Business

Overview

        With a history dating back to 1889, Washington Mutual, Inc. is a financial services company committed to serving consumers and small- to mid-sized businesses. Based on our consolidated assets at December 31, 2001, we were the largest savings institution and the seventh largest banking company in the United States.

        Our assets have grown over the last six years primarily through acquisitions. In 1996, we acquired Keystone Holdings, Inc., the parent of American Savings Bank, F.A. This acquisition, referred to as the "Keystone Transaction," gave us our first depository institution in California. In 1997, we acquired Great Western Financial Corporation and in October 1998, we acquired H.F. Ahmanson & Co. ("Ahmanson"). In February 1998, Ahmanson had acquired Coast Savings Financial, Inc.

        During 2001, we completed three acquisitions. On January 31, we acquired the mortgage operations of The PNC Financial Services Group, Inc. ("PNC"). On February 9, we acquired Texas-based Bank United Corp. ("Bank United"), and on June 1, we acquired Fleet Mortgage Corp., a unit of FleetBoston Financial Corp., and certain other mortgage lending operations of Fleet National Bank ("Fleet"). Substantially due to these acquisitions, our loan servicing portfolio (excluding loans retained in our portfolio) grew from $79.34 billion at January 1, 2001 to $378.38 billion at December 31, 2001. Correspondingly, the mortgage servicing rights ("MSR") associated with our servicing portfolio increased from $1.02 billion at January 1, 2001 to $6.24 billion at December 31, 2001. The acquisition of Bank United also increased our deposit base by $8.09 billion and added approximately $12 billion to our loans held in portfolio.

        On January 4, 2002, we completed our acquisition of New York-based Dime Bancorp, Inc. ("Dime"). This acquisition added approximately $28 billion to our asset base, and increased our deposit base by approximately $15 billion.

        On March 1, 2002, we acquired for cash certain operating assets of HomeSide Lending, Inc. ("HomeSide"). HomeSide is the U.S. mortgage unit of the National Australia Bank Limited ("National"). We will subservice HomeSide's $187 billion mortgage servicing portfolio. National retained ownership of HomeSide's mortgage servicing rights, along with the related hedges and certain other assets and liabilities.

        We manage our operations by grouping our products and services within business segments. These business segments are:

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Banking and Financial Services Group



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Home Loans and Insurance Services Group



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Specialty Finance Group

        In addition, the management of our interest rate risk, liquidity, capital, borrowings and purchased investment securities portfolios are performed by our Treasury Division.

Banking and Financial Services Group

        The Banking and Financial Services Group ("Banking & FS") offers a comprehensive line of consumer and business financial products and services to individuals and small and middle market businesses. Banking & FS provides services to approximately seven million consumer and business households through over 1,400 financial centers (both free-standing and in-store), 51 business banking centers, and over 2,150 automated teller machines located in twelve states. With the acquisitions of Bank United and Dime, the group now serves more than 415,000 households in Texas through over 200 financial

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centers, and approximately one million households in the greater New York metropolitan area through 123 financial centers and approximately 250 automated teller machines.

        Banking & FS offers various consumer deposit products as well as a variety of fee-based banking services. Deposit products offered include the group's signature Free Checking accounts as well as savings accounts, money market deposit accounts and time deposit accounts. In 2001 the group introduced a new checking account product, the Platinum Account, which combines a money market rate of interest with a checking account. In addition to traditional banking products, fixed annuities, home mortgage loans and insurance products are made available through the financial centers. The group also offers investment advisory and securities brokerage services. Banking & FS offers customers the convenience of 24-hour telephone and internet banking and investment services through wamu.com, wmfinancial.com, wmgroupoffunds.com and invest1to1.com.

        In 2000, Banking & FS began opening financial centers in Las Vegas with project Occasio ^TM (Latin for "favorable opportunity"), which features a new retail approach to banking. Occasio financial centers serve customers in an open, free-flowing retail environment where they can interact with roaming customer service representatives. Occasio provides Banking & FS a vehicle for expanding into new market areas where acquisition opportunities may be limited. By the end of 2001, the group had opened 20 Occasio financial centers in Las Vegas and 16 Occasio financial centers in Phoenix and established a retail banking presence in Atlanta with the opening of 20 Occasio financial centers. The group will continue to expand its presence in Phoenix and Atlanta and expects eventually to have a total of approximately 40 and 80 Occasio financial centers in those markets, respectively. Future plans for project Occasio also include the enhancement of the group's financial center network in existing markets, including the greater New York metropolitan area. Additional market areas are also under evaluation for the future expansion of project Occasio.

        Banking & FS offers a full array of consumer and business loan products. Consumer lending products include home equity lines of credit and loans, transportation financing (cars, recreational vehicles and boats), student loans, lines of credit and installment loans, and manufactured housing loans. Credit products and financial services offered to small- and mid-sized businesses include lines of credit, receivables and inventory financing, equipment loans, real estate financing, Small Business Administration ("SBA") loans, international trade financing, cash management and merchant bankcard services. One of Banking & FS's primary business objectives is to expand consumer and business lending activities, as they generally offer higher yields than prime mortgage lending activities. The size of the consumer and business loan portfolios has grown in recent years, partly due to the introduction of the consumer lending product line in California, Florida and Texas and the expansion of business banking in California. The merger with Bank United also strengthened the group's market position for business lending in Texas and nationally through SBA lending offices.

        The group's investment services are offered to the public by over 500 financial consultants of WM Financial Services, a licensed broker-dealer. Fixed annuities are offered to the public by over 900 bank employees licensed to offer such products. Investment advisory and distribution services for WM Group of Funds are provided respectively by WM Advisors, Inc. and WM Funds Distributor, Inc. At December 31, 2001, WM Advisors had $11.58 billion of assets under management.

Home Loans and Insurance Services Group

        The principal activities of the Home Loans & Insurance Services Group ("Home Loans Group") are originating and servicing single-family residential ("SFR") loans. Loans are originated and held in the loan portfolio or sold into the secondary market. The Home Loans Group also offers insurance products that complement the mortgage lending process. The group's products are offered to customers through multiple distribution channels, including retail home loan centers, financial centers, correspondent channels, wholesale home loan centers, and consumer direct through call centers and the internet.

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        The acquisitions of Bank United and the mortgage operations of PNC and Fleet in 2001, and Dime, including its North American Mortgage Company subsidiary, in early 2002 have significantly strengthened the group's mortgage banking capability, further diversified its mortgage operations geographically, increased its servicing portfolio, and enhanced its market position in the home lending business. These acquisitions strengthened our ability to originate loans in all 50 states, including originating FHA-insured and VA-guaranteed loans on a national scale. The correspondent lending channel, in particular, grew significantly during 2001, as the result of the acquisition of the mortgage operations of PNC and Fleet. These acquisitions, along with the recently completed acquisition of certain operating assets of HomeSide, have made the Home Loans Group the nation's largest residential mortgage servicer.

        The Home Loans Group has developed an automated mortgage origination platform, Optis ^TM . The first release of Optis was completed in 2001 and is designed to enhance productivity with automated pricing and approval, while providing consistent evaluations of credit quality. The second release is expected to improve functionality of the mortgage origination process, reduce costs and improve operating efficiencies.

        The Home Loans Group's strength as a portfolio lender provides customers with a range of choices designed to meet their financial needs. The group offers a broad product line that includes adjustable-rate mortgages ("ARMs") offering borrowers multiple payment options, traditional ARMs, and fixed-rate mortgages, both conforming and nonconforming. The Home Loans Group also offers FHA-insured and VA-guaranteed fixed-rate mortgages and, through Long Beach Mortgage Company ("Long Beach Mortgage"), its subprime wholesale channel, originates specialty home loans, a component of specialty mortgage finance ("SMF") lending.

        To manage risk, all loans originated are subjected to the same nondiscriminatory underwriting standards and to certain restrictions on terms and origination practices. The determination of the risk and the amount of review necessary is based on the credit profile of the borrower and the size and characteristics of the loan. Additionally, the group performs re-underwriting and appraisal review on some of the loans acquired from its correspondents, or delegates the underwriting of these loans to specific correspondents. All loans secured by first liens on real property require title insurance and casualty insurance for the lesser of the outstanding balance of the loan plus all prior liens on the property or the replacement cost of the property.

        The Home Loans Group generally retains the servicing of loans that are originated for sale into the secondary market, thereby maintaining the customer relationship. Mortgage servicing is the administration and collection of mortgage payments and fees. The SFR servicing portfolio (including loans retained in the portfolio) grew from approximately 1.4 million customers at December 31, 2000 to approximately 4.3 million at December 31, 2001 with an average loan size of $115,000. At year-end, Washington Mutual had a $496.7 billion loan servicing portfolio which represented an 8.62% market share, based upon a 2001 mortgage servicer ranking by Inside Mortgage Finance . As part of the integration steps taken on the recent acquisitions, the group consolidated eight servicing facilities into four to reduce overhead. The remaining four locations are in California, South Carolina, Wisconsin and Illinois. With the recent acquisition of certain operating assets of HomeSide, the group acquired two additional servicing sites in Texas and Florida and a loan servicing platform that, together with the Optis origination platform, is expected to enable end-to-end control of the mortgage process.

        The capital markets function of the Home Loans Group manages loan pricing and loan sales, and loans purchased from correspondents. Capital markets also hedges the interest rate risk of loans originated for sale by entering into forward sales agreements and by purchasing interest rate option contracts. Capital markets sells most of the fixed-rate SFR loan volume, with most fixed-rate conforming mortgage loans sold to government sponsored enterprises ("GSEs") such as Fannie Mae ("FNMA"). Loans that do not conform to GSE standards, such as jumbo loans, are generally held in portfolio or sold by capital markets in the secondary market either directly or through securitizations. Capital markets also periodically sells

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originated SMF loans in whole loan or securitization transactions. ARM loans are also sold periodically in the secondary market in order to manage asset growth more efficiently. In addition, the group is developing an institutional broker-dealer business to help facilitate its loan securitizations. When licensing is completed later this year, the broker-dealer business will provide a link between the Home Loans Group and the capital markets, allowing the group to sell, trade, and underwrite mortgage-related products directly to institutional investors.

        The Home Loans Group manages a portfolio of originated ARM and fixed-rate loans and mortgage-backed securities ("MBS"). The group also purchases and manages SMF loans with risk characteristics similar to those originated by Long Beach Mortgage. While the group reviews and re-underwrites SMF loans for unacceptable credit risk, charge offs on these loans are expected to be higher over time than on the group's prime mortgage loans. SMF loans have higher credit risk and, thus, generally provide higher risk-adjusted yields than prime mortgage loans or agency MBS.

        The Home Loans Group provides insurance services that support the mortgage lending process by offering homeowners, flood, earthquake and other property and casualty insurance products to mortgage borrowers. In addition, the group offers mortgage life insurance, accidental death and dismemberment, term and whole life insurance, and other insurance products to existing mortgage and deposit customers. The group also manages the Company's captive private mortgage reinsurance activities. The group's insurance services website, wamuins.com, provides information, quotes, and buying capabilities over the internet.

Specialty Finance Group

        The Specialty Finance Group provides real estate secured financing primarily for multi-family properties. Additionally, the group provides commercial real estate lending and residential builder construction financing as a part of its secured financing activities. The group also offers mortgage banker financing and conducts a consumer finance business through Washington Mutual Finance Corporation ("Washington Mutual Finance"). Washington Mutual Finance currently operates 459 branches in 25 states, primarily in the southeastern United States, Texas and California.

        The group's multi-family lending base includes products for permanent financing, construction lending and rehab financing. Multi-family loans are offered to property owners and developers throughout the United States. While the national market for multi-family lending is quite large, market share is highly fragmented, as the top 25 lenders account for only 32% of the total number of loans originated annually. As part of its business strategy, the Specialty Finance Group intends to seek additional market share by pursuing multi-family industry consolidation opportunities.

        The Specialty Finance Group's multi-family lending program revolves around three key elements: originating loans, servicing loans and providing ancillary banking services to enhance customer retention. Combining these three elements under one umbrella has allowed the group to attain a leading market position in this field.

        The Company was recently ranked as a leading national originator of multi-family loans, measured both in terms of number of loans and total origination dollar volume. This has been achieved through both internal growth and acquisitions. The recent acquisitions of Bank United and Dime have expanded our origination activities into the Midwest and East and broadened our multi-family product line.

        The Company also leads the nation in the number of multi-family loans serviced. Around this servicing base, the Specialty Finance Group is developing uniform loan servicing standards across a national servicing platform. Periodic economic analysis, such as debt service coverage on each property and ongoing credit review will also be part of this platform's capabilities. Additionally, the group is developing a scalable business template that is designed to enable it to maintain high levels of service with low operating costs in all types of multi-family markets.

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        Combining the origination and servicing of multi-family loans with full-service banking allows the Specialty Finance Group to focus on the customers' total needs. As part of this relationship banking, the group provides operating accounts for daily cash needs, investment accounts for security and escrow deposits, and other business-related accounts to ensure that customers are offered a full array of banking services.

        The Specialty Finance Group also provides loans for residential builders, real estate developers, and mortgage bankers. These areas represent approximately 30% of the total non multi-family commercial lending activities of the group. As an extension of its multi-family lending activities, these products will provide additional services to the group's traditional customer base. The group anticipates further growth in these product categories, as the Company expands its multi-family lending.

        In addition to the commercial lending and servicing activities mentioned above, the Specialty Finance Group, through Washington Mutual Finance, originates and services consumer installment loans and consumer real estate secured loans. These loans are generally held in the loan portfolio. Loans originated by Washington Mutual Finance generally earn higher yields than loans made by the Company's banking subsidiaries because they tend to have higher credit risk. The majority of the growth in the loan portfolio originated in 2001 was related to loans secured by real estate. The consumer installment loans are primarily for personal, family or household purposes. Such loans are unsecured or secured by luxury goods, automobiles or other personal property. Additionally, Washington Mutual Finance acquires installment contracts from local retail establishments, usually without recourse to the originating merchant.

Employees

        Our number of full-time equivalent employees ("FTE") at December 31, 2001 was 39,465, compared with 28,798 at December 31, 2000 and 28,509 at December 31, 1999. During 2001, the number of FTE increased primarily as a result of the acquisitions of Bank United and the mortgage operations of PNC and Fleet. In addition, the acquisition of Dime added approximately 6,900 FTE during the first quarter of 2002. We believe that we have been successful in attracting quality employees and that our employee relations are good.

Factors That May Affect Future Results

        From time to time, we have made and will make forward-looking statements. Our Form 10-K and other documents that we file with the Securities and Exchange Commission have forward-looking statements. In addition, our 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 our expectations or predictions of future conditions, events or results. 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. We do 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 our control, that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements.

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        Some of these factors are described below.

    General business and economic conditions may significantly affect our earnings.

        Our business and earnings are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, money supply, fluctuations in both debt and equity capital markets, the strength of the U.S. economy, and the local economies in which we conduct business. If any of these conditions worsen, our business and earnings could be adversely affected. For example, if short-term interest rates rise faster than mortgage rates, our net interest income, which is our largest component of net income, would be adversely affected. 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 decrease the 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 our earnings.

        In addition, our business and earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies. We are particularly affected by the policies of the Federal Reserve Board, which regulates the supply of money and credit in the United States. The Federal Reserve Board's policies directly and indirectly influence the yield on our interest-earning assets and the cost of our interest-bearing liabilities. Changes in those policies are beyond our control and difficult to predict.

    If we are unable to effectively manage the volatility of our mortgage banking business, our earnings could be adversely affected.

        During 2001, through a series of acquisitions, we became one of the largest originators and servicers of SFR loans in the nation. Changes in interest rates significantly affect the mortgage banking business. One of the principal risks to the mortgage banking business is prepayments and their effect on MSR. One of the ways we mitigate this risk is by purchasing financial instruments, such as fixed-rate investment securities, which tend to increase in value when long-term interest rates decline. The success of this strategy, however, is dependent on management's judgments regarding the direction and timing of changes in long-term interest rates, and the resulting decisions that are made regarding the purchases and subsequent sales of these financial instruments. If this strategy is not successful, our net income could be adversely affected. For further discussion of how MSR prepayment risk is managed, see "Market Risk Management."

    A failure to effectively integrate the operations and personnel of companies we have acquired could adversely affect our earnings and financial condition.

        During 2001 and early 2002, we consummated five large acquisitions. As a result of these acquisitions, we significantly expanded our mortgage banking and loan servicing business, greatly expanded our consumer banking and lending presence in Texas and began consumer banking operations in the State of New York. If we experience difficulties in integrating the acquired operations into our company, including the integration of technology platforms, this could result in higher than anticipated administrative costs, employee turnover and the loss of customers, among other things. These events could cause our earnings to be lower than anticipated and could adversely affect our operations and financial condition.

    Due to the concentration of our operations in California, a decline in the California economy could adversely affect our earnings and financial condition.

        At December 31, 2001, 51% of our SFR and multi-family loan portfolio and 63% of our deposits were concentrated in California. Consequently, our results of operations and financial condition are particularly subject to the conditions in the single-family and multi-family residential markets in California. If economic conditions generally, or in California in particular, worsen or if the market for residential real

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estate declines, we may experience greater delinquencies, which may result in a higher provision for loan and lease losses and decreased collateral values on our existing portfolio. We also may not be able to originate the volume or type of loans or achieve the level of deposits that we currently anticipate.

    The financial services industry is highly competitive.

        We operate in a highly competitive environment. The activities of our three major lines of business (Banking and Financial Services, Home Loans and Insurance Services, and Specialty Finance) are subject to significant competition in attracting and retaining deposits and making loans as well as in providing other financial services in all of our market areas. We face competition in customer service, interest rates on loans and deposits, lending limits and customer convenience, such as product lines offered and the accessibility of services.

        Our most direct competition for deposits comes from savings institutions, credit unions and commercial banks doing business in our market areas. Enacted in 1999, the Gramm-Leach-Bliley Act ("GLB Act") does not increase our authority to affiliate, but it does benefit our competitors, as discussed below. As with all banking organizations, we have also experienced competition from nonbanking sources, including mutual funds, corporate and governmental debt securities and other investment alternatives offered within and outside of our primary market areas.

        Our most direct competition for loans comes from other savings institutions, national mortgage companies, insurance companies, commercial banks and GSEs. In addition to the provisions of the GLB Act, technological advances and heightened e-commerce activities have also increased accessibility to services without physical presence, which has intensified competition among banking as well as nonbanking companies in offering financial products and services. Although our competitors' activities may make it a bigger challenge for us to achieve our financial goals, we are continuously reassessing our overall competitive edge to attract more customers for our products and services.

    Changes in the regulation of financial services companies could adversely affect our business.

        Proposals for further regulation of the financial services industry are continually being introduced in Congress. The agencies regulating the financial services industry periodically adopt changes to their regulations. 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 our business. For further discussion of the regulations of financial services, see "Regulation and Supervision — Recent and Proposed Legislation and Regulation."

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This was an acquisition of selected assets and/or liabilities.

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The acquisition was of financial centers and deposits only. The only assets acquired were branch facilities or loans collateralized by acquired savings deposits.

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Includes loans, deposits and assets acquired by Ahmanson from Coast Savings Financial, Inc.

Taxation

    General

        For federal income tax purposes, we report income and expenses using the accrual method of accounting on a calendar year basis. We are subject to federal income tax under existing provisions of the Internal Revenue Code of 1986, as amended (the "Code"), in generally the same manner as other corporations.

    State Income Taxation

        Many of the states in which we do business, impose corporate income taxes on companies doing business in those states. The state of Washington does not currently have a corporate income tax. Washington imposes on businesses a business and occupation tax based on a percentage of gross receipts.

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Currently, the tax does not apply to interest received on loans secured by first mortgages or deeds of trust on residential properties. However, it is possible that legislation might be introduced in the future that would repeal or limit this exemption.

    Assistance Agreement

        In connection with the Keystone Transaction, we acquired American Savings Bank, F.A. ("ASB"). ASB was formed to effect the December 1988 acquisition (the "1988 Acquisition") of certain assets and liabilities of the failed savings and loan association subsidiary of Financial Corporation of America. In connection with the 1988 Acquisition, Keystone Holdings and certain of its affiliates entered into a number of continuing agreements with the predecessor to the Federal Deposit Insurance Corporation ("FDIC"), including an Assistance Agreement. The Assistance Agreement provides, in part, for the payment to the Federal Savings & Loan Insurance Corporation ("FSLIC") Resolution Fund over time of 75% of most of the federal tax savings and 19.5% of most of the California tax savings (in each case computed in accordance with specific provisions contained in the Assistance Agreement) attributable to the utilization of certain tax loss carryforwards. The provision for such payments is reflected in the financial statements as "Income Taxes."

        In connection with the acquisition of Bank United in 2001, we acquired Bank United Holdings. Bank United Holdings entered into a Tax Benefits Agreement with the Federal Home Loan Bank Board. The Tax Benefits Agreement requires the Bank to pay to the FSLIC Resolution Fund an amount equal to one-third of the sum of the federal and state net tax benefits as defined in the original acquisition agreements ("Net Tax Benefits"). Net Tax Benefits are equal to the excess of any of the federal income tax liability which would have incurred if the tax benefit item had not been deducted or excluded from income over the federal income tax liability actually incurred. Net Tax Benefits items are tax savings resulting mainly from the utilization of net operating losses. The obligation to share tax benefit utilization continues through 2003.

        See Note 12 to the Consolidated Financial Statements – "Income Taxes."

Environmental Regulation

        Our 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 ("CERCLA") 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 us both as an owner of properties used in or held for our business, and as a secured lender of property that is found to contain hazardous substances or wastes.

        Further, although CERCLA exempts holders of security interests, the exemption may not be available if a secured party engages in the management of its borrower or the collateral property in a manner deemed beyond the protection of the secured party's interest. Federal and state legislation, as well as guidance issued by the United States Environmental Protection Agency and a number of court decisions, have provided assurance to lenders regarding the activities they may undertake and remain within CERCLA's secured party exemption. However, these assurances are not absolute and generally will not protect a lender or fiduciary that participates or otherwise involves itself in the management of its borrower, particularly in foreclosure proceedings. As a result, CERCLA and similar state statutes may influence our decision whether to foreclose on property that is found to be contaminated. Our general policy is to obtain an environmental assessment prior to foreclosing on commercial property. The existence of hazardous substances or wastes on such property may cause us to elect not to foreclose on the property, thereby limiting, and in some instances precluding, our realization on such loans.

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Regulation and Supervision

        References in this section to applicable statutes and regulations are brief summaries only. One should consult the statutes and regulations for a full understanding of the details of their operation.

    General

        As a savings and loan holding company, Washington Mutual, Inc. ("WMI" or "the Parent Company") is subject to regulation by the Office of Thrift Supervision (the "OTS"). Washington Mutual Bank, FA ("WMBFA") and Washington Mutual Bank fsb ("WMBfsb") are federal savings associations and are subject to extensive regulation and examination by the OTS, which is their primary federal regulator. Their deposit accounts are insured by the FDIC, through the Savings Association Insurance Fund (the "SAIF") and, to a lesser extent, in the case of WMBFA, the Bank Insurance Fund (the "BIF"). The FDIC also has some authority to regulate WMBFA and WMBfsb. Washington Mutual Bank ("WMB") is subject to regulation and supervision by the Director of Financial Institutions of the State of Washington (the "State Director"). The FDIC insures the deposit accounts of WMB through both the BIF and the SAIF. The FDIC examines and regulates WMB and other state-chartered banks that are not members of the Federal Reserve System ("FDIC-regulated banks"). Federal and state laws and regulations govern, among other things, investment powers, deposit activities, borrowings, maintenance of guaranty funds and retained earnings.

        State and federal laws govern our consumer finance subsidiaries. Federal laws apply to various aspects of their lending practices. State laws establish applicable licensing requirements, provide for periodic examinations and establish maximum finance charges on credit extensions.

    Holding Company Regulation

        WMI is a multiple savings and loan holding company, as defined by federal law, because it owns three savings associations: WMB, WMBFA and WMBfsb. WMB is a state-chartered savings bank that has elected to be treated as a savings association for purposes of the federal savings and loan holding company law. WMI is regulated as a unitary savings and loan holding company because WMBFA and WMBfsb are deemed to have been acquired in supervisory transactions. Therefore, certain restrictions under federal law on the activities and investments of multiple savings and loan holding companies do not apply to WMI. These restrictions will apply to WMI if WMB, WMBFA or WMBfsb fails to be a qualified thrift lender ("QTL"). By this we mean generally that:

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at least 65% of a specified asset base must consist of: loans to small businesses, credit card loans, educational loans, or certain assets related to domestic residential real estate, including residential mortgage loans and mortgage securities; or



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at least 60% of total assets must consist of cash, United States government or government agency debt or equity securities, fixed assets, or loans secured by: deposits, real property used for residential, educational, church, welfare or health purposes, or real property in certain urban renewal areas.

        WMB, WMBFA and WMBfsb are currently in compliance with QTL standards. Failure to remain a QTL also would restrict the ability of WMBFA, WMBfsb or WMB to obtain advances from a Federal

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Home Loan Bank ("FHLB"). In addition, failure to remain a QTL would restrict the ability of WMBFA or WMBfsb to establish new financial centers and pay dividends.

        Acquisitions by Savings and Loan Holding Companies.     Neither WMI nor any other person may acquire control of a savings institution or a savings and loan holding company without the prior approval of the OTS, or, if the acquirer is an individual, the OTS' lack of disapproval. In either case, the public must have an opportunity to comment on the proposed acquisition, and the OTS must complete an application review. Without prior approval from the OTS, WMI may not acquire more than 5% of the voting stock of any savings institution that is not one of its subsidiaries.

        The GLB Act generally restricts any nonfinancial entity from acquiring us unless such nonfinancial entity was, or had submitted an application to become, a savings and loan holding company as of May 4, 1999. Since we were treated as a unitary savings and loan holding company prior to that date, we may engage in nonfinancial activities and acquire nonfinancial subsidiaries.

        Annual Reporting; Examinations.     Under the Home Owners' Loan Act ("HOLA") and OTS regulations, WMI, as a savings and loan holding company, must file periodic reports with the OTS. In addition, WMI must comply with OTS record-keeping requirements.

        WMI is subject to holding company examination by the OTS. The OTS may take enforcement action if the activities of a savings and loan holding company constitute a serious risk to the financial safety, soundness or stability of a subsidiary savings association.

        Commonly Controlled Depository Institutions.     Depository institutions are "commonly controlled" if they are controlled by the same holding company or if one depository institution controls another depository institution. WMI controls WMB, WMBFA and WMBfsb. The FDIC has authority to require FDIC-insured banks and savings associations to reimburse the FDIC for losses it incurs in connection either with the default of a "commonly controlled" depository institution or with the FDIC's provision of assistance to such an institution.

        Capital Adequacy.     WMI is not currently subject to any regulatory capital requirements, but each of its subsidiary depository institutions is subject to various capital requirements. See "Regulation and Supervision- Capital Requirements."

    Subsidiary Savings Institution Regulation

        As federally-chartered savings associations, WMBFA and WMBfsb are subject to regulation and supervision by the OTS. As a state-chartered savings bank, WMB is subject to regulation and supervision by the State Director and the FDIC.

        Federal Regulation and Supervision of WMBFA and WMBfsb.     Federal statutes empower federal savings institutions, such as WMBFA and WMBfsb, to conduct, subject to various conditions and limitations, business activities that include:

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accepting deposits and paying interest on them;



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making and buying loans on residential and other real estate;



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making and buying a limited amount of consumer loans;



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making and buying a limited amount of commercial loans;



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investing in corporate obligations, government debt securities, and other securities;



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offering various banking services to their customers; and



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owning subsidiaries that invest in real estate and carry on certain other activities, including securities and insurance agency activities.

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        OTS regulations further delineate such institutions' investment and lending powers. Federal savings institutions generally may not invest in noninvestment-grade debt securities, nor may they generally make equity investments, other than investments in service corporations.

        State Regulation and Supervision.     Washington State statutes empower savings banks, such as WMB, to conduct, subject to various conditions and limitations, business activities that include:

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accepting deposits and paying interest on them;



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making or buying loans on or investing in residential and other real estate;



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making consumer loans;



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making commercial loans;



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investing in corporate obligations, government debt securities, and other securities;



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offering various banking services to their customers; and



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owning subsidiaries that engage in a wide variety of activities.

        Under state law, savings banks in Washington also generally have all of the powers that federal mutual savings banks have under federal laws and regulations.

        Federal Prohibitions on Exercise of State Bank Powers.     Federal law prohibits banks, such as WMB, and their subsidiaries from exercising certain powers that were granted by state law to make investments or carry on activities as principal (i.e., for their own account) unless either (i) national banks have power under federal law to make such investments or carry on such activities, or (ii) the bank and such investments or activities meet certain requirements established by federal law and the FDIC.

        Federal Restrictions on Transactions with Affiliates.     WMB, WMBFA and WMBfsb, as holding company subsidiaries that are depository institutions, are subject to both qualitative and quantitative limitations on their transactions with WMI and its other subsidiaries. They are subject to the same affiliate and insider transaction rules applicable to member banks of the Federal Reserve System, as set forth in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act, as well as such additional limitations as the institution's primary federal regulator may adopt. These provisions prohibit or limit a savings institution from extending credit to, or entering into certain transactions with, affiliates, principal stockholders, directors and executive officers of the savings institution and its affiliates. For these purposes, the term "affiliate" generally includes a holding company such as WMI and any company under common control with the savings institution. In addition, the federal law governing unitary savings and loan holding companies flatly prohibits WMB, WMBFA or WMBfsb from making any loan to any affiliate whose activity is not permitted for a subsidiary of a bank holding company. This law also prohibits WMB, WMBFA or WMBfsb from making any equity investment in any affiliate that is not its subsidiary. We currently are in material compliance with all these provisions.

        Restrictions on Subsidiary Savings Institution Capital Distributions.     WMI's principal sources of funds are cash dividends paid to it by its banking and other subsidiaries, investment income, and borrowings. Federal and state law limits the ability of a depository institution, such as WMB, WMBFA or WMBfsb, to pay dividends or make other capital distributions.

        Washington state law prohibits WMB from declaring or paying a dividend greater than its retained earnings if doing so would cause its net worth to be reduced below (i) the amount required for the protection of preconversion depositors or (ii) the net worth requirements, if any, imposed by the State Director.

        OTS regulations limit the ability of savings associations such as WMBFA and WMBfsb to pay dividends and make other capital distributions. Certain savings associations, including WMBFA and WMBfsb, must file an application for approval by the OTS before the proposed declaration of a dividend

12

or approval of the proposed capital distribution by its board of directors. In addition, a savings association must obtain prior approval from the OTS if it fails to meet certain regulatory conditions, or 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.

    FDIC Insurance

        The FDIC insures the deposits of each of our banking subsidiaries to the applicable maximum in each institution. The FDIC administers two separate deposit insurance funds, the BIF and the SAIF. The BIF is a deposit insurance fund for commercial banks and some state-chartered savings banks. The SAIF is a deposit insurance fund for most savings associations. WMB is a member of the BIF, but a substantial portion of its deposits is insured through the SAIF. WMBFA and WMBfsb are members of the SAIF, but a small portion of WMBFA's deposits is insured through the BIF. WMB and WMBFA are subject to payment of assessments ratably to both funds.

        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. In addition, regardless of the potential risk to the insurance fund, federal law requires the FDIC to establish assessment rates that will maintain each insurance fund's ratio of reserves to insured deposits at $1.25 per $100. Both funds currently meet this reserve ratio. During 2001, the assessment rate for both SAIF and BIF deposits ranged from zero to 0.27% of covered deposits. WMB and WMBFA qualified for the lowest rate on their BIF deposits in 2001, and WMB, WMBFA and WMBfsb qualified for the lowest rate on their SAIF deposits in 2001. Accordingly, none of these institutions paid any deposit insurance assessments in 2001. If, in the future, the reserve ratio of either insurance fund falls below required levels, that fund may reinstitute deposit insurance assessments for all institutions, including those not currently subject to deposit insurance assessments.

        In addition to deposit insurance assessments, the FDIC is authorized to collect assessments against insured deposits to be paid to the Financing Corporation ("FICO") to service FICO debt incurred in the 1980s. The FICO assessment rate is adjusted quarterly. Since 2000, SAIF- and BIF-insured deposits have been assessed at the same rate by FICO. For the years 2000 and 2001, the average annual rate was 2.07 cents and 1.90 cents per $100 of insured deposits.

    Capital Requirements

        Each of our subsidiary depository institutions is subject to various capital requirements. WMB is subject to FDIC capital requirements, while WMBFA and WMBfsb are subject to OTS capital requirements.

        WMB.     FDIC regulations recognize two types or tiers of capital: core ("Tier 1") capital and supplementary ("Tier 2") capital. Tier 1 capital generally includes common stockholders' equity and noncumulative perpetual preferred stock less most intangible assets. Tier 2 capital, which is limited to 100% of Tier 1 capital, includes such items as qualifying general loan loss reserves, cumulative perpetual preferred stock, mandatory convertible debt, term subordinated debt and limited life preferred stock; however, the amount of term subordinated debt and intermediate term preferred stock that may be included in Tier 2 capital is limited to 50% of Tier 1 capital.

        The FDIC uses a combination of risk-based guidelines and leverage ratios to evaluate capital adequacy. Under the risk-based capital guidelines, different categories of assets are assigned different risk weights, based generally on the perceived credit risk of the asset. For example, U.S. Treasury Bills and Government National Mortgage Association ("GNMA") securities are placed in the 0% risk category,

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FNMA and Federal Home Loan Mortgage Corporation ("FHLMC") MBS are placed in the 20% risk category, loans secured by SFR properties are generally placed in the 50% risk category, and commercial real estate and consumer loans are generally placed in the 100% risk category. These risk weights are multiplied by corresponding asset balances to determine a risk-weighted asset base. Certain off-balance sheet items are added to the risk-weighted asset base by converting them to a balance sheet equivalent and assigning them the appropriate risk weight in one of four categories.

        Under FDIC guidelines, the ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8.00%, and the ratio of Tier 1 capital to risk-weighted assets must be at least 4.00%.

        In addition to the risk-based capital guidelines, the FDIC uses a leverage ratio to evaluate a bank's capital adequacy. Most banks are required to maintain a minimum leverage ratio or Tier 1 capital to average assets of 4.00%. The FDIC retains the right to require a particular institution to maintain a higher capital level based on the institution's particular risk profile.

        The FDIC may consider other factors that may affect a bank's financial condition. These factors may include interest rate risk exposure, liquidity, funding and market risks, the quality and level of earnings, concentration of credit risk, risks arising from nontraditional activities, loan and investment quality, the effectiveness of loan and investment policies, and management's ability to monitor and control financial operating risks.

        The following table sets forth the current regulatory requirement for capital ratios for FDIC regulated banks as compared with our capital ratios at December 31, 2001:

⁽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.

        WMBFA and WMBfsb.     The OTS requires savings associations, such as WMBFA and WMBfsb, to meet each of three separate regulatory capital standards:

•

a core capital leverage requirement,



•

a tangible capital requirement, and



•

a risk-based capital requirement.

        For a limited time, core capital may include certain amounts of qualifying supervisory goodwill.

        OTS regulations incorporate a risk-based capital requirement that is designed to be no less stringent than the capital standard applicable to national banks. It is modeled in many respects on, but not identical to, the risk-based capital requirements adopted by the FDIC. The OTS may establish, on a case-by-case basis, individual minimum capital requirements for a savings association that vary from the requirements that otherwise would apply under the OTS capital regulations. The OTS has not established such individual minimum capital requirements for WMBFA or WMBfsb.

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        The following table sets forth the current regulatory requirement for capital ratios for savings associations as compared with our capital ratios at December 31, 2001:

⁽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.

    Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") Requirements

        FDICIA created a statutory framework that increased the importance of meeting applicable capital requirements. FDICIA established five capital categories:

•

well-capitalized,



•

adequately capitalized,



•

undercapitalized,



•

significantly undercapitalized, and



•

critically undercapitalized.

        An institution's 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. The federal banking agencies (including the FDIC and the OTS) have adopted regulations that implement this statutory framework. Under these regulations, 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 core 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 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.

        Federal law requires that the federal banking agencies' risk-based capital guidelines take into account various factors including interest rate risk, concentration of credit risk, risks associated with nontraditional activities, and the actual performance and expected risk of loss of multi-family mortgages. The federal banking agencies' capital standards specify that concentration of credit and nontraditional activities are among the factors that the agencies will consider in evaluating capital adequacy. The OTS and FDIC risk-based capital standards include provisions for the risk weighting of loans made to finance the purchase or construction of multi-family residences. The OTS's risk-based capital requirements for savings associations (such as WMBFA and WMBfsb) include an interest rate risk component. Implementation of this requirement has been delayed, and the OTS has proposed eliminating this interest rate risk component. Management believes that the effect of including such an interest rate risk component in the calculation of risk-adjusted capital will not cause WMBFA or WMBfsb to cease to be well capitalized. A joint policy statement of the FDIC and certain other federal banking agencies (not including the OTS) provides guidance on prudent interest rate risk management principles, and states that these agencies will evaluate the banks' interest rate risk on a case-by-case basis rather than adopting a standardized measure or establish an explicit minimum capital charge for interest rate risk.

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    Other FDIC and OTS Regulations and Examination Authority

        The FDIC has adopted regulations to protect the deposit insurance funds and depositors, including regulations governing the deposit insurance of various forms of accounts. The FDIC also has adopted numerous regulations to protect the safety and soundness of FDIC-regulated banks. These regulations cover a wide range of subjects including financial reporting, change in bank control, affiliations with securities firms and capital requirements. In certain instances, these regulations restrict the exercise of powers granted by state law.

        An FDIC regulation and a joint FDIC/OTS policy statement place a number of restrictions on the activities of WMB's and WMBFA's securities affiliates and on such affiliates' transactions with WMB, WMBFA and WMBfsb. These restrictions include requirements that such affiliates follow practices and procedures to distinguish them from WMB, WMBFA and WMBfsb and that such affiliates give customers notice from time to time of their separate corporate status and of the distinction between insured deposits and uninsured nondeposit products.

        As required by applicable Federal laws, FDIC regulations and OTS regulations impose requirements and restrictions on the operations of WMB, WMBFA and WMBfsb. These regulations include requirements to protect the privacy of consumers' nonpublic financial information and to provide 90 days advance notice of the closure of certain facilities.

        FDICIA imposes supervisory standards requiring periodic OTS or FDIC examinations, independent audits, uniform accounting and management standards, and prompt corrective action for problem institutions. As a result of FDICIA, depository institutions and their affiliates are subject to federal standards governing asset growth, interest rate exposure, executive compensation, and many other areas of depository institution operations. FDICIA contains numerous other provisions, including reporting requirements and revised regulatory standards for, among other things, real estate lending.

        The FDIC may sanction any FDIC-regulated bank that does not operate in accordance with FDIC regulations, policies and directives. Proceedings may be instituted against any FDIC-regulated bank, or any institution-affiliated party, such as a trustee, director, officer, employee, agent, or controlling person of the bank, who engages in unsafe and unsound practices, including violations of applicable laws and regulations. The FDIC may revalue assets of an institution, based upon appraisals, and may require the establishment of specific reserves in amounts equal to the difference between such revaluation and the book value of the assets. The State Director has similar authority under Washington State law, and the OTS has similar authority under HOLA. 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.

        Federal regulation of depository institutions is intended for the protection of depositors (and the BIF and the SAIF), and not for the protection of stockholders or other creditors. In addition, a provision in the Omnibus Budget Reconciliation Act of 1993 requires that in any liquidation or other resolution of any FDIC-insured depository institution, claims for administrative expenses of the receiver and for deposits in U.S. financial centers (including claims of the FDIC as subrogee of the insured institution) shall have priority over the claims of general unsecured creditors.

    Federal Reserve and Consumer Regulation

        Under Federal Reserve Board regulations, WMB, WMBFA and WMBfsb are each 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. These regulations generally require that WMB, WMBFA and WMBfsb each maintain reserves against net

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transaction accounts in the amount of 3% on amounts of $41.3 million or less, plus 10% on amounts in excess of $41.3 million. Institutions may designate and exempt $5.7 million of certain reservable liabilities from these reserve requirements. These amounts and percentages are subject to adjustment by the Federal Reserve Board. A savings bank, like other depository institutions maintaining reservable accounts, may borrow from the Federal Reserve Bank discount window, but the Federal Reserve Board's regulations require the savings bank to exhaust other reasonable alternative sources before borrowing from the Federal Reserve Bank.

        Numerous other regulations promulgated by the Federal Reserve Board affect the business operations of our 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.

        The GLB Act included provisions which give consumers new protections regarding the transfer and use of their nonpublic personal information by financial institutions. The four banking agencies have issued regulations implementing these provisions of the GLB Act. In addition, states are permitted under the GLB Act to have their own privacy laws which offer greater protection to consumers than the GLB Act. Numerous states in which the Company does business have enacted such laws.

    Federal Home Loan Bank System

        The FHLB System was created in 1932 and consists of twelve regional FHLBs. The FHLBs are federally chartered but privately owned institutions created by Congress. The Federal Housing Finance Board ("Finance Board") is an agency of the federal government and is generally responsible for regulating the FHLB System. Each FHLB is owned by its member institutions. The primary purpose of the FHLBs is to provide funding to their members for making housing loans as well as for affordable housing and community development lending. 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.

        Under current rules, an FHLB member is generally required to purchase FHLB stock in an amount equal to at least 5% of the aggregate outstanding advances made by the FHLB to the member. The GLB Act and new regulations adopted by the Finance Board in December 2000 require a new capital structure for the FHLBs. The new capital structure contains risk-based and leverage capital requirements similar to those currently in place for depository institutions. Each FHLB has submitted a capital structure plan to the Finance Board, which is in the process of reviewing each of the plans.

        Other changes in the GLB Act to the FHLB system included a broadening of purposes for which FHLB advances may be used, and a change in the manner of calculating the obligations payable by the FHLBs for the Resolution Funding Corporation ("REFCORP"). Previously, the aggregate amount of the annual REFCORP obligation paid by all FHLBs was $300 million. The GLB Act imposes an annual obligation equal to 20% of the net earnings of the FHLBs. This change will result in a greater obligation in years when FHLBs have high income levels, thereby reducing the return on members' investments. With the broadening in the purpose for which FHLB advances can be used, our borrowing costs may rise as demand for advances increases.

        Generally, an institution eligible to be a member must initially apply for membership in the FHLB for the district where the member's principal place of business is located. WMBFA currently is a member only of the San Francisco FHLB, because WMBFA's home office is in Stockton, California. WMB, whose head office is in Seattle, is a member of the Seattle FHLB, as is WMBfsb, whose home office is in Salt Lake City. The Dallas FHLB (of which Bank United was a member prior to merging into WMBFA) and the New York FHLB (of which Dime's depository institution subsidiary, The Dime Savings Bank of New York, FSB, was a member prior to merging into WMBFA), have requested that the Finance Board allow WMBFA to be a member of those FHLBs without terminating WMBFA's membership in the San Francisco FHLB. WMBFA has supported these requests. On January 22, 2002, the Finance Board

17

announced that it will not consider any applications by institutions to be members of more than one FHLB until the Finance Board has developed a comprehensive policy solution.

    Community Reinvestment Act

        The Community Reinvestment Act ("CRA") requires financial institutions regulated by the federal financial supervisory agencies to ascertain and help meet the credit needs of the communities we serve, including low- to moderate-income ("LMI") neighborhoods, while maintaining safe and sound banking practices. The 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 1998, WMBFA and WMBfsb each received an "outstanding" CRA rating from the OTS, and WMB received an "outstanding" CRA rating from the FDIC in 1999. These ratings reflect our commitment to meeting the credit needs of the communities we serve.

        Under regulations that apply to all CRA performance evaluations after July 1, 1997, many factors play a role in assessing a financial institution's CRA performance. The institution's regulator must consider its financial capacity and size, legal impediments, local economic conditions and demographics, including the competitive environment in which it operates. The evaluation does not rely on absolute standards, and the institutions are not required to perform specific activities or to provide specific amounts or types of credit. We maintain a CRA file available for public viewing, as well as an annual CRA highlights document. These documents describe our credit programs and services, community outreach activities, public comments and other efforts to meet community credit needs.

        In May 1998, we announced a ten-year $120 billion community commitment to all areas in which we conduct business. As of December 31, 2001, we had exceeded our targets for lending in LMI neighborhoods and under-served market areas, reaching almost 30% of our ten-year goal in only two years. In September 2001, we announced a new ten-year $375 billion community commitment, effective January 2002. This commitment replaced prior ones made by us and the companies we acquired.

        The $375 billion commitment targets single-family, small business and consumer, and multi-family lending, and community investment at the following levels:

•

Single-family lending — $300 billion in affordable housing loans to minority borrowers, borrowers in LMI census tracts, and borrowers earning less than 80% of median income. Of this amount, $100 billion is specifically targeted to LMI borrowers.



•

Consumer and small business and lending — $48 billion in loans to LMI consumers and small businesses, including:



•

Consumer loans, home equity loans and lines of credit to borrowers with low-to moderate-incomes and in LMI census tracts, and



•

Small business lending, with an emphasis on loans and lines of credit of $50,000 or less and loans to people of color, women and disabled persons.




•

Multi-family lending — $25 billion for multi-family structures, including (among others) apartment and manufactured home park developments, in LMI census tracts or serving families earning less than 80% of median income.



•

Community investment — $2 billion in investments and loans for community development. This commitment area includes low-income housing initiatives, tax-exempt housing revenue bonds, and community banks and financial institutions targeting multi-cultural communities or other community needs.

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        In addition to these goals and objectives, we made a commitment (along with pledges in other areas, like diversity) to philanthropically support the communities in which we conduct our business. Towards that end we will strive to return to our neighborhoods 2% of our pre-tax earnings. This corporate support is returned through grants, sponsorships, loans at below market rates, in-kind donations, paid employee volunteer time, and other financial support of our efforts to develop our communities.

    Recent and Proposed Legislation and Regulation

        In January 2001, the four federal banking agencies jointly issued expanded examination and supervision guidance relating to subprime lending activities. In the guidance, "subprime" lending generally refers to programs that target borrowers with weakened credit histories or lower repayment capacity. The guidance principally applies to institutions with subprime lending programs with an aggregate credit exposure equal to or greater than 25 percent of an institution's Tier 1 capital. Such institutions would be subject to more stringent risk management standards and, in many cases, additional capital requirements. As a starting point, the guidance generally expects that such an institution would hold capital against subprime portfolios in an amount that is one and one half to three times greater than the amount appropriate for similar types of non-subprime assets.

        The guidance is primarily directed at insured depository institutions. WMBFA currently holds specialty mortgage finance loans in excess of 25 percent of its Tier 1 capital and could be adversely affected by the application of the guidance. A significant portion of these loans and the consumer finance loans originated by Washington Mutual Finance may be considered subprime loans under the guidance. While WMI, Long Beach Mortgage and Washington Mutual Finance are not currently subject to any specific capital requirements imposed by the federal banking agencies, the OTS does have certain examination authority over WMI in its capacity as a savings and loan holding company and, accordingly, WMI and its nonbanking subsidiaries could also be adversely affected by the guidance. Management is currently analyzing the impact of the guidance on the conduct of its business.

        In December 2001, the Federal Reserve Board published final regulations implementing the Home Ownership and Equity Protection Act ("HOEPA"). Compliance with the regulations is mandatory as of October 1, 2002. HOEPA, which was enacted in 1994, imposes additional disclosure requirements and certain substantive limitations on certain mortgage loans with rates or fees above specified levels. The regulations lower the rate levels that trigger the application of HOEPA and include additional fees in the calculation of the fee amount that triggers HOEPA. The loans Washington Mutual currently makes are generally below the rate and fee levels that trigger HOEPA. However, as a result of the new regulations, more of the loans we currently offer will be subject to HOEPA.

        The OTS adopted as final on July 18, 2001 an interim rule that removed the regulation that required a savings association to maintain an average daily balance of liquid assets of at least four percent of its liquidity base, and retained a provision requiring a savings association to maintain sufficient liquidity to ensure its safe and sound operation.

        The OTS is soliciting comments on a number of proposed changes to the capital regulations. These changes are designed to eliminate unnecessary capital burdens and to align OTS capital regulations more closely to those of other banking regulators. Under the proposed rule, a one-to-four family residential first mortgage loan may qualify for a 50 percent risk weight if it meets certain criteria, including a loan-to-value ("LTV") ratio below 90 percent. Currently these loans must have an LTV ratio of 80 percent or less to qualify for the 50 percent risk weight. The OTS also proposes to eliminate the requirement that a thrift institution must deduct from total capital that portion of a land loan or a nonresidential construction loan in excess of an 80 percent LTV ratio and eliminate the interest rate risk component of the risk-based capital regulations.

        On November 29, 2001 the banking agencies issued a final rule that changed regulatory capital standards to address the treatment of recourse obligations, residual interests and direct credit substitutes

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that expose banking organizations to credit risk. The final rule treats recourse obligations and direct credit substitutes more consistently than the agencies' prior risk-based capital standards and adds new standards for the treatment of residual interests, including a concentration limit for credit-enhancing interest-only strips. In addition, the agencies allow the use of credit ratings and certain alternative approaches to match the risk-based capital requirement more closely to a banking organization's relative risk of loss for certain positions in asset securitizations. The final rule was effective on January 1, 2002. Any transactions settled on or after January 1, 2002, are subject to this final rule. Banking organizations that entered into transactions before January 1, 2002 were permitted to elect early adoption, as of November 29, 2001, of any provision of the final rule if such adoption resulted in reduced capital requirements. Conversely, banking organizations that entered into transactions before January 1, 2002 that resulted in increased capital requirements under the final rule may delay the application of this rule to those transactions until December 31, 2002. Washington Mutual elected early adoption of the final rule as of December 31, 2001. The overall impact was favorable to our capital position.

        On October 26, 2001, President Bush signed into law the USA PATRIOT Act. The Act includes numerous provisions designed to fight international money laundering and to block terrorist access to the U.S. financial system. The provisions generally affecting banking organizations relate to the relationships of such organizations with foreign banks and with individuals and entities who reside or are located outside the United States.

    Regulation of Nonbanking Affiliates

        As broker-dealers registered with the Securities and Exchange Commission and as members of the National Association of Securities Dealers, Inc. ("NASD"), WM Financial Services and our mutual fund distributor subsidiary are subject to various regulations and restrictions imposed by those entities, as well as by various state authorities. As our registered investment advisor, WM Advisors is subject to various federal and state securities regulations and restrictions. A new subsidiary, WaMu Capital Corp., has applied to the Securities and Exchange Commission and the NASD for registration as a broker-dealer. WaMu Capital Corp. will be subject to the various regulations and restrictions imposed by those entities, as well as by various state authorities.

        The NASD has adopted rules concerning NASD member operations conducted in financial centers of depository institutions. The NASD requirements are substantially similar to the policy statements governing the activities of our securities affiliates previously issued by the various banking regulators.

        Our consumer finance subsidiaries are 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 subsidiaries are subject to various state licensing and examination requirements.

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        Mr. Killinger is Chairman, President and Chief Executive Officer of Washington Mutual. He was named President and director in 1988, Chief Executive Officer in 1990 and Chairman in 1991. Mr. Killinger joined Washington Mutual as an Executive Vice President of WMB in 1983.

        Mr. Chapman is President of Washington Mutual's Specialty Finance Group. He is responsible for overseeing the Commercial Real Estate and Specialty Lending units and Washington Mutual Finance Corporation. After joining Washington Mutual in 1998 as President and Chief Executive Officer of Washington Mutual Finance Corporation, he became a member of the Executive Committee in 2001. Previously, Mr. Chapman served as President of AMRESCO Residential Mortgage Corporation and spent seventeen years in various positions with Household Finance Corporation.

        Ms. Chapman has been Senior Executive Vice President and General Counsel since 1999. She became Executive Vice President, General Counsel and a member of the Executive Committee in 1997. Prior to joining Washington Mutual, Ms. Chapman was a partner with Foster Pepper & Shefelman PLLC, a Seattle, Washington law firm.

        Mr. Cornick is an Executive Vice President of Washington Mutual and is serving as interim President of the Banking and Financial Services Group. He is responsible for consumer banking, financial services and business banking. Mr. Cornick, who has served 35 years with Washington Mutual, was named Senior Vice President in 1988 and Executive Vice President in 1997. He is also serving as an interim member of the Executive Committee from August 2001 to August 2002.

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        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. He has more than 25 years of human resources management experience, most recently, at Amazon.com as Vice President of Strategic Growth and Human Resources.

        Mr. Davis is President, Home Loans and Insurance Services Group. He is responsible for single family lending and insurance services. Mr. Davis became Executive Vice President and a member of the Executive Committee in January 1997. Prior to joining Washington Mutual, he was Director of Mortgage Originations of American Savings Bank, F.A. from 1993 through 1996 and served as President of ASB Financial Services, Inc. from 1989 to 1993.

        Mr. Ehrlich has been Executive Vice President, Corporate Relations and a member of the Executive Committee since 1999. He is responsible for overseeing the Company's corporate public relations, employee communications, government relations and investor relations. Mr. Ehrlich became Assistant Vice President of Corporate Communications in 1994 and Senior Vice President in 1998. He joined Washington Mutual as a public relations consultant in 1990.

        Mr. Freimuth has been Senior Executive Vice President, Corporate Services since 1999. He is responsible for a variety of central corporate support areas, including human resources and credit oversight. Mr. Freimuth became Senior Vice President in 1991 and Executive Vice President and a member of the Executive Committee in 1997. Mr. Freimuth joined WMB as a Vice President in 1988.

        Mr. Gross joined Washington Mutual in 2001 as Executive Vice President and Chief Information Officer and became a member of the Executive Committee at that time. He is responsible for directing the Company's corporate technology strategy. Mr. Gross joined Washington Mutual from Sydney, Australia-based Westpac Banking Corp. where he was Group Executive of Technology, Operations and eCommerce.

        Mr. Longbrake has been Vice Chair and Chief Financial Officer since 1999. He is responsible for corporate finance and enterprise risk management. Mr. Longbrake rejoined Washington Mutual as Executive Vice President and Chief Financial Officer and a member of the Executive Committee in October 1996. From March of 1995 through September of 1996, he served as Deputy to the Chairman for Finance and Chief Financial Officer of the FDIC. Mr. Longbrake became Vice Chair, Enterprise Risk Management and Chief Financial Officer in 2002.

        Mr. Miles has been Senior Vice President and Controller since January 2001. He serves as Washington Mutual's principal accounting officer. Mr. Miles joined the Company as Senior Vice President, Corporate Tax in June 1999. Prior to joining the Company, Mr. Miles was Director, Domestic Taxes of BankBoston, N.A.

        Ms. Oppenheimer is President of the Banking and Financial Services Group. She is responsible for consumer banking, financial services and business banking. Ms. Oppenheimer became Executive Vice President in 1993 and has been a member of the Executive Committee since its formation in 1990. She has been an officer of the Company since 1985. From August 2001 through August 2002, Ms. Oppenheimer is on part-time status, but she continues to play a strategic role in the Company.

        Mr. Tall is Vice Chair, Corporate Development and Specialty Finance Group. He is responsible for mergers and acquisitions, commercial real estate, specialty commercial lending, and the consumer finance subsidiaries. Mr. Tall became an Executive Vice President in 1987 and Vice Chair in 1999. He has been a member of the Executive Committee since its formation in 1990.

        Mr. Vanasek is Executive Vice President and Chief Credit Risk Officer. He is responsible for overseeing all facets of the Company's credit risk management policies, strategies and performance. Mr. Vanasek became a member of the Executive Committee in 2001. Prior to joining Washington Mutual

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in 1999, he spent eight years at the former Norwest Bank, in a variety of lending risk management positions including Chief Credit Officer.