full as of September 30, 2003 (a “Prior Pioneer Participant”) became an Inactive Participant under Section 2.28 of the Plan only with respect to their ESOP Account attributable to the Pioneer ESOP.
As of October 1, 2003, the Account of each Prior Pioneer Participant was credited with an amount equal to the benefit under the Pioneer ESOP as of September 30, 2003. Amounts credited to Participant Accounts constitute contributions to the ESOP, and shall remain part of the ESOP until the Participants elect to transfer the funds to a fund other than the Company Stock Fund. Each Participant who was a Prior Pioneer Participant, who became a Participant in the Plan effective |
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October 1, 2003, shall be fully vested in the amount attributable to the Pioneer ESOP in his Company Stock Fund. |
Appendix A
Company: Pacific First Financial Corporation, Pacific First Bank, a Federal Savings Bank or their affiliates (“Pacific First”)
Service, In General: |
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Employees who were employed by Pacific First and became Employees in connection with the acquisition of Pacific First by the Company on April 1, 1993, shall be credited with Service for service performed with Pacific First. |
Appendix A
Company: Great Western Bank
Service, In General: |
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Employees, who were employed by Great Western Bank at the time it was acquired by Pacific First, shall be credited with Service for service performed with Great Western Bank. |
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Participant Loans: |
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Acquired Participant Loans subject to Section 7.4(d).
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Appendix A
Company: Tri-City Cosmopolitan Travel Services, Inc.
Service, In General: |
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Employees who were employed by Tri-City Cosmopolitan Travel Services, Inc. at the time it was acquired by Mutual Travel, Inc. on November 15, 1993 shall, effective January 1, 1994, be credited with Service for service performed with Tri-City Cosmopolitan Travel Services, Inc. |
Appendix A
Company: Global Express Travel
Service, In General: |
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Employees who were employed by Global Express Travel at the time it was acquired by Mutual Travel, Inc. on October 1, 1993 shall be credited with Service for service performed with Global Express Travel. |
Appendix A
Company: Summit Savings and Loan
Service, In General: |
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Employees who were employed by Summit Savings and Loan at the time it was acquired by the Company on November 15, 1994, and who are employed by an Employer on November 15, 1995, shall be credited with Service for service performed with Summit Savings and Loan that is in addition to Service credited for Eligibility for Participation below. |
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Eligibility for Participation Service: |
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Employees who were employed by Summit Savings and Loan at the time it was acquired by the Company on November 15, 1994, shall be credited with Service for service performed with Summit Savings and Loan. |
Appendix A
Company: Olympus Savings Bank
Olympus Capital Corporation
Service, In General: |
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Employees who were employed by Olympus Capital Corporation, or its affiliates, at the time it was acquired by an affiliate of the Company on April 28, 1995, and who are employed by an Employer on April 29, 1996, shall be credited with Service for service performed with Olympus Capital Corporation or its affiliates. |
Appendix A
Company: Enterprise Bank
Service, In General: |
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Employees who were employed by Enterprise Bank at the time it was acquired by the Company on August 29, 1995, and who continue to be employed by an Employer thereafter, shall be credited with Service for service performed with Enterprise Bank. |
Appendix A
Company: Western Bank
Service, In General: |
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Employees who were employed by Western Bank at the time it was acquired by the Company on February 1, 1996 shall be credited with Service for services performed with Western Bank. |
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Participant Loans: |
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Acquired Participant Loans subject to Section 7.4(d).
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Appendix A
Company: Utah Federal Savings Bank
Service, In General: |
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Employees who were employed by Utah Federal Savings Bank at the time it was acquired by the Company or by its affiliate shall be credited with Service for service performed with Utah Federal Savings Bank. |
Appendix A
Company: American Savings Bank, FA
Service, In General: |
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Employees who were employed by American Savings Bank, F.A. at the time it was acquired by the Company or by its affiliate shall be credited with up to one year of Service for service with American Savings Bank, F.A. |
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Vesting: |
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Effective December 31, 2003 the American Savings Bank 401(k) Employer Matching account shall be 100% vested. |
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Participant Loans: |
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Acquired Participant Loans subject to Section 7.4(d). |
Appendix A
Company: United Western Financial Group, Inc.
Service, In General: |
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Employees who were employed by United Western Financial Group, Inc. at the time it was acquired by the Company or by its affiliate shall be credited with Service for service performed with United Western Financial Group, Inc. or its affiliates. |
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Years of Vesting Service |
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Percent Vested |
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Less than 3 |
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0 |
% |
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3 or more years |
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100 |
% |
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Effective December 31, 2003, the United Western Financial Group, Inc. 401(k) Profit Sharing account shall be 100% vested. |
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Participant Loans: |
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Acquired Participant Loans subject to Section 7.4(d) |
Appendix A
Company: Great Western Financial Corporation and
Great Western Financial Services Corp.
Vesting: |
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The PAYSOP Account is 100% vested.
Effective December 31, 2003, the Great Western Employee Savings Incentive Plan (ESIP) Employer Matching account shall be 100% vested. |
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Participant Loans: |
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Not Applicable |
Appendix A
Company: H. F. Ahmanson & Company
Service, In General: |
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Employees hired by the Company on or after July 21, 1998 and who were employed by H. F. Ahmanson and Company or one of its affiliates immediately prior to such hire shall be credited with Service for service performed with H. F. Ahmanson or its affiliates. |
Eligibility for Participation Service |
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Vesting: |
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The Coast Match Account and the HSB/Coast Rollover Account shall be 100% Vested
Effective December 31, 2003, the H.F. Ahmanson 401(k) Employer Matching Account shall be 100% vested. |
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Participant Loans: |
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Acquired Participant Loans subject to Section 7.4(d) |
Appendix A
Company: Peoples Security Finance Company, Inc. (“Peoples”)
Eligibility for Participation Service |
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Employees who were hired by the Company in connection with its purchase of assets of Peoples and who were employed by Peoples or one of its affiliates immediately prior to such hire shall be credited with Service for up to one year of service performed with Peoples or its affiliates. |
Appendix A
Company: Alta Residential Mortgage, Inc. (“Alta”)
Service, In General: |
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Employees who were employed by Alta at the time it was acquired by the Company shall be credited with Service for service performed with Alta or its affiliates. |
Appendix A
Company: Long Beach Mortgage Company
Service, In General: |
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Employees who were employed by Long Beach Mortgage Company at the time it was acquired by the Company shall be credited with Service for service performed with Long Beach Mortgage Company. |
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Vesting: |
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Effective December 31, 2003 the Long Beach Mortgage Company 401(k) Employer Matching Account and the Long Beach Mortgage Company 401(k) Pre-98 Employer Matching Account shall be 100% vested: |
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Participant Loans: |
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Acquired Participant Loans subject to Section 7.4(d). |
Company: PNC Mortgage Corp. of America
and a subsidiary of PNC Bank, National Association (“PNC”)
Service, In General: |
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Employees who were employed by a subsidiary of PNC Bank, National Association (“PNC”), as of January 31, 2001 when such subsidiary was acquired by the Company and who were employed by the Company upon the closing of such acquisitions shall be credited with Service for service with PNC. |
Appendix A
Company: Bank United Corp.
Service, In General: |
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Employees who were employed by Bank United Corp. or one of its affiliates at the time that it was acquired by the Company or by one of its affiliates shall, after April 30, 2001, be credited with Service for service with Bank United Corp. |
Eligibility for Participation Service |
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Vesting: |
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Effective December 31, 2003, the Bank United 401(k) Employer Match Account shall be 100% vested. |
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Participant Loans: |
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Acquired Participant Loans subject to Section 7.4(d) |
Appendix A
Company: Fleet Mortgage Corp.
Service, In General: |
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Employees who were employed by Fleet Mortgage Corp. at the time it was acquired by the Company or by one of its affiliates and who continue employment with the Company, shall, after May 31, 2001, be credited with Service for service with Fleet Mortgage Corp. or its affiliates. |
Appendix A
Company: Dime Bancorp, Inc.
Service, In General: |
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Employees who were employed by Dime Bancorp, Inc. at the time that it was acquired by the Company of by one of its affiliates or subsidiaries and who continue employment with the Company, shall, after March 31, 2002, be credited with Service for service with Dime Bancorp, Inc. or its affiliates or subsidiaries. |
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Eligibility for Participation Service |
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Not Applicable |
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Vesting: |
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Each Employee who has one or more accounts under the Plan attributable to such Employee’s participation in a defined contribution plan maintained by Dime Bancorp, Inc. shall be vested in such account in accordance with the vesting provisions set forth in Article VII of the |
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Retirement 401(k) Investment Plan of Dime Bancorp, Inc., as amended. |
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Participant Loans: |
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Acquired Participant Loans subject to Section 7.4(d). |
Appendix A
Company: HomeSide Lending, Inc.
Service, In General: |
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Employees who were employed by HomeSide Lending, Inc. at the time that certain of its assets were acquired by the Company or by one of its affiliates or subsidiaries and who continue employment with the Company, shall, after June 30, 2002, be credited with Service for service with HomeSide Lending, Inc. or its affiliates or subsidiaries. |
Appendix A
Company: Providian Financial Corporation and Providian National Bank
Entry Date |
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Eligible Employees who on September 30, 2005 were employed by Providian Financial Corporation, Providian National Bank or any affiliates or subsidiaries thereof and who on October 1, 2005 became employed by the Employer may first enter the Plan on April 1, 2006. |
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Service, In General: |
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Employees who on September 30, 2005 were employed by Providian Financial Corporation, Providian National Bank or any affiliate or subsidiary thereof and who on October 1, 2005 became employed by the Employer shall, after April 1, 2006, be credited with Service for service with Providian Financial Corporation, Providian National Bank or their affiliates or subsidiaries. |
Exhibit 10.9
WASHINGTON MUTUAL, INC.
SUPPLEMENTAL EMPLOYEES’ RETIREMENT PLAN
Amended and Restated
Effective July 20, 2004
WASHINGTON MUTUAL, INC.
SUPPLEMENTAL EMLOYEES’ RETIREMENT PLAN
Effective July 20, 2004
TABLE OF CONTENTS
PREAMBLE |
4 |
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ARTICLE I |
NATURE OF PLAN |
4 |
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1.1 |
PURPOSE |
4 |
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1.2 |
TOP HAT PLAN AND EXCESS BENEFITS |
4 |
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1.3 |
UNFUNDED PLAN |
4 |
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ARTICLE II |
DEFINITIONS AND CONSTRUCTION |
5 |
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2.1 |
ACCOUNTS |
5 |
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2.2 |
BENEFICIARY |
5 |
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2.3 |
CODE |
5 |
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2.4 |
COMMITTEE |
6 |
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2.5 |
COMPANY |
6 |
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2.6 |
COMPENSATION |
6 |
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2.7 |
DISABLED OR DISABILITY |
6 |
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2.8 |
ELIGIBLE EMPLOYEE |
6 |
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2.9 |
EMPLOYEE |
6 |
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2.10 |
EMPLOYER |
6 |
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2.11 |
ERISA |
6 |
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2.12 |
FORMER PARTICIPANT |
6 |
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2.13 |
HUMAN RESOURCES COMMITTEE |
6 |
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2.14 |
INTEREST RATE |
6 |
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2.15 |
NORMAL RETIREMENT AGE |
6 |
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2.16 |
PARTICIPANT |
7 |
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2.17 |
PENSION PLAN |
7 |
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2.18 |
PLAN |
7 |
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2.19 |
PLAN YEAR |
7 |
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2.20 |
RELATED EMPLOYER |
7 |
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2.21 |
RETIREMENT PLANS |
7 |
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2.22 |
SAVINGS PLAN |
7 |
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2.23 |
YEAR OF VESTING SERVICE |
7 |
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ARTICLE III |
BENEFITS |
8 |
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3.1 |
PARTICIPANT’S ACCOUNTS |
8 |
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3.2 |
BENEFITS CREDITED TO ACCOUNTS |
8 |
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3.3 |
INTEREST CREDITED TO ACCOUNTS |
8 |
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ARTICLE IV |
PAYMENT OF BENEFITS |
9 |
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4.1 |
PAYMENT |
9 |
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4.2 |
DETERMENTATION OF NONFORFEITABLE BENEFITS |
9 |
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4.3 |
UPON DEATH OF PARTICIPANT |
10 |
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4.4 |
PAYMENT IN THE EVENT OF LEGAL DISABILITY |
10 |
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4.5 |
ACCOUNTS CHARGED |
10 |
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4.6 |
UNCLAIMED ACCOUNTS |
10 |
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4.7 |
RIGHT TO OFFSET FOR TAXES, OTHER OBLIGATIONS |
11 |
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ARTICLE V |
PLAN ADMINISTRATION COMMITTEE |
12 |
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5.1 |
APPOINTMENT |
12 |
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5.2 |
TERM |
12 |
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5.3 |
COMPENSATION |
12 |
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5.4 |
POWERS OF PLAN ADMINISTRATION COMMITTEE |
12 |
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5.5 |
MANNER OF ACTION |
13 |
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5.6 |
AUTHORIZED REPRESENTATIVE |
13 |
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5.7 |
INTERESTED MEMBER |
14 |
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5.8 |
INDEMNITY |
14 |
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ARTICLE VI |
PARTICIPANT ADMINISTRATIVE PROVISIONS |
15 |
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6.1 |
BENEFICIARY DESIGNATION |
15 |
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6.2 |
PERSONAL DATA TO PLAN ADMINISTRATION COMMITTEE |
15 |
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6.3 |
ADDRESS FOR NOTIFICATION |
15 |
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6.4 |
PLACE OF PAYMENT AND PROOF OF CONTINUED ELIGIBILITY |
15 |
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6.5 |
ASSIGNMENT OR ALIENATION |
16 |
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6.6 |
INFORMATION AVAILABLE |
16 |
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6.7 |
BENEFICIARY’S RIGHT TO INFORMATION |
16 |
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6.8 |
CLAIMS PROCEDURE |
16 |
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6.9 |
APPEAL PROCEDURE FOR DENIAL OF BENEFITS |
16 |
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6.10 |
NO RIGHTS IMPLIED |
17 |
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ARTICLE VII |
AMENDMENT AND TERMINATION |
18 |
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7.1 |
AMENDMENT |
18 |
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7.2 |
TERMINATION |
18 |
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ARTICLE VIII |
MISCELLANEOUS |
19 |
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8.1 |
EXECUTION OF RECEIPTS AND RELEASES |
19 |
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8.2 |
EMPLOYER RECORDS |
19 |
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8.3 |
INTERPRETATIONS AND ADJUSTMENTS |
19 |
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8.4 |
EVIDENCE |
19 |
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8.5 |
SEVERABILITY |
19 |
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8.6 |
NOTICE |
19 |
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8.7 |
WAIVER OF NOTICE |
19 |
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8.8 |
SUCCESSORS |
19 |
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8.9 |
HEADINGS |
20 |
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8.10 |
GOVERNING LAW |
20 |
WASHINGTON MUTUAL, INC.
SUPPLEMENTAL EMPLOYEES’ RETIREMENT PLAN
Effective July 20, 2004
PREAMBLE
Washington Mutual Bank originally established this plan to provide benefits to certain management and highly compensated employees whose contributions to the Company’s qualified retirement plans were limited by Internal Revenue Code Section 401(a)(17) beginning on January 1, 1994. Washington Mutual, Inc. became the successor sponsor of the Plan. The Plan is hereby amended and restated effective July 20, 2004 as follows:
ARTICLE I
NATURE OF PLAN
1.1 Purpose . The purpose of this Plan is to provide retirement benefits for certain key employees of the Company and its affiliates that supplement the benefits accrued under the WaMu Pension Plan.
1.2 Top Hat Plan and Excess Benefits . The Plan is an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of management or highly compensated employees (within the meaning of sections 201(2), 301(a)(3), and 401(a)(1) of ERISA), and is intended to be exempt from Parts 2, 3, and 4 of ERISA.
1.3 Unfunded Plan . This Plan is established as an unfunded plan of deferred compensation. The compensation that is payable hereunder and interest that accrues thereon are represented solely by bookkeeping entries on accounts maintained by the Plan Administration Committee. No funds are held in trust or otherwise segregated for the sole purpose of paying Plan benefits. All Plan benefits are payable solely from the general assets of the Company. The Company may from time to time reserve assets in a general account or grantor trust owned by the Company for the purpose of paying liabilities that are accrued under this Plan. Participants and Beneficiaries shall have no legal nor equitable rights, interest or claims in any specific collateral, property or assets of the Company, but shall be general unsecured creditors of the Company until benefits are paid hereunder.
End of Article I
4
ARTICLE II
DEFINITIONS AND CONSTRUCTION
For the purpose of this Plan, the following definitions shall apply unless the context requires otherwise. Words used in the masculine gender shall apply to the feminine, where applicable, and wherever the context of the Plan dictates, the plural shall be read as the singular and the singular as the plural. The words “Article” or “Section” in this Plan shall refer to an Article or Section of this Plan unless specifically stated otherwise. Compounds of the word “here,” such as “herein” and “hereof” shall be construed to refer to another provision of this Plan, unless otherwise specified or required by the context. In determining the time within which an event or action is to take place for purposes of the Plan, no fraction of a day shall be considered, and any act, the performance of which would fall on a Saturday, Sunday, holiday or other non-business day, may be performed on the next following business day.
2.1 Accounts . The separate bookkeeping records maintained to record the benefits of a Participant earned under the Plan which include the following or any others that are established by the Plan Administration Committee.
(a) “ Pension Account ” shall mean the Account reflecting benefits credited to a Participant hereunder that are earned with reference to the WaMu Pension Plan (or its predecessor), together with earnings, gains and losses credited thereto.
(b) “ Savings Account ” shall mean the Account reflecting benefits credited to a Participant hereunder that are earned with reference to the WaMu Savings Plan (or its predecessor), together with earnings, gains and losses credited thereto.
2.2 Beneficiary . Any person or fiduciary designated by a Participant who is or may become entitled to a benefit under the Plan following the death of the Participant; provided, that, in the case of a married Participant, the Participant’s Beneficiary shall be the Participant’s surviving spouse unless the Participant’s spouse (i) consents in writing to the designation of another party as Beneficiary of all or a part of the benefit to which the Participant may become entitled under the Plan, (ii) such election designates a Beneficiary which may not be changed without spousal consent (or the consent of the spouse expressly permits designations by the Participant without any requirement of further spousal consent), (iii) the spouse’s consent acknowledges the effect of such election, and (iv) such consent is witnessed by a notary public or a member of the Plan Administration Committee. Such spousal consent shall not be required if it is established to the satisfaction of the Plan Administration Committee that such consent cannot be obtained because the spouse cannot be located or because of such other circumstances as the Secretary of the Treasury may prescribe by regulations. Any consent by a spouse hereunder shall be effective only with respect to that spouse.
2.3 Code. The Internal Revenue Code of 1986, as amended.
2.4 Committee . The Plan Administration Committee, as it is appointed from time to time by the Human Resources Committee pursuant to Article V.
2.5 Company. Washington Mutual, Inc. or any successor thereto.
2.6 Compensation . A Participant’s compensation, determined according to the definition of “compensation” under the Pension Plan for the Plan Year, without regard to the limitations of section 401(a)(17) of the Code contained in the Pension Plan, that is actually paid or made available to the Participant during such year, less the maximum amount of compensation that can be considered under section 401(a)(17)(A) of the Code, as adjusted by section 401(a)(17)(B) of the Code.
2.7 Disabled or Disability. A Participant is Disabled when he is determined to be disabled under the terms of the Pension Plan.
2.8 Eligible Employee . An Employee who is in salary levels 1-5 or who is designated as eligible by the Committee (whether individually or by class), in its discretion.
2.9 Employee. Any employee of an Employer; specifically excluding, however, a person who is a nonresident alien who receives no earned income that constitutes income from sources within the United States.
2.10 Employer. The Company, Washington Mutual Bank, Washington Mutual Bank fsb, Washington Mutual Life Insurance Company, Murphey Favre, Inc., Murphey Favre Securities Services, Inc., Composite Research & Management Co., and Washington Mutual Insurance Services, Inc. The term Employer also includes any Related Employer from time to time designated by the Committee as an Employer.
2.11 ERISA. The Employee Retirement Income Security Act of 1974, as amended.
2.12 Former Participant. Any individual, other then a Re-Employed Employee, who has been a Participant, but who has terminated employment, and who has not yet received the entire benefit to which he is entitled under the Plan.
2.13 Human Resources Committee . The Human Resources Committee of the Board of Directors of the Company.
2.14 Interest Rate . The rate at which interest is credited to Participants Accounts under the Pension Plan for the Plan Year.
2.15 Normal Retirement Age. The first day of the month that coincides with or immediately precedes the date the Participant attains age 65.
2.16 Participant. An Eligible Employee who is eligible for benefits under any of the Retirement Plans and who the Committee has identified as a Participant hereunder, including a Former Participant.
2.17 Pension Plan. The WaMu Pension Plan, or its predecessor, the Washington Mutual, Inc. Cash Balance Pension Plan.
2.18 Plan. The Washington Mutual, Inc Supplemental Employees’ Retirement Plan as embodied herein and as amended from time to time.
2.19 Plan Year. The fiscal year of the Plan, which is the period from January 1 through December 31 of each year.
2.20 Related Employer. Any business entity that is, along with an Employer, (i) a member of a controlled group of corporations (as defined by section 414(b) of the Code), (ii) a member of a group of trades or businesses (whether or not incorporated) that are under common control (as defined by section 414(c) of the Code), (iii) a member of an affiliated service group (as defined by section 414(m) of the Code), or (iv) any other entity described by Treasury Regulations promulgated pursuant to section 414(o) of the Code.
2.21 Retirement Plans. T he WaMu Pension Plan and the WaMu Savings Plan.
2.22 Savings Plan. The WaMu Savings Plan, or its predecessor, the Washington Mutual, Inc. Retirement Savings and Investment Plan.
2.23 Year of Vesting Service. Each Plan Year in which a Participant earns a year of vesting service under the Pension Plan. A Year of Vesting Service will also be credited for each year of vesting service earned under the Pension Plan prior to the time the Participant was eligible to participate in this Plan.
End of Article II
ARTICLE III
Accounts and Credits
3.1 Participant’s Accounts. The Committee shall establish for each Participant one or more Accounts described in Section 2.1, as appropriate, to which shall be allocated the proper benefit accruals hereunder, together with interest credited thereto and less the distributions therefrom.
3.2 Benefits Credited to Accounts. For each Plan Year that a Participant earns a Year of Vesting Service and remains an Employee on the last day of the Plan Year, the following amounts shall be credited to his appropriate Accounts:
(a) Pension Account. A percentage of each Participant’s Compensation for the Plan Year equal to the benefit accrual percentage under the Pension Plan for that Plan Year.
(b) Savings Account. The profit sharing contributions under the Savings Plan, if any, that would have been allocated to the Participant’s accounts thereunder but for the limitations of section 401(a)(17) of the Code. This credit shall not include any matching contributions that are based on salary deferral elections of the Participant under the Savings Plan.
3.3 Interest Credited to Accounts. On a regular basis, and at least annually, each Participant’s Accounts shall be credited with an amount of interest payable on the accumulated amounts previously credited to the Accounts at the Interest Rate for the Plan Year. For purposes of this Section 3.3, Interest Rate shall be the yield on 30-year Treasury Constant Maturities, determined for each Plan Year on the basis of the rate announced in the prior year.
End of Article III
ARTICLE IV
PAYMENT OF BENEFITS
4.1. Payment . A Participant shall receive payment of the nonforfeitable balance of his Accounts as follows:
(a) Payment will commence as soon as administratively possible after termination of employment with the Company and all Related Employers. Notwithstanding the preceding, if the Participant is a Key Employee as set forth in Section 409A of the Code, payments shall commence no earlier than 6 months after termination of employment.
(b) In general, a Participant shall receive payment of the nonforfeitable balance in his Accounts in the form of a single lump sum payment as soon as administratively feasible after the Payment Commencement Date. However, if the Participant meets the requirements set forth in subparagraph (i) below, he may elect another form of payment pursuant to subparagraph (ii) below. In the absence of any election, payment will be made in the form of a lump sum.
(i) To be eligible to make an election to receive payment in a form set forth in 4.1(b)(ii), a Participant must meet each of the following requirements:
A. The balance in his account on the Payment Commencement Date must exceed $100,000; and
B. The election must be made at least twelve (12) months prior to the Payment Commencement Date.
(ii) A Participant who meets the requirements of Section 4.1(b)(i) may elect to receive payment of his nonforfeitable balance in a series of installments over a period of up to ten (10) years. If a Participant makes an election pursuant to this Section 4.1(b)(ii), such election shall be null and void if the balance of his Accounts does not exceed $100,000 at the time of termination.
4.2. Determination of Nonforfeitable Benefits. A Participant’s Accounts shall be fully nonforfeitable if termination of employment occurs as a result of death or Disability or at any time following Normal Retirement Age. Upon termination of employment for any other reason, the nonforfeitable percentage of a Participant’s Accounts shall be based upon such Participant’s Years of Vesting Service and shall be determined in accordance with this Section 4.2. Any portion of a Participant’s Accounts that is not nonforfeitable shall be forfeited at the time benefit payments commence.
If Participant has not engaged in dishonesty as defined in this Section 4.2, his nonforfeitable percentage shall be the same percentage used to determine his vesting under the Pension Plan. The Account of a Participant who has engaged in dishonesty shall be completely forfeited. For purposes of this Section, dishonesty means that the Participant has engaged in acts of fraud, embezzlement, theft or any other crime of moral turpitude or has otherwise been dishonest in his or her relationship with the Employer (without necessity of criminal proceedings being initiated) and the Participant’s employment terminated by either discharge or resignation, all as determined by the Plan Administration Committee.
4.3. Upon Death of Participant. Upon the death of a Participant, his entire balance will be paid to his Beneficiary, as determined under Section 6, in a lump sum as soon as administratively feasible, provided that the balance in his Accounts immediately after his death is less than $100,000. If his balance immediately after his death is $100,000 or more, the balance will be paid in three annual installments.
4.4. Payment in the Event of Legal Disability. Payments to any Participant, Former Participant, or Beneficiary shall be made to the recipient entitled thereto in person or upon his personal receipt, in form satisfactory to the Committee, except when the recipient entitled thereto shall be under legal disability, or, in the sole judgment of the Committee, shall otherwise be unable to apply such payment in furtherance of his own interest and advantage. The Committee may, in such event, in its sole discretion, direct all or any portion of such payments to be made in any one or more of the following ways:
(a) To such person directly;
(b) To the guardian of his person or his estate;
(c) To a relative or friend of such person, to be expended for his benefit; or
(d) To a custodian for such person under any Uniform Gifts to Minors Act.
The decision of the Committee, in each case, will be final, binding, and conclusive upon all persons ever interested hereunder. The Committee shall not be obliged to see to the proper application or expenditure of any payment so made. Any payment made pursuant to the power herein conferred upon the Committee shall operate as a complete discharge of all obligations of the Employer and the Committee, to the extent of the distributions so made.
4.5. Accounts Charged. The Committee shall charge all distributions made to a Participant or to his Beneficiary from his Accounts against the Accounts of the Participant when made.
4.6. Unclaimed Accounts. Neither the Employer nor the Plan Administration Committee shall be obliged to search for or ascertain the whereabouts of any Participant or Beneficiary. The Committee, by certified or registered mail addressed to his last known
address of record with the Committee or Employer, shall notify any Participant or Beneficiary that he is entitled to a distribution under this Plan, and the notice shall state the provisions of this Section. If Payment Commencement Date has arrived, and the Participant or the Beneficiary fails to claim his benefits or make his whereabouts known in writing to the Committee by the date that is immediately prior to three years (adjusted according to the abandonment period of the escheat laws of the applicable state) after the date of notification, the Participant’s Accounts shall be forfeited.
4.7. Right To Offset For Taxes, Other Obligations . 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. In addition, if a Participant becomes entitled to a distribution under the Plan, and if at such time such Participant has outstanding any debt, obligation or other liability representing an amount owning to the Company, then the Company may offset such amount owning it against the amount of benefits otherwise distributable to the extent permitted by applicable law.
End of Article IV
ARTICLE V
PLAN ADMINISTRATION COMMITTEE
5.1. Appointment. The Plan Administration Committee has been appointed by the Company to administer the Plan and serves in such capacity at the pleasure of the board of directors of the Company. The board of directors of the Company may remove the Committee or appoint a successor committee at any time. If the Plan Administration Committee ceases to exist or is removed without the appointment of a replacement committee, the Company shall function as the Plan Administration Committee.
5.2. Term. Each member of the Committee shall serve until his or her successor is appointed. Any member of the Committee may be removed by the Company, with or without cause, which shall have the power to fill any vacancy which may occur. A member may resign upon written notice to the Company.
5.3. Compensation. The members of the Committee shall serve without compensation for services as such, but the Company shall pay all expenses of the members of the Committee.
5.4. Powers of Plan Administration Committee. The Committee shall have full and absolute discretion in the exercise of its powers hereunder. All exercises of power by the Committee hereunder shall be final, conclusive and binding on all interested parties, unless found by a court of competent jurisdiction, in a final judgment that is no longer subject to review or appeal, to be arbitrary and capricious. In addition to the power otherwise enumerated herein, the Committee shall have the following specific authority:
(a) To direct the administration of the Plan in accordance with the provisions herein set forth;
(b) To adopt rules of procedure and regulations necessary for the administration of the Plan that are not inconsistent with the terms of the Plan;
(c) To interpret and construe the provisions of the Plan and determine all questions with respect to rights of Employees, Participants, and Beneficiaries under the Plan, including but not limited to rights of eligibility of an Employee to participate in the Plan, the value of a Participant’s Accounts, and the nonforfeitable percentage of each Participant’s Accounts;
(d) To interpret and enforce the terms of the Plan and the rules and regulations it adopts;
(e) To review and render decisions with respect to a claim for, (or denial of a claim for) a benefit under the Plan;
(f) To furnish the Employer with information that the Employer may require for tax or other purposes;
(g) To engage the service of counsel (who may, if appropriate, be counsel for the Employer) and agents whom it may deem advisable to assist it with the performance of its duties;
(h) To prescribe procedures to be followed by distributes in obtaining benefits;
(i) To receive from the Employer and from Employees such information as shall be necessary for the proper administration of the Plan;
(j) To maintain, or cause to be maintained, separate Accounts in the name of each Participant;
(k) To select a secretary, who need not be a member of the Committee; and
(l) To interpret and construe the Plan; and
(m) To amend the Plan, but only for the following purposes:
(i) changes in the laws or regulations related to this Plan;
(ii) to clarify any provisions in the Plan or to correct any errors in the document;
(iii) to simplify administration or for administrative convenience; and
(iv) for any other reason, provided that no such amendment shall materially increase the Company’s liability or potential liability under this Plan.
5.5. Manner of Action. The decision of a majority of the members of the Plan Administration Committee appointed and qualified shall control. In case of a vacancy in the membership of the Committee, the remaining members may exercise any and all of the powers, authorities, duties, and discretion conferred upon the Committee. The Committee may, but need not, call or hold formal meetings. Any decision made or action taken pursuant to written approval of a majority of the then members shall be sufficient. The Committee shall maintain adequate records of its decisions.
5.6. Authorized Representative. The Committee may authorize any one of its members, or its secretary, to sign on its behalf any notices, directions, applications, certificates, consents, approvals, waivers, letters, or other documents.
5.7. Interested Member. No member of the Committee may decide or determine any matter concerning the distribution, nature, or method of settlement of his own benefits under the Plan unless there is only one person acting alone in the capacity as the Committee.
5.8. Indemnity. The Company shall indemnify and save harmless the Committee, and its members, and each of them, from and against any and all loss resulting from liability to which the Committee, or its members, may be subjected by reason of any act, conduct, or inaction (except willful or reckless misconduct), in their official capacities in the administration of the Plan, including all expenses reasonably incurred in their defense, in case the Company fails to provide such defense.
End of Article V
ARTICLE VI
PARTICIPANT ADMINISTRATIVE PROVISIONS
6.1 Beneficiary Designation. Each Participant may from time to time designate a Beneficiary to whom his Accounts shall be paid in the event of his death. The Committee shall prescribe the form for the designation of Beneficiary and, upon the Participant’s filing the form with the Committee, it shall revoke all designations filed prior to that date by the same Participant. A Participant may designate multiple and/or contingent Beneficiaries. If a Participant fails to name a Beneficiary, or if the Beneficiary named by a Participant predeceases him or is otherwise ineligible to be a Beneficiary, the Committee may direct that payment of a Participant’s Accounts be made to the person or persons in the following priority: (i) the Participant’s spouse at the time of death; (ii) if no surviving spouse, then to the Participant’s surviving children (including adopted children) in equal shares; (iii) if the Participant has no surviving children, then to the Participant’s surviving parents in equal shares; (iv) if the Participant has no surviving parents then to the Participant’s estate or such other individual or entity designated by the Committee, in its sole discretion, if no estate exists or it is otherwise impractical to make payment to the estate.
The Committee, in its sole discretion, shall determine to whom the payment shall be made under this Section.
6.2 Personal Data to Plan Administration Committee. Each Participant and Beneficiary must furnish to the Committee such evidence, data, or information as the Committee considers necessary or desirable for the purpose of administering the Plan. The provisions of this Plan are effective for the benefit of each Participant upon the condition precedent that each Participant will promptly furnish full, true, and complete evidence, data, and information when requested by the Committee, provided the Committee shall advise each Participant of the effect of his failure to comply with its request.
6.3 Address for Notification. Each Participant and each Beneficiary of a deceased Participant shall file with the Committee, in writing, such person’s post office address, and each subsequent change of such post office address. Any payment or distribution hereunder, and any communication addressed to a Participant or his Beneficiary, at the last address filed with the Committee, or if no address has been filed, then the last address indicated on the records of the Employer shall be deemed to have been delivered to the Participant or his Beneficiary on the date that such distribution or communication is deposited in the United States mail, postage prepaid.
6.4 Place of Payment and Proof of Continued Eligibility. Any check representing payment hereunder and any communication addressed to an Employee, a former Employee, a retired Employee, or a Beneficiary at his last address filed with the Committee, or if no such address has been filed, then at his last address as indicated on the records of the Employer, shall be deemed to have been delivered to such person on the date on which such check or communication is deposited in the United States mail. If the Committee, for any reason, is in doubt as to whether benefit payments are being received by the person entitled
thereto, it shall, by registered mail addressed to the person concerned, at his address last known to the Committee, notify such person that all unmailed and future retirement payments shall be henceforth withheld until he provides the Committee with evidence of his continued life and his proper mailing address.
6.5 Assignment or Alienation. Except as may be specified under a “qualified domestic relations order,” as defined in section 514(b)(7) of ERISA, no benefit payable under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary prior to actually being received by the person entitled to the benefit under the terms of the Plan. The Company shall not in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements, or torts of any person entitled to benefits hereunder.
6.6 Information Available. Any Participant or Beneficiary may examine copies of this Plan or any other instrument under which the Plan was established or is operated. The Plan Administration committee will maintain all of the items listed in this Section in its office, or in such other place or places as he may designate from time to time for examination during reasonable business hours. Upon the written request of a Participant or Beneficiary, the Plan Administration Committee shall furnish him with a copy of any item listed in this Section. The Plan Administration Committee may make a reasonable charge to the requesting person for the copy so furnished.
6.7 Beneficiary’s Right to Information. A beneficiary’s right to (and the Committees’ duty to provide to the Beneficiary) information or data concerning the Plan shall not arise until the Beneficiary first becomes entitled to receive a benefit under the Plan.
6.8 Claims Procedure. Prior to or upon becoming entitled to receive a benefit hereunder, a Participant or Beneficiary shall file a claim for such benefit with the Committee at the time and in the manner prescribed thereby. However, the Committee may direct payment of a Participant’s or Beneficiary’s benefits hereunder without requiring the filing of a claim therefore, if the Committee has knowledge of such Participant’s or Beneficiary’s whereabouts.
6.9 Appeal Procedure for Denial of Benefits. The Committee shall provide adequate notice in writing to any Participant or to any Beneficiary (“Claimant”) whose claim for benefits under the Plan the Committee has denied.
(a) Such notice must be sent within 90 days of the date the claim is received by the Committee unless special circumstances require an extension of time for processing the claim. Such extension shall not exceed 90 days and no extension shall be allowed unless, within the initial 90 day period, the claimant is sent an extension notice indicating the special circumstances requiring the extension and specifying a date by which the Committee expects to render its decision.
(b) The Committee’s notice of denial to the Claimant shall set forth the following:
(1) The specific reason or reasons for the denial;
(2) Specific references to pertinent Plan provisions on which the Committee based its denial;
(3) A description of any additional material and information needed for the Claimant to perfect his or her claim and an explanation of why the material or information is needed;
(4) A statement that the Claimant may request a review upon written application to the Committee, review pertinent Plan documents, and submit issues and comments in writing. The notice must also state that any appeal of the Committee’s adverse determination must be made in writing to the Committee within 60 days after receipt of the Committee’s notice of denial of benefits. The notice must further advise the Claimant that failure to appeal the action to the Committee in writing within the 60-day period will render the Committee’s decision final, binding, and conclusive.
(5) The address of the Committee to which the Claimant may forward his or her appeal.
(c) If the Claimant should appeal to the Committee, the Claimant or a duly authorized representative, may submit, in writing, whatever issues and comments the Claimant deems pertinent. The Committee shall re-examine all facts related to the appeal and make a final determination as to whether the denial of benefits is justified under the circumstances. The Committee shall advise the Claimant in writing of its decision on the appeal, the specific reasons for the decision, and the specific Plan provisions on which the decision is based. The notice of the decision shall be given within 60 days of the Claimant’s written request for review, unless special circumstances (such as a hearing) would make the rendering of a decision within the 60 day period infeasible, but in no event shall the Committee render a decision regarding the denial of a claim for benefits later than 120 days after its receipt of a request for review. If an extension of time for review is required because of special circumstances, written notice of the extension shall be furnished to the claimant prior to the date the extension period commences.
6.10 No Rights Implied . Nothing contained in this Plan, or in any modification or amendment to the Plan, shall give any Employee, Participant, or any Beneficiary any right to continue employment, or any other legal or equitable right against an Employer, or Employee of the Employer, or against their agents, except as expressly provided by the Plan.
End of Article VI
ARTICLE VII
AMENDMENT AND TERMINATION
7.1 Amendment. The Company shall have the right at any time, without prior notice and without cause, to amend or terminate the Plan by action of its board of directors or by action of the Human Resources Committee. The Company shall make all amendments in writing. Each amendment shall state the date to which it is either retroactively or prospectively effective.
7.2 Termination . Upon termination of the Plan, the Company shall pay all benefits credited to Participants pursuant to Section 4.1.
End of Article VII
ARTICLE VIII
MISCELLANEOUS
8.1 Execution of Receipts and Releases. Any payment to any Participant, or to legal representative or Beneficiary, in accordance with the provisions of the Plan, shall to the extent thereof be in full satisfaction of all claims hereunder against the Plan. The Committee may require such Participant, legal representative, or Beneficiary, as a condition precedent to such payment, to execute a receipt and release therefore in such form as it shall determine.
8.2 Employer Records . Each Employer shall, upon request or as may be specifically required hereunder, furnish or cause to be furnished, all of the information or documentation which is necessary or required by the Committee to perform its duties and functions under the Plan. Records of an Employer as to an Employee’s or Participant’s period of employment, termination of employment and the reason therefore, leaves of absence, reemployment, and Compensation will be conclusive on all persons, unless determined by the Committee to be incorrect.
8.3 Interpretations and Adjustments. To the extent permitted by law, an interpretation of the Plan and a decision on any matter within the Committee’s discretion made in good faith is binding on all persons. A misstatement of other mistake of fact shall be corrected when it becomes known and the person responsible shall make such adjustment on account thereof as he considers equitable and practicable.
8.4 Evidence . Evidence required of anyone under the Plan may be by certificate, affidavit, document, or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties. Any action required of the Employer may be by resolution of its board of directors or by any person authorized to act on behalf of the Employer.
8.5 Severability. In the event any provision of the Plan shall be held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions of the Plan, but shall be fully severable and the Plan shall be construed and enforced as if the illegal or invalid provision had never been included herein.
8.6 Notice . Any notice required to be given herein by an Employer or the Committee, shall be deemed delivered, when (a) personally delivered, or (b) placed in the United States mails, in an envelope addressed to the last address of record the person to whom the notice is given.
8.7 Waiver of Notice. Any person entitled to notice under the Plan may waive the notice.
8.8 Successors . The Plan shall be binding upon all persons entitled to benefits under the Plan, their respective heirs and legal representatives, upon each Employer, its successors and assigns, and upon the Plan Administration Committee, and its successors.
8.9 Headings . The titles and headings of Articles and Sections are included for convenience of reference only and are not to be considered in construction of the provisions hereof.
8.10 Governing Law. All questions arising with respect to the provisions of this Agreement shall be determined by application of the laws of the State of Washington except to the extent Washington law is preempted by federal law.
End of Article VII
IN WITNESS WHEREOF, the undersigned officer of Washington Mutual, Inc. has executed this instrument as of May , 2005.
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WASHINGTON MUTUAL, INC. |
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By: |
/s/ Daryl D. David |
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Its: Executive Vice President – Human Resources |
WASHINGTON MUTUAL, INC.
Supplemental Employees’ Retirement Plan
Amendment No. 1
THIS AMENDMENT to the Washington Mutual, Inc. Supplemental Employees’ Retirement Plan (“Plan”) is made by Washington Mutual, Inc. (“Company”).
WHEREAS , the Company maintains the Plan for the benefit of its eligible employees; and
WHEREAS , effective October 1, 2005, Providian Financial Corporation (“Providian”) will merge with and into the Company, and Providian National Bank (“PNB”) will merge with and into Washington Mutual Bank, FA (“WMB”); and
WHEREAS , employees of Providian who become employees of the Company and employees of PNB who become employees of WMB on October 1, 2005 as a result of the company mergers will not be moved to the Company payroll system until April 1, 2006; and
WHEREAS , until April 1, 2006, the former Providian and PNB employees will continue to participate in any supplemental nonqualified retirement plans that were sponsored by Providian and PNB prior to the company mergers; and
WHEREAS , the Company would like to amend the Plan to delay the Plan entry date for the former employees of Providian and PNB to April 1, 2006.
NOW, THEREFORE , effective September 30, 2005, the Plan is hereby amended as follows:
Section 2.8 of the Plan, Eligible Employees, is amended by adding the following sentence to the end of that section:
Notwithstanding the foregoing Eligible Employees who on September 30, 2005 were employed by Providian Financial Corporation, Providian National Bank or any affiliates or subsidiaries thereof and who on October 1, 2005 became employed by the Employer may first enter the Plan on April 1, 2006.
This amendment is adopted and executed this 30th day of September, 2005.
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WASHINGTON MUTUAL, INC. |
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By: |
/s/ Daryl D. David |
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Daryl D. David |
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Executive V.P. – Human Resources |
Exhibit 10.10
WASHINGTON MUTUAL, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT ACCUMULATION PLAN
(Amended and Restated)
Effective January 1, 2004
WASHINGTON MUTUAL, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT ACCUMULATION PLAN
Effective January 1, 2004
TABLE OF CONTENTS
ARTICLE I |
NATURE OF PLAN |
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5 |
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1.1 |
PURPOSE |
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5 |
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1.2 |
TOP HAT PLAN |
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5 |
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1.3 |
UNFUNDED PLAN |
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5 |
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ARTICLE II |
DEFINITIONS AND CONSTRUCTION |
|
6 |
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2.1 |
ACCOUNTS |
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6 |
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2.2 |
ANNUAL LEADERSHIP BONUS |
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6 |
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2.3 |
BENEFICIARY |
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6 |
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2.4 |
CODE |
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6 |
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2.5 |
COMPANY |
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6 |
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2.6 |
COMPENSATION |
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7 |
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2.7 |
COMMITTEE |
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7 |
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2.8 |
DISABLED OR DISABILITY |
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7 |
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2.9 |
ELIGIBLE EMPLOYEE |
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7 |
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2.10 |
EMPLOYEE |
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7 |
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2.11 |
EMPLOYER |
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7 |
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2.12 |
ERISA |
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7 |
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2.13 |
FORMER EMPLOYEE PARTICIPANT |
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7 |
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2.14 |
HUMAN RESOURCES COMMITTEE |
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7 |
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2.15 |
PARTICIPANT |
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7 |
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2.16 |
PENSION PLAN |
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7 |
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2.17 |
PLAN |
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7 |
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2.18 |
PLAN YEAR |
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8 |
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2.19 |
RELATED EMPLOYER |
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8 |
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2.20 |
YEAR OF EXECUTIVE SERVICE |
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8 |
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ARTICLE III |
BENEFITS |
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9 |
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3.1 |
PARTICIPANT’S ACCOUNTS |
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9 |
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3.2 |
BENEFITS CREDITED TO ACCOUNTS |
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9 |
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3.3 |
INTEREST CREDITED TO ACCOUNTS |
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9 |
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ARTICLE IV |
PAYMENT OF BENEFITS |
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11 |
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1
4.1 |
PAYMENT COMMENCEMENT DATE |
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11 |
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4.2 |
PAYMENT OPTIONS |
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11 |
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4.3 |
DETERMINATION OF NONFORFEITABLE BENEFITS |
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11 |
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4.4 |
UPON DEATH OF PARTICIPANT |
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12 |
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4.5 |
PAYMENT IN THE EVENT OF LEGAL DISABILITY |
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12 |
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4.6 |
ACCOUNTS CHARGED |
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12 |
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4.7 |
UNCLAIMED ACCOUNTS |
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13 |
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ARTICLE V |
PLAN ADMINISTRATION COMMITTEE |
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14 |
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5.1 |
APPOINTMENT |
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14 |
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5.2 |
TERM |
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14 |
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5.3 |
COMPENSATION |
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14 |
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5.4 |
POWERS OF PLAN ADMINISTRATION COMMITTEE |
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14 |
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5.5 |
ADJUSTMENTS |
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15 |
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5.6 |
MANNER OF ACTION |
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15 |
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5.7 |
AUTHORIZED REPRESENTATIVE |
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15 |
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5.8 |
INTERESTED MEMBER |
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15 |
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5.9 |
INDEMNITY |
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15 |
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ARTICLE VI |
PARTICIPANT ADMINISTRATIVE PROVISIONS |
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16 |
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6.1 |
BENEFICIARY DESIGNATION |
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16 |
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6.2 |
PERSONAL DATA TO PLAN ADMINISTRATION COMMITTEE |
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16 |
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6.3 |
ADDRESS FOR NOTIFICATION |
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16 |
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6.4 |
PLACE OF PAYMENT AND PROOF OF CONTINUED ELIGIBILITY |
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16 |
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6.5 |
ASSIGNMENT OR ALIENATION |
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17 |
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6.6 |
INFORMATION AVAILABLE |
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17 |
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6.7 |
BENEFICIARY’S RIGHT TO INFORMATION |
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17 |
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6.8 |
CLAIMS PROCEDURE |
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17 |
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6.9 |
APPEAL PROCEDURE FOR DENIAL OF BENEFITS |
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17 |
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6.10 |
NO RIGHTS IMPLIED |
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18 |
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6.11 |
RIGHT TO OFFSET FOR TAXES, OTHER OBLIGATIONS |
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18 |
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ARTICLE VII |
AMENDMENT AND TERMINATION |
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20 |
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7.1 |
AMENDMENT |
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20 |
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7.2 |
TERMINATION |
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20 |
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ARTICLE VIII |
MISCELLANEOUS |
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21 |
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8.1 |
EXECUTION OF RECEIPTS AND RELEASES |
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21 |
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8.2 |
EMPLOYER RECORDS |
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21 |
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8.3 |
EVIDENCE |
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21 |
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8.4 |
SEVERABILITY |
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21 |
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8.5 |
NOTICE |
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21 |
8.6 |
WAIVER OF NOTICE |
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21 |
8.7 |
SUCCESSORS |
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21 |
8.8 |
HEADINGS |
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22 |
8.9 |
GOVERNING LAW |
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22 |
WASHINGTON MUTUAL, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT ACCUMULATION PLAN
Effective January 1, 2004
PREAMBLE
The Supplemental Executive Retirement Accumulation Plan (“SERAP”) was established effective January 1, 1996 by the Compensation and Stock Option Committee of the Board of Directors of Washington Mutual, Inc. The purpose of the SERAP was to provide certain executives with retirement income to supplement the retirement income provided by the Company’s qualified retirement plans and the nonqualified plans for executives.
On October 19, 2004, the Human Resources Committee approved a new executive retirement plan (the “Executive Target Replacement Income Plan” or the “ETRIP”) for executives at levels 1, 2 and 3. As a result, effective January 1, 2004, executives at levels 1, 2, and 3 are no longer eligible to receive benefit credits under Section 3.2 of this Plan, but will be eligible for interest credits under Section 3.3 of the Plan on accrued balances in their Accounts.
The Human Resources Committee also approved changes to the formula used to determine benefit credits under Section 3.2 for level 4 and 5 employees who remain eligible for this Plan. The new formula will take into account executive service with the Company without regard to the Participant’s age.
ARTICLE I
NATURE OF PLAN
1.1 Purpose . The purpose of this Plan is to provide retirement benefits to certain executive employees of the Company and its affiliates that supplement the benefits accrued under the Retirement Plans.
1.2 Top Hat Plan . The Plan is an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of management or highly compensated employees (within the meaning of sections 201(2), 301(a)(3), and 401(a)(1) of ERISA), and is intended to be exempt from Parts 2, 3, and 4 of ERISA.
1.3 Unfunded Plan . This Plan is established as an unfunded plan of deferred compensation. The compensation that is payable hereunder and interest that accrues thereon are represented solely by bookkeeping entries on accounts maintained by the Plan Administration Committee. No funds are held in trust or otherwise segregated for the sole purpose of paying Plan benefits. All Plan benefits are payable solely from the general assets of the Company. Participants and Beneficiaries shall have no legal or equitable rights, interest or claims in any specific collateral, property or assets of the Company, but shall be general unsecured creditors of the Company until benefits are paid hereunder. The Company may from time to time reserve assets in a general account or grantor trust owned by the Company for the purpose paying liabilities that are accrued under this Plan.
End of Article I
ARTICLE II
DEFINITIONS AND CONSTRUCTION
For the purpose of this Plan, the following definitions shall apply unless the context requires otherwise. Words used in the masculine gender shall apply to the feminine, where applicable, and wherever the context of the Plan dictates, the plural shall be read as the singular and the singular as the plural. The words “Article” or “Section” in this Plan shall refer to an Article or Section of this Plan unless specifically stated otherwise. Compounds of the word “here,” such as “herein” and “hereof” shall be construed to refer to another provision of this Plan, unless otherwise specified or required by the context.
In determining the time within which an event or action is to take place for purposes of the Plan, no fraction of a day shall be considered, and any act, the performance of which would fall on a Saturday, Sunday, holiday observed by the Company, or other non-business day, may be performed on the next following business day.
2.1 Accounts . The separate bookkeeping records that are established and maintained by the Plan Administration Committee to record any amounts credited on behalf of each Participant under the terms of the Plan. A Participant’s Account shall only include the amounts actually credited thereto by the Committee.
2.2 Annual Leadership Bonus. The bonus paid under the Annual Leadership Bonus Plan. For purposes of this Plan, Annual Leadership Bonus shall also include annual bonuses paid by Washington Mutual Advisors, Inc. and any other annual bonuses that are approved for inclusion by the committee, in its discretion.
2.3 Beneficiary . Any person or fiduciary designated by a Participant who is or may become entitled to a benefit under the Plan following the death of the Participant; provided, that, in the case of a married Participant, the Participant’s Beneficiary shall be the Participant’s surviving spouse unless the Participant’s spouse (i) consents in writing to the designation of another party as Beneficiary of all or a part of the benefit to which the Participant may become entitled under the Plan, (ii) such election designates a Beneficiary which may not be changed without spousal consent (or the consent of the spouse expressly permits designations by the Participant without any requirement of further spousal consent), (iii) the spouse’s consent acknowledges the effect of such election, and (iv) such consent is witnessed by a notary public or a member of the Plan Administration Committee. Such spousal consent shall not be required if it is established to the satisfaction of the Plan Administration Committee that such consent cannot be obtained because the spouse cannot be located (and any other circumstances the Secretary of the Treasury may prescribe by regulations). Any consent by a spouse hereunder shall be effective only with respect to that spouse.
2.4 Code. The Internal Revenue Code of 1986, as amended.
2.5 Company. Washington Mutual, Inc. or any successor thereto.
2.6 Compensation . A Participant’s compensation, determined according to the definition of “compensation” under the Pension Plan for the Plan Year, without regard to the limitations of section 401(a)(17) of the Code contained in the Pension Plan, that is actually paid or made available to the Participant during such year, less the maximum amount of compensation that can be considered under section 401(a)(17)(A) of the Code, as adjusted by section 401(a)(17)(B) of the Code.
2.7 Committee. The Plan Administration Committee, as it is appointed from time to time by the Human Resources Committee pursuant to Article V.
2.8 Disabled or Disability. A Participant is Disabled when he is determined to be disabled under the terms of the WaMu Pension Plan.
2.9 Eligible Employee . Effective January 1, 2004, an Employee who is classified as a level 4 or level 5 employee. An Employee’s status as an Eligible Employee shall be determined separately for each Plan Year as of the end of the Plan Year. All other Employees are ineligible, provided that the Human Resources Committee, may, in its discretion, designate any other Employee as eligible and may designate any Employee who would otherwise be eligible as ineligible in any Plan Year.
2.10 Employee. Any employee of an Employer; specifically excluding, however, a person who is a nonresident alien who receives no earned income that constitutes income from sources within the United States.
2.11 Employer. The Company and any Related Employer designated by the Human Resources Committee from time to time whether explicit or implicit.
2.12 ERISA. The Employee Retirement Income Security Act of 1974, as amended.
2.13 Former Employee Participant. Any individual who is a Participant, but who has terminated employment, and who has not yet received the entire benefit to which he or she is entitled under the Plan, and any individual who was previously an Eligible Employee and who has become ineligible for any reason.
2.14 Human Resources Committee . The Human Resources Committee of the Board of Directors of the Company.
2.15 Participant. An individual who is or has been an Eligible Employee.
2.16 Pension Plan. The WaMu Pension Plan.
2.17 Plan. The Washington Mutual, Inc. Supplemental Executive Retirement Accumulation Plan as embodied herein and as amended from time to time.
2.18 Plan Year. The fiscal year of the Plan, which is the period from January 1 through December 31 of each year.
2.19 Related Employer. Any business entity that is, along with an Employer, (i) a member of a controlled group of corporations (as defined by section 414(b) of the Code), (ii) a member of a group of trades or businesses (whether or not incorporated) that are under common control (as defined by section 414(c) of the Code), (iii) a member of an affiliated service group (as defined by section 414(m) of the Code), or (iv) any other entity described by Treasury Regulations promulgated pursuant to section 414(o) of the Code.
2.20 Year of Executive Service. Effective January 1, 2004, Eligible Employees will be credited with a year of service for each Plan Year in which they are an Eligible Employee on December 31 st of that Plan Year.
End of Article II
ARTICLE III
BENEFITS
3.1 Participant’s Accounts. The Committee shall establish for each Participant one or more Accounts, as appropriate, to which shall be allocated the proper benefit accruals hereunder, together with interest credited thereto and less the distributions therefrom. For each Eligible Employee who was a Participant on January 1, 2004, his Accounts shall include with the balance in his Accounts as of December 31, 2003.
3.2 Benefits Credited to Accounts. For Plan Years beginning on or after January 1, 2004, unless the Committee determines otherwise, credits shall be made in accordance with the following schedule:
Years of Executive Service: |
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Benefit
Credit
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Less than 3 |
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3 |
% |
3 |
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3 |
% |
4 |
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4 |
% |
5 |
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5 |
% |
6 |
|
6 |
% |
7 |
|
7 |
% |
8 |
|
8 |
% |
9 |
|
9 |
% |
10 |
|
10 |
% |
11 |
|
11 |
% |
12 |
|
12 |
% |
More than 12 |
|
12 |
% |
Notwithstanding the preceding, any Participant who was a Participant prior to January 1, 2004, and who’s Benefit Credit Percentage for the Plan Year per the above schedule is less than the Benefit Credit rate for the 2003 Plan Year (“2003 Rate”), shall receive a Benefit Credit based on the 2003 Rate for that Plan Year.
3.3 Interest Credited to Accounts. Each Participant’s Account and each Former Employee Participant’s Accounts shall be credited with interest on the balance in his or her Account.
(1) Interest Rate. The rate of interest shall be equal to the rate that would have been paid by the Company at the beginning of the Plan Year had it issued unsecured junior debt with a maturity date of ten years. If the Company did not make such a debt offering at or near the beginning of the Plan Year for which the interest rate is being determined, the Plan Administration Committee shall, in its discretion, determine this rate by reference to the following: (i) the rates paid on similar debt offerings of comparably rated financial institutions, and (ii) an estimate of the probable interest rate on such a debt offering from at least one nationally-recognized
investment banking firm. The Committee may, in its discretion, determine the rate for the following Plan Year at any time during the Plan Year. The interest rate so determined will be set forth in writing and kept with the Plan records. The Human Resources Committee may, in its discretion, determine that interest credits shall cease with respect to any Participant’s Accounts.
(2) Timing. Interest will be credited on a regular basis (at least annually) and prior to the crediting of benefits described in Section 3.2 to the Accounts of all Participants.
End of Article III
ARTICLE IV
PAYMENT OF BENEFITS
4.1. Payment Commencement Date . A Participant shall receive payment of the nonforfeitable balance of his Accounts commencing as soon as administratively possible after termination of employment with the Company and all Related Employers. Notwithstanding the preceding, if the Participant is a Key Employee as set forth in Section 409A of the Code, payments shall commence no earlier than 6 months after termination of employment.
4.2. Payment Options. In general, a Participant shall receive payment of the nonforfeitable balance in his Accounts in the form of a single lump sum payment as soon as administratively feasible after the Payment Commencement Date. However, if the Participant meets the requirements set forth in subparagraph (a) below, he may elect another form of payment pursuant to subparagraph (b) below. In the absence of any election, payment will be made in the form of a lump sum.
(a) To be eligible to make an election to receive payment in a form set forth in 4.2(b), a Participant must meet each of the following requirements:
(i) The balance in his account on the Payment Commencement Date must exceed $100,000; and
(ii) The election must be made at least twelve (12) months prior to the Payment Commencement Date.
(b) A Participant who meets the requirements of Section 4.2(a) may elect to receive payment of his nonforfeitable balance in a series of installments over a period of up to ten (10) years. If a Participant makes an election pursuant to Section 4.2, such elections shall be null and void if the balance of his Accounts does not exceed $100,000 at the time of termination.
4.3. Determination of Nonforfeitable Benefits. The nonforfeitable benefit for any Participant shall be determined as follows:
(a) If the Participant terminates employment as a result of death or Disability, his Accounts shall be fully nonforfeitable;
(b) If the Participant engages in dishonesty, his Account shall be fully forfeited, regardless of his Years of Executive Service. For this purpose, dishonesty means that the Participant has engaged in an act of fraud, embezzlement, theft or any other crime of moral turpitude or has otherwise been dishonest in his relationship with the Employer (without necessity of formal criminal proceedings being initiated) and the Participant’s employment terminated by either discharge or resignation, all as determined by the Committee.
(c) The following vesting schedule shall apply if a Participant has not engaged in an act of dishonesty, as described in paragraph (b):
Years of
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Percent
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Fewer than 2 |
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0 |
% |
2 |
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25 |
% |
3 |
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50 |
% |
4 |
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75 |
% |
5 or more |
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100 |
% |
(d) Notwithstanding the preceding, any Participant whose nonforfeitable percentage under this section is less than his nonforfeitable percentage under the terms of the Plan for the 2003 Plan Year, shall have his nonforfeitable benefit determined at the higher of the two percentages.
4.4. Upon Death of Participant. Upon the death of a Participant, his entire balance will be paid to his Beneficiary, as determined under Section 6, in a lump sum as soon as administratively feasible, provided that the balance in his Accounts immediately after his death is less than $100,000. If his balance immediately after his death is $100,000 or more, the balance will be paid in three annual installments.
4.5. Payment in the Event of Legal Disability. Payments to any Participant, Former Employee Participant, or Beneficiary shall be made to the recipient entitled in form satisfactory to the Plan Administration Committee, except when the recipient entitled thereto shall be under a legal disability, or, in the judgment of the Committee, shall otherwise be unable to apply such payment in furtherance of such recipient’s own interest and advantage. The Committee may, in such event, direct all or any portion of such payments to be made in any one or more of the following ways:
(a) to such person directly;
(b) to the guardian or estate of such person;
(c) to a relative or friend of such person, to be expended for such person’s benefit; or
(d) to a custodian for such person under any Uniform Gifts to Minors Act.
4.6. Accounts Charged. The Committee shall charge all distributions made to a Participant or to such Participant’s Beneficiary from and against the Accounts of the Participant when made.
4.7. Unclaimed Accounts. Neither the Employer nor the Committee shall be obliged to search for or ascertain the whereabouts of any Participant or Beneficiary. The Committee, by certified or registered mail addressed to his last known address of record with the Committee or Employer, shall notify any Participant or Beneficiary that he is entitled to a distribution under this Plan, and the notice shall state the provisions of this Section. If Payment Commencement Date has arrived, and the Participant or the Beneficiary fails to claim his benefits or make his whereabouts known in writing to the Committee by the date that is immediately prior to three years (adjusted according to the abandonment period of the escheat laws of the applicable state) after the date of notification, the Participant’s Accounts shall be forfeited.
End of Article IV
ARTICLE V
PLAN ADMINISTRATION COMMITTEE
5.1. Appointment. The Plan Administration Committee has been appointed by the Company to administer the Plan and serves in such capacity at the pleasure of the board of directors of the Company. The board of directors of the Company may remove the Plan Administration Committee or appoint a successor committee at any time. If the Plan Administration Committee ceases to exist or is removed without the appointment of a replacement committee, the Company shall function as the Plan Administration Committee.
5.2. Term. Each member of the Committee shall serve until his or her successor is appointed and assumes membership. Any member of the Committee may be removed, with or without cause, and the board of directors of the Company shall have the power to fill any vacancy that may occur. A member may resign upon written notice to the board of directors of the Company or the Plan Administration Committee.
5.3. Compensation. The members of the Committee shall serve without compensation for services as such, but the Company shall pay all expenses of the members of the Committee.
5.4. Powers of Plan Administration Committee. The Committee shall have full and absolute discretion in the exercise of its powers hereunder. All exercises of power by the Committee hereunder shall be final, conclusive and binding on all interested parties, unless found by a court of competent jurisdiction, in a final judgment that is no longer subject to review or appeal, to be arbitrary and capricious. In addition to the power otherwise enumerated herein, the Committee shall have the following specific authority:
(a) to direct the administration of the Plan in accordance with the provisions herein set forth;
(b) to adopt rules of procedure and regulations necessary for the administration of the Plan that are not inconsistent with the terms of the Plan;
(c) to interpret and construe the provisions of the Plan and determine all questions with respect to rights of Employees, Participants, and Beneficiaries under the Plan, including but not limited to rights of eligibility of an Employee to participate in the Plan, the value of a Participant’s Accounts, and the nonforfeitable percentage of each Participant’s Accounts;
(d) to interpret and enforce the terms of the Plan and the rules and regulations it adopts;
(e) to review and render decisions with respect to a claim for, (or denial of a claim for) a benefit under the Plan;
(f) to furnish the Employer with information that the Employer may require for tax or other purposes;
(g) to engage the service of counsel (who may, if appropriate, be counsel for the Employer) and agents whom the Committee may deem advisable to assist it with the performance of its duties;
(h) to receive from the Employer and from employees such information as shall be necessary for the proper administration of the Plan;
(i) to maintain, or cause to be maintained, separate Accounts in the name of each Participant; and
(j) to select a secretary, who need not be a member of the Committee.
5.5. Adjustments. Any misstatement or other mistake of fact may be corrected by the Committee when it becomes known, in the manner the Committee deems equitable and practicable.
5.6. Manner of Action. The decision of a majority of the members of the Plan Administration Committee shall control. In case of a vacancy on the Committee, the remaining members may exercise any and all of the powers, authorities, duties, and discretion conferred upon the Committee. The Committee may, but need not, call or hold formal meetings. Any decision may be made or action may be taken by the Committee pursuant to written approval of a majority of the then members. The Committee shall maintain adequate records of its decisions.
5.7. Authorized Representative. The Committee may authorize any one of its members, or its secretary, to sign on its behalf any notices, directions, applications, certificates, consents, approvals, waivers, letters, or other documents requested pursuant hereto or necessary or desirable for the Committee to administer the Plan as provided herein, or to do any act necessary to carry out the Committee’s duties and obligations set forth herein.
5.8. Interested Member. No member of the Committee may decide or determine any matter concerning the distribution, nature, or method of settlement of his or her own benefits under the Plan unless there is only one person acting alone as the Committee.
5.9. Indemnity. The Company shall indemnify and save harmless the Committee, and its members, and each of them, from and against any and all loss, damage, action, fee, cost, claim, liability, proceeding, or expense (including reasonable attorneys fees) to which the Committee, or its members, may be subjected arising out of, resulting in whole or in part from, or otherwise related to any act, conduct, or inaction (except willful or reckless misconduct), in their official capacities in the administration of the Plan.
End of Article V
ARTICLE VI
PARTICIPANT ADMINISTRATIVE PROVISIONS
6.1 Beneficiary Designation. Each Participant may from time to time designate a Beneficiary to whom his Accounts shall be paid in the event of his death. The Committee shall prescribe the form for the designation of Beneficiary and, upon the Participant’s filing the form with the Committee, it shall revoke all designations filed prior to that date by the same Participant. A Participant may designate multiple and/or contingent Beneficiaries. If a Participant fails to name a Beneficiary, or if the Beneficiary named by a Participant predeceases him or is otherwise ineligible to be a Beneficiary, the Committee may direct that payment of a Participant’s Accounts be made to the person or persons in the following priority: (i) the Participant’s spouse at the time of death; (ii) if no surviving spouse, then to the Participant’s surviving children (including adopted children) in equal shares; (iii) if the Participant has no surviving children, then to the Participant’s surviving parents in equal shares; (iv) if the Participant has no surviving parents then to the Participant’s estate or such other individual or entity designated by the Committee, in its sole discretion, if no estate exists or it is otherwise impractical to make payment to the estate.
The Committee, in its sole discretion, shall determine to whom the payment shall be made under this Section.
6.2 Personal Data to Plan Administration Committee. Each Participant and Beneficiary must furnish to the Committee such evidence, data, or information as the Committee considers necessary or desirable for the purpose of administering the Plan. The provisions of this Plan are effective for the benefit of each Participant upon the condition precedent that each Participant will promptly furnish full, true, and complete evidence, data, and information when requested by the Committee.
6.3 Address for Notification. Each Participant and each Beneficiary of a deceased Participant shall file with the Committee, in writing, such person’s mailing address, and each subsequent change of such mailing address. Any payment or distribution hereunder, and any communication addressed to a Participant or his Beneficiary, at the last address filed with the Committee, or if no address have been filed, then the last address indicated on the records of the Employer shall be deemed to have been delivered to the Participant or his Beneficiary on the date that such distribution or communication is deposited in the United States Mail, postage prepaid.
6.4 Place of Payment and Proof of Continued Eligibility. Any payment or distribution hereunder, and any communication addressed to a Participant or Beneficiary, at the last address filed with the Plan Administration Committee, or if no address has been filed, then the last address indicated on the records of the Employer shall be deemed to have been delivered to the Participant or Beneficiary on the date that such distribution or communication is deposited in the United States Mail, postage prepaid. If the Committee, for any reason, is in doubt as to whether benefit payments are being received by the person entitled thereto, it shall, by registered mail addressed to the person concerned, at the last
address of record, notify such person that all unmailed and future retirement income payments shall be henceforth withheld until such person provides the Committee with evidence of continued life and the proper mailing address for future payments.
6.5 Assignment or Alienation. Except as may be specified under a “qualified domestic relations order,” as defined in section 514(b)(7) of ERISA, no benefit payable under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary prior to actually being received by the person entitled to the benefit under the terms of the Plan. The Company shall not in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements, or torts of any person entitled to benefits hereunder.
6.6 Information Available. Any Participant or Beneficiary may examine copies of this Plan or any other instrument under which the Plan was established or is operated. The Plan Administration committee will maintain such documents in its office, or in such other place or places as the Committee may designate from time to time for examination during reasonable business hours. Upon the written request of a Participant or Beneficiary, the Plan Administration Committee shall furnish him or her with a copy of such documents. The Plan Administration Committee may make a reasonable charge to the requesting person for the copy so furnished.
6.7 Beneficiary’s Right to Information. A beneficiary’s right to (and the Committees’ duty to provide to the Beneficiary) information or data concerning the Plan shall not arise until the Beneficiary first becomes entitled to receive a benefit under the Plan.
6.8 Claims Procedure. Prior to or upon becoming entitled to receive a benefit hereunder, a Participant or Beneficiary shall file a claim for such benefit with the Committee at the time and in the manner prescribed thereby. However, the Committee may direct payment of a Participant’s or Beneficiary’s benefits hereunder without requiring the filing of a claim therefore, if the Committee has knowledge of such Participant’s or Beneficiary’s whereabouts.
6.9 Appeal Procedure for Denial of Benefits. The Committee shall provide adequate notice in writing as prescribed pursuant to paragraph (b) below to any Participant or to any Beneficiary (“Claimant”) whose claim for benefits under the Plan has been denied.
(a) Such notice must be sent within 90 days of the date the claim is received by the Committee unless special circumstances require an extension of time for processing the claim. Such extension shall not exceed 90 days and no extension shall be allowed unless, within the initial 90 day period, the claimant is sent an extension notice indicating the special circumstances requiring the extension and specifying a date by which the Committee expects to render its decision.
(b) The Committee’s notice of denial to the Claimant shall set forth the following:
(1) the specific reason or reasons for the denial;
(2) specific references to pertinent Plan provisions on which the Committee based its denial;
(3) a description of any additional material and information needed for the Claimant to perfect his or her claim and an explanation of why the material or information is needed;
(4) a statement that the Claimant may request a review upon written application to the Committee, review pertinent Plan documents, and submit issues and comments in writing;
(5) a statement that any appeal of the Committee’s adverse determination must be made in writing to the Committee within 60 days after receipt of the Committee’s notice of denial of benefits, and that failure to appeal the action to the Committee in writing within the 60-day period will render the Committee’s determination final, binding, and conclusive; and
(6) the address of the Plan Administration Committee to which the Claimant may forward his or her appeal.
(c) If the Claimant should appeal to the Committee, the Claimant or a duly authorized representative, may submit, in writing, whatever issues and comments the Claimant deems pertinent. The Committee shall re-examine all facts related to the appeal and make a final determination as to whether the denial of benefits is justified under the circumstances. The Committee shall advise the Claimant in writing of its decision on the appeal, the specific reasons for the decision, and the specific Plan provisions on which the decision is based. The notice of the decision shall be given within 60 days of the Claimant’s written request for review, unless special circumstances (such as a hearing) would make the rendering of a decision within the 60 day period infeasible, but in no event shall the Committee render a decision regarding the denial of a claim for benefits later than 120 days after its receipt of a request for review. If an extension of time for review is required because of special circumstances, written notice of the extension shall be furnished to the claimant prior to the date the extension period commences.
6.10 No Rights Implied . Nothing contained in this Plan, or in any modification or amendment to the Plan, shall give any Employee, Participant, or any Beneficiary any right to continue employment, or any other legal or equitable right against an Employer, or Employee of the Employer, or against their agents, except as expressly provided by the Plan.
6.11 Right To Offset For Taxes, Other Obligations . 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. In addition, if a Participant becomes entitled to a distribution under the Plan, and if at such time such Participant has outstanding any debt, obligation or other liability representing an amount owning to the Company, then the Company may offset such amount owning it against the amount of benefits otherwise distributable to the extent permitted by applicable law.
End of Article VI
ARTICLE VII
AMENDMENT AND TERMINATION
7.1 Amendment. The Company shall have the right at any time, without prior notice and without cause, to amend or terminate the Plan by action of its board of directors or by action of the Committee. All amendments shall be in writing. Each amendment shall state the date to which it is either retroactively or prospectively effective.
7.2 Termination . Upon termination of the Plan, the Company shall pay all benefits credited to Participants pursuant to Article IV.
End of Article VII
ARTICLE VIII
MISCELLANEOUS
8.1 Execution of Receipts and Releases. Any payment to any Participant, or to such Participant’s legal representative or beneficiary, in accordance with the provisions of the Plan, shall to the extent thereof be in full satisfaction of all claims hereunder against the Plan. The Plan Administration Committee may require such Participant, legal representative, or Beneficiary, as a condition precedent to such payment, to execute a receipt and release therefore in the form determined by the Committee. Any payment made pursuant to the power herein conferred upon the Plan Administration Committee shall operate as a complete discharge of all obligations of the Employer, the Plan Administration Committee and the Committee, to the extent of the distributions so made. Neither the Employer, nor the Committee, is obliged to ensure the proper application or expenditure of any payment so made.
8.2 Employer Records . Each Employer shall, upon request or as may be specifically required hereunder, furnish or cause to be furnished, all of the information or documentation which is necessary or required by the Plan Administration Committee to perform its duties and functions under the Plan. Records of an Employer as to an Employee’s or Participant’s period of employment, termination of employment and the reason therefore, leaves of absent, reemployment, and Compensation will be conclusive on all persons, unless determined by the Plan Administration Committee to be incorrect.
8.3 Evidence . Evidence required of anyone under the Plan may be by certificate, affidavit, document, or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties. Any action required of an Employer may be by resolution of its board of directors or by any person authorized to act on behalf of the Employer.
8.4 Severability. In the event any provision of the Plan shall be held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions of the Plan, but shall be fully severable and the Plan shall be construed and enforced as if the illegal or invalid provision had never been included herein.
8.5 Notice . Any notice required to be given herein by an Employer or the Plan Administration Committee, shall be deemed delivered, when (a) personally delivered, or (b) placed in the United States mails, in an envelope addressed to the last address of record the person to whom the notice is given.
8.6 Waiver of Notice. Any person entitled to notice under the Plan may waive the notice.
8.7 Successors . The Plan shall be binding upon all persons entitled to benefits under the Plan, their respective heirs and legal representatives, upon each Employer, its successors and assigns, and upon the Plan Administration Committee, and its successors.
8.8 Headings . The titles and headings of Articles and Sections are included for convenience of reference only and are not to be considered in construction of the provisions hereof.
8.9 Governing Law. All questions arising with respect to the provisions of this Agreement shall be determined by application of the internal laws of the State of Washington except to the extent Washington law is preempted by federal law.
End of Article VII
IN WITNESS WHEREOF, the undersigned officer of Washington Mutual, Inc. has executed this instrument as of May , 2005.
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WASHINGTON MUTUAL, INC. |
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By: |
/s/ Daryl D. David |
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Its: Executive Vice President – Human Resources |
WASHINGTON MUTUAL, INC.
Supplemental Executive Retirement Accumulation Plan
Amendment No. 1
THIS AMENDMENT to the Washington Mutual, Inc. Supplemental Executive Retirement Accumulation Plan (“Plan”) is made by Washington Mutual, Inc. (“Company”).
WHEREAS , the Company maintains the Plan for the benefit of its eligible employees; and
WHEREAS , effective October 1, 2005, Providian Financial Corporation (“Providian”) will merge with and into the Company, and Providian National Bank (“PNB”) will merge with and into Washington Mutual Bank, FA (“WMB”); and
WHEREAS , employees of Providian who become employees of the Company and employees of PNB who become employees of WMB on October 1, 2005 as a result of the company mergers will not be moved to the Company payroll system until April 1, 2006; and
WHEREAS , until April 1, 2006, the former Providian and PNB employees will continue to participate in any supplemental nonqualified retirement plans that were sponsored by Providian and PNB prior to the company mergers; and
WHEREAS , the Company would like to amend the Plan to delay the Plan entry date for the former employees of Providian and PNB to April 1, 2006, and to provide prior service credit for purposes of determining benefit credits under the Plan.
NOW, THEREFORE , effective September 30, 2005, the Plan is hereby amended as follows:
1. Section 2.9 of the Plan, Eligible Employees, is amended by adding the following sentence to the end of that section:
Notwithstanding the foregoing, Eligible Employees who on September 30, 2005 were employed by Providian Financial Corporation, Providian National Bank or any affiliates or subsidiaries thereof and who on October 1, 2005 became employed by the Employer may first enter the Plan on April 1, 2006.
2. Section 2.20 of the Plan, Year of Executive Service, is amended by adding the following sentence to the end of the section:
(31) Employees who on September 30, 2005 were employed by Providian Financial Corporation, Providian National Bank or any affiliate or subsidiary thereof and who on October 1, 2005 became employed by the Employer shall, after April 1,
2006, be credited with Service for service with Providian Financial Corporation, Providian Nation Bank or their affiliates or subsidiaries, but only to the extent that such service occurred after December 31, 2003.
This amendment is adopted and executed this 30 th day of September, 2005.
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WASHINGTON MUTUAL, INC. |
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By: |
/s/ Daryl D. David |
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Daryl D. David |
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Executive V.P. – Human Resources |
Exhibit 10.11
WASHINGTON MUTUAL, INC.
Deferred Compensation Plan
Amendment No. 1
THIS AMENDMENT to the Washington Mutual, Inc. Deferred Compensation Plan (“Plan”) is made by Washington Mutual, Inc. (“Company”).
WHEREAS , the Company maintains the Plan for the benefit of its eligible employees; and
WHEREAS , effective October 1, 2005, Providian Financial Corporation (“Providian”) will merge with and into the Company, and Providian National Bank (“PNB”) will merge with and into Washington Mutual Bank, FA (“WMB”); and
WHEREAS , employees of Providian who become employees of the Company and employees of PNB who become employees of WMB on October 1, 2005 as a result of the company mergers will not be moved to the Company payroll system until April 1, 2006; and
WHEREAS , until April 1, 2006, the former Providian and PNB employees will continue to participate in any nonqualified plans that were sponsored by Providian and PNB prior to the company mergers; and
WHEREAS , the Company would like to amend the Plan to delay the Plan entry date for the former employees of Providian and PNB to April 1, 2006, and to provide prior service credit for purposes of determining eligibility to participate in the matching contribution portion of the Plan.
NOW, THEREFORE , effective September 30, 2005, the Plan is hereby amended as follows:
Section 2.1 of the Plan, Eligible Employees, is amended by adding the following subsection (d) to the end of Section 2.1:
(d) Notwithstanding Sections 2.1(b) and (c) above, Eligible Employees who on September 30, 2005 were employed by Providian Financial Corporation, Providian National Bank or any affiliates or subsidiaries thereof and who on October 1, 2005 became employed by the Employer may first enter the Plan on April 1, 2006.
This amendment is adopted and executed this 30th day of September, 2005.
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WASHINGTON MUTUAL, INC. |
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By: |
/s/ Daryl D. David |
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Daryl D. David |
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Executive V.P. – Human Resources |
WASHINGTON MUTUAL, INC.
RESOLUTION OF THE HUMAN RESOURCES COMMITTEE
REGARDING AN AMENDMENT TO THE DEFERRED COMPENSATION PLAN
WHEREAS , the Company previously established the Washington Mutual, Inc. Deferred Compensation Plan (the “Plan”) to provide benefits to certain executives, directors and senior officers; and
WHEREAS , the Committee has the authority to amend the Plan from time to time; and
WHEREAS , the Committee deems it advisable to amend the Plan to eliminate the provision that automatically changes the earnings crediting method to the “Interest Method” for participants who terminate their employment and maintain an account balance in the Plan;
NOW, THEREFORE , IT IS HEREBY RESOLVED that the Plan is amended as follows:
Section 4.3(d) is hereby deleted in its entirety.
FURTHER RESOLVED that the Company’s Executive Vice President of Human Resources is authorized to take any actions necessary to carry out the intent of this resolution.
EXHIBIT 12.1
WASHINGTON MUTUAL, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
|
|
Year Ended December 31, |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|||||
|
|
(dollars in millions) |
|
|||||||||||||
Earnings, including interest on deposits (1) : |
|
|
|
|
|
|
|
|
|
|
|
|||||
Income from continuing operations before income taxes |
|
$ |
5,438 |
|
$ |
3,984 |
|
$ |
6,029 |
|
$ |
6,006 |
|
$ |
4,826 |
|
Fixed charges |
|
7,871 |
|
4,403 |
|
4,687 |
|
5,842 |
|
8,071 |
|
|||||
|
|
$ |
13,309 |
|
$ |
8,387 |
|
$ |
10,716 |
|
$ |
11,848 |
|
$ |
12,897 |
|
Fixed charges (1) : |
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest expense |
|
$ |
7,702 |
|
$ |
4,234 |
|
$ |
4,534 |
|
$ |
5,726 |
|
$ |
7,979 |
|
Estimated interest component of net rental expense |
|
169 |
|
169 |
|
153 |
|
116 |
|
92 |
|
|||||
|
|
$ |
7,871 |
|
$ |
4,403 |
|
$ |
4,687 |
|
$ |
5,842 |
|
$ |
8,071 |
|
Ratio of earnings to fixed charges (2) |
|
1.69 |
|
1.90 |
|
2.29 |
|
2.03 |
|
1.60 |
|
|||||
Earnings, excluding interest on deposits (1) : |
|
|
|
|
|
|
|
|
|
|
|
|||||
Income from continuing operations before income taxes |
|
$ |
5,438 |
|
$ |
3,984 |
|
$ |
6,029 |
|
$ |
6,006 |
|
$ |
4,826 |
|
Fixed charges |
|
4,143 |
|
2,360 |
|
2,522 |
|
3,181 |
|
4,990 |
|
|||||
|
|
$ |
9,581 |
|
$ |
6,344 |
|
$ |
8,551 |
|
$ |
9,187 |
|
$ |
9,816 |
|
Fixed charges (1) : |
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest expense |
|
$ |
7,702 |
|
$ |
4,234 |
|
$ |
4,534 |
|
$ |
5,726 |
|
$ |
7,979 |
|
Less: interest on deposits |
|
(3,728 |
) |
(2,043 |
) |
(2,165 |
) |
(2,661 |
) |
(3,081 |
) |
|||||
Estimated interest component of net rental expense |
|
169 |
|
169 |
|
153 |
|
116 |
|
92 |
|
|||||
|
|
$ |
4,143 |
|
$ |
2,360 |
|
$ |
2,522 |
|
$ |
3,181 |
|
$ |
4,990 |
|
Ratio of earnings to fixed charges (2) |
|
2.31 |
|
2.69 |
|
3.39 |
|
2.89 |
|
1.97 |
|
(1) As defined in Item 503(d) of Regulation S-K.
(2) These computations are included herein in compliance with Securities and Exchange Commission Regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there were no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there were no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates.
EXHIBIT 12.2
WASHINGTON MUTUAL, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS
|
|
Year Ended December 31, |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|||||
|
|
(dollars in millions) |
|
|||||||||||||
Earnings, including interest on deposits (1) : |
|
|
|
|
|
|
|
|
|
|
|
|||||
Income from continuing operations before income taxes |
|
$ |
5,438 |
|
$ |
3,984 |
|
$ |
6,029 |
|
$ |
6,006 |
|
$ |
4,826 |
|
Fixed charges |
|
7,871 |
|
4,403 |
|
4,687 |
|
5,842 |
|
8,071 |
|
|||||
|
|
$ |
13,309 |
|
$ |
8,387 |
|
$ |
10,716 |
|
$ |
11,848 |
|
$ |
12,897 |
|
Preferred dividend requirement |
|
$ |
– |
|
$ |
– |
|
$ |
– |
|
$ |
5 |
|
$ |
7 |
|
Ratio of income from continuing operations before income taxes to net income from continuing operations |
|
1.58 |
|
1.61 |
|
1.59 |
|
1.59 |
|
1.59 |
|
|||||
Preferred dividends (2) |
|
$ |
– |
|
$ |
– |
|
$ |
– |
|
$ |
8 |
|
$ |
11 |
|
Fixed charges (1) : |
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest expense |
|
$ |
7,702 |
|
$ |
4,234 |
|
$ |
4,534 |
|
$ |
5,726 |
|
$ |
7,979 |
|
Estimated interest component of net rental expense |
|
169 |
|
169 |
|
153 |
|
116 |
|
92 |
|
|||||
|
|
7,871 |
|
4,403 |
|
4,687 |
|
5,842 |
|
8,071 |
|
|||||
Fixed charges and preferred dividends |
|
$ |
7,871 |
|
$ |
4,403 |
|
$ |
4,687 |
|
$ |
5,850 |
|
$ |
8,082 |
|
Ratio of earnings to fixed charges and preferred dividends (3) |
|
1.69 |
|
1.90 |
|
2.29 |
|
2.03 |
|
1.60 |
|
|||||
Earnings, excluding interest on deposits (1) : |
|
|
|
|
|
|
|
|
|
|
|
|||||
Income from continuing operations before income taxes |
|
$ |
5,438 |
|
$ |
3,984 |
|
$ |
6,029 |
|
$ |
6,006 |
|
$ |
4,826 |
|
Fixed charges |
|
4,143 |
|
2,360 |
|
2,522 |
|
3,181 |
|
4,990 |
|
|||||
|
|
$ |
9,581 |
|
$ |
6,344 |
|
$ |
8,551 |
|
$ |
9,187 |
|
$ |
9,816 |
|
Preferred dividends (2) |
|
$ |
– |
|
$ |
– |
|
$ |
– |
|
$ |
8 |
|
$ |
11 |
|
Fixed charges (1) : |
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest expense |
|
$ |
7,702 |
|
$ |
4,234 |
|
$ |
4,534 |
|
$ |
5,726 |
|
$ |
7,979 |
|
Less: interest on deposits |
|
(3,728 |
) |
(2,043 |
) |
(2,165 |
) |
(2,661 |
) |
(3,081 |
) |
|||||
Estimated interest component of net rental expense |
|
169 |
|
169 |
|
153 |
|
116 |
|
92 |
|
|||||
Fixed charges and preferred dividends |
|
4,143 |
|
2,360 |
|
2,522 |
|
3,181 |
|
4,990 |
|
|||||
|
|
$ |
4,143 |
|
$ |
2,360 |
|
$ |
2,522 |
|
$ |
3,189 |
|
$ |
5,001 |
|
Ratio of earnings to fixed charges and preferred dividends (3) |
|
2.31 |
|
2.69 |
|
3.39 |
|
2.88 |
|
1.96 |
|
(1) As defined in Item 503(d) of Regulation S-K.
(2) The preferred dividends were increased to amounts representing the pretax earnings that would be required to cover such dividend requirements.
(3) These computations are included herein in compliance with Securities and Exchange Commission Regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there were no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there were no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates.
Exhibit 21
WASHINGTON MUTUAL, INC.
SUBSIDIARY LISING
WASHINGTON MUTUAL BANK
Federally Chartered under the laws of the United States
DBA: |
Washington Mutual Bank |
|
Washington Mutual Bank, FA |
NEW AMERICAN CAPITAL, INC., a Delaware corporation
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-23221, 333-52785, 333-81221, 333-47308, and 333-68524 on Form S-4, Registration Statement Nos. 033-86840, 333-40928, 333-69503, 333-87675, 333-74646, 333-76834, 333-106672, and 333-126353 on Form S-8, and Registration Statement Nos. 333-63976, 333-67988, and 333-130929 on Form S-3 of our reports dated March 8, 2006, relating to the financial statements and financial statement schedules of Washington Mutual, Inc. and management’s report on the effectiveness of internal control over financial reporting appearing in and incorporated by reference in the Annual Report on Form 10-K of Washington Mutual, Inc. for the year ended December 31, 2005.
|
Seattle, Washington |
March 8, 2006 |
EXHIBIT 31.1
I, Kerry K. Killinger, certify that:
1. I have reviewed this annual report on Form 10-K of Washington Mutual, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 15, 2006 |
/s/ KERRY K. KILLINGER |
|
Kerry K. Killinger
|
EXHIBIT 31.2
I, Thomas W. Casey, certify that:
1. I have reviewed this annual report on Form 10-K of Washington Mutual, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 15, 2006 |
/S/ THOMAS W. CASEY |
|
Thomas W. Casey
|
EXHIBIT 32.1
WASHINGTON MUTUAL, INC.
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Kerry K. Killinger, the Chief Executive Officer of Washington Mutual, Inc., does hereby certify that this report on Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Washington Mutual, Inc.
Date: March 15, 2006 |
By: |
/s/ KERRY K. KILLINGER |
|
|
Kerry K. Killinger |
|
|
Chairman and Chief Executive Officer of Washington Mutual, Inc. |
A signed original of this written statement required by Section 906 has been provided to Washington Mutual, Inc. and will be retained by Washington Mutual, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
WASHINGTON MUTUAL, INC.
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Thomas W. Casey, the Chief Financial Officer of Washington Mutual, Inc., does hereby certify that this report on Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Washington Mutual, Inc.
Date: March 15, 2006 |
By: |
/s/ THOMAS W. CASEY |
|
|
Thomas W. Casey |
|
|
Executive Vice President and Chief Financial Officer of Washington Mutual, Inc. |
A signed original of this written statement required by Section 906 has been provided to Washington Mutual, Inc. and will be retained by Washington Mutual, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.