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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549
FORM 10-K
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(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR FISCAL YEAR ENDED DECEMBER 31, 2000

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO :

COMMISSION FILE NUMBER 1-14667

(Mark One)

[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED DECEMBER 31, 2001

[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROMTO:

Commission File Number 1-14667
WASHINGTON MUTUAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

------------------------

(Exact name of registrant as specified in its charter)

WASHINGTON Washington 91-1653725
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NUMBER)

(State or Other Jurisdiction of Incorporation
or Organization) (I.R.S. Employer
Identification Number)

1201 THIRD AVENUE, SEATTLE, WASHINGTON Third Avenue, Seattle, Washington

98101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(Address of Principal Executive Offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:Registrant's telephone number, including area code: (206) 461-2000

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SECURITIES REGISTERED PURSUANT TO SECTION
Securities registered pursuant to Section 12(b) OF THE ACT:

of the Act:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Title of each class Name of each exchange
on which registered
Common Stock New York Stock Exchange
8% Corporate Premium Income Equity Securities New York Stock Exchange
Litigation Tracking Warrants^TM NASDAQ

SECURITIES REGISTERED PURSUANT TO SECTIONSecurities registered pursuant to Section 12(g) OF THE ACT: NONEof the Act: none
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO __..
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. [ ]
The aggregate market value of voting stock held by nonaffiliates of the registrant as of March 2, 2001:
COMMON STOCK -- $28,799,686,768(1)

1, 2002:
Common Stock — $31,328,958,175⁽¹⁾
⁽¹⁾Does not include any value attributable to 12,000,00018,000,000 shares that are held in escrow and not traded.
The number of shares outstanding of the issuer's classes of common stock as of March 2, 2001:
COMMON STOCK -- 583,802,776(2)

1, 2002:
Common Stock — 971,374,311⁽²⁾
⁽²⁾Includes the 12,000,00018,000,000 shares held in escrow.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Incorporated by Reference
Portions of the definitive proxy statement for the Annual Meeting of Shareholders to be held April 17, 2001,16, 2002, are incorporated by reference into Part III.

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WASHINGTON MUTUAL, INC.

2000

2001 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PAGE
----

Page
PART I...................................................... I 1
ITEM
Item 1. BUSINESS.......................................... Business 1
Overview...............................................
Overview 1
Banking and Financial Services Group................... Group 1
Home Loans and Insurance Services Group................ 3
Group 2
Specialty Finance Group................................ 6
Treasury Division...................................... 7
Employees.............................................. 8
Competitive Environment................................ 8
Group 4
Employees 5
Factors That May Affect Future Results................. 9
Results 5
Business Combinations.................................. 11
Taxation............................................... 11
Combinations 8
Taxation 8
Environmental Regulation............................... 12
Regulation 9
Regulation and Supervision............................. 13
Supervision 10
Principal Officers..................................... 24
ITEMOfficers 21
Item 2. PROPERTIES........................................ 25
ITEMProperties 23
Item 3. LEGAL PROCEEDINGS................................. 25
ITEMLegal Proceedings 23
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................ 26
Submission of Matters to a Vote of Security Holders 23
PART II..................................................... 26
ITEMII 24
Item 5. MARKET FOR OUR COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS......................................... 26
ITEMMarket for our Common Stock and Related Security Holder Matters 24
Item 6. SELECTED FINANCIAL DATA........................... 27
ITEMSelected Financial Data 25
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 29
Overview............................................... 29Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 30
Review of Financial Condition.......................... 35
Provision and Allowance for Loan and Lease Losses...... 38
Operating Segments..................................... 42
Asset and Liability Management Strategy................ 43
Liquidity.............................................. 45
Capital Adequacy....................................... 46
Operations 25
Cautionary Statements 25
Overview 26
Recently Issued Accounting Standards Adopted 26
Critical Accounting Policies 27
Earnings Performance 27
Review of Financial Condition 34
Asset Quality 38
Operating Segments 44
Liquidity 45
Capital Adequacy 46
Market Risk Management 47
Maturity and Repricing Information 54
Tax Contingency 55
Goodwill Litigation 56
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 47
Item 8. Financial Statements and Supplementary Data 58
Item 9. Changes in Theseand Disagreements with Accountants on Accounting and Financial Statements.................................. 46
Recently Issued Accounting Standards Not Yet Adopted... 47
Tax Contingency........................................ 47
Goodwill Litigation.................................... 48
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................ 49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....... 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................... 51
Disclosure 58
PART III.................................................... 51
III 59
PART IV..................................................... 51
ITEMIV 59
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.................................... 51
Exhibits, Financial Statement Schedules and Reports on Form 8-K 59
i 3

PART I

ITEM 1. BUSINESS

OVERVIEW
Business
Overview
With a history dating back to 1889, Washington Mutual, Inc. is a financial services company committed to serving consumers and smallsmall- to mid-sized businesses. Based on our consolidated assets at December 31, 2000,2001, we were the largest savings institution and the seventh largest banking company in the United States.

Our principal business offices are located at 1201 Third Avenue, Seattle,
Washington 98101 and our telephone number is (206) 461-2000. When we refer to
"we" or "Washington Mutual" or the "Company" in this Form 10-K, we mean
Washington Mutual, Inc., and its consolidated subsidiaries. When we refer to
WMI, we mean Washington Mutual, Inc. exclusively.

Our business operations are conducted by our subsidiaries. Our principal
banking subsidiaries are Washington Mutual Bank, FA ("WMBFA"), Washington Mutual
Bank ("WMB") and Washington Mutual Bank fsb ("WMBfsb"). Our other principal
subsidiaries are Washington Mutual Finance Corporation ("Washington Mutual
Finance"), Long Beach Mortgage Company ("Long Beach Mortgage") and WM Financial
Services, Inc. ("WMFS").
Our assets have grown over the last fivesix years primarily through acquisitions. In 1996, we acquired Keystone Holdings, Inc., the parent of American Savings Bank, F.A. ("ASB"). This acquisition, referred to as the "Keystone Transaction," gave us our first depository institution in California. In 1997, we acquired Great Western Financial Corporation ("Great Western") and in October 1998, we acquired H.F. Ahmanson & Co. ("Ahmanson"). In February 1998, Ahmanson had acquired Coast Savings Financial, Inc. (the "Coast Acquisition").
During 2001, we completed three acquisitions. On January 31, 2001, we acquired the mortgage operations of The PNC Financial Services Group, Inc. The principal subsidiaries acquired in that
transaction were renamed Washington Mutual Home Loans, Inc. ("WMHLI") and
Washington Mutual Mortgage Securities Corp. ("WMMSC"PNC"). On February 9, 2001, we acquired Texas-based Bank United Corp. ("Bank United"), which was
merged into Washington Mutual, Inc. Asand on June 1, we acquired Fleet Mortgage Corp., a result, allunit 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 subsidiariesmortgage 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 Corp., including Bank United, a federally chartered savings bank, becamealso increased our subsidiaries. Bank United was subsequently merged into WMBFA.

As a resultdeposit 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 acquisitions described above, our company has been
transformed into a national financial services company. Although we operate
principally in California, Washington, Oregon, Florida, Texas and Utah, we have
physical operations in 42 states.

Effective January 1, 2001, we realigned our business segments. The
following discussionNational Australia Bank Limited ("National"). We will subservice HomeSide's $187 billion mortgage servicing portfolio. National retained ownership of our business portrays our business as it is now being
managed. Separately, we are in the process of enhancing our segment reporting
process methodologies and allocations and will be reporting segment results
under the new methodologies and as realigned beginningHomeSide's mortgage servicing rights, along with the first quarter of
2001.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

•
Home Loans and Insurance Services Group

•
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

OurDivision.
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. We provide serviceBanking & FS provides services to approximately fiveseven million consumer and business households through multiple delivery channels: over 1,100 finan-

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cial1,400 financial centers (both free-standing and in-store), including 3551 business banking centers, and over 1,6002,150 automated teller machines located in eighttwelve states. WeWith 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 offer ouroffers investment advisory and securities brokerage services. Banking & FS offers customers the convenience of 24-hour telephone and internet banking and investment services.

Our strategy is to expand our base of consumerservices through wamu.com, wmfinancial.com, wmgroupoffunds.com and business relationships
by combining national convenience with local customer service and a broad-based
product line.invest1to1.com.
In addition to traditional banking products, we offer investment
management, securities brokerage services and annuity products through our
subsidiaries and affiliates. In May 2000, we launched our own web complex, made
up of our banking site, wamu.com; Invest1to1.com and wmfinancial.com, which
provide on-line financial planning and stock trading; and wmgroupoffunds.com,
featuring WM Group of Funds information and interaction with investors and
financial advisors. In partnership with our Home Loans & Insurance Services
Group, mortgage loans and insurance products are made available through our
financial centers. Banking & FS offers various consumer and business deposit products, as well
as a variety of value-added, fee-based banking services. Deposit products
offered include checking accounts, savings accounts, money market deposit
accounts ("MMDAs") and time deposit accounts. Fee-based services include, but
are not limited to:

- payment choices, including debit card, pay-by-phone, on-line banking,
money orders, bank checks, and traveler's checks,

- a membership program featuring free checks, a variety of product
discounts, shopping and travel services, and credit card protection
service, and

- safety deposit box rentals.

A primary focus of the Banking & FS Group in 2000 was thebegan opening of financial centers in Las Vegas with project Occasio(TM)Occasio^TM (Latin for "favorable opportunity"), which features a completely new retail approach to banking. Occasio(TM)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 an additionala vehicle for expanding into new market areas where acquisition opportunities may be limited. Based onBy the favorable customer acceptance and strong resultsend of 2001, the group had opened 20 Occasio financial centers in Las Vegas weand 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 intoits presence in Phoenix beginning in 2001 and will openAtlanta and expects eventually to have a total of approximately 40 and 80 Occasio financial centers in Phoenix throughout 2001those 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 2002. Occasio(TM)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 centers welcome customers in an open, free-flowing retail environment where they
can either interact with roaming customer service representatives or become
engaged by high-tech, self-help, touch screens. Occasio(TM) focuses on the
customerservices offered to small- and how the customer chooses to be served. Customers can also log onto
Washington Mutual's home page, which provides links to allmid-sized businesses include lines of our internet
productscredit, 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 ourthe consumer and commercial business loan portfolioportfolios 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 WM Business Bankbusiness banking in California. The following consumer loan products are
available through our financial centers:

- second mortgage loans, both for purposes unrelated to the property
securing the loan and for a variety of purposes related to the property,
including its renovation or remodeling,

- manufactured housing loans,

- purchase money loans for automobiles, marine and recreational vehicles,

- student loans,

- loans secured by deposit accounts, and

- secured and unsecured loans made under our line of credit or term loan
programs.

We offer a full line of business loan products and banking services through
our Western Bank offices in the northwest and WM Business Bank offices in
California. We concentrate on developing and maintaining

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strong client relationships with small and mid-sized companies. Our core
business customers are companies with $5 million to $100 million in sales. We
provide the following loan products to our business customers:

- business lines of credit,

- working capital loans,

- equipment loans,

- loans secured by real estate, and

- Small Business Administration ("SBA") loans.

We also offer an array of banking services to our business customers
including:

- international trade finance,

- deposit, cash, and treasury management services, and

- merchant bankcard services.

Commercial business loans are made on a secured or unsecured basis.
Collateral for secured commercial loans may be business assets, real estate,
personal assets, or some combination thereof. Our decision to make a consumer or
commercial loan is based on an evaluation of the borrower's financial capacity,
including such factors as income, other indebtedness and credit history; company
performance, in the case of commercial loans; and collateral. The merger with Bank United Corp. enhances our presence inalso strengthened the State of
Texas. Prior to the merger, our operations served more than 125,000 households
through 48 financial centers in and around Dallas and Houston. The merger with
Bank United Corp. adds over 300,000 households and approximately 160 financial
centers to our Texas presence and expands our market coverage into the Austin
and San Antonio markets. The merger with Bank United Corp. strengthens ourgroup's market position for business lending in Texas as well asand nationally through SBA lending offices located in some of the nation's most attractive geographic
markets.

Ouroffices.
The group's investment services are offered through: (1) WMFS,to the public by over 500 financial consultants of WM Financial Services, a licensed broker-dealer, (2) WM Fund Advisors, Inc. ("WM Advisors") providing investmentbroker-dealer. Fixed annuities are offered to the public by over 900 bank employees licensed to offer such products. Investment advisory and distribution services for the WM Group of Funds are provided respectively by WM Advisors, Inc. and (3) the
Annuity Program.WM Funds Distributor, Inc. At December 31, 2000, WMFS was licensed in 49 states and Puerto
Rico and operated in the eight states where our financial centers are located.
Over 500 financial consultants and 800 licensed bank employees provide
investment services to retail customers.2001, WM Advisors our registered investment advisor subsidiary, had $8.21$11.58 billion of assets under management in 17 mutual funds, five asset management
portfolios, and one variable annuity at December 31, 2000. The WM Group of Funds
is managed both by WM Advisors and by three subadvisors. The WM Group of Funds
is distributed through our financial centers and is also distributed through a
network of over 400 broker-dealers and independent financial advisors. The
Annuity Program utilizes over 800 licensed bank employees who sell fixed
annuities to our customers.

HOME LOANS AND INSURANCE SERVICES GROUP

The management.
Home Loans and Insurance Services Group
The principal activities of the Home Loans & Insurance Services Group ("Home Loans Group") originates, purchasesare originating and services theservicing single-family residential ("SFR") mortgage assets of WMBFA, WMB, WMBfsb,loans. Loans are originated and Long Beach Mortgage. This groupheld in the loan portfolio or sold into the secondary market. The Home Loans Group also includes the activities of Washington Mutual Insurance Services, Inc., anoffers insurance agencyproducts that supportscomplement the mortgage lending process, as well as the
insurance needs of all consumers doing business with us.process. The Home Loans Group's mission is to be the premier catalyst for affordable
homeownership, using our proprietary approach to home lending encompassed in our
branding, the Power of Yes(TM). The goal of the Home Loans Group is to be the
nation's leading mortgage lender. We will measure our success by our origination
and servicing market share, our profitability, and brand awareness.

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During 2000, the Home Loans Group announced partnerships with two
electronic mortgage origination companies to develop a mortgage origination and
decision-making platform known as Optis(TM). This system will be available in
all of our distribution channels, which will allow consumers to conduct business
with us according to their preferences. In the third quarter of 2000, we
re-launched www.wamumortgage.com. The new site possesses a more robust
recommendation engine, numerous calculators, interactive customer service, and
provides 24-hour customer access to the status of their loan application.

As of December 31, 2000, the Home Loans Group served about 1.2 million
households throughout the United States by providing a wide range of mortgage
financing products. Our principal banking subsidiaries offer first mortgage loan
products that provide permanent home financing as well as loans for the
construction of single-family homes. Permanent loans made available to consumers
include conventional fixed-rate and adjustable-rate mortgage ("ARM") loans,
FHA-insured, VA-guaranteed fixed-rate mortgage loans, and both fixed- and
adjustable-rate Jumbo (loan amounts in excess of $275,000) loans. All loangroup's products are offered with a variety of maturities, amortization schedules and,
in the case of ARMs, rate repricing frequencies.

The primary ARM products that we offer are indexed to the 12-month average
of the annual yields on actively traded United States Treasury securities
adjusted to a constant maturity of one-year ("MTA"). Under our current programs,
a borrower may choose among loans that have interim payment caps or interim
interest rate caps.

Our loans with payment caps typically have monthly rate adjustments with
initial start rates fixed for one-, three-, six-, or twelve-months. We often
offer a "teaser" rate with our payment-capped ARMs, which means the initial
start rate of the loan is below market rates. These loans offer our borrowers
payment flexibility not offered in other loan products, which has made this our
most popular home-financing product. The loans feature four payment options each
month: a minimum payment based on the start rate; a payment that covers the full
interest due; a payment that ensures full amortization over the term of the
loan; and a payment that amortizes the loan over 15 years. These loans typically
have payments that we cannot change annually by more than a contractual
percentage, usually 7.5%. In addition, we offer loans with fixed initial start
rates for one-, three-, or five-years and annual rate adjustments thereafter.
The annual rate adjustments are usually limited to 2% and the payments are
always re-amortized to the remaining maturity of the loan. In addition, we offer
each of our loan products with a prepayment premium as well as at a different
rate without a prepayment premium.

These mortgage products are made available to consumerscustomers through variousmultiple distribution channels, which includeincluding retail home loan centers, wholesale home loan centers, financial centers, correspondent channels, wholesale home loan centers, and consumer direct through call centers and the internet. For 2000, based on total
originations, the Home Loans Group was the nation's largest ARM lender as well
as the nation's largest Jumbo lender. In addition, the Home Loans Group was the
nation's fifth largest residential lender and sixth largest residential loan
servicer.

Two of our primary business objectives are to stabilize income and
diversify revenues. To achieve these objectives, we have implemented a
three-point strategy to generate: (1) spread income from loans held in
portfolio; (2) fee income through loan servicing, loan-related fees, and
insurance services income; and (3) gains from sales of loans and mortgage-backed
securities ("MBS").
2

The acquisitions of Bank United Corp. and the mortgage operations of The
PNC Financial Services Group, Inc.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 diversify ourdiversified its mortgage operations geographically, enhance ourincreased its servicing portfolio, and enhanced its market position in the home loan business, and build our
loan servicing portfolio.lending business. These acquisitions make us the nation's second largest
residential mortgage originator and fourth largest servicer of residential
mortgages based on pro forma numbers for the year ended December 31, 2000. They
enhancestrengthened our position by giving us a stronger capabilityability to originate loans in all 50 states, including originating FHA-insured and VA-guaranteed loans on a national scale. WithThe correspondent lending channel, in particular, grew significantly during 2001, as the result of the acquisition of WMMSC, we also obtained an improved
capability to securitize loansthe mortgage operations of PNC and sellFleet. These acquisitions, along with the resulting MBS inrecently completed acquisition of certain operating assets of HomeSide, have made the secondary
market and to generate fee income through master servicing activities.

Originations of prime SFR loans (excluding SFR construction loans)
increased during 2000, fueled particularly by originations of short-term ARMs,
which reprice primarily on a monthly basis according toHome Loans Group the index (e.g., MTA,
11th District monthly weighted average cost of funds index ("COFI")) to which
the

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ARMs are tied. The increase in short-term ARM originations was attributable to
the higher interest rate environment during the first half of 2000 and the
resulting customer preference for short-term ARMs over fixed-rate loans.

We generally sell the fixed-rate SFR loans we originate. Most of the
fixed-rate conformingnation's largest residential mortgage loans are sold to Fannie Mae. In addition, we
securitize loans that are also sold to Fannie Mae. We use our own underwriting
standards and origination system to originate loans.

We occasionally securitize loans through Fannie Mae and Freddie Mac under
programs in which they have recourse against us as the servicer of the loans
("Recourse MBS"). These securitizations primarily involve ARMs. They generally
are less costly and sometimes require less documentation than securitizations
without recourse ("Non-Recourse MBS"). We can either sell Recourse MBS in the
secondary market or use them to collateralize borrowings and to meet regulatory
liquidity requirements. We have retained the majority of Recourse MBS in our
portfolio.servicer.
The Home Loans Group has also been developing waysdeveloped an automated mortgage origination platform, Optis^TM. The first release of selling ARM loansOptis 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 secondary marketmortgage 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 complement our existing strategy of sellingmeet 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 loans. Selling ARM loans in the secondary market will allow us to manage asset
growth more efficientlymortgages, both conforming and should reduce the volatility of income related to
loans during changing interest rate environments. To achieve optimum pricing,
current ARM production that is not retained in the loan portfolio will either be
sold to investors shortly following origination or securitized and retained in
the available-for-sale securities portfolio for a period of time, and then sold
as Non-Recourse MBS. We expect to be able to increase the amount of noninterest
income relative to net interest income through gains on sales of loans and MBS
as well as loan servicing income.

Through Long Beach Mortgage, we are engaged in the business of originating,
purchasing and selling specialty mortgage loans. Long Beach Mortgage originates
loans primarily through wholesale channels of production. Long Beach Mortgage's
nationwide network of independent mortgage loan brokers generates loans in all
50 states and the District of Columbia. In 2000, none of Long Beach Mortgage's
wholesale brokers was responsible for more than 1% of Long Beach Mortgage's
wholesale originations during the year. Long Beach Mortgage maintains a close
working relationship with brokers through its sales force of approximately 280
account executives located in 59 offices.

Long Beach Mortgage has followed a strategy of selling or securitizing and
selling substantially all of its loan originations in the secondary market. Long
Beach Mortgage has historically sold its entire economic interest in the loan
except for the related servicing rights, which it has generally retained. In
2000, Long Beach Mortgage began securitizing and selling its production while
retaining rights to residual cash flows in the securities created.nonconforming. The Home Loans Group also purchases loan portfolios with risk
characteristics similar to those of loans originated by Long Beach Mortgage.
Because these portfolios, as well as those ofoffers FHA-insured and VA-guaranteed fixed-rate mortgages and, through Long Beach Mortgage tend to have
higher creditCompany ("Long Beach Mortgage"), its subprime wholesale channel, originates specialty home loans, a component of specialty mortgage finance ("SMF") lending.
To manage risk, they generally provide higher yields than the prime mortgage
loans made by our banking subsidiaries and WMHLI. Our typical borrowers within
these portfolios would generally not qualify for a loan from our banking
subsidiaries due to their credit history, higher debt-to-income ratio or other
factors. While we screen these portfolios for unacceptable credit risk, these
loans, by their nature, bear more credit risk than is found in prime mortgage
loans or in agency MBS. Accordingly, we expect that loan charge offs on these
portfolios will be higher over time than on our other mortgage portfolios.

In addition to SFR mortgage loans, the Home Loans Group also offers
construction financing on SFR properties. We make custom construction loans to
the intended occupant of a house to finance the house's construction. We
typically combine construction phase financing with permanent financing of the
completed home.

Allall loans originated are subjectsubjected to the same nondiscriminatory underwriting standards. All loans are subjectstandards and to underwritingcertain restrictions on terms and origination practices. The determination of the risk and the amount of review and approval by various
levelsnecessary is based on the credit profile of our personnel, depending onthe borrower and the size and characteristics of the loan. We require title insuranceAdditionally, the group performs re-underwriting and appraisal review on allsome 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 securing loans.
We also require our borrowers to maintain propertytitle insurance and casualty insurance in an
amount at least equal tofor the totallesser of 5
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ourthe outstanding balance of the loan amount plus all prior liens on the property or the replacement cost of the property, whicheverproperty.
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 less. We perform re-underwritingthe administration and appraisal review
on somecollection 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 byInside 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 acquiredpurchased from our correspondents. Washington Mutual Insurance Services, Inc.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
3

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 agencyservices that supportssupport the mortgage lending process by offering fire, homeowners, flood, earthquake and other property and casualty insurance products to mortgage borrowers. In addition, the agencygroup offers mortgage life insurance, accidental death and dismemberment, term and whole life insurance, and other life insurance products to existing mortgage and deposit customers. The Washington Mutual Insurance Services, Inc.group also manages the Company's captive private mortgage reinsurance activities. The group's insurance services website, wamuins.com, was launched in October 2000, providingprovides information, quotes, and buying capabilities over the internet.

SPECIALTY FINANCE GROUP

The
Specialty Finance Group conducts operations through WMBFA, WMB, WMBfsb,
and Washington Mutual Finance. An array of commercial products are offered to
our customers through our group, all under the Washington Mutual brand name.
Additionally, consumer finance products are offered through Washington Mutual
Finance.

The Specialty Finance Group provides industry specialty financing for the
following business sectors: syndicated finance, asset-based finance, and
franchise finance. In each of these areas, we have developed specialized
expertise that allows us to serve our markets efficiently while at the same time
ensuring high credit quality from a diverse group of customers.

The merger with Bank United Corp. complements our plans to grow our
commercial business portfolio and extends our market presence into some of the
nation's most attractive geographic markets, including Texas. Like our existing
business, Bank United Corp. offers a full line of commercial products and
services to businesses across the nation. Lending programs added as a result of
the merger with Bank United Corp. include mortgage banker finance, and energy
and healthcare lending.
The Specialty Finance Group provides real estate secured financing primarily for multi-family properties. Additionally, the group provides commercial and multi-family real estate lending and residential builder construction. Asconstruction financing as a resultpart of the merger with Bank United Corp., the Groupits secured financing activities. The group also provides non-real estate secured lending activities, as previously mentioned. In
addition, the Specialty Finance Group provides loan servicing for these lending
activities.

Commercialoffers mortgage banker financing and multi-family real estate loans are offered to property
owners and developersconducts a consumer finance business through 19 Washington Mutual commercial real estate
offices in Finance Corporation ("Washington Oregon, Utah, Colorado, and California. The payment
experience on loans secured by income-producing properties usually depends on
the successful operations of the real estate projects that secure the loans and,
thus, may be subject to adverse conditions in the real estate market or in the
economy, particularly the interest rate environment. Commercial real estate
values tend to be cyclical and, while commercial real estate values trended
upward in many parts of the country in 2000, we closely monitor the commercial
real estate environment to determine the appropriate level of our activity in
this area. In commercial real estate lending, we consider the project's
location, marketability, and overall attractiveness. Current underwriting
guidelines for commercial real estate loans require an economic analysis of each
property with regard to the annual revenue and expenses, debt service coverage,
and fair value to determine the maximum loan amount. Before we make a commercial
real estate loan, various levels of approvals must be obtained depending on the
size and characteristics of the loan.

Residential builder construction provides loans to borrowers who are in the
business of acquiring land and building homes for resale. Each builder loan is
made on a property-by-property basis and generally matures one to three years
from origination. Proper consideration is given to the higher risk inherent in
these transactions as each loan is underwritten. During 2000, substantially all
of our SFR builder construction loans were made in Washington, Oregon, Utah,
Florida, and California. The addition of Bank United Corp.'s residential builder
construction business qualifies us as one of the largest builder construction
lenders in the nation and diversifies our geographic market presence.

Mortgage banker finance provides small- and medium-sized mortgage and
consumer finance companies with credit facilities, including secured lines of
credit, securities purchased under agreements to resell and

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9

working capital credit lines. Mortgage banker finance also offers cash
management, document custody, and deposit services to its customers.Mutual Finance"). Washington Mutual Finance currently operates 533459 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.
4

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 which 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. TheseSuch loans typically have original terms ranging from 12 to 360 months. In 2000,
originations had an average original term of 74 months. Of the originations (in
dollars) in 2000, 70% wereare unsecured or secured by luxury goods, automobiles or other personal property, and 30% were secured by real estate.property. Additionally, Washington Mutual Finance acquires installment contracts from local retail establishments, usually without recourse to the originating merchant. These
contracts are typically written with original terms of three to 60 months,
averaging 28 months in 2000.

The loans made by Washington Mutual Finance generally have a higher yield
than the prime mortgage loans made by our banking subsidiaries, because these
loans tend to have higher credit risk. Our typical consumer finance borrower
would generally not qualify for a loan from our banking subsidiaries due to
their credit history, high debt-to-income ratio or other factors.

TREASURY DIVISION

The primary responsibilities of our treasury division are:

- interest rate risk management,

- liquidity management,

- investing activities,

- borrowing activities, and

- capital management.

Interest Rate Risk Management

We actively manage the amounts and maturities of our assets and liabilities
to mitigate repricing and prepayment risks. We sell fixed-rate loans, since they
are difficult to match in duration to liabilities because of prepayment risk and
longer maturities. To further mitigate repricing risk, prepayment risk, and to a
lesser extent cap risk, we use derivative instruments, such as interest rate
exchange agreements and interest rate cap agreements. See "Management of
Interest Rate Risk and Derivative Activities." We do not attempt to hedge lag or
basis risk because the impacts of these risks are usually short-lived and the
cost of hedging is high.

To monitor the sensitivity of earnings to interest rate changes, we conduct
financial modeling of the balance sheet and earnings under a variety of interest
rate scenarios. This modeling does require significant assumptions about loan
prepayment rates, loan origination volumes and liability funding sources. While
these assumptions may ultimately differ from actual results, these simulations
are helpful for measuring interest rate sensitivity. We monitor interest rate
sensitivity and attempt to reduce the risk of a significant decrease in net
interest income caused by a change in interest rates. We also monitor the impact
of interest rate changes on our net portfolio value.

Liquidity Management

Our liquidity policy is to maintain sufficient liquidity above daily
funding needs to protect against unforeseen liquidity demands. We manage
liquidity primarily through the securitization of mortgage loans and through
various sources of borrowings, including securities sold under agreements to
repurchase ("repurchase agreements"), Federal Home Loan Bank ("FHLB") advances,
and other secured and unsecured sources of funds.

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10

Investing Activities

We manage the Company's purchased investment securities, which are
primarily comprised of agency MBS and investment grade private MBS. During 2000,
our purchases of MBS declined, since the MBS had acceptable, but lower returns
than loans originated by us and held in our portfolio or securitized and
retained.

Borrowing Activities

To keep pace with asset growth in recent years, we have increasingly relied
on wholesale borrowings to fund asset growth. Borrowings include repurchase
agreements, the purchase of federal funds, the issuance of capital notes and
other types of debt securities, the issuance of commercial paper, and funds
obtained as advances from the FHLBs of Seattle and San Francisco. We also have
access to the Federal Reserve Bank's discount window.

We actively engage in repurchase agreements with authorized broker-dealers
and major customers, selling U.S. Government debt securities and MBS under
agreements to repurchase them at a future date.

WMB and WMBfsb are members of the FHLB of Seattle, and WMBFA is a member of
the FHLB of San Francisco. As members, each company maintains a credit line that
is a percentage of its total regulatory assets, subject to collateralization
requirements. Each institution obtaining FHLB advances is required to enter into
a written agreement with the lending FHLB under which the borrowing institution
is primarily and unconditionally obligated to repay such advances and all other
amounts owed to the lending FHLB. All advances must be fully secured by eligible
collateral. Eligible collateral includes all stock owned of the FHLBs, deposits
with the FHLBs, and certain mortgages or deeds of trust and securities of the
U.S. Government and its agencies.

Our depository institutions accept deposits, primarily time deposit
accounts, from political subdivisions and public agencies. We consider these
deposits to be a borrowing source rather than a customer relationship and,
hence, they are managed by the treasury division.

Other funding activities include the issuance of commercial paper by WMI
and Washington Mutual Finance. We have commercial paper facilities backed by
combined credit facilities from a syndicate of banks. We also issue senior and
subordinated debt at WMI and WMBFA, and senior notes at Washington Mutual
Finance.

Capital Management

In order to deploy accumulated capital, we repurchased our common stock
during the first half of 2000. From April 20, 1999, the inception of the
repurchase program, through June 30, 2000, we repurchased a total of 66.3
million shares as part of our previously announced purchase programs. We did not
repurchase any shares during the last half of 2000. During this time, capital
was accumulated to facilitate balance sheet growth and accommodate the
acquisitions of Bank United Corp. and the mortgage operations of The PNC
Financial Services Group, Inc. Our capital management strategy also focuses on
the risk-based capital and leverage ratios of our principal banking
subsidiaries.

EMPLOYEES
Employees
Our number of full-time equivalent employees ("FTE") at December 31, 2001 was 39,465, compared with 28,798 at December 31, 2000 was 28,798, a slight increase fromand 28,509 at December 31, 1999. During the
previous year,2001, the number of FTE also increased slightly from 27,957 at December
31, 1998, primarily as a result of approximately 1,000 employees added inthe acquisitions of Bank United and the mortgage operations of PNC and Fleet. In addition, the acquisition of Long Beach Mortgage.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.

COMPETITIVE ENVIRONMENT

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

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significant competition in attracting and retaining deposits and making loans as
well as in providing other financial services in all of our market areas.
Competition focuses on customer services, 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 has historically come from savings
institutions, credit unions and commercial banks doing business in our primary
market areas of California, Washington, Oregon, Florida, Texas and Utah. Enacted
in 1999, the Gramm-Leach-Bliley ("GLB") Act does not increase our authority to
affiliate, but it does benefit our competitors, as discussed below. See
"Business -- Regulation and Supervision." 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 has traditionally come from other
savings institutions, national mortgage companies, insurance companies,
commercial banks and government-sponsored enterprises ("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.

With the changes in technology and increased competition from banking as
well as from nonbanking entities, the traditional environment in which we have
operated in the past has been transformed into a fiercely dynamic and
competitive environment. Although we are faced with increased competitive
pressures, we remain adaptable to these changes by continuously reviewing and
redefining the ways in which we do our business and, as a result, we remain a
strong market force in our core areas.

FACTORS THAT MAY AFFECT FUTURE RESULTS
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.
5

Some of these factors are described below.

Business
General business and Economic Conditionseconomic 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, monetarymoney 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 continue to decline,
this could increase loan prepayments,rise faster than mortgage rates, our net interest income, which could lead to a decline in the valueis our largest component of our mortgage servicing rights. Annet income, would be adversely affected. A prolonged economic downturn or rising interest rate

9
12

environment could decrease the demand for loans and 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.
Higher interest rates would also increase our cost of interest-bearing
liabilities, which could outpace the increase in the yield on interest-earning
assets and lead to a reduction in the net interest margin.

Diversification of Assets

We have reduced the percentage of SFR loans and MBS in our portfolio and
increased the percentage of consumer loans, commercial business loans and
specialty mortgage finance loans. Although these loans generally provide a
higher yield than our SFR loans and MBS, they also carry more credit risk. To
the extent that we need to increase our provision for loan and lease losses as a
result of these loans, our earnings could be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") -- Provision and Allowance for Loan and Lease Losses" in
this Form 10-K for more specific discussion.

Concentration of Operations in California

At December 31, 2000, 52% of our loan portfolio and 71% of our deposits
were concentrated in California. As a result, 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 estate declines, we may experience greater delinquencies,
which may result in decreased net income 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 forward-looking statements contained within MD&A assume that the
California economy and real estate market will remain healthy. Worsening of
economic conditions or a significant decline in real estate values in California
could have a materially adverse effect on our results of operations and
financial condition.

Competition

We face significant competition both in attracting and retaining deposits
and in making loans in all of our markets. As with all banking organizations, we
have also experienced competition from nonbanking sources, including mutual
funds and securities brokerage companies. We expect increased competition in the
financial services industry as a result of recent legislation that removes many
of the restrictions on affiliations among banks, insurance companies, and
securities firms. Our most direct competition for loans comes from other savings
institutions, national mortgage companies, insurance companies, commercial
banks, and government-sponsored enterprises ("GSEs"), such as Fannie Mae and
Freddie Mac. Competition from such sources could increase in the future and
could adversely affect our ability to achieve our financial goals.
In addition, competitive factors, such as the lower cost structure of less-regulated
originators and the influence of the GSEs in establishing rates, heavily
influence our lending activities.

Fiscal and Monetary Policies

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.

Mergers
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 Acquisitions

We expandservicers 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 business, in part, by acquiring other financial institutions
or a portionnet income could be adversely affected. For further discussion of their business. We continuehow MSR prepayment risk is managed, see "Market Risk Management."
A failure to explore opportunities to acquire
other financial institutions that will complementeffectively integrate the operations and enhance our key
strategies. A numberpersonnel of factors related to past and future acquisitionscompanies we have acquired could adversely affect our 10
13earnings 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 earnings. In addition,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 acquisitions are often subjectcompany, 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 regulatory approval. The failure to receive required regulatory approvals within
the time frame or on the conditions expected by managementbe lower than anticipated and could also 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
6

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 earnings.

BUSINESS COMBINATIONSFinancial 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."
7

Business Combinations
Most of our growth since 1988 has occurred ACQUISITION NAME DATE ACQUIRED ---------------- --------------

Columbia Federal Savings Bank and Shoreline Savings Bank............................................. April 29, 1988 Old Stone Bank(1).................................. June 1, 1990 Frontier Federal Savings Association(2)............ June 30, 1990 Williamsburg Federal Savings Bank(2)............... Sept. 14, 1990 Vancouver Federal Savings Bank..................... July 31, 1991 CrossLand Savings, FSB(2).......................... Nov. 8, 1991 Sound Savings and Loan Association................. Jan. 1, 1992 World Savings and Loan Association(2).............. March 6, 1992 Great Northwest Bank............................... April 1, 1992 Pioneer Savings Bank............................... March 1, 1993 Pacific First Bank, A Federal Savings Bank......... April 9, 1993 Far West Federal Savings Bank(2)................... April 15, 1994 Summit Savings Bank................................ Nov. 14, 1994 Olympus Bank, a Federal Savings Bank............... April 28, 1995 Enterprise Bank.................................... Aug. 31, 1995 Western Bank....................................... Jan. 31, 1996 Utah Federal Savings Bank.......................... Nov. 30, 1996 American Savings Bank, F.A. ....................... Dec. 20, 1996 United Western Financial Group..................... Jan. 15, 1997 Great Western Financial Corporation................ July 1, 1997 H.F. Ahmanson & Company(3)......................... Oct. 1, 1998 Industrial Bank.................................... Dec. 31, 1998 Long Beach Financial Corporation................... Oct. 1, 1999 Alta Residential Mortgage Trust.................... Feb. 1, 2000 Mortgage operations of The PNC Financial Services Group, Inc.(1)................................... Jan. 31, 2001 Bank United Corp................................... Feb. 9, 2001

- ---------------

as a result of business combinations. The following table summarizes our business combinations since 1988: LOANS DEPOSITS ASSETS ------- -------- ------- (DOLLARS IN MILLIONS) $ 551 $ 555 $ 753 230 293 294 -- 96 -- -- 4 -- 200 253 261 -- 185 -- 17 21 24 -- 38 -- 603 586 710 625 660 927 3,771 3,832 5,861 -- 42 -- 128 169 188 238 279 391 93 139 154 501 696 776 89 107 122 14,563 12,815 21,894 273 300 404 32,448 27,785 43,770 33,939 33,975 50,355 11 26 27 415 -- 821 156 -- 158 3,290 -- 7,363 15,095 7,673 18,286
Acquisition Name
Date Acquired Loans Deposits Assets
(in millions)

Columbia Federal Savings Bank and Shoreline Savings Bank April 29, 1988 $ 551 $ 555 $ 753
Old Stone Bank⁽¹⁾ June 1, 1990 230 293 294
Frontier Federal Savings Association⁽²⁾ June 30, 1990 - 96 -
Williamsburg Federal Savings Bank⁽²⁾ Sept. 14, 1990 - 4 -
Vancouver Federal Savings Bank July 31, 1991 200 253 261
CrossLand Savings, FSB⁽²⁾ Nov. 8, 1991 - 185 -
Sound Savings and Loan Association Jan. 1, 1992 17 21 24
World Savings and Loan Association⁽²⁾ March 6, 1992 - 38 -
Great Northwest Bank April 1, 1992 603 586 710
Pioneer Savings Bank March 1, 1993 625 660 927
Pacific First Bank, a Federal Savings Bank April 9, 1993 3,771 3,832 5,861
Far West Federal Savings Bank⁽²⁾ April 15, 1994 - 42 -
Summit Savings Bank Nov. 14, 1994 128 169 188
Olympus Bank, a Federal Savings Bank April 28, 1995 238 279 391
Enterprise Bank Aug. 31, 1995 93 139 154
Western Bank Jan. 31, 1996 501 696 776
Utah Federal Savings Bank Nov. 30, 1996 89 107 122
Keystone Holdings, Inc. Dec. 20, 1996 14,563 12,815 21,894
United Western Financial Group Jan. 15, 1997 273 300 404
Great Western Financial Corporation July 1, 1997 32,448 27,785 43,770
H.F. Ahmanson & Company⁽³⁾ Oct. 1, 1998 33,939 33,975 50,355
Industrial Bank Dec. 31, 1998 11 26 27
Long Beach Financial Corporation Oct. 1, 1999 415 - 821
Alta Residential Mortgage Trust Feb. 1, 2000 156 - 158
Mortgage operations of The PNC Financial Services Group, Inc.⁽¹⁾ Jan. 31, 2001 3,352 - 7,307
Bank United Corp. Feb. 9, 2001 14,983 8,093 19,034
Fleet Mortgage Corp.⁽¹⁾ Jun 1, 2001 4,378 - 7,813
Dime Bancorp, Inc. Jan. 4, 2002 16,271 15,117 27,934
HomeSide Lending, Inc.⁽¹⁾ Mar. 1, 2002 1,071 - 1,178
⁽¹⁾
This was an acquisition of selected assets and/or liabilities.
⁽²⁾
The acquisition was of branchesfinancial centers and deposits only. The only assets acquired were branch facilities or loans collateralized by acquired savings deposits.
⁽³⁾
Includes loans, deposits and assets acquired by Ahmanson from Coast.

TAXATIONCoast 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.

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Tax Bad Debt Reserve Recapture

The Small Business Job Protection Act of 1996 (the "Job Protection Act")
requires that qualified thrift institutions, such as WMBFA, WMB and WMBfsb,
generally recapture for federal income tax purposes that portion of the balance
of their tax bad debt reserves that exceeds the December 31, 1987 balance, with
certain adjustments. Such recaptured amounts generally are to be taken into
ordinary income ratably over a six-year period beginning in 1997. Accordingly,
we have paid or will have to pay approximately an additional $4 million (based
upon current federal income tax rates) each year of the six-year period in
federal income taxes due to the Job Protection Act.
State Income Taxation

The states
Many of California, Oregon, Florida, Texas, Utah and Idaho, as well
as many otherthe 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.
8

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

As a result
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 acquisitionfailed savings and loan association subsidiary of ASB in 1996, we are partyFinancial 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 an agreement
(the "Assistance Agreement") with a predecessor of the Federal Savings & LoanDeposit Insurance Corporation Resolution Fund (the "FRF"("FDIC")., including an Assistance Agreement. The Assistance Agreement provides, in part, for the payment to the FRFFederal 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 of
New West Federal Savings and Loan Association.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 "NotesNote 12 to the Consolidated Financial Statements -- Note 12: Income– "Income Taxes."

ENVIRONMENTAL REGULATION
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. Recent federalFederal 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 foreclosure offoreclosing 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
9

Regulation and Supervision
References in this section to applicable statutes and regulations are brief summaries only. YouOne should consult the statutes and regulations for a full understanding of the details of their operation.
General
As a savings and loan holding company, WMIWashington Mutual, Inc. ("WMI" or "the Parent Company") is subject to regulation by the Office of Thrift Supervision ("OTS"(the "OTS"). WMBFAWashington Mutual Bank, FA ("WMBFA") and WMBfsbWashington 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 Federal Deposit Insurance Corporation ("FDIC"),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. WMBWashington Mutual Bank ("WMB") is subject to regulation and supervision by the Director of Financial Institutions of the State of Washington ("State(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.

PRIMARY
FEDERAL
ENTITY CHARTER REGULATOR STATE REGULATOR INSURANCE FUND(S)
------ ---------- --------- ----------------- -----------------

WMI............................ Entity
Charter Primary Federal
Regulator State Regulator Insurance Fund(s)
WMI State (WA) OTS None n.a. n.a.
WMBFA..........................
WMBFA Federal OTS None SAIF, BIF
WMB............................
WMB State (WA) FDIC WA State Director BIF, SAIF
WMBfsb.........................
WMBfsb Federal OTS None SAIF
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.

On November 12, 1999, the GLB Act was signed into law. The GLB Act
significantly reforms various aspects of the financial services business and
includes provisions which:

- establish a new framework under which bank holding companies and banks
(subject to numerous restrictions) can own securities firms, insurance
companies and other financial companies;

- generally subject banks to the same securities regulation as other
providers of securities products;

- prohibit new unitary savings and loan holding companies from engaging in
nonfinancial activities or affiliating with nonfinancial entities;

- provide consumers with new protections regarding the transfer and use of
their nonpublic personal information by financial institutions; and

- change the FHLB system in numerous ways, which are described in more
detail below.

The provisions permitting full affiliations between bank holding companies
or banks and other financial companies do not increase our authority to
affiliate. As a unitary savings and loan holding company, we were generally
permitted to have such affiliations prior to the enactment of the GLB Act. It is
expected, however, that these provisions will benefit our competitors.

The provisions subjecting banks to securities regulation are not expected
to significantly affect us since primarily all of our securities business is
conducted through securities subsidiaries that are already subject to such
regulation. Some new provisions restricting or regulating ownership of insurance
companies by banks apply also to savings institutions, and may hinder WMBFA,
WMBfsb or WMB from acquiring certain insurance companies.

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16

The prohibition on the ability of new unitary savings and loan holding
companies to engage in nonfinancial activities or affiliating with nonfinancial
entities generally applies only to savings and loan holding companies that were
not, or had not submitted an application to become, savings and loan holding
companies as of May 4, 1999. Since we were treated as a unitary savings and loan
holding company prior to that date, the GLB Act will not prohibit us from
engaging in nonfinancial activities or acquiring nonfinancial subsidiaries.
However, 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.

Management does not believe that complying with the new consumer privacy
provision will have a significant impact on our business.

Changes to the FHLB system in the GLB Act included a change in the manner
of calculating the Resolution Funding Corporation ("REFCORP") obligations
payable by the FHLBs; a broadening of purposes for which FHLB advances may be
used; and removal of the requirement that federal savings associations be FHLB
members. 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.
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:

-
•
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

•
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 the FHLB. Failurea Federal
10

Home Loan Bank ("FHLB"). In addition, failure to remain a QTL also would restrict the ability of WMBFA or WMBfsb to establish new branchesfinancial 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
keepingrecord-keeping requirements.

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17
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; Affiliate
Transactions.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.

WMB, WMBFA and WMBfsb, as holding company subsidiaries that are depository
institutions, are subject to both qualitative and quantitative limitations on
the transactions they conduct with WMI and its other subsidiaries.
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-CapitalSupervision- Capital Requirements." The OTS has proposed a regulation which would require savings and
loan holding companies to give prior notice to the OTS of certain transactions
which could affect capital and which would also set forth the circumstances
under which the OTS would, on a case-by-case basis, review a holding company's
capital adequacy and, when necessary, require additional capital.
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:

-
•
accepting deposits and paying interest on them;

•
making and buying loans on residential and other real estate;

•
making and buying a limited amount of consumer loans;

•
making and buying a limited amount of commercial loans;

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

•
offering various trust and banking services to their customers; and

•
owning subsidiaries that invest in real estate and carry on certain other activities, including securities and insurance agency activities.
11
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:

-
•
accepting deposits and paying interest on them;

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

•
making consumer loans;

•
making commercial loans;

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

15
18

•
offering various trust and banking services to their customers; and

•
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. All banks WMB, WMBFA and savingsWMBfsb, 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. Associations (such
asCertain savings associations, including WMBFA and WMBfsb) that are subsidiaries of a savings and loan holding companyWMBfsb, must file a notice withan application for approval by the OTS at least 30 days 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

16
19 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 2000,2001, 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 2000,2001, and WMB, WMBFA and WMBfsb qualified for the lowest rate on their SAIF deposits in 2000.2001. Accordingly, none of these institutions paid any deposit insurance assessments in 2000.2001. 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. Before 2000, the FICO assessment rate for SAIF-insured deposits was five
times higher than the rate for BIF-insured deposits. The average annual
assessment rate in 1999 was 5.925 cents per $100 of SAIF-insured deposits and
1.185 cents per $100 of BIF-insured deposits. Beginning inSince 2000, SAIF- and BIF-insured deposits werehave been assessed at the same rate by FICO. For the yearyears 2000 and 2001, the average annual rate was 2.07 cents and 1.90 cents per $100 of insured deposits. Because we
have substantially more SAIF-insured deposits than BIF-insured deposits, this
change resulted in an overall reduction of the amount of our FICO assessments.
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 GNMAGovernment National Mortgage Association ("GNMA") securities are placed in the 0% risk category,
13

FNMA and FHLMCFederal Home Loan Mortgage Corporation ("FHLMC") MBS are placed in the 20% risk category, loans secured by SFR properties and certain private issue
MBS 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 ofor 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.

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20
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, 2000:

TIER 1 CAPITAL TO
AVERAGE ASSETS TIER 1 CAPITAL TO TOTAL CAPITAL TO
(FDIC LEVERAGE RATIO) RISK-WEIGHTED ASSETS RISK-WEIGHTED ASSETS
--------------------- -------------------- --------------------

Regulatory Minimum......... 4.00%(1) 4.00% 8.00%
WMB's Actual............... 5.83 10.15 11.24

- ---------------
2001:
Tier 1 Capital to
Average Assets
(FDIC Leverage Ratio) Tier 1 Capital to
Risk-Weighted Assets Total Capital to
Risk-Weighted Assets
Regulatory Minimum 4.00 %⁽¹⁾ 4.00 % 8.00 %
WMB's Actual 6.45 10.86 12.08
⁽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 adequacy 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. Associations whose exposure
to interest-rate risk is deemed to be above normal will be required to deduct a
portion of such exposure in calculating their risk-based capital. 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.
14

The following table sets forth the current regulatory requirement for capital ratios for savings associations as compared with our capital ratios at December 31, 2000:

TIER 1 CAPITAL
TO ADJUSTED
TOTAL ASSETS TANGIBLE CAPITAL TIER 1 CAPITAL TO TOTAL CAPITAL TO
(OTS TO TANGIBLE RISK-WEIGHTED RISK-WEIGHTED
LEVERAGE RATIO) ASSETS ASSETS ASSETS
--------------- ---------------- ----------------- ----------------

Regulatory Minimum...... 4.00%(1) 1.50% 4.00% 8.00%
WMBFA's Actual.......... 5.81 5.81 10.40 11.36
WMBfsb's Actual......... 6.97 6.97 11.14 12.10

- ---------------
2001:
Tier 1 Capital to
Adjusted Total Assets
(OTS Leverage Ratio) Tangible Capital to
Tangible Assets Tier 1 Capital to
Risk-Weighted
Assets Total Capital to
Risk-Weighted
Assets
Regulatory Minimum 4.00 %⁽¹⁾ 1.50 % 4.00 % 8.00 %
WMBFA's Actual 5.18 5.18 9.00 10.93
WMBfsb's Actual 7.30 7.30 11.53 12.78
⁽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.

FDICIA
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.

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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. In 1994, theThe federal banking agencies jointly revised theiragencies' capital standards to specify that concentration of credit and nontraditional activities are among the factors that the agencies will consider in evaluating capital adequacy. In that
year, theThe OTS and FDIC amended their risk-based capital standards with respect
toinclude provisions for the risk weighting of loans made to finance the purchase or construction of multi-family residences. The OTS adopted final regulations adding an interest
rate risk component to theOTS's risk-based capital requirements for savings associations (such as WMBFA and WMBfsb), although implementation include an interest rate risk component. Implementation of the
regulationthis requirement has been delayed.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. In June 1996,A joint policy statement of the FDIC and certain other federal banking agencies (not including the OTS) issued a joint policy statement providingprovides guidance on prudent interest rate risk management principles. Theprinciples, and states that these agencies stated that they wouldwill evaluate the banks' interest rate risk on a case-by-case basis and would not adoptrather 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 19
22

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 stateState 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 law and regulations require that WMBFA and WMBfsb maintain liquid
assets in excess of a specified limit. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity."
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 ("Budget Act") 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. branchesfinancial 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
16

transaction accounts in the amount of 3% on amounts of $44.3$41.3 million or less, plus 10% on amounts in excess of $44.3$41.3 million. Institutions may designate and exempt $5.0$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 will containcontains risk-based and leverage capital requirements similar to those currently in place for depository institutions. Each FHLB must submithas submitted a capital structure plan to the Finance Board, for approval
within 270 dayswhich is in the process of reviewing each of the publicationplans.
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 new regulations.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 is eligible to be a member ofmust initially apply for membership in the FHLB for the district where the member's principal place of business is located. WMBFA whose
home office is Stockton, California,currently is a member only of the San Francisco FHLB;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 20
23

WMBfsb, whose home office is in Salt Lake City. Prior to its merger with WMBFA,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 Dallas FHLB. Under Finance Board regulations,
Bank United membership terminated when it merged into WMBFA. The Federal Home
Loan Bank Act provides, however, for membership of the FHLB adjoining the
district in which an institution is located if membership is demanded by
convenience and approved by the Finance Board.allow WMBFA has applied to becomebe a member of those FHLBs without terminating WMBFA's membership in the DallasSan Francisco FHLB. The Dallas FHLBWMBFA has approved the application
contingent upon the approval ofsupported these requests. On January 22, 2002, the Finance Board.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 their delineatedthe communities we serve, including low- to moderate-income ("LMI") neighborhoods, within those communities, 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 1999,1998, WMBFA and WMBfsb each received an "outstanding" CRA rating from the OTS, and WMB received an "outstanding" CRA rating from the FDIC.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. TheAs 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 $120$375 billion commitment targets single-family, small business and consumer, and multi-family lending, and community investment at the following levels:

-
•
Single-family lending -- $81.6— $300 billion in affordable housing loans to minority racial and ethnic borrowers, borrowers in low- to
moderate-income ("LMI")LMI census tracts, and borrowers earning less than 80% of median income. Of this amount, $30$100 billion is specifically targeted to LMI borrowers.

- Small

•
Consumer and small business and consumer lending -- $25— $48 billion in loans to LMI consumers and small businesses, and LMI consumers, including:

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

•
Small businesses,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 -- $12.1— $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 -- $1.3— $2 billion in investments and loans for community development. This commitment area includes low-income housing initiatives, tax-exempt housing revenue bonds, minority financial
institutions and community banks and financial institutions targeting minority racial and ethnicmulti-cultural communities or other community needs.
18
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 21
24

we "willwill strive to return"return to our neighborhoods the greater of 2% of our pre-tax earnings or 3% of our after-tax earnings plus 10% of any net recovery from the
resolution of Ahmanson's goodwill litigation against the U.S. government.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.

As of December 31, 2000, we exceeded our 2000 targets for lending in LMI
neighborhoods and underserved market areas in the second year of our $120
billion, ten-year commitment in loans and investments.
Recent and Proposed Legislation and Regulation

The GLB Act is summarized in "Regulation and Supervision -- General." The
new capital structure for FHLBs is summarized in "Regulation and
Supervision -- Federal Home Loan Bank System."

In February 1999, the OTS proposed a regulation that could affect WMI's
treatment as a unitary savings and loan holding company. If a holding company
owns more than one savings association, it is a multiple savings and loan
holding company ("SLHC"); if it owns only one savings association, it is a
unitary SLHC. HOLA generally restricts multiple SLHCs and their non-association
subsidiaries to traditional savings association activities and services and to
activities permitted bank holding companies. These restrictions do not apply to
unitary SLHCs. In addition, these restrictions do not apply to a multiple SLHC
if all, or all but one, of its subsidiary savings associations were acquired in
transactions involving a sale or transfer from an ailing or failing institution.
Such savings associations are sometimes referred to as "supervisory"
acquisitions, and a multiple SLHC is sometimes referred to as an "exempt"
multiple SLHC if all, or all but one, of its subsidiary associations are
supervisory acquisitions. The OTS proposal stated that, under certain
circumstances, an exempt multiple SLHC could lose its exempt status if it or one
of its supervisory subsidiary associations is involved in a merger. This
proposal has been withdrawn by the OTS. The OTS may, however, issue the same or
a similar proposal in the future.

WMI has had the status of an exempt multiple SLHC because two of its three
subsidiary associations -- WMBFA and WMBfsb -- have been deemed supervisory
acquisitions. However, both WMBFA and WMBfsb, as well as WMI, have been involved
in subsequent merger transactions. Accordingly, it is possible that, if the
proposed regulation or a similar regulation were adopted, the OTS could assert
that WMI is not an exempt multiple SLHC. If that were to occur, WMI would have
to merge its subsidiary associations or discontinue activities, including real
estate development activities not permitted to multiple SLHCs.

The OTS and other banking regulators proposed revisions to their capital
rules concerning the treatment of residual interests in asset securitizations
and other transfers of financial assets. Generally, the proposed rule would
require that risk-based capital be held in an amount equal to the amount of
residual interests retained on an institution's balance sheet and would limit
the amount of residual interests that may be included in Tier 1 capital.

The OTS has proposed a regulation which would require certain SLHCs to
notify the OTS before engaging in or committing to engage in a limited set of
debt transactions, transactions that reduce capital, some asset acquisitions,
and other transactions. In addition, while the regulation does not propose
capital requirements applicable to all SLHCs, the OTS is considering whether to
adopt a rule setting forth the circumstances in which it would review, on a
case-by-case basis, the capital adequacy of an SLHC and, when necessary, require
additional capital.
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 22
25

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 an SLHCa 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 2000,2001, the Federal Reserve Board published proposedfinal regulations which would implementimplementing 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 proposed regulations would lower the rate levels that trigger the application of HOEPA and would 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, ifas a result of the changes to the rate levels and the calculation of fee amounts in
the proposed regulation are adopted,new regulations, more of the loans we currently offer wouldwill 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
19

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 branchesfinancial 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.

23
26

PRINCIPAL OFFICERS
20

Principal Officers
The following table sets forth certain information regarding the principal officers of Washington Mutual:
EMPLOYEE OF
PRINCIPAL OFFICERS AGE CAPACITY IN WHICH SERVED COMPANY SINCE
------------------ --- ------------------------ -------------

Kerry K. Killinger................... 51 Chairman of the Board of Directors, 1983
President and
Chief Executive Officer
Fay L. Chapman....................... 54 Senior Executive Vice President and General 1997
Counsel
Craig S. Davis....................... 49 President, Home Loans and Insurance Services 1996
Group
William W. Ehrlich................... 34 Executive Vice President, Corporate 1993
Relations
Steven P. Freimuth................... 44 Senior Executive Vice President, Corporate 1988
Services
William A. Longbrake................. 57 Vice Chair and Chief Financial Officer 1996
Deanna W. Oppenheimer................ 42 President, Banking and Financial Services 1985
Group
Craig E. Tall........................ 55 Vice Chair, Corporate Development and 1985
Specialty
Finance Group
S. Liane Wilson...................... 58 Vice Chair, Corporate Technology 1985
Robert H. Miles...................... 44 Senior Vice President and Controller 1999
Principal Officers
Age Capacity in Which Served Employee of
Company Since
Kerry K. Killinger 52 Chairman of the Board of Directors, President and Chief Executive Officer 1983
Craig J. Chapman 45 President, Specialty Finance Group 1998
Fay L. Chapman 55 Senior Executive Vice President and General Counsel 1997
Jack A. Cornick 55 Executive Vice President and Interim President, Banking and Financial Services Group 1968
Daryl D. David 47 Executive Vice President, Human Resources 2000
Craig S. Davis 50 President, Home Loans and Insurance Services Group 1996
William W. Ehrlich 35 Executive Vice President, Corporate Relations 1993
Steven P. Freimuth 45 Senior Executive Vice President, Corporate Services 1988
Jeremy V. Gross 43 Executive Vice President and Chief Information Officer 2001
William A. Longbrake 58 Vice Chair, Enterprise Risk Management and Chief Financial Officer 1996
Robert H. Miles 45 Senior Vice President and Controller 1999
Deanna W. Oppenheimer 43 President, Banking and Financial Services Group 1985
Craig E. Tall 56 Vice Chair, Corporate Development and Specialty Finance Group 1985
James G. Vanasek 57 Executive Vice President and Chief Credit Risk Officer 1999 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, since 1979.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.
21

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 and then rejoined the
Company in 1993 as a coordinator in the Mergers and Acquisitions Department.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.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, and Corporate 24
27

Tax Manager 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.

Ms. Wilson has been
Mr. Vanasek is Executive Vice Chair, Corporate Technology since 1999. ShePresident and Chief Credit Risk Officer. He is responsible for corporate information technology. Ms. Wilsonoverseeing all facets of the Company's credit risk management policies, strategies and performance. Mr. Vanasek became an Executive
Vice President in 1988 and has been a member of the Executive Committee since
its formation in 1990. Ms. Wilson joined WMB 2001. Prior to joining Washington Mutual
22

in 1985 as Senior Vice President1999, he spent eight years at the former Norwest Bank, in a variety of Information Technology.

ITEM 2. PROPERTIESlending risk management positions including Chief Credit Officer.

Properties
The Company's headquarters are located at 1201 Third Avenue, Seattle, Washington 98101. As of December 31, 2000, our banking subsidiaries2001, we conducted business in 4241 states through 1,053 consumer financial centers, 71 Western Bank branches, 10 WM
Business Bank offices in California, 183 home loan centers and 23 wholesale loanapproximately 2,200 physical distribution centers. Consumer finance operations were conducted in over 590 locations in 38
states.

The
Additionally, significant administration offices that we owned or leased were as follows:
APPROXIMATE TERMINATION OR
LOCATION LEASED/OWNED SQUARE FOOTAGE RENEWAL DATE(1)
-------- ------------ -------------- ---------------

1201 3rd Ave., Seattle, WA....................... Leased 289,000 2007
1191 2nd Ave., Seattle, WA....................... Leased 115,000 2006
1101 2nd Ave., Seattle, WA....................... Leased 75,000 2006
999 3rd Ave., Seattle, WA........................ Leased 43,000 2004
1111 3rd Ave., Seattle, WA....................... Leased 161,000 2004
1301 5th Ave., Seattle, WA....................... Leased 59,000 2008
1401 2nd Ave., Seattle, WA....................... Leased 85,000 2009
1501 4th Ave., Seattle, WA....................... Leased 50,000 2004
2520 & 2530 223rd St. SE, Bothell, WA............ Leased 110,000 2008
188 106th Ave. NE, Bellevue, WA.................. Leased 39,000 2002
17875/77 Van Karman, Irvine, CA.................. Owned 156,000 n.a.
3351 Michaelson Dr., Irvine, CA.................. Leased 47,000 2004
Stockton, CA(2).................................. Owned 252,000 n.a.
Chatsworth, CA(2)................................ Owned 327,000 n.a.
Chatsworth, CA(2)................................ Leased 644,000 2003 - 2015
1000 Wilshire Blvd., Los Angeles, CA............. Leased 19,000 2002
1100 Town & Country Rd., Orange, CA.............. Leased 73,000 2001 - 2002
8900 Grand Oak Circle, Tampa, FL................. Owned 71,000 n.a.
3405 McLemore Dr., Pensacola, FL................. Leased 50,000 2004

- ---------------
Location
Leased/Owned Approximate
Square Footage Termination or
Renewal Date⁽¹⁾
1201 3rd Ave., Seattle, WA Leased 310,000 2007
1191 2nd Ave., Seattle, WA Leased 193,000 2006
1111 3rd Ave., Seattle, WA Leased 177,000 2006
2520 & 2530 223^rd St. SE, Bothell, WA Leased 106,000 2008
999 3rd Ave., Seattle, WA Leased 84,000 2005
1401 2nd Ave., Seattle, WA Leased 83,000 2009
1101 2nd Ave., Seattle, WA Leased 77,000 2006
1501 4th Ave., Seattle, WA Leased 60,000 2010
1301 5th Ave., Seattle, WA Leased 58,000 2008
Northridge, CA⁽²⁾ Leased 441,000 2005-2006
Stockton, CA⁽²⁾ Owned 334,000 n.a.
Chatsworth, CA⁽²⁾ Owned 323,000 n.a.
17875 & 17877 Von Karman, Irvine, CA Owned 290,000 n.a.
Chatsworth, CA⁽²⁾ Leased 286,000 2002-2015
4150 N. Palm Dr., Fullerton, CA Owned 86,000 n.a.
7600 Dublin Blvd., Dublin, CA Owned 76,000 n.a.
1100 Town & Country Rd., Orange, CA Leased 72,000 2002
3351 Michaelson Dr., Irvine, CA Leased 53,000 2004
2601 10th Ave. N., Lake Worth, FL Owned 112,000 n.a.
333 E. Butterfield Rd., Lombard, IL Leased 105,000 2003
Vernon Hills, IL⁽²⁾ Leased 81,000 2002-2006
2000 Oxford Dr., Bethel Park, PA Leased 71,000 2006
2210 Enterprise Dr., Florence, SC Leased 179,000 2008
3200 SW Freeway, Houston, TX Leased 384,000 2008
11200 W. Parkland Ave., Milwaukee, WI Owned 242,000 n.a.
⁽¹⁾
The Company has options to renew leases at most locations.
⁽²⁾
Multiple locations.

ITEM 3. LEGAL PROCEEDINGS

Legal Proceedings
We have certain litigation and negotiations in progress resulting from activities arising from normal operations. InThese include actions which are or purport to be class actions, some of which seek large damage awards. Nevertheless, in the opinion of management, none of thesethe pending litigation matters is likely to have a materially adverse effect on our results of operations or financial condition.

25
28

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Submission of Matters to a Vote of Security Holders
No matters were submitted to shareholders during the fourth quarter of 2000.

2001.
23

PART II

ITEM 5. MARKET FOR OUR COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Market for our Common Stock and Related Security Holder Matters
Our common stock trades on The New York Stock Exchange under the symbol WM. Prior to December 9, 1998, our common stock traded on The Nasdaq Stock Market
under the symbol WAMU. As of March 2, 2001,1, 2002, there were 583,802,776971,374,311 shares issued and outstanding held by 35,20742,399 shareholders of record. The closing price of our common stock on March 2, 20011, 2002 was $51.10$33.24 per share. Common Stock

The information regarding high and low quarterly sales prices of the Company's common stock, prices by quarter were as follows:

YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------ ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------

Fourth quarter.......................... $55.88 $37.88 $35.94 $25.13
Third quarter........................... 40.56 30.19 36.63 27.94
Second quarter.......................... 32.63 24.63 41.94 34.63
First quarter........................... 27.00 21.81 45.25 38.44

Theand the quarterly cash dividends declared by quarter were as follows:

YEAR ENDED
DECEMBER 31,
----------------
2000 1999
------ ------

Fourth quarter............................................. $0.300 $0.260
Third quarter.............................................. 0.290 0.250
Second quarter............................................. 0.280 0.240
First quarter.............................................. 0.270 0.230

Preferred Stock

At December 31, 2000, we had no preferred stock outstanding.

Paymentthereon, is set forth in this Form 10-K in the "Quarterly Results of Dividends and Policy

Payment of future dividends is subject to declaration by the Board of
Directors. Factors considered in determining the size of dividends are the
amount and stability of profits, adequacy of capitalization, and expected asset
and deposit growth of our subsidiaries. Our dividend policy is also dependent on
the ability of WMB, WMBFA and WMBfsb to pay dividends to their respective parent
company, which is influenced by legal, regulatory and economic restrictions. See
"Business -- Regulation and Supervision -- Restrictions on Subsidiary Savings
Institution Dividends."

Our retained earnings at December 31, 2000Operations" table included a pre-1988 thrift bad
debt reserve for tax purposes of $2.01 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, we will incur a federal income tax
liability, at the then prevailing corporate tax rate, to the extent of such
subsidiaries' pre-1988 thrift bad debt reserve. As a result, our ability to pay
dividends in excess of current earnings may be limited.

26
29

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected consolidated financial data for
Washington Mutualunder Supplementary Data and is derived from and should be read in conjunction with the
Consolidated expressly incorporated herein by reference.
24
Financial Review
Cautionary Statements of Washington Mutual and the Notes thereto,
which are included in this Annual Report on Form 10-K.

YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

INCOME STATEMENT DATA
Interest income............. $ 13,783 $ 12,062 $ 11,221 $ 10,203 $ 9,892
Interest expense............ 9,472 7,610 6,929 6,287 6,027
Net interest income......... 4,311 4,452 4,292 3,916 3,865
Provision for loan and lease
losses.................... 185 167 162 247 498
Noninterest income.......... 1,984 1,509 1,507 980 819
Noninterest expense......... 3,126 2,910 3,268 3,111 3,595
Income before income
taxes..................... 2,984 2,884 2,369 1,538 591
Net income.................. 1,899 1,817 1,487 885 375
Net income attributable to
common stock.............. 1,899 1,817 1,471 830 292
Net income per common share:
Basic..................... 3.55 3.17 2.61 1.56 0.55
Diluted................... 3.54 3.16 2.56 1.52 0.54
Average diluted common
shares used to calculate
earnings per share........ 536,463,063 574,553,031 578,562,305 556,759,023 539,058,104
Cash dividends paid per
common share:
Pre-business
combinations(1)........ $ 1.14 $ 0.98 $ 0.82 $ 0.71 $ 0.60
Post-business
combinations(2)........ 1.14 0.98 0.73 0.66 0.65
Common stock dividend payout
ratio(2).................. 32.95% 31.40% 29.32% 40.61% 94.12%
Return on average assets.... 1.01 1.04 0.96 0.63 0.28
Return on average
stockholders' equity...... 21.15 19.66 16.62 11.73 4.70
Return on average common
stockholders' equity...... 21.15 19.66 16.67 11.95 3.95

27
30

DECEMBER 31,
-------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

BALANCE SHEET DATA
Assets............... $ 194,716 $ 186,514 $ 165,493 $ 143,522 $ 137,329
Securities........... 58,724 60,786 47,046 37,025 35,036
Loans held for
sale............... 3,404 794 1,827 1,141 1,399
Loans held in
portfolio.......... 119,626 113,746 107,612 97,531 92,610
Deposits............. 79,574 81,130 85,492 83,429 87,509
Borrowings........... 101,656 94,327 65,200 49,976 40,015
Stockholders'
equity............. 10,166 9,053 9,344 7,601 7,426
Ratio of
stockholders'
equity to total
assets............. 5.22% 4.85% 5.65% 5.30% 5.41%
Diluted book value
per common share... $ 19.26(3) $ 16.18(3) $ 16.07(3) $ 13.23(3)(4) $ 12.52(3)(4)
Number of common
shares outstanding
at end of period... 527,855,720(3) 559,589,272(3) 581,408,525(3) 550,689,721(3)(4) 554,811,012(3)(4)

- ---------------
(1) Amounts paid by acquired companies prior to their combination with the
Company were not included.

(2) Based on dividends paid and earnings of the Company after restatement of
financial statements for transactions accounted for as poolings of
interests.

(3) 12,000,000 shares of common stock issued to an escrow for the benefit of the
general and limited partners of Keystone Holdings and the FSLIC Resolution
Fund and their transferees were not included.

(4) Net of outstanding treasury shares and included potential conversion of
outstanding convertible preferred stock.

28
31

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto presented elsewhere in
this report.
This section contains forward-looking statements, which are not historical facts and pertain to our future operating results. These forward-looking statements are within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in this report that are not historical facts. When used in this report, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and"estimates," or words of similar expressionsmeaning, or future or conditional verbs, such as "will," "would," "should," "could," or "may" are generally intended to identify forward-looking statements. These forward-looking statements are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Actual results may differ materially from the results discussed in these forward-looking statements due to the following factors, among others: changes in business and economic conditions that negatively affect credit quality; concentration of operations in California; competition; changes in interest rates that could negatively affect the net interest margin and the expected duration of assets; and the effects of mergers and acquisitions.

Five-Year Summary of Selected Financial Data
Year Ended December 31,
2001 2000 1999 1998 1997
(dollars in millions, except per share amounts)

Income Statement Data
Net interest income $ 6,876 $ 4,311 $ 4,452 $ 4,292 $ 3,916
Provision for loan and lease losses 575 185 167 162 247
Noninterest income 2,627 1,984 1,509 1,507 980
Noninterest expense 4,617 3,126 2,910 3,268 3,111
Income before income taxes and extraordinary item 4,311 2,984 2,884 2,369 1,538
Extraordinary item – gain on extinguishment of repurchase agreements, net of taxes of $239 million in 2001 382 - - - -
Net income 3,114 1,899 1,817 1,487 885
Net income attributable to common stock 3,107 1,899 1,817 1,471 830
Net income per common share⁽¹⁾:
Basic 3.65 2.37 2.12 1.74 1.04
Diluted 3.59 2.36 2.11 1.71 1.01
Average diluted common shares used to calculate earnings per share (in thousands)⁽¹⁾ 864,658 804,695 861,830 867,843 835,139
Cash dividends declared per common share⁽¹⁾ 0.90 0.76 0.65 0.49 0.44
Common stock dividend payout ratio⁽²⁾ 24.66 % 32.07 % 30.82 % 27.97 % 42.31 %
Return on average assets 1.38 1.01 1.04 0.96 0.63
Return on average common stockholders' equity 23.53 21.15 19.66 16.67 11.95
Net interest margin 3.32 2.38 2.63 2.88 2.91
⁽¹⁾
Restated for all stock splits.
⁽²⁾
Based on net income per basic common share and post-business combination dividends declared per common share.

December 31,
2001 2000 1999 1998 1997
(dollars in millions, except per share amounts)

Balance Sheet Data
Assets $ 242,506 $ 194,716 $ 186,514 $ 165,493 $ 143,522
Securities 58,349 58,724 60,786 47,046 37,025
Loans held for sale 23,842 3,404 794 1,827 1,141
Loans held in portfolio 132,991 119,626 113,746 107,612 97,550
Mortgage servicing rights 6,241 1,017 643 461 311
Deposits 107,182 79,574 81,130 85,492 83,429
Other borrowings 12,576 9,930 6,203 4,630 7,175
Redeemable preferred stock 102 - - - -
Stockholders' equity 14,063 10,166 9,053 9,344 7,601
Ratio of stockholders' equity to total assets 5.80 % 5.22 % 4.85 % 5.65 % 5.30 %
Ratio of average stockholders' equity to average total assets 5.85 % 4.79 % 5.29 % 5.77 % 5.41 %
Book value per common share⁽¹⁾⁽²⁾ $ 16.45 $ 12.84 $ 10.78 $ 10.71 $ 9.20
Number of common shares outstanding at end of period (in thousands)⁽¹⁾⁽²⁾ 855,089 791,784 839,384 872,113 826,035
⁽¹⁾
Restated for all stock splits.
⁽²⁾
18,000,000 shares of common stock issued to an escrow for the reasons, among others, discussed underbenefit of the heading "Factors That May
Affect Future Results" includedgeneral and limited partners of Keystone Holdings and the FSLIC Resolution Fund and their transferees were not included.
25
Overview
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto presented elsewhere in this Form 10-K.

Our net income for 2000 was $1.90 billion, compared with $1.82report.
The acquisitions of Bank United and the mortgage operations of PNC added approximately $26 billion in 1999assets during the first quarter of 2001. The acquisition of Fleet Mortgage Corp., a unit of FleetBoston Financial Corp., and $1.49certain other mortgage lending operations of Fleet National Bank (collectively, "Fleet") added approximately $8 billion in 1998. We had diluted earnings per shareassets during the second quarter of $3.542001. These acquisitions contributed significantly to the growth in 2000, $3.16 in 1999our mortgage banking business, and $2.56 in 1998.

During 2000, one of management's goals was to decrease the proportion of
SFR loans on our balance sheet by selling SFR loans and MBS. We continued our
policy of selling substantially all of our fixed-rate SFR originations and the
specialty mortgage finance loans originated by our subsidiary, Long Beach
Mortgage. We also began to sell ARM loans in the secondary market. In order to
achieve optimum pricing, current ARM production that is not held in the loan
portfolio is either sold to investors shortly following origination or
securitized and retained in the available-for-sale securities portfolio for a
period of time, and then sold. As a result of this initiative, we sold $18.07
billion of adjustable-rate loans during 2000. This strategy of selling current
ARM production or securitizing and retaining as securities for sale at a later
timeaccordingly, resulted in an increasesignificant increases in our MSR and loan servicing portfolios. Largely due to these acquisitions, the balance of loans held for sale to $3.40MSR increased from $1.02 billion at December 31, 2000 to $6.24 billion at December 31, 2001 and the loan servicing portfolio with MSR increased from $794$79.34 billion at December 31, 2000 to $378.38 billion at December 31, 2001.
Variances in the amounts reported on the Statements of Income between 2001 and prior years are partially attributable to the results from the aforementioned acquisitions, which are referred to hereafter as the "Acquired Companies." These acquisitions were accounted for as purchase transactions. Consequently, the results of those operations are included prospectively from the date of acquisition.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141,Business Combinations, and SFAS No. 142,Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method. SFAS No. 142 became effective January 1, 2002 and eliminates the amortization of goodwill relating to past and future acquisitions (except that goodwill related to business combinations initiated after June 30, 2001 and consummated before January 1, 2002 was not required to be amortized). Instead, goodwill is subject to an impairment assessment that must be performed upon adoption of SFAS No. 142 and at least annually thereafter.
The impairment assessment in connection with the initial adoption of SFAS No. 142 did not have a material impact on the results of operations or financial condition of the Company. For acquisitions initiated prior to July 1, 2001, pretax goodwill amortization of approximately $110 million at year-end 1999.

Growing noninterest incomewill no longer be expensed. Certain other identifiable intangible assets will continue to be amortized.
In June 2001, the FASB issued SFAS No. 143,Accounting for Asset Retirement Obligations. SFAS No. 143 addresses the accounting and reporting for obligations associated with the retirement of tangible, long-lived assets. The Statement is effective January 1, 2003 and is not expected to have a material impact on the results of operations or financial condition of the Company.
In August 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. The Statement supercedes SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, but retains the requirements relating to recognition and measurement of an important partimpairment loss and resolves certain implementation issues resulting from SFAS No. 121. The Statement became effective January 1, 2002 and is not expected to have a material impact on the results of operations or financial condition of the Company.
26
Critical Accounting Policies
Various elements of our strategyaccounting policies, by their nature, are inherently subject to reduceestimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified three policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our exposurefinancial statements. These policies relate to the valuation of our MSR, the methodology for the determination of our allowance for loan and lease losses and the valuation of derivatives under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities. These policies and the judgments, estimates and assumptions are described in greater detail in subsequent sections of Management's Discussion and Analysis and in the notes to the financial statements included herein. In particular, Note 1 to the Consolidated Financial Statements – "Summary of Significant Accounting Policies" describes generally our accounting policies and Note 5 to the Consolidated Financial Statements – "Mortgage Banking Activities" provides details of the assumptions used in valuing our MSR and the effect of changes to certain of those assumptions. We believe that the judgments, estimates and assumptions used in interest rates. During 2000, noninterest income
represented 32%the preparation of total revenue (netour Consolidated Financial Statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our Consolidated Financial Statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition.
Earnings Performance
Net Interest Income
Net interest income and noninterest income),
compared with 25% for 1999. We increased the amount of noninterest income
relative to$2.57 billion, or 59% in 2001 from 2000. The increase in net interest income was primarily due to a significant improvement in the net interest margin. The net interest margin was 3.32% for 2001, compared with 2.38% for 2000. The increase in the margin was primarily due to significantly lower wholesale borrowing rates during 2001, as compared with 2000. Since our wholesale borrowing rates are closely correlated with interest rate policy changes made by producing gains on salesthe Federal Reserve and reprice more quickly to current market rates than our interest-earning assets, the margin benefited from the Federal Reserve's 475 basis point reduction in the Federal Funds rate, which declined from 6.50% in December 2000 to 1.75% in December 2001. The increase in deposits (a cost-effective funding source for asset growth), coupled with lower rates, also benefited the margin in 2001. An increase in average interest-earning assets, primarily resulting from the addition of loansthe Bank United loan portfolio and increasing our loan servicingthe mortgage banking operations of the Acquired Companies, also contributed to the growth in net interest income.
Net interest income as well as increasing depositor and other
retail banking fees.

We also expanded our capability to generate loans. Total loan volume
increased by $7.07 billion from 1999 to 2000. To further mitigate our exposure
to adverse changesdecreased $141 million, or 3% in interest rates, we increased our originations of non-SFR
loans to 29% of total originations during 2000 compared with 22% for the prior
year. We also purchased specialty mortgage finance and commercial loans to
further diversify our balance sheet. These loans have the benefit of yielding
wider margins, compared with our traditional home mortgage products. These
specialty mortgage finance and commercial loans also have more predictable and
stable prepayment rates. The characteristics of these portfolios should mitigate
our exposure to margin compression during periods of rising interest rates. As
this strategy also increases our credit risk, management closely monitors the
performance of these loans.

Starting in 1998 and continuing in 1999, we purchased shorter duration
investment grade MBS in the secondary market. The MBS had acceptable, but lower
returns than loans originated by us and held in our portfolio. After reviewing
first quarter 1999 results, management re-evaluated our capital deployment
strategy. In April 1999, the Board of Directors approved a share repurchase
program and MBS purchases were curtailed. From the second quarter of 1999
through June 30, 2000, we purchased a total of 66.3 million shares as part of
our previously announced repurchase programs totaling 111.3 million shares. We
have not

29
32

repurchased any of our common stock since the second quarter of 2000. Management
instead focused on internal growth and acquisitions as a means of deploying
capital.

On January 31, 2001, we acquired the mortgage operations of The PNC
Financial Services Group, Inc. The principal subsidiaries acquired in that
transaction were renamed Washington Mutual Home Loans, Inc. ("WMHLI") and
Washington Mutual Mortgage Securities Corp. ("WMMSC"). The acquisition further
diversifies our mortgage operations geographically and expands our loan
origination, servicing and securitization capacity. At January 31, 2001, WMHLI
and WMMSC had total assets of approximately $7 billion.

On February 9, 2001, we acquired Bank United Corp. This acquisition
enhances our existing plans to grow our commercial business and expands our
ability to originate FHA-insured and VA-guaranteed loans. At February 9, 2001,
Bank United Corp. had total assets of approximately $18 billion.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income was $4.31 billion for 2000, compared with $4.45 billion
in 1999 and $4.29 billion in 1998.1999. The decline in net interest income for 2000 was primarily due to the decrease in the net interest spread and margin, partially offset by an increase in average interest-earning assets. The net interest spread and
margin were 2.25% andwas 2.38% for 2000, compared with 2.48% and 2.63% for 1999. The net interest spread and margin were 2.70% and 2.88% for 1998.

The compressiondecrease in the net interest spread and margin was primarilyoccurred due to
the fact that our liabilities reprice to market rates more quickly than our
assets. This compression was in response to the rising interest rate environment that existed during the first half of 2000, evidenced by an increase in the average
three-month London Interbank Offered Rate ("LIBOR") from 6.14% in the fourth
quarter of 1999 to 6.70% in the third quarter of 2000, and by a 100 basis point
increase in the federal funds rate from 5.50% in2000. From November 1999 to 6.50% in May 2000. Accordingly,2000, the cost of our interest-bearing liabilitiesFederal Funds rate increased 71100 basis points to 5.37% for 2000 from 4.66% for 1999. This increase was primarily
due to a 91 basis point increase in the cost of our borrowings from 5.52% in
1999 to 6.43% in 2000. The increased usage of wholesale borrowings (our primary
funding source for asset growth) also contributed to the higher borrowing
expense. The cost of our interest-bearing liabilities and cost of borrowings
were 4.83% and 5.85% for 1998.

Interest rates stabilized during the latter half of 2000,6.50%, which caused an
improvement in the net interest margin during the fourth quarter. The net
interest spread and margin rose to 2.29% and 2.42% for the fourth quarter,
compared with 2.19% and 2.31% for the third quarter. Reflecting this lower
interest rate environment, adjustable-rate SFR loan originations were 76% of
total SFR originations for the fourth quarter of 2000, as compared with an
average of 88% over the prior three quarters.

The overall yield on our interest-earning assets increased 48 basis points
during 2000, driven primarily by a 57 basis point increase in the yield on our
loans to 7.97%, compared with 7.40% for 1999. The rise in the yield on our loan
portfolio was the result of adjustments to variable-rate loans tied to
treasury-based indices and COFI. For the same reasons, there was a 36 basis
point increase in the yield on our other interest-earning assets to 6.97% for
2000, compared with 6.61% for 1999. For 1998, the overall yield on our
interest-earning assets was 7.53%, which was primarily attributable to the 7.73%
yield on our loan portfolio.

With the reduction in the federal funds rate to 5.50% in January 2001,
coupled with the "snap back" effect on our ARM portfolio from the rate increases
during the first half of 2000, we anticipate an improvement in the net interest
margin during 2001. If interest rates remain stable or decline further, then the
net interest margin could expand even further. If further rate reductions do
occur, we may adopt the strategy of extending the maturity range of our wholesale borrowings and increasing our holdingsborrowing costs to increase accordingly.
Interest income included hedging-related expense from stand alone derivatives of interest rate cap contracts$7 million in 2001. Interest expense in 2001 included net hedging-related income from derivatives embedded within these liabilities. Restructuring this portfolio in such a manner
would reduce our exposure to margin compression during periodsrepurchase agreements of rising
interest rates.

30
33$69 million, largely offset by hedging-related expense of $54 million from stand alone derivatives.
27

Certain average balances, together with the total dollar amounts of interest income and expense and the weighted average interest rates, were as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------- ----------------------------- -----------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME OR AVERAGE INCOME OR AVERAGE INCOME OR
BALANCE(1) RATE EXPENSE BALANCE(1) RATE EXPENSE BALANCE(1) RATE EXPENSE
---------- ---- --------- ---------- ---- --------- ---------- ---- ---------
(DOLLARS IN MILLIONS)

ASSETS
Cash equivalents, securities and
FHLB stock...................... $ 63,067 6.97% $ 4,395 $ 56,177 6.61% $ 3,714 $ 43,484 7.02% $ 3,054
Loans(2).......................... 117,742 7.97 9,388 112,859 7.40 8,348 105,595 7.73 8,167
-------- ------- -------- ------- -------- -------
Total interest-earning
assets.................. 180,809 7.62 13,783 169,036 7.14 12,062 149,079 7.53 11,221
Other assets...................... 6,763 5,750 6,042
-------- -------- --------
Total assets.............. $187,572 $174,786 $155,121
======== ======== ========
LIABILITIES
Deposits:
Checking accounts............... $ 14,120 0.46 65 $ 13,645 0.60 82 $ 12,165 0.61 75
Savings accounts and MMDAs...... 29,816 4.05 1,207 30,267 4.82 1,460 25,924 3.65 947
Time deposit accounts........... 36,340 5.55 2,018 39,183 4.16 1,628 48,341 5.31 2,566
-------- ------- -------- ------- -------- -------
Total deposits............ 80,276 4.10 3,290 83,095 3.82 3,170 86,430 4.15 3,588
Borrowings:
Repurchase agreements........... 28,491 6.33 1,804 26,082 5.36 1,397 17,695 5.67 1,004
Advances from FHLBs............. 56,979 6.33 3,608 47,008 5.37 2,522 30,110 5.65 1,701
Federal funds purchased and
commercial paper.............. 3,442 6.52 224 2,421 5.19 126 4,122 5.61 231
Other........................... 7,198 7.59 546 4,958 7.97 395 5,226 7.76 405
-------- ------- -------- ------- -------- -------
Total borrowings.......... 96,110 6.43 6,182 80,469 5.52 4,440 57,153 5.85 3,341
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities............. 176,386 5.37 9,472 163,564 4.66 7,610 143,583 4.83 6,929
-------- ------- -------- ------- -------- -------
Other liabilities................. 2,207 1,978 2,591
-------- -------- --------
Total liabilities............... 178,593 165,542 146,174
STOCKHOLDERS' EQUITY.............. 8,979 9,244 8,947
-------- -------- --------
Total liabilities and
stockholders' equity............ $187,572 $174,786 $155,121
======== ======== ========
Net interest spread and net
interest income................. 2.25 $ 4,311 2.48 $ 4,452 2.70 $ 4,292
======= ======= =======
Net interest margin............... 2.38 2.63 2.88

- ---------------
Year Ended December 31,
2001 2000 1999
Average
Balance Rate Interest
Income or
Expense Average
Balance Rate Interest
Income or
Expense Average
Balance Rate Interest
Income or
Expense
(dollars in millions)

Assets
Interest-earning assets:
Loans⁽¹⁾⁽²⁾:
SFR $ 98,494 7.01 % $ 6,908 $ 81,471 7.40 % $ 6,028 $ 82,568 6.96 % $ 5,743
Specialty mortgage finance⁽³⁾ 9,054 9.96 902 5,352 10.42 557 2,390 10.72 256
Total SFR 107,548 7.26 7,810 86,823 7.59 6,585 84,958 7.06 5,999
SFR construction⁽⁴⁾ 2,731 8.09 221 1,331 9.51 127 1,077 8.64 93
Second mortgage and other consumer:
Home equity loans and lines 8,201 8.37 686 5,613 8.99 505 3,630 8.63 313
Other 3,957 13.64 540 3,777 14.39 543 4,106 13.43 551
Commercial business 4,856 7.13 349 1,794 9.42 169 1,242 8.65 108
Commercial real estate:
Multi-family 16,487 7.73 1,274 15,507 7.85 1,218 14,554 7.05 1,026
Other commercial real estate 4,534 7.75 353 2,897 8.32 241 3,292 7.84 258
Total loans 148,314 7.57 11,233 117,742 7.97 9,388 112,859 7.40 8,348
MBS⁽⁵⁾ 41,430 6.95 2,875 58,469 6.97 4,078 52,293 6.68 3,493
Investment securities and other⁽⁵⁾ 17,625 5.43 957 4,598 6.90 317 3,884 5.68 221
Total interest-earning assets 207,369 7.26 15,065 180,809 7.62 13,783 169,036 7.14 12,062
Noninterest-earning assets 18,204 6,763 5,750
Total assets $ 225,573 $ 187,572 $ 174,786
Liabilities
Interest-bearing liabilities:
Deposits:
Checking accounts $ 23,502 0.51 119 $ 14,120 0.46 65 $ 13,645 0.60 82
Savings accounts and money market deposit accounts ("MMDAs") 34,168 3.00 1,017 29,816 4.05 1,207 30,267 4.82 1,460
Time deposit accounts 38,852 5.04 1,958 36,340 5.55 2,018 39,183 4.16 1,628
Total deposits 96,522 3.21 3,094 80,276 4.10 3,290 83,095 3.82 3,170
Borrowings:
Securities sold under agreements to repurchase ("repurchase agreements") 29,582 4.04 1,196 28,491 6.33 1,804 26,082 5.36 1,397
Advances from FHLBs 63,859 4.58 2,924 56,979 6.33 3,608 47,008 5.37 2,522
Federal funds purchased and commercial paper 4,806 4.11 198 3,442 6.52 224 2,421 5.19 126
Other 13,289 5.85 777 7,198 7.59 546 4,958 7.97 395
Total borrowings 111,536 4.57 5,095 96,110 6.43 6,182 80,469 5.52 4,440
Total interest-bearing liabilities 208,058 3.93 8,189 176,386 5.37 9,472 163,564 4.66 7,610
Noninterest-bearing liabilities 4,308 2,207 1,978
Total liabilities 212,366 178,593 165,542
Stockholders' equity 13,207 8,979 9,244
Total liabilities and stockholders' equity $ 225,573 $ 187,572 $ 174,786
Net interest spread and net interest income 3.33 $ 6,876 2.25 $ 4,311 2.48 $ 4,452
Net interest margin 3.32 2.38 2.63
^{(1) Average balances were obtained from the best available daily, weekly or
monthly data, which management believes approximated the average balances
calculated on a daily basis.
(2)}
Nonaccrual loans were included in the average loan amounts outstanding.
⁽²⁾
Interest income for loans includes amortization of net deferred loan origination costs of $172 million, $65 million, and $48 million for the years ended December 31, 342001, 2000, and 1999.
⁽³⁾
Includes purchased subprime loans as well as first mortgages originated by Washington Mutual Finance and Long Beach Mortgage.
⁽⁴⁾
Includes custom construction loans to the intended occupant of a house to finance the house's construction and residential builder construction loans to borrowers who are in the business of acquiring land and building homes for resale.
⁽⁵⁾
Yield on MBS and investment securities are based on average amortized cost balances.
28
The dollar amounts of interest income and interest expense fluctuate depending upon changes in interest rates and upon changes in amounts (volume)the volume of our 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 thatvolume) which were allocated proportionately to the changes in volume and the changes in rate)rate and included in the relevant column below were as follows:
2000 VS. 1999 1999 VS. 1998
----------------------------------- ----------------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO DUE TO
-------------------- -------------------
VOLUME(1) RATE TOTAL CHANGE VOLUME(1) RATE TOTAL CHANGE
---------- ------- ------------ ---------- ------ ------------
(DOLLARS IN MILLIONS)

INTEREST INCOME
Cash equivalents, securities and
FHLB stock....................... $ 473 $ 208 $ 681 $ 848 $(188) $ 660
Loans(2)........................... 371 669 1,040 547 (366) 181
----- ------ ------ ------ ----- ------
Total interest income.... 844 877 1,721 1,395 (554) 841
INTEREST EXPENSE
Deposits:
Checking accounts................ 3 (20) (17) 9 (2) 7
Savings accounts and MMDAs....... (21) (232) (253) 176 337 513
Time deposit accounts............ (125) 515 390 (437) (501) (938)
----- ------ ------ ------ ----- ------
Total deposit expense.... (143) 263 120 (252) (166) (418)
Borrowings:
Repurchase agreements............ 137 270 407 452 (59) 393
Advances from FHLBs.............. 587 499 1,086 911 (90) 821
Federal funds purchased and
commercial paper.............. 61 37 98 (89) (16) (105)
Other............................ 171 (20) 151 (21) 11 (10)
----- ------ ------ ------ ----- ------
Total borrowing
expense................ 956 786 1,742 1,253 (154) 1,099
----- ------ ------ ------ ----- ------
Total interest expense... 813 1,049 1,862 1,001 (320) 681
----- ------ ------ ------ ----- ------
Net interest income................ $ 31 $ (172) $ (141) $ 394 $(234) $ 160
===== ====== ====== ====== ===== ======

- ---------------
2001 vs. 2000 2000 vs. 1999
Increase/(Decrease)
Due to
Increase/(Decrease)
Due to
Total Change Total Change
Volume Rate Volume Rate
(dollars in millions)

Interest Income
Loans
SFR $ 1,207 $ (327 ) $ 880 $ (77 ) $ 362 $ 285
Specialty mortgage finance⁽¹⁾ 370 (25 ) 345 309 (8 ) 301
Total SFR 1,577 (352 ) 1,225 232 354 586
SFR construction⁽²⁾ 115 (21 ) 94 24 10 34
Second mortgage and other consumer:
Home equity loans and lines 218 (37 ) 181 178 14 192
Other 26 (29 ) (3 ) (46 ) 38 (8 )
Commercial business 229 (49 ) 180 51 10 61
Commercial real estate:
Multi-family 76 (20 ) 56 70 122 192
Other commercial real estate 129 (17 ) 112 (32 ) 15 (17 )
Total loans 2,370 (525 ) 1,845 477 563 1,040
MBS (1,182 ) (21 ) (1,203 ) 426 159 585
Investment securities and other 720 (80 ) 640 49 47 96
Total interest income 1,908 (626 ) 1,282 952 769 1,721
Interest Expense
Deposits:
Checking accounts 47 7 54 3 (20 ) (17 )
Savings accounts and MMDAs 159 (349 ) (190 ) (21 ) (232 ) (253 )
Time deposit accounts 134 (194 ) (60 ) (125 ) 515 390
Total deposit expense 340 (536 ) (196 ) (143 ) 263 120
Borrowings:
Repurchase agreements 66 (674 ) (608 ) 137 270 407
Advances from FHLBs 399 (1,083 ) (684 ) 587 499 1,086
Federal funds purchased and commercial paper 73 (99 ) (26 ) 61 37 98
Other 379 (148 ) 231 171 (20 ) 151
Total borrowing expense 917 (2,004 ) (1,087 ) 956 786 1,742
Total interest expense 1,257 (2,540 ) (1,283 ) 813 1,049 1,862
Net interest income $ 651 $ 1,914 $ 2,565 $ 139 $ (280 ) $ (141 )
^{(1) Average balances were obtained from}
Includes purchased subprime loans as well as first mortgages originated by Washington Mutual Finance and Long Beach Mortgage.
⁽²⁾
Includes custom construction loans to the best available daily, weekly or
monthly data, which management believes approximatedintended occupant of a house to finance the average balances
calculated on a daily basis.

(2) Nonaccrualhouse's construction and residential builder construction loans were includedto borrowers who are in the average loan amounts outstanding.

32
35

business of acquiring land and building homes for resale.
29
Noninterest Income
Noninterest income consisted of the following:
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(IN MILLIONS)

Depositor and other retail banking fees.................. $ 976 $ 764 $ 569
Securities fees and commissions.......................... 318 271 192
Insurance fees and commissions........................... 44 43 42
Loan servicing income.................................... 147 112 117
Loan related income...................................... 117 103 111
Gain on sale of loans.................................... 262 109 133
Gain on sale of retail deposit branch systems............ -- -- 289
Loss from securities..................................... (1) (12) (30)
Other income............................................. 121 119 84
------ ------ ------
Total noninterest income....................... $1,984 $1,509 $1,507
====== ====== ======

Depositor
Percentage Change
Year Ended December 31,
2001/
2000 2000/
1999
2001 2000 1999
(in millions)

Depositor and other retail banking fees $ 1,290 $ 976 $ 764 32 % 28 %
Securities fees and commissions 303 318 271 (5 ) 17
Insurance income 100 49 43 104 14
SFR mortgage banking (expense) income:
Loan servicing fees 1,375 295 291 366 1
Amortization of MSR (1,006 ) (133 ) (88 ) 656 51
Impairment of MSR (1,749 ) (9 ) 4 - -
Other, net (141 ) (19 ) (109 ) 642 (83 )
Net SFR loan servicing (expense) income (1,521 ) 134 98 - 37
Loan related income 156 35 30 346 17
Gain from mortgage loans 963 262 109 268 140
Gain from sale of originated MBS 117 2 - - -
Total SFR mortgage banking (expense) income (285 ) 433 237 - 83
Portfolio loan related income 193 82 73 135 12
Gain (loss) from other securities 744 (3 ) (12 ) - 75
Other income 282 129 133 119 (3 )
Total noninterest income $ 2,627 $ 1,984 $ 1,509 32 31
SFR Mortgage Banking Income
The increase in SFR loan servicing fees for 2001, as compared with 2000, was substantially the result of the addition of the loan servicing portfolios of the Acquired Companies. The acquisitions also resulted in a substantial increase in MSR, which grew from $1.02 billion at December 31, 2000 to $6.24 billion at December 31, 2001. The Acquired Companies added $4.82 billion to our MSR portfolio at the time of the acquisitions. Our loan servicing portfolio with MSR increased by $299.04 billion to $378.38 billion at December 31, 2001. Of this increase, $255.43 billion was attributable to the Acquired Companies.
Total servicing portfolio by type, excluding retained MBS without MSR and owned loans, was as follows:
December 31, 2001
Unpaid Principal
Balance Weighted Average
Servicing Fee
(in millions)

(in basis points, annualized)

Government $ 61,541 52
Agency 242,075 45
Private 69,996 51
Specialty home loans 8,888 50
Total servicing portfolio, excluding retained MBS without MSR and owned loans $ 382,500 * 47
*
Includes $4.12 billion of loans serviced without MSR.
30
MSR impairment was $1.75 billion in 2001 and MSR amortization was $1.01 billion in 2001, representing increases of $1.74 billion and $873 million, respectively, from 2000 primarily as a result of the growth in MSR and higher actual prepayment volumes and anticipated prepayment rates during 2001. Long-term mortgage interest rates declined and remained low during much of the year resulting in high levels of refinancing activity that in turn led to higher actual prepayment volumes and anticipated prepayment rates within our mortgage servicing portfolio.
The value of our MSR asset is subject to prepayment risk. Future expected net cash flows from servicing a loan in our servicing portfolio will not be realized if the loan pays off earlier than we anticipate. Moreover, since most loans within our servicing portfolio do not contain penalty provisions for early payoff, we will not receive a corresponding economic benefit if the loan pays off earlier than expected. MSR are the discounted present value of the future net cash flows we expect to receive from our servicing portfolio. Accordingly, prepayment risk subjects our MSR to impairment.
In measuring impairment of MSR, we stratify the loans in our servicing portfolio based on loan type, coupon rate and other predetermined characteristics. We measure MSR impairment by estimating the fair value of each stratum. An impairment allowance for a stratum is recorded when, and in the amount by which, its fair value is less than its carrying value. We estimate fair value using a discounted cash flow (DCF) model, independent third-party appraisals and management's analysis of observable data to formulate conclusions about anticipated changes in future market conditions, including interest rates. The DCF model estimates the present value of the 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. The reasonableness of management's assumptions about these factors is confirmed through independent broker surveys. Independent appraisals of the fair value of our servicing portfolio are obtained periodically, but not less frequently than annually, and are used by management to evaluate the reasonableness of the value conclusions.
Our methodology for estimating the fair value of MSR is highly sensitive to changes in assumptions. For example, our determination of fair value uses anticipated prepayment speeds. Actual prepayment experience may differ and any difference may have a material effect on our risk. 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 5 to the Consolidated Financial Statements – "Mortgage Banking Activities."
Although low mortgage interest rates caused prepayment levels to rise, they also allowed us to generate strong levels of salable fixed-rate loan volume. This resulted in a gain from mortgage loans of $963 million during 2001. The adoption of SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, on January 1, 2001 had the effect of accelerating gains from mortgage loans by $217 million during the year. The increase in gain from mortgage loans in 2000, as compared with 1999, was largely the result of the sale of $12.90 billion of loans previously held in portfolio.
We recorded a gain from other securities of $744 million in 2001. Of this gain, $643 million represented sales of fixed-rate U.S. Government agency and treasury bonds. Since these fixed-rate securities generally benefit from declining interest rates, they were sold to partially offset MSR impairment. To further offset the impairment, we liquidated certain repurchase agreements with embedded interest rate floors, which resulted in a pretax gain, accounted for on a net-of-tax basis as an extraordinary item under current accounting rules, of $621 million.
The FASB is nearing the completion of a statement that would eliminate the requirement that all forms of gains or losses on debt extinguishments, such as the liquidation of repurchase agreements, be
31

reported as extraordinary items. The early termination of repurchase agreements constitutes a normal part of our asset and liability management strategy. Upon adoption of that statement, gains or losses on debt extinguishments that are considered to be part of our normal business operations would be allowed to be reported as a component of noninterest income or noninterest expense for all financial statement periods presented.
All Other Noninterest Income Analysis
The increase in depositor and other retail banking fees of $976 million for 2000 increased
28% from $764 million for 1999during 2001 and 72% from $569 million for 1998. The increase
in 2000 was primarilypredominantly due to higher collections of nonsufficient funds and other
fees on existing checking accounts from higher customer usage and fee increases.
The increase from 1998 to 1999 was primarily due to collecting more debit card,
ATM, nonsufficient funds and other fees that resulted from an increased number of checking accounts. The number of checking accounts increased by more than one million during 2001 to approximately 6 million accounts and over 500,000 during 2000 to 4.8approximately 5 million accountsaccounts.
The decrease in securities fees and commissions from 2001 compared with 2000 was due to lower sales of investment products, including variable annuities, largely the result of continued investor uncertainty regarding the stock market. Offsetting this decline was a significant increase in fees from the sale of fixed annuities. In addition, this decline was also offset by an $11 million increase in asset management fees. Funds under management totaled $11.58 billion at December 31, 2001, up from $9.70 billion at December 31, 2000 and over
400,000 during 1999 to 4.3 million accounts$8.32 billion at December 31, 1999. Securities fees and commissions increased to $318 million for 2000 from
$271 million in 1999 and $192 million in 1998. During 2000, weWe earned more investment management fees in 2000, as compared with 1999, due to the growth in assets under management in the WM Group of Funds. Assets under management grewFunds, and recognized higher commission income from $7.42 billion at December
31, 1999 to $8.21 billion at December 31, 2000. Higherincreased volume of securities transactions in 2000 also contributed to the increase in fee income.

Loan servicingtransactions.
Insurance income increased to $147 million in 2000, compared with $112
million in 1999 and $117 million in 1998. The increase wasduring 2001 primarily due to growth in loans serviced for others as a result of loan sales and
securitizations. The impact of this portfolio growth was partially offset by an
increase in the amortization of mortgage servicing rights ("MSR") primarily
resulting from the larger servicing portfolio. Weour captive reinsurance programs. Acquisitions also incurred an MSR
impairment of $9 million during the fourth quarter of 2000 duecontributed to an increase in prepayment estimates as a resultrevenues in optional insurance and property and casualty insurance products.
A large portion of falling long-term interest rates. The
weighted average servicing fee was approximately 43 basis points during 2000 and
39 basis points during 1999.

Loanthe growth in portfolio loan related income during 2001 was $117 million in 2000, up from $103 million in 1999
and $111 million in 1998. This income is comprised of late charges, prepayment
fees, reconveyance fees, and other miscellaneous fees. The increase in income
from 1999due to 2000 resulted from increased volume of late charges on the loan portfolio and higher loan prepayment fees onas a result of the higher level of refinancing activity within our loan portfolio. The increase from 1999 to 2000 resulted from higher levels of late charges and higher prepayment fees, primarily due to the growth of the purchased specialty mortgage finance portfolio asportfolio.
The increase in other income during 2001 included an increase of $37 million from our bank-owned life insurance program, which was initially funded in the resultsecond quarter of increased refinancing activity. The decrease in
income from 1998 to 1999 was due to2000. In addition, the rise in interest rates, which causedincrease includes a decline in loan prepayments and the related prepayment fees. Late charges also
decreased as a result of a downward trend in delinquencies.

Gain on sale of loans increased to $262$34 million for 2000, compared with
$109 million in 1999 and $133 million in 1998. Thenet gain for 2000 was
attributable to the sale of fixed- and adjustable-rate loans, which included
$12.90 billion of seasoned loans and $8.71 billion of current loan production.
Additionally, we sold $3.74 billion of loans originated by Long Beach Mortgage.
The gains for 1999 and 1998 resulted from sales of $8.96 billion and $18.24
billion of current loan production, which were comprised of fixed-rate loans.
Sales of loans originated by Long Beach Mortgage contributed $23 million towards
the 1999 gains.

33
36

Losses from securities were $1 million during 2000, compared with $12
million during 1999 and $30 million during 1998. During the first half of 2000,
we incurred net losses on MBS sales. The proceeds from these sales were used to
repurchase our common stock. These sales also reduced our interest rate
sensitivity. Substantially offsetting these losses were $9 million in gains from the sale of ARM loan originations13 financial centers and a gain of $32 million on Concord EFS, Inc. ("Concord") stock. We donated the Concord stock to the Washington Mutual Foundation; therefore, there is a similar increase in 2000 that were securitized and held in the
available-for-sale securities portfolio for a period of time prior to being
sold, as well as $9 million in gains from the sale of securities that were
purchased as hedges against our MSR portfolio.

"other expense."
32

Noninterest Expense
Noninterest expense consisted of the following:
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(IN MILLIONS)

Compensation and benefits................................ $1,348 $1,186 $1,189
Occupancy and equipment.................................. 604 565 498
Telecommunications and outsourced information services... 323 276 256
Depositor and other retail banking losses................ 105 107 88
Transaction-related expense.............................. -- 96 508
Amortization of goodwill and other intangible assets..... 106 98 104
Advertising and promotion................................ 132 111 114
Postage.................................................. 98 89 77
Professional fees........................................ 101 70 61
Regulatory assessments................................... 31 59 63
Office supplies.......................................... 30 35 42
Travel and training...................................... 63 52 45
Other expense............................................ 185 166 223
------ ------ ------
Total noninterest expense...................... $3,126 $2,910 $3,268
====== ====== ======

Compensation
Percentage Change
Year Ended December 31,
2001/
2000 2000/
1999
2001 2000 1999
(in millions)

Compensation and benefits $ 1,924 $ 1,348 $ 1,223 43 % 10 %
Occupancy and equipment 804 604 575 33 5
Telecommunications and outsourced
information services 441 323 276 37 17
Professional fees 201 101 76 99 33
Advertising and promotion 185 132 111 40 19
Amortization of goodwill and other
intangible assets 172 106 98 62 8
Depositor and other retail banking losses 144 105 107 37 (2 )
Postage 136 98 89 39 10
Loan expense 126 50 33 152 52
Travel and training 112 63 55 78 15
Other expense 372 196 267 90 (27 )
Total noninterest expense $ 4,617 $ 3,126 $ 2,910 48 7
Employee base compensation and benefits expense increased during 2001 due primarily to $1.35 billion,the addition of the Acquired Companies and the hiring of additional staff to support our expanding operations. Full-time equivalent employees ("FTE") were 39,465 at December 31, 2001, compared with $1.19 billion for both 199928,798 at December 31, 2000 and 1998.28,509 at December 31, 1999. During the first quarter of 2002, the acquisition of Dime added approximately 6,900 FTE. We therefore expect employee base compensation and benefits expense to increase in 2002.
The increase in occupancy and equipment expense in 2001 resulted primarily from rent, maintenance, and depreciation expense on newly leased or acquired properties, including those of the Acquired Companies. The increase during 2000 was mostly due to computer equipment upgrades.
A significant portion of the increase was
due to increased commission expense resulting from the higher volume of loan
originations and securities transactions. Other significant factors were
increases in base compensation expense and higher premiums on employee medical
and dental insurance. Also contributing to the increase was the acquisition of
Long Beach Mortgage in October 1999, which was not included in our results prior
to its acquisition. Full-time equivalent employees ("FTE") were 28,798 at
December 31, 2000, compared with 28,509 at December 31, 1999 and 27,957 at
December 31, 1998.

Occupancy and equipment expense was $604 million in 2000, compared with
$565 million for 1999 and $498 million for 1998. The increase during 2000 was
primarily due to higher rent and depreciation expense that resulted from
additional building leases and the leasehold improvements thereon, and computer
equipment upgrades. Similar computer system upgrades caused an increase in
equipment expense during 1999, partially offset by occupancy expense reductions
from the closure of 162 consumer financial centers in California as a result of
the merger with Ahmanson.

Telecommunicationstelecommunications and outsourced information services expense during 2001 was $323
millionattributable to higher rates, effective at the beginning of the year, with a third party service provider. Additionally, the Company added 194 financial centers as a result of acquisitions and the opening of Occasio financial centers in 2000, compared with $276 million in 1999 and $256 million in 1998.new markets, which also contributed to higher telecommunications expense. In 2000, the majority of the increase reflected higher use of services resulting from additional
locations, higher levels of customer support, and increased use of outsourced data processing. During 2000,2002, the openingCompany plans to open approximately 120 additional financial centers. We anticipate that this will result in higher telecommunication and outsourced information services expense in 2002.
The increase in professional fees in 2001 was predominantly the result of 26 financial centers in new
markets, in conjunction with project Occasio(TM)higher consulting and other professional service fees from various technology projects as well as the development of Optis(TM), also contributedour website, a new loan origination platform and new products. In 2000, the increase was attributable to higher telecommunications expense.

We completed the integration of Ahmansonvarious consulting projects designed to streamline our processes and procedures as well as to develop and deliver new products.
The increase in the fourth quarter of 1999. As
a result, there were no transaction-related expenses incurred in 2000.

34
37

Advertisingadvertising and promotion expense increased to $132 million in 2000 from
$111 million in 1999during 2001 and $114 million in 1998. The increase during 2000 was primarily due to additional costs associated with campaigns for various loan and deposit products. In 1998, we incurred additionalproducts and our expansion into new markets.
33

Amortization of goodwill and intangible assets increased in 2001 primarily due to the Acquired Companies. Upon adopting SFAS No. 142 at January 1, 2002, goodwill amortization was eliminated.
The increase in depositor and other retail banking losses in 2001 was primarily the result of growth in new checking accounts and an increase in the number of ATMs.
The increase in loan expense in 2001 and 2000 was mostly due to higher closing costs associated with campaigns designedincreased loan originations, as a result of increased refinancing activity and the acquisition of the Acquired Companies.
The increase in other expense in 2001 was primarily due to introduce productsincreases in contributions to the California market.

Professional feesWashington Mutual Foundation, provision for 2000 were $101 million, compared with $70 million in
1999losses on delinquent FHA and $61 million in 1998. The 2000 increase was attributable to various
consulting projects designed to streamline our processes and procedures, and to
develop and deliver new products.

Regulatory assessments were $31 million in 2000, compared with $59 million
in 1999 and $63 million in 1998. The overall assessment rate for Savings
Association Insurance Fund deposits was significantly reduced in the first
quarter of 2000, which caused a corresponding decrease in regulatory
assessments. See "Business -- Regulation and Supervision -- FDIC Insurance."

Other expense increased to $185 million in 2000VA loans repurchased from $166 million in 1999.
The increase of $19 million during 2000 was mainly comprised of increases in
loan expenses, contributions,GNMA, and other outside services.services expense. The higher loan
expenses in 2000 were attributable to an overall increase in loan originations
and purchases. Themajor portion of the decrease from 19981999 to 19992000 was due to 1998 expenses
associated with the donationelimination of land for open space to support further
development of property owned by Ahmanson as a real estate investment.

Taxation

Income taxes include federal and applicable state income taxes and payments
in lieu of taxes. The provision for income taxes was $1.09 billion for 2000,
which represented an effective tax rate of 36.37%.

In connection with the Keystone Transaction, we acquired 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
subsidiaryFDIC insurance premiums on customer deposits.
Review of Financial Corporation of America. In connection with the 1988
Acquisition, the Internal Revenue Service (the "Service") entered into a closing
agreement (the "Closing Agreement") with respect to the federal income tax
consequences of the 1988 Acquisition and certain aspects of the taxation of
Keystone Holdings and certain of its affiliates. The Closing Agreement contains
provisions that were intended to ensure that losses generated by New West
Federal Savings and Loan Association would be available to offset income of ASB
for federal income tax purposes. 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 FDIC, including an Assistance
Agreement.

See "Notes to Consolidated Financial Statements -- Note 12: Income Taxes."

REVIEW OF FINANCIAL CONDITIONCondition
Assets. At December 31, 2000,2001, our assets were $194.72$242.51 billion, an increase of $8.21$47.79 billion or 4%25% from $186.51$194.72 billion at December 31, 1999.2000. This increase was primarily resultedattributable to the Acquired Companies.
Securities. Securities consisted of the following:
December 31,
2001 2000
(in millions)

Available-for-sale securities, total amortized cost of $58,783 and $42,288:
MBS $ 28,568 $ 40,349
Other investment securities 29,781 1,810
Total available-for-sale securities $ 58,349 $ 42,159
Held-to-maturity securities, total fair value of zero and $16,486:
MBS $ - $ 16,428
Other investment securities - 137
Total held-to-maturity securities $ - $ 16,565
Upon adopting SFAS No. 133 at January 1, 2001, we reclassified our held-to-maturity securities to available-for-sale. Our combined MBS portfolio declined $28.21 billion to $28.57 billion at December 31, 2001 from the retention of loans originated by us, either as loans
or$56.78 billion at December 31, 2000. This decrease was principally related to high prepayment activity and sales in securitized form, and the purchase of whole loans. In particular, loans
held for sale and loans held in portfolio2001. Other investment securities increased by $2.61$27.83 billion and $5.88
billion.

Securities. Our securities portfolio decreased by $2.07to $29.78 billion or 3% to
$58.72at December 31, 2001 from $1.95 billion at December 31, 2000 from $60.79 billion at year-end 1999. The
decrease was primarily due to principal paydownsthe purchase of U.S. Government agency and sales of MBS that had been
purchased in 1998 andtreasury bonds. Refer to Note 3 to the first half of 1999, partially offsetConsolidated Financial Statements – "Securities" for additional information on securities, classified by the retention
of MBS that were created from loan securitizations. In 2001, we expect to
increase our purchases of other investment securities, such as government bonds.
These bonds have fixed-maturities, are non-callable and non-prepayable and are
expected to serve as economic hedges of mortgage servicing rights, which are
subject to prepayment risk in a declining interest rate environment.

At December 31, 2000, we held $21.99 billion of private issue MBS and CMOs.
Of this total, 73% were rated the highest investment grade (AAA), 3% were rated
investment grade (AA through BBB), 1% were rated below investment grade and 23%
were unrated.

35
38

At December 31, 2000, 60% of MBS were adjustable rate. Of the 60% indexed
to an adjustable rate, 52% were indexed to COFI, 34% to U.S. Treasury indices,
and 14% to other indices. The remaining 40% of MBS were fixed-rate.security type.
34

Loans. Total loans at December 31, 2000 were $123.03 billion, up $8.49
billion or 7% from $114.54 billion at December 31, 1999. This increase was
primarily due to growth in ARM, second mortgage and other consumer, and
specialty mortgage finance loans. These increases were partially offset by sales
and securitizationsconsisted of SFRthe following:
December 31,
2001 2000 1999 1998 1997
(in millions)

Loans held for sale $ 23,842 $ 3,404 $ 794 $ 1,827 $ 1,141
Loans held in portfolio:
SFR 82,021 80,181 79,834 79,275 71,020
Specialty mortgage finance⁽¹⁾ 9,821 6,783 4,452 722 529
Total SFR loans 91,842 86,964 84,286 79,997 71,549
SFR construction:
Builder⁽²⁾ 2,127 1,040 729 505 401
Custom⁽³⁾ 475 391 514 515 476
Second mortgage and other consumer:
Home equity loans and lines 9,320 6,521 4,822 3,845 3,468
Other 3,728 3,957 3,705 3,486 3,245
Commercial business 5,390 2,274 1,452 1,129 838
Commercial real estate⁽⁴⁾:
Multi-family 15,608 15,657 15,261 14,559 14,022
Other commercial real estate 4,501 2,822 2,977 3,576 3,551
Total loans held in portfolio $ 132,991 $ 119,626 $ 113,746 $ 107,612 $ 97,550
⁽¹⁾
Includes purchased subprime loans as well as principal payments. During 2000, we
expanded our capacityfirst mortgages originated by Washington Mutual Finance.
⁽²⁾
Represents loans to generatebuilders for the purpose of financing the acquisition, development and construction of single-family residences for sale.
⁽³⁾
Represents construction loans and developed a market to sell ARM
loans, in addition to our ongoing policy of selling fixed-rate loans. This was
done as part of our strategy to remix the balance sheet and to become less
reliant on net interest income by increasing gain on sale of loans and loan
servicing income. Our current strategy is to hold newly originated monthly
adjustable-rate loans during periods of high prepayment activity and sell a
sufficient amount during periods of low prepayment activity to stabilize balance
sheet growth over time. This strategy of selling current ARM production or
securitizing and retaining as securities for sale at a later time resulted in an
increase in the balance of loans held for sale to $3.40 billion at December 31,
2000, from $794 million at year-end 1999.

Loans (exclusive of the allowance for loan and lease losses) consisted of
the following:

DECEMBER 31,
------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- ------- -------
(DOLLARS IN MILLIONS)

SFR................................... $ 83,113 $ 80,628 $ 81,102 $72,161 $69,101
SFR construction...................... 1,431 1,243 1,020 877 728
Second mortgage and other consumer:
Banking subsidiaries................ 7,992 6,393 5,478 4,913 4,216
Washington Mutual Finance........... 2,486 2,134 1,853 1,800 1,730
Specialty mortgage finance............ 7,254 4,452 722 529 463
Commercial business................... 2,274 1,452 1,129 838 395
Commercial real estate:
Apartment buildings................. 15,658 15,261 14,559 14,022 13,871
Other commercial real estate........ 2,822 2,977 3,576 3,551 3,513
-------- -------- -------- ------- -------
$123,030 $114,540 $109,439 $98,691 $94,017
======== ======== ======== ======= =======

We have been diversifying our SFR loans by product type from a COFI
concentration to Treasury-based. This diversification reduces our interest rate
risk because Treasury-based loans have repricing frequencies that more closely
match the repricing of our borrowings. This diversification is achieved through
the securitization and sale of COFI-based loans and paydowns of portfolio loans
indexed to COFI. At December 31, 2000, 88% of SFR loans were adjustable rate, of
which 66% were indexed to U.S. Treasury indices, 28% were indexed to COFI, and
6% to other indices. The remaining 12% of the SFR loan portfolio at year-end
2000 were fixed rate. At December 31, 1999, 85% of SFR loans were adjustable
rate, of which 52% were indexed to U.S. Treasury indices, 42% were indexed to
COFI, and 6% to other indices. The remaining 15% of the year-end 1999 SFR loan
portfolio were fixed rate.

36
39

Loan volume (originations and purchases) was as follows:

YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN MILLIONS)

SFR:
Adjustable rate..................................... $37,286 $33,114 $20,929
Fixed rate.......................................... 6,631 10,678 23,960
------- ------- -------
43,917 43,792 44,889
SFR construction:
Custom.............................................. 639 977 1,017
Builder............................................. 1,210 1,026 731
Second mortgage and other consumer:
Banking subsidiaries................................ 5,004 2,946 3,096
Washington Mutual Finance........................... 2,342 2,101 1,838
Specialty mortgage finance............................ 8,249 5,009 429
Commercial business................................... 2,695 1,186 1,013
Commercial real estate:
Apartment buildings................................. 1,601 1,673 2,015
Other commercial real estate........................ 358 236 472
------- ------- -------
$66,015 $58,946 $55,500
======= ======= =======

Originations and purchases were as follows:

YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN MILLIONS)

Originated............................................ $59,263 $51,589 $52,431
Purchased............................................. 6,752 7,357 3,069
------- ------- -------
$66,015 $58,946 $55,500
======= ======= =======

Our loan originations increased 15% to $59.26 billion in 2000 from $51.59
billion the year before. In particular, originations of short-term ARMs, which
reprice primarily on a monthly basis, increased to $31.65 billion in 2000,
compared with $15.24 billion in 1999. The increase in short-term ARM
originations in 2000 was attributablemade directly to the higher interest rate environment
during the first halfintended occupant of 2000 and customer preference for short-term ARMs over
fixed-rate loans.

We purchased $6.75 billion of loans in 2000, compared with $7.36 billion in
1999 and $3.07 billion in 1998. Of the 2000 purchases, $4.01 billion were
specialty mortgage finance loans with a weighted average yield of 8.50%. The
1999 purchases included $3.30 billion of specialty mortgage finance loans with a
weighted average yield of 8.70%.

Real estate construction (including SFR construction andsingle-family residence.
⁽⁴⁾
Includes commercial real estate construction)construction balances of $993 million in 2001, $267 million in 2000, $237 million in 1999, $221 million in 1998, and $65 million in 1997.
SFR construction, commercial real estate construction and commercial business loans by maturity date were as follows:
DECEMBER 31, 2000
----------------------------------------------------
REAL ESTATE COMMERCIAL
CONSTRUCTION BUSINESS
------------------ --------------------
ARMS FIXED-RATE ARMS FIXED-RATE TOTAL
---- ---------- ------ ---------- ------
(DOLLARS IN MILLIONS)

Due within one year......................... $824 $244 $ 730 $190 $1,988
After one but within five years............. 123 13 294 161 591
After five years............................ 40 454 423 476 1,393
---- ---- ------ ---- ------
$987 $711 $1,447 $827 $3,972
==== ==== ====== ==== ======

37
40

MSR
December 31, 2001
Due
Within One Year After One But
Within Five Years After
Five Years Total
(in millions)

SFR construction:
ARMs $ 549 $ 1,233 $ 41 $ 1,823
Fixed-rate 131 102 546 779
Commercial real estate construction:
ARMs 22 722 130 874
Fixed-rate 5 50 64 119
Commercial business:
ARMs 650 2,437 1,124 4,211
Fixed-rate 126 203 850 1,179
Total $ 1,483 $ 4,747 $ 2,755 $ 8,985
The increase in loans held for sale was substantially the result of higher fixed-rate loan production, which occurred due to lower mortgage rates and the addition of the mortgage operations of the Acquired Companies. The reduction in mortgage rates also led to substantially higher volumes of refinancing activity. Loan applications increased beginning in the second half of the first quarter of 2001 and remained high throughout the year.
35

The increase in loans held in portfolio was substantially due to the acquisition of Bank United. This increase was partially offset by higher levels of prepayment activity within our SFR (excluding specialty mortgage finance) portfolio.
Loan volume was as follows:
Year Ended December 31,
2001 2000
(in millions)

SFR:
ARMs $ 37,224 $ 37,286
Fixed rate 107,538 6,631
Specialty mortgage finance⁽¹⁾ 11,059 8,501
Total SFR loan volume 155,821 52,418
SFR construction:
Builder⁽²⁾ 2,244 1,210
Custom⁽³⁾ 630 639
Second mortgage and other consumer:
Home equity loans and lines 7,747 4,449
Other 2,321 2,897
Commercial business 2,650 2,695
Commercial real estate:
Multi-family 2,053 1,601
Other commercial real estate 570 358
Total loan volume $ 174,036 $ 66,267
⁽¹⁾
Includes purchased subprime loans as well as first mortgages originated by Washington Mutual Finance and Long Beach Mortgage.
⁽²⁾
Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale.
⁽³⁾
Represents construction loans made directly to the intended occupant of a single-family residence.
Loan volume by channel was as follows:
Year Ended December 31,
2001 2000
(in millions)

Originated $ 111,128 $ 59,263
Purchased/Correspondent 62,908 7,004
Total loan volume by channel $ 174,036 $ 66,267
36
Refinancing activity⁽¹⁾ was as follows:
Year Ended December 31,
2001 2000
(in millions)

SFR:
ARMs $ 27,300 $ 13,299
Fixed rate 70,255 1,554
SFR construction 31 22
Commercial real estate 1,580 1,020
Total refinances $ 99,166 $ 15,895
⁽¹⁾
Includes loan refinancings entered into by both new and pre-existing loan customers.
The increased volume of purchased/correspondent loans during 2001 was predominantly due to the mortgage operations of PNC and Fleet, which added $28.58 billion and $26.55 billion, respectively, during the year ended December 31, 2001. Purchases of specialty mortgage finance loans were $5.05 billion in 2001 compared with $4.01 billion in 2000.
Deposits. Deposits consisted of the following:
December 31,
2001 2000
(in millions)

Checking accounts:
Interest bearing $ 15,350 $ 5,925
Noninterest bearing 22,386 8,575
37,736 14,500
Savings accounts 6,970 5,436
MMDAs 25,514 25,220
Time deposit accounts 36,962 34,418
Total deposits $ 107,182 $ 79,574
Deposits increased to $1.02$107.18 billion at December 31, 20002001 from $643 million at
December 31, 1999. Additions of $516 million to MSR during the year were
primarily due to loan sales and securitizations. The acquisitions of Bank United
Corp. and the mortgage operations of The PNC Financial Services Group, Inc. adds
about $2 billion of MSR to our balance sheet.

Deposits. Deposits declined slightly to $79.57 billion at December 31, 2000
from $81.132000. As a result of the acquisition of Bank United, we added $7.70 billion in retail deposits for the year. At December 31, 2001, total deposits included $12.79 billion in custodial/escrow deposits related to loan servicing activities, compared with $1.32 billion at December 31, 1999.

Our goal2000. Escrow deposits increased in 2001 due to our expanded mortgage banking operations. Time deposit accounts increased by $2.54 billion from year-end 2000 substantially due to the commencement in July 2001 of our Institutional Certificate of Deposit program, which totaled $2.38 billion at December 31, 2001. This program, with an authorized size of $15 billion, offers fixed or floating rate certificates of deposit to institutional investors. Terms range from seven days to five years, and the minimum denomination offered is to increase the ratio of transaction$100,000.
Checking accounts, to total
deposits. As a result, savings accounts and MMDAs and checking accounts have("transaction deposits") increased to 57%66% of total deposits at year-end 2000,December 31, 2001, compared with 54%57% at year-end 1999.2000. These three products generally have the benefit of interest-free funding or
lower interest costs, compared with time deposit accounts. The increase in deposits and the continuing migration towards transaction deposits have benefited our cost of funds and net interest margin. Even though transaction
accountsthese deposits are more liquid, we consider them to be athe core relationship with our customers. In the aggregate, we view these core accounts to becustomers, as they provide a more stable source of long-term funding than time deposits. At December 31, 2001, deposits funded 44% of total assets, compared with 41% at year-end 2000.
37

Time deposit accounts in amounts of $100,000 or more totaled $8.75$6.92 billion and $8.84$8.75 billion at December 31, 20002001 and 1999.2000. At December 31, 2000, $3.142001, $2.33 billion of these deposits mature within three months, $2.02$1.45 billion mature in over three to six months, $2.63$1.37 billion mature in over six months to one year, and $962 million$1.77 billion mature after one year.

While the vast majority of our deposits are retail in nature, we do engage
in certain wholesale activities -- primarily accepting time deposits from
political subdivisions and public agencies. We consider wholesale deposits to be
an alternative borrowing source rather than a customer relationship, and as
such, their levels are determined by management's decision as to the most
economic funding sources.
Borrowings. Our borrowings primarilymostly take the form of repurchase agreements and advances from the FHLBsFederal Home Loan Banks of Seattle, San Francisco and San Francisco.Dallas. The exact mix at any given time is dependent upon the market pricing of the individual borrowing sources.
Our wholesale borrowing portfolioborrowings increased by $3.60$13.59 billion at December 31, 2000,2001, compared with the prior year.year-end 2000. Other borrowings also increased by $3.73$2.65 billion overduring 2001 predominantly due to the issuance of senior and subordinated debt, and Trust Preferred Income Equity Redeemable Securities^SM ("PIERS^SM"). Refer to "Liquidity" for further discussion of these funding sources.
Asset Quality
Nonaccrual Loans, Foreclosed Assets and Restructured Loans.
Loans are generally placed on nonaccrual status when they are four payments or more past due or when the timely collection of the principal or interest, in whole or in part, is not expected. Management's classification of a loan as nonaccrual or restructured does not necessarily indicate that the principal of the loan is uncollectible in whole or in part.
Nonaccrual loans and foreclosed assets ("nonperforming assets") and restructured loans consisted of the following:
December 31,
2001 2000 1999 1998 1997
(dollars in millions)

Nonaccrual loans:
SFR $ 1,041 $ 509 $ 572 $ 689 $ 744
Specialty mortgage finance⁽¹⁾ 415 179 57 2 2
Total SFR nonaccrual loans 1,456 688 629 691 746
SFR construction:
Builder⁽²⁾ 26 16 15 7 10
Custom⁽³⁾ 10 2 3 2 -
Second mortgage and other consumer:
Home equity loans and lines 44 32 27 21 11
Other 104 85 72 69 67
Commercial business 159 12 10 7 3
Commercial real estate:
Multi-family 56 10 21 44 38
Other commercial real estate 298 21 20 33 58
Total nonaccrual loans 2,153 866 797 874 933
Foreclosed assets 228 153 199 275 341
Total nonperforming assets $ 2,381 $ 1,019 $ 996 $ 1,149 $ 1,274
As a percentage of total assets 0.98 % 0.52 % 0.53 % 0.69 % 0.89 %

Restructured loans
$
118
$
120
$
117
$
179
$
183
Total nonperforming assets and restructured loans $ 2,499 $ 1,139 $ 1,113 $ 1,328 $ 1,457
⁽¹⁾
Includes purchased subprime loans as well as first mortgages originated by Washington Mutual Finance and Long Beach Mortgage.
⁽²⁾
Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale.
⁽³⁾
Represents construction loans made directly to the intended occupant of a single-family residence.
38
Nonaccrual loans increased to $2.15 billion at December 31, 1999.2001 from $866 million at December 31, 2000. Of the increase in nonaccrual loans during the year ended December 31, 2001, approximately $634 million was attributable to loans originated by the Acquired Companies. These loans are concentrated in the SFR, commercial business and commercial real estate loan categories.
SFR loans (excluding specialty mortgage finance) on nonaccrual status increased by $532 million during the year ended December 31, 2001. This increase is attributable to loans originated by the Acquired Companies' lending channels, loans repurchased from investors in conjunction with our expanded mortgage banking operations (which includes loans originated through correspondent channels) and internal portfolio activity.
The SFR portfolio consists of loans within all regions of the country and has been impacted by the national economic decline. During the year, general economic conditions have deteriorated as evidenced by the increase in the national unemployment rate from 4.0% at December 31, 2000 to 5.8% at December 31, 2001.
Management anticipates that SFR nonaccrual loans will continue to increase in light of softening economic conditions and has taken steps to minimize our exposure through enhanced default management processes. Additionally, we have taken steps to reduce risk through the implementation of more stringent credit standards for new transactions, including the adoption of lower limits on loan-to-value ratios, particularly in markets that have recently experienced significant price appreciation or reflect a high probability of price depreciation. Revised policy limits relating to refinancing transactions have also been adopted. As of December 31, 2001, approximately 6% of the nonaccrual portfolio has a current loan-to-value ratio above 80% for which no private mortgage insurance coverage exists.
The increase in specialty mortgage finance loans on nonaccrual status is attributable to the continued growth and seasoning of loans within this category. Increased nonaccrual amounts are likely as portfolio growth continues and existing loans season.
In the commercial real estate portfolio, approximately $236 million of the Company's healthcare loans have been placed on nonaccrual status. While the majority of these loans continues to meet contractual payment performance requirements, concerns over the future timely collection of principal and interest supported their transfer to nonaccrual status. These loans are secured by healthcare properties located throughout the United States. We have taken steps to reduce our exposure in this lending activity and have assigned the responsibility for these relationships to our Asset Management Group, which specializes in the management of complex and/or troubled credits.
In the commercial business portfolio, we continue to closely monitor small business loans originated by Bank United. These consist primarily of Small Business Administration loans and have experienced significant increases in fundingnonaccrual loans. As of December 31, 2001, this portfolio totaled $493 million, of which nonaccrual loans were used primarily$61 million. We continue to support asset growth.

Certain portionsclosely monitor loans in the nationally syndicated loan portfolio, including shared national credits. We have placed our $53 million interest in seven of these loans on nonaccrual status as of the repurchase agreementsyear end, and advancesadditional nonaccrual loans in this category are likely.
Our portfolio of multi-family loans, which comprise 78% of our commercial real estate loan portfolio at December 31, 2001, continues to perform well. At December 31, 2001, nonaccrual loans in this category represented 0.36% of total multi-family loans. Two loans totaling $34 million that were originated by Bank United comprise approximately 60% of the December 31, 2001 nonaccrual total.
Commercial and commercial real estate loans originated by Bank United that are eligible for credit renewals are subjected to our standards for commercial lending activities, which are typically more restrictive than those previously used by Bank United. In addition, we are limiting the volume of new loan originations and reducing portfolio expenses made to borrowers in higher risk categories, whenever possible.
The increase in foreclosed assets since December 31, 2000 includes $38 million of inventory from FHLBs
contain embedded derivatives. See "Notesthe Acquired Companies.
39
As a result of the increase in nonaccrual loans during the year ended December 31, 2001, the ratio of the allowance for loan and lease losses to Consolidated Financial
Statements -- Note 9: Repurchase Agreementsnonaccrual loans declined to 65% at December 31, 2001 from 117% at December 31, 2000. This ratio is subject to significant fluctuations from year to year due to such factors as the mix of loan types in the portfolio, the economic prospects of our borrowers and, Note 10: Advancesin the case of secured loans, the value and marketability of collateral. The methodologies we use to determine the allowance for loan and lease losses are discussed below.
If interest on nonaccrual loans under the original terms had been recognized, such income would have been $187 million in 2001, $83 million in 2000 and $67 million in 1999.
Loans (exclusive of the allowance for loan and lease losses) and nonaccrual loans by geographic concentration at December 31, 2001 were as follows:
California Washington
Oregon Florida
Portfolio Nonaccrual Portfolio Nonaccrual Portfolio Nonaccrual
(dollars in millions)

SFR $ 50,609 $ 368 $ 12,283 $ 136 $ 5,110 $ 82
Specialty mortgage finance⁽¹⁾ 2,442 66 352 22 593 21
Total SFR 53,051 434 12,635 158 5,703 103
SFR construction:
Builder⁽²⁾ 666 3 314 4 284 8
Custom⁽³⁾ 53 1 319 6 6 -
Second mortgage and other consumer:
Home equity loans and lines 4,794 15 1,921 11 373 2
Other 805 7 1,103 20 197 5
Commercial business 830 3 1,014 7 165 11
Commercial real estate:
Multi-family 13,344 10 1,151 1 131 34
Other commercial real estate 1,479 5 1,191 7 131 10
Total loans (exclusive of the allowance for loan and lease losses) $ 75,022 $ 478 $ 19,648 $ 214 $ 6,990 $ 173
Loans and nonaccrual loans as a percentage of total loans and total nonaccrual loans 48 % 22 % 13 % 10 % 4 % 8 %

Texas
Other⁽⁴⁾⁽⁵⁾
Total
Portfolio Nonaccrual Portfolio Nonaccrual Portfolio Nonaccrual
(dollars in millions)

SFR $ 2,463 $ 38 $ 35,316 $ 417 $ 105,781 $ 1,041
Specialty mortgage finance⁽¹⁾ 580 19 5,854 287 9,821 415
Total SFR 3,043 57 41,170 704 115,602 1,456
SFR construction:
Builder⁽²⁾ 347 - 516 11 2,127 26
Custom⁽³⁾ 8 - 89 3 475 10
Second mortgage and other consumer:
Home equity loans and lines 1,115 4 1,124 12 9,327 44
Other 227 8 1,459 64 3,791 104
Commercial business 954 68 2,428 70 5,391 159
Commercial real estate:
Multi-family 386 1 606 10 15,618 56
Other commercial real estate 347 6 1,354 270 4,502 298
Total loans (exclusive of the allowance for loan and lease losses) $ 6,427 $ 144 $ 48,746 $ 1,144 $ 156,833 $ 2,153
Loans and nonaccrual loans as a percentage of total loans and total nonaccrual loans 4 % 7 % 31 % 53 % 100 % 100 %
⁽¹⁾
Includes purchased subprime loans as well as first mortgages originated by Washington Mutual Finance and Long Beach Mortgage.
⁽²⁾
Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale.
⁽³⁾
Represents construction loans made directly to the intended occupant of a single-family residence.
⁽⁴⁾
Of this category, Illinois had the largest portfolio balance of approximately $5.68 billion with nonaccrual loans of $92 million.
⁽⁵⁾
Of this category, New York had the largest nonaccrual amount of approximately $150 million with a portfolio balance of $5.45 billion.
40
At December 31, 2001, nonaccrual loans in California accounted for 22% of total nonaccrual loans, down from FHLBs."

PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES35% in 2000. Due to the concentration of our loans in California, the California real estate market requires continual review. In general, California real estate values increased during 1999, 2000 and 2001. However, economic performance within California may vary significantly among property types or by region.
Provision and Allowance for Loan and Lease Losses
Due to economic trends, growth in the commercial and specialty mortgage finance loan portfolios and nonaccrual loans, we increased the provision for loan and lease losses to $575 million during 2001, while incurring $305 million in net charge offs for the year. As a result of the slowing economy and resulting portfolio weaknesses, we anticipate that the provision may continue to exceed net charge offs in coming quarters. As a percentage of average loans, net charge offs were 0.21% for the year ended December 31, 2001, compared with 0.15% for the year ended December 31, 2000.
The allowance for loan and lease losses represents management's estimate of credit losses inherent in our loan and lease portfolios.portfolios as of the balance sheet date. Management performs periodicregular reviews of the portfolios in order to identify these inherent losses, and to assess the overall collection probability of collection offor these portfolios. TheThis process by whichprovides an allowance that consists of two components: allocated and unallocated. To arrive at the allocated component, we combine estimates of the allowance is determined encompassesneeded for loans that are evaluated collectively, such as single family residential and specialty mortgage finance, and loans that are analyzed individually, such as commercial business and commercial real estate.
The determination of the allocated component for loans that are evaluated collectively involves the monitoring of delinquency, default, and loss rates (among other factors that determine portfolio risk) and an assessment of current economic conditions, particularly in geographic areas where we have significant concentrations. Loss factors are based on the analysis of the historical performance of each loan category and an assessment of current
economic and portfolio trends and conditions, as well as specific risk factors impacting the loan and lease portfolios. We monitor delinquency, default,These factors are then applied to the collective total of the loan balances and loss rates, among other factors impacting portfolio risk. In addition,
non-homogeneous type loans, such ascommitments.
Loans within the commercial business, and commercial real estate loans,and builder single family residential construction categories are reviewed on an individual loan basis in order to identify
impairment, and forloss factors are applied based on the risk rating purposes.assigned to the loan. A specific allowance, which is part of the allocated component, may be assigned on these loan types if they have been individually determined to be impaired. Loans are considered impaired when it is probable that we will be unable to collect all amounts contractually due as scheduled, including contractual 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, we evaluate various factors, such as occupancy and rental rates in our real estate markets and the level of obsolescence that may exist on assets acquired from commercial business loans.
In estimating the amount of credit losses inherent in our loan and lease portfolios, various judgments and assumptions are made. For example, when assessing the condition of the overall economic environment, assumptions are made regarding future market conditions and their impact on the loan and lease portfolio. In the event the national economy were to sustain a prolonged downturn, the loss factors applied to our portfolios may need to be revised, which may significantly impact the measurement of the allowance for loan and lease losses. For impaired loans that are collateral-dependent, the estimated fair value of the collateral may deviate significantly from the proceeds received when the collateral is sold. To mitigate the imprecision inherent in most estimates of expected credit losses, the allocated component of the allowance is supplemented by an unallocated component. The unallocated component reflects our judgmental assessment of the impact that various factors have on the overall measurement of credit losses.
41

These factors include, but are not limited to, general economic and business conditions affecting the key lending areas 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, regulatory examination results and findings of the Company's internal credit review function. As of December 31, 2000, 76%2001, 74% of the allowance for loan and lease losses was allocated to individual loans or loan categories, although the entire allowance was available forto absorb charge offs across the entire loan and lease portfolio.

38
41
Although we consider the allowance for loan and lease losses of $1.40 billion adequate to cover losses inherent in our loan portfolio at December 31, 2001, in light of the foregoing, no assurance can be given that we will not in any particular period sustain loan losses that are significantly different from the amount reserved, or that subsequent evaluations of the loan portfolio, in light of factors then prevailing, would not result in a significant change in the allowance for loan and lease losses.
Refer to Note 1 to the Consolidated Financial Statements – "Summary of Significant Accounting Policies" for further discussion of the Allowance for Loan and Lease Losses.
Changes in the allowance for loan and lease losses were as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)

Balance, beginning of year.................... $1,042 $1,068 $1,048 $1,066 $ 979
Provision for loan and lease losses........... 185 167 162 247 498
Identified allowance for loans sold or
securitized................................. (36) (1) (74) (25) --
Allowance acquired through business
combinations................................ -- -- 108 11 16
------ ------ ------ ------ ------
1,191 1,234 1,244 1,299 1,493
Loans charged off:
SFR and SFR construction.................... (20) (38) (66) (141) (297)
Second mortgage and other consumer:
Banking subsidiaries..................... (43) (46) (34) (23) (12)
Washington Mutual Finance................ (120) (97) (90) (80) (60)
Specialty mortgage finance.................. (5) -- -- -- --
Commercial business......................... (11) (5) (5) (3) (1)
Commercial real estate:
Apartments............................... (2) (15) (22) (41) (67)
Other commercial real estate............. (2) (22) (10) (17) (48)
------ ------ ------ ------ ------
Total charge offs................... (203) (223) (227) (305) (485)
Recoveries of loans previously charged off:
SFR and SFR construction.................... 1 4 18 22 27
Second mortgage and other consumer:
Banking subsidiaries..................... 4 3 2 3 1
Washington Mutual Finance................ 17 16 16 18 16
Specialty mortgage finance.................. 1 -- -- -- --
Commercial business......................... 1 1 1 -- --
Commercial real estate:
Apartments............................... 1 3 6 7 9
Other commercial real estate............. 1 4 8 4 5
------ ------ ------ ------ ------
Total recoveries.................... 26 31 51 54 58
------ ------ ------ ------ ------
Net charge offs............................. (177) (192) (176) (251) (427)
------ ------ ------ ------ ------
Balance, end of year.......................... $1,014 $1,042 $1,068 $1,048 $1,066
====== ====== ====== ====== ======
Net charge offs as a percentage of average
loans....................................... 0.15% 0.17% 0.17% 0.26% 0.48%
Year Ended December 31,
2001 2000 1999 1998 1997
(dollars in millions)

Balance, beginning of year $ 1,014 $ 1,042 $ 1,068 $ 1,048 $ 1,066
Allowance acquired through business combinations/other 120 (36 ) (1 ) 34 (14 )
Provision for loan and lease losses 575 185 167 162 247
1,709 1,191 1,234 1,244 1,299
Loans charged off:
SFR (29 ) (19 ) (38 ) (65 ) (141 )
Specialty mortgage finance⁽¹⁾ (26 ) (5 ) - - -
Total SFR charge offs (55 ) (24 ) (38 ) (65 ) (141 )
SFR construction⁽²⁾ - (1 ) - (1 ) -
Second mortgage and other consumer (200 ) (163 ) (143 ) (124 ) (103 )
Commercial business (74 ) (11 ) (5 ) (5 ) (3 )
Commercial real estate:
Multi-family - (2 ) (15 ) (22 ) (41 )
Other commercial real estate (10 ) (2 ) (22 ) (10 ) (17 )
Total charge offs (339 ) (203 ) (223 ) (227 ) (305 )
Recoveries of loans previously charged off:
SFR 2 1 4 18 22
Specialty mortgage finance⁽¹⁾ - 1 - - -
Total SFR recoveries 2 2 4 18 22
Second mortgage and other consumer 23 21 19 18 21
Commercial business 6 1 1 1 -
Commercial real estate:
Multi-family - 1 3 6 7
Other commercial real estate 3 1 4 8 4
Total recoveries 34 26 31 51 54
Net charge offs (305 ) (177 ) (192 ) (176 ) (251 )
Balance, end of year $ 1,404 $ 1,014 $ 1,042 $ 1,068 $ 1,048
Net charge offs as a percentage of average loans 0.21 % 0.15 % 0.17 % 0.17 % 0.26 %
Allowance as a percentage of total loans held in portfolio 1.06 % 0.85 % 0.92 % 0.99 % 1.07 %
⁽¹⁾
Includes purchased subprime loans as well as first mortgages originated by Washington Mutual Finance and Long Beach Mortgage.
⁽²⁾
Includes custom construction loans to the intended occupant of a house to finance the house's construction and residential builder construction loans to borrowers who are in the business of acquiring land and building homes for resale.
42
An analysis of the allowance for loan and lease losses was as follows:
December 31,
2001 2000 1999
Allowance
for Loan
and Lease
Losses Allocated
Allowance
as a %
of Loan
Category Loan
Category
as a %
of Total
Loans⁽¹⁾ Allowance
for Loan
and Lease
Losses Allocated
Allowance
as a %
of Loan
Category Loan
Category
as a %
of Total
Loans⁽¹⁾ Allowance
for Loan
and Lease
Losses Allocated
Allowance
as a %
of Loan
Category Loan
Category
as a %
of Total
Loans⁽¹⁾
(dollars in millions)

Specific and allocated allowances:
SFR $ 290 0.35 % 61.67 % $ 250 0.31 % 67.03 % $ - - % 70.19 %
Specialty mortgage finance⁽²⁾ 97 0.99 7.39 52 0.77 5.67 - - 3.91
Total SFR 387 0.42 69.06 302 0.35 72.70 - - 74.10
SFR construction⁽³⁾ 32 1.23 1.96 7 0.49 1.20 5 0.40 1.09
Second mortgage and other consumer 247 1.89 9.81 220 2.10 8.76 - - 7.50
Commercial business 116 2.15 4.05 44 1.94 1.90 18 1.24 1.28
Commercial real estate:
Multi-family 138 0.88 11.74 138 0.88 13.09 59 0.39 13.42
Other commercial real estate 114 2.53 3.38 64 2.27 2.35 - - 2.61
Total allocated allowance 1,034 0.78 % 100.00 % 775 0.65 % 100.00 % 82 0.07 % 100.00 %
Unallocated allowance 370 0.28 - 239 0.20 - 960 0.85 -
Total allowance for loan and lease losses $ 1,404 1.06 % 100.00 % $ 1,014 0.85 % 100.00 % $ 1,042 0.92 % 100.00 %

December 31,
1998 1997
Allowance
for Loan
and Lease
Losses Allocated
Allowance
as a %
of Loan
Category Loan
Category
as a %
of Total
Loans⁽¹⁾ Allowance
for Loan
and Lease
Losses Allocated
Allowance
as a %
of Loan
Category Loan
Category
as a %
of Total
Loans⁽¹⁾
(dollars in millions)

Specific and allocated allowances:
SFR $ - - % 73.67 % $ - - % 72.81 %
Specialty mortgage finance⁽²⁾ - - 0.67 - - 0.54
Total SFR - - 74.34 - - 73.35
SFR construction⁽³⁾ 1 0.10 0.95 2 0.23 0.90
Second mortgage and other consumer - - 6.81 - - 6.87
Commercial business 17 1.51 1.05 3 0.36 0.86
Commercial real estate:
Multi-family 126 0.87 13.53 123 0.88 14.38
Other commercial real estate - - 3.32 - - 3.64
Total allocated allowance 144 0.13 % 100.00 % 128 0.13 % 100.00 %
Unallocated allowance 924 0.86 - 920 0.94 -
Total allowance for loan and lease losses $ 1,068 0.99 % 100.00 % $ 1,048 1.07 % 100.00 %
⁽¹⁾
Excludes loans held for sale.
⁽²⁾
Includes purchased subprime loans as well as first mortgages originated by Washington Mutual Finance and Long Beach Mortgage.
⁽³⁾
Includes custom construction loans to the intended occupant of a house to finance the house's construction and residential builder construction loans to borrowers who are in the business of acquiring land and building homes for resale.
43
During the second quarter of 2000, in conjunction with our continued expansion of our lending activity beyond traditional SFR loans, management enhanced its methodology for determining the allocated components of the allowance. This enhancement resulted in an allocation of previously unallocated allowance amounts to individual loan categories. Portions of the allowance for
loan and lease losses are now allocated to cover estimated losses inherent in
each loan and lease category as well as to individual loans. Management also
maintains an unallocated component of the allowance to cover estimated credit
losses not fully considered in the allocated portion of the allowance. Factors
impacting the level of the unallocated component include modeling deficiencies
resulting from the absence of comprehensive historical information, lack of
credit performance data related to newly developed loan products or programs,
changes in underwriting standards and other factors impacting the estimation of
credit losses.

39
42

An analysis of the allowance for loan and lease losses was as follows:

DECEMBER 31,
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997
----------------------- ----------------------- ----------------------- -----------------------
LOAN LOAN LOAN LOAN
CATEGORY CATEGORY CATEGORY CATEGORY
AS A % OF AS A % OF AS A % OF AS A % OF
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN MILLIONS)

Specific and allocated
allowances:
SFR........................ $ 250 68% $ -- 70% $ -- 74% $ -- 73%
SFR construction........... 8 1 5 1 1 1 2 1
Second mortgage and other
consumer:
Banking subsidiaries...... 115 6 -- 6 -- 5 -- 5
Washington Mutual
Finance................. 104 2 -- 2 -- 2 -- 2
Specialty mortgage
finance................... 52 6 -- 4 -- 1 -- *
Commercial business........ 44 2 18 1 17 1 3 1
Commercial real estate:
Apartment buildings....... 138 13 59 13 126 13 123 14
Other commercial real
estate.................. 64 2 -- 3 -- 3 -- 4
------ --- ------ --- ------ --- ------ ---
Total allocated
allowance.......... 775 100 82 100 144 100 128 100
Unallocated allowance...... 239 -- 960 -- 924 -- 920 --
------ --- ------ --- ------ --- ------ ---
Total allowance for
loan and lease
losses............. $1,014 100% $1,042 100% $1,068 100% $1,048 100%
====== === ====== === ====== === ====== ===

DECEMBER 31,
-----------------------
1996
-----------------------
LOAN
CATEGORY
AS A % OF
ALLOWANCE TOTAL LOANS
--------- -----------
(DOLLARS IN MILLIONS)

Specific and allocated
allowances:
SFR........................ $ -- 73%
SFR construction........... -- 1
Second mortgage and other
consumer:
Banking subsidiaries...... -- 4
Washington Mutual
Finance................. -- 2
Specialty mortgage
finance................... -- 1
Commercial business........ 1 *
Commercial real estate:
Apartment buildings....... 174 15
Other commercial real
estate.................. -- 4
------ ---
Total allocated
allowance.......... 175 100
Unallocated allowance...... 891 --
------ ---
Total allowance for
loan and lease
losses............. $1,066 100%
====== ===

- ---------------
* Less than 1%.

We record an allowance for recourse obligations to cover inherent losses on
loans securitized and retained in our MBS portfolio for which we retain the
credit risk, and to cover estimated losses on loans and MBS sold to third
parties for which a recourse obligation exists. A regular review is performed to
determine the adequacy of the allowance for recourse obligations. As of December
31, 2000, the allowance for recourse obligations totaled $104 million, compared
with $113 million at year-end 1999.

The total loss coverage percentage is the allowance for loan and lease
losses and the allowance for recourse obligations as a percentage of nonaccrual
loans:

DECEMBER 31,
--------------------
2000 1999 1998
---- ---- ----

Total loss coverage percentage.............................. 126% 140% 129%

At December 31, 2000 and 1999, we had $16.16 billion and $18.12 billion of
loans securitized and retained with recourse, and $4.06 billion and $4.65
billion of loans securitized and sold with recourse.

Nonperforming Assets

Assets considered to be nonperforming include nonaccrual loans and
foreclosed assets. When loans securitized or sold with recourse become
nonperforming, they are included in nonaccrual loans. Management generally
classifies loans as nonaccrual if the timely collection of principal and
interest is not expected, any portion of the loan has been charged off, or the
loan is four payments or more past due.

Nonperforming assets were $1.04 billion or 0.53% of total assets at
December 31, 2000, compared with $1.03 billion or 0.55% of total assets at
year-end 1999.

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43

Nonperforming assets consisted of the following:

DECEMBER 31,
----------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)

Nonaccrual loans:
SFR......................................... $ 529 $ 602 $ 752 $ 845 $ 999
SFR construction............................ 18 18 9 10 9
Second mortgage and other consumer:
Banking subsidiaries..................... 51 43 39 29 25
Washington Mutual Finance................ 66 55 52 49 43
Specialty mortgage finance.................. 179 57 2 2 3
Commercial business......................... 12 10 7 3 1
Commercial real estate:
Apartment buildings...................... 10 22 44 38 65
Other commercial real estate............. 21 20 33 58 29
------ ------ ------ ------ ------
886 827 938 1,034 1,174
Foreclosed assets............................. 153 199 275 341 470
Other nonperforming assets.................... -- -- -- -- 7
------ ------ ------ ------ ------
Total nonperforming assets.......... $1,039 $1,026 $1,213 $1,375 $1,651
====== ====== ====== ====== ======
Nonperforming assets as a percentage of total
assets...................................... 0.53% 0.55% 0.73% 0.96% 1.20%

If interest on nonaccrual loans had been recognized, such income would have
been $83 million in 2000, $67 million in 1999 and $66 million in 1998.

Specialty mortgage finance loans on nonaccrual status increased by $122
million during 2000 and by $55 million during 1999 due to the continued growth
and seasoning of this portfolio. This increase in nonaccrual loans was
consistent with our expectations. We expect the balance of nonaccrual loans to
increase as the portfolio continues to grow and season. The balance of specialty
mortgage finance loans increased to $7.26 billion at year-end 2000 from $4.45
billion at year-end 1999.

Loans (exclusive of the allowance for loan and lease losses) and nonaccrual
loans by geographic concentration at December 31, 2000 were as follows:

WASHINGTON
CALIFORNIA OREGON OTHER TOTAL
---------------------- ---------------------- ------------------------- ----------------------
PORTFOLIO NONACCRUAL PORTFOLIO NONACCRUAL PORTFOLIO(1) NONACCRUAL PORTFOLIO NONACCRUAL
--------- ---------- --------- ---------- ------------ ---------- --------- ----------
(DOLLARS IN MILLIONS)

SFR........................ $42,797 $240 $12,221 $ 76 $28,095 $213 $ 83,113 $529
SFR construction........... 335 5 731 5 365 8 1,431 18
Second mortgage and other
consumer:
Banking subsidiaries..... 3,791 9 2,982 30 1,219 12 7,992 51
Washington Mutual
Finance................ 259 5 40 1 2,187 60 2,486 66
Specialty mortgage
finance.................. 1,534 32 316 10 5,404 137 7,254 179
Commercial business........ 255 1 930 11 1,089 -- 2,274 12
Commercial real estate:
Apartment buildings...... 14,232 9 1,106 -- 320 1 15,658 10
Other commercial real
estate................. 1,384 7 1,056 1 382 13 2,822 21
------- ---- ------- ---- ------- ---- -------- ----
$64,587 $308 $19,382 $134 $39,061 $444 $123,030 $886
======= ==== ======= ==== ======= ==== ======== ====
Loans and nonaccrual loans
as a percentage of total
loans and total
nonaccrual loans......... 52% 35% 16% 15% 32% 50% 100% 100%

- ---------------
(1) Of this category, Florida had the largest portfolio balance of approximately
$4.94 billion.

At December 31, 2000, nonaccrual loans in California accounted for 35% of
total nonaccrual loans, down from 49% in 1999. Due to the concentration of our
loans in California, the California real estate market

41
44

requires continual review. In general, real estate values have increased during
1998, 1999 and 2000. However, economic performance within California may vary
significantly among property types or by region.

Impaired Loans

Commercial real estate loans over $1 million and all commercial business
and builder construction loans are individually evaluated for impairment.
Management generally identifies loans to be evaluated for impairment when such
loans are on nonaccrual status or have been restructured. However, not all
nonaccrual loans are impaired. Loans are considered impaired when it is probable
that we will be unable to collect all amounts contractually due, including
scheduled interest payments. Restructured loans are evaluated for impairment
based on the contractual terms specified by the original loan agreement, rather
than the contractual terms specified by the restructuring agreement. Loans
performing under restructured terms beyond a specified performance period are
classified as accruing, but may still be deemed impaired. Factors involved in
determining impairment include, but are not limited to, the financial condition
of the borrower, the value of the underlying collateral, and current economic
conditions.

OPERATING SEGMENTS
Operating Segments
Effective January 1, 2001, we realigned our business segments. Separately,
we are in the process of enhancingoperating segments and enhanced our segment reporting process methodologies
and allocations and willmethodologies. Historical periods have been restated to be reporting segment results under these new
methodologies and as realigned beginningconsistent with the first quarter of 2001.

For the historical periods presented in this Form 10-K, wenew alignment and methodologies. We are now managed our
business along fivethree major operating segments: Consumer Banking Mortgage
Banking, Commercial Banking,and Financial Services, Home Loans and ConsumerInsurance Services, and Specialty Finance. Although
we did not consider the Treasury group to be an operating segment, it managed
investments and interest rate risk. Generally, MBS that we purchased were
allocated to Treasury. Refer to Note 23 of the Notes to the Consolidated Financial Statements – "Operating Segments" – for summarized financial information for these operating
segments.

Deposit accounts managed byregarding the Western Bank/WM Business Bank division are
allocatedkey elements of our management reporting methodologies used to measure segment performance.
Banking and Financial Services
Net income was $955 million in 2001, compared with $787 million in 2000 and $490 million in 1999. Due to the commercial banking segment,growth in deposits and substantially all of the retail
consumer deposits are allocated to the consumer banking segment. The related
interest expense is allocated to those segments. The consumer banking segment
was allocated an amount of assets equal to the excess of its deposits over its
balance of consumer loans. The other segments were allocated an amount of
indebtedness in excess of deposits necessary to support the interest-earning
assets of the segment. The rate on such indebtedness was our weighted average
borrowing cost.

Consumer Banking

Netloans, net interest income was $2.50$2.27 billion, up from $1.90 billion in 2000 $2.49and $1.71 billion in 1999, and
$2.561999. Noninterest income increased to $1.78 billion in 1998. Net interest income for the consumer banking group
increased slightly2001 from 1999 to 2000 primarily due to the increase in the net
interest spread$1.40 billion and margin, whereas the decline from 1998 to 1999 was due to the
compression of the net interest spread and margin. The yield on the consumer
banking group's SFR and consumer loans responded more quickly than the cost of
deposits to the rise in short-term interest rates during the first half of 2000.
Noninterest income was $1.04$1.14 billion in 2000 $817 million inand 1999, and $626
million in 1998.respectively. The riseincrease in noninterest income duringwas predominantly due to the comparative periods
resulted from an increase in depositor and other retail banking fees associated with higher collections of nonsufficient funds, and other fees on existing checking accounts from higher customer usage and fee increases. The increase
from 1998 to 1999 was primarily due to collecting more debit card, ATM,
nonsufficient funds and other fees that resulted from an increased number ofgrowth in new checking accounts. The number of checking accounts increased by more than
500,000 during 200021% in 2001 (including 271,183 accounts acquired from Bank United) and 12% in 2000.
Primarily reflecting increases in compensation and benefits expense, occupancy and equipment expense, and depositor and other retail banking losses, noninterest expense increased to 4.8 million accounts at December 31,$2.41 billion in 2001, compared with $1.97 billion in 2000 and over
400,000$2.04 billion in 1999. The acquisition of Bank United also contributed to the increase during the 2001 periods.
Total average assets increased by approximately 37% during 2001. The increase in 2001 was due to the growth in consumer loans. Average consumer loans increased 35% during 2001.
Home Loans and Insurance Services
Segment results for the Home Loans and Insurance Services Group were significantly impacted by the addition of the mortgage operations of the Acquired Companies.
Net income was $1.35 billion, $910 million, and $684 million in 2001, 2000 and 1999, to 4.3 million accounts at December 31, 1999.

Mortgage Bankingrespectively. Net interest income was $741 million$2.14 billion in 2001, up from $1.63 billion in 2000 $796 millionand $1.41 billion in 1999, and
$833 million1999. The increase in 1998. The decline in net interest income during the comparative
periods2001 was primarily due to the compressiongrowth of loans held for sale, resulting from the net interest spread and
marginsubstantial increase in the mortgage banking group. The cost of borrowings for the mortgage
banking

42
45

group responded more quickly than the yield on ARMs to the rise in short-term
interest rates during the first half of 2000. In addition, the volume of
wholesale borrowings increased during 2000 to fund asset growth.SFR loan volume.
Noninterest income was $431increased to $1,481 million in 2001, compared with $548 million in 2000 $259and $302 million in 1999, and $326 million in 1998.
Noninterest income increased1999. The increase was predominantly due to higher gains from 1999 to 2000 primarily as a result of
increased gain on sale ofmortgage loans, SFR mortgage banking loan servicingrelated income, and otherportfolio loan related income. The increase in gain on salefrom mortgage loans during 2001 reflected the addition of loans was attributablethe loan origination operations of the Acquired Companies, a substantial increase in salable fixed-rate SFR loan volume due to refinancing activity, and the saleimpact of $12.90 billionthe adoption of seasoned loans and $8.71 billion of current loan production during 2000.SFAS No. 133. The increase in SFR mortgage banking loan servicingrelated income was primarily due to higher levels of late fees on loan payments. A significant portion of the growth in loans serviced
for others as a result ofportfolio loan sales and securitizations. The impact of this
portfolio growth was partially offset by an increaserelated income in mortgage servicing
rights amortization. The decline in noninterest income from 1998 to 19992001 was due to higher loan prepayment fees resulting from a decreasehigher level of refinancing activity. Due to high levels of amortization and the recognition of MSR impairment, net SFR loan servicing expense totaled $1.52 billion in 2001, compared with net SFR loan servicing income and loan related income. In addition,
gain on sale of loans was lower in 1999 due to a decrease in fixed-rate loan
originations and sales.

Total assets increased $8.61 billion, nearly 19%, to $54.98 billion at
December 31, 2000 from $46.37 billion at year-end 1999. This increase was
primarily due to an increase in MBS.

Commercial Banking

Net interest income was $362$134 million in 2000 $376and $98 million in 1999, and
$368 million in 1998. The decline in net interest income from 1999 to 2000
resulted from the compression1999. To offset most of the net interest spread and marginMSR impairment in 2001, the commercial real estate portfolio. Repricing indices for the majoritygroup received an inter-segment allocation of the
commercial real estate portfolio responded more slowlypretax financial hedge gains of $1.49 billion.
44

Noninterest expense rose to the rise$1.34 billion in short-term
interest rates than the cost of borrowings. Net interest income was higher in
1999, compared with 1998, due to an increase in the net interest spread and
margin in the commercial real estate portfolio. Noninterest income was $342001 from $607 million in 2000 $30and $582 million in 1999, and $24 million in 1998. Noninterest
expense was $128 million in 2000, $104 million in 1999, and $101 million in
1998.1999. The increase in noninterest expense during 2000 was primarilymostly due to higher compensation and benefits expense, within commercial real estate lending
andprimarily the result of the expanded loan servicing operations added by the Acquired Companies.
Total average assets increased by approximately 19% during 2001, compared with the same period a year ago, primarily as a result of our expansion of WM Business Bank offices in California.

Financial Services

Noninterestthe Acquired Companies.
Specialty Finance
Net income was $371$378 million in 2001, up from $274 million and $290 million in 2000 $317 million inand 1999, and $230
million in 1998. Noninterest income was up during the comparative periods due to
increased securities fees and commissions. During these periods, there were
higher sales of investment products and growth of assets under management.
Noninterest expense was $240 million in 2000, $200 million in 1999, and $165
million in 1998. The increase in noninterest expense was primarily due to an
increase in commission expense related to a higher volume of securities
transactions.

Consumer Financerespectively. Net interest income was $354$984 million in 2001, $734 million in 2000, $255and $703 million in 1999,1999. The increase in net interest income reflected growth in other commercial real estate loans from the acquisition of Bank United, and $203the continuing growth of the group's loan portfolio. Total average assets increased by approximately 29% in 2001 due primarily to the acquisition of Bank United.
Noninterest income increased to $77 million in 1998.2001 from $43 million in 2000 and 1999, primarily due to increases in loan related income. The acquisition of Bank United contributed to the increase in loan related income.
Noninterest expense increased to $256 million in 2001 from $190 million and $164 million in 2000 and 1999, respectively. The increase during 2001 was primarily attributable to higher compensation and benefits expense and occupancy and equipment expense from the comparative periodsacquisition of Bank United.
Liquidity
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 obligations and other commitments on a timely and cost-effective basis.
The principal sources of liquidity for our consolidated enterprise are customer deposits, wholesale borrowings, the sale and securitization of mortgage loans into secondary market channels, the maturity and repayment of portfolio loans and MBS, and agency and treasury bonds held in our available-for-sale securities portfolio. Among these sources, transaction deposits and wholesale borrowings from Federal Home Loan Bank advances and repurchase agreements continue to provide the Company with a significant source of stable funding. During 2001, those sources funded 67% of average total assets. Our continuing ability to retain our transaction deposit customer base and to attract new deposits is dependent on various factors, such as customer service satisfaction levels and the competitiveness of interest rates offered on our deposit products. We expect that Federal Home Loan Bank advances and repurchase agreements will continue to be our most significant sources of wholesale borrowings during 2002, and we expect to have the requisite assets available to pledge as collateral to obtain these funds.
To supplement these funding sources, our bank subsidiaries also raise funds in domestic and international capital markets. In April 2001, our two most significant bank subsidiaries, WMBFA and WMB, established a $15 billion Global Bank Note Program (the "Program"). The Program facilitates issuance of both senior and subordinated debt in the United States and in international capital markets on both a syndicated and non-syndicated basis and in a variety of currencies and structures. During 2001, our bank subsidiaries issued $3.75 billion of senior notes and $1 billion of subordinated notes under the Program. At December 31, 2001, $10.25 billion remained unissued.
The Company, through Long Beach Mortgage, had credit facilities in the aggregate amount of $1 billion available at December 31, 2001, of which $500 million expires in April 2002 and $500 million expires in September 2002.
Liquidity for the Parent Company is generated through its ability to raise funds in various capital markets, and through dividends from subsidiaries, lines of credit and commercial paper programs.
45

A significant portion of the Parent Company's funding during 2001 was duereceived from dividends paid by our bank subsidiaries. Although we expect the Parent Company to continue to receive bank subsidiary dividends during 2002, such dividends are limited by various regulatory requirements related to capital adequacy and retained earnings. For more information on dividend restrictions applicable to our banking subsidiaries, refer to "Business – Regulation and Supervision" and Note 17 to the Consolidated Financial Statements – "Regulatory Capital Requirements and Dividend Restrictions."
During 2001, the Parent Company consummated a private placement offering of $1.15 billion of Trust Preferred Income Equity Redeemable Securities^SM ("PIERS^SM"). The offering consisted of 23 million units, with each unit comprised of a preferred security issued by a special purpose subsidiary trust, and a warrant to purchase approximately 1.2 shares of Washington Mutual common stock. The trust preferred securities would qualify as Tier 1 capital for the Parent Company if it were subject to the same regulatory capital adequacy standards applicable to commercial bank holding companies. The proceeds from the PIERS^SM were used for general corporate purposes, including the funding of acquisitions.
In November 2001, the Parent Company filed a shelf registration with the Securities and Exchange Commission that allows for the issuance of $1.5 billion of senior and subordinated debt in the United States and in international capital markets and in a variety of currencies and structures. The proceeds from the sale of the debt securities will be used for general corporate purposes. In January 2002, $1 billion of senior debt securities were issued under this shelf registration.
At December 31, 2001, the Parent Company had no commercial paper outstanding. The Parent Company shares two revolving credit facilities totaling $1.2 billion with Washington Mutual Finance. These facilities provide back-up for the commercial paper programs of the Parent Company and Washington Mutual Finance. The amount available under these shared facilities, net of the amount of commercial paper outstanding at Washington Mutual Finance, was $849 million at December 31, 2001.
Capital Adequacy
Reflecting strong earnings and the issuance of $1.15 billion of PIERS^SM, $398 million of which was attributable to the attached warrants (recorded as capital surplus), the ratio of stockholders' equity to total assets increased to 5.80% at December 31, 2001 from 5.22% at year-end 2000. These sources of capital were more than adequate to accommodate the recent acquisitions as well as support growth.
In April 1999, the Board of Directors ("Board") approved a share repurchase program. From the second quarter of 1999 through June 30, 2000, we purchased a total of 100 million shares as part of our previously authorized total of 167 million shares. We did not repurchase any of our common stock from the second quarter of 2000 until the fourth quarter of 2001. Management instead focused on internal growth and acquisitions as a means of deploying capital during this time. On October 19, 2001, we announced the resumption of our share repurchase program and repurchased an additional 7 million shares during the fourth quarter of 2001. Management may engage in future share repurchases as liquidity conditions permit and market conditions warrant.
The regulatory capital ratios of WMBFA, WMB and WMBfsb and minimum regulatory requirements to be categorized as well capitalized were as follows:
December 31, 2001
Well-
Capitalized
Minimum
WMBFA WMB WMBfsb
Tier 1 capital to adjusted total assets (leverage) 5.18 % 6.45 % 7.30 % 5.00 %
Adjusted tier 1 capital to total risk-weighted assets 9.00 10.86 11.53 6.00
Total risk-based capital to total risk-weighted assets 10.93 12.08 12.78 10.00 46
Our federal savings bank subsidiaries are also required by OTS regulations to maintain tangible capital of at least 1.50% of assets. WMBFA and WMBfsb both satisfied this requirement at December 31, 2001.
Our broker-dealer subsidiaries are also subject to capital requirements. At December 31, 2001, both of our securities subsidiaries were in compliance with their applicable capital requirements.
Market Risk Management
Certain of the statements contained within this section that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are intended to assist in the understanding of how our financial performance would be affected by the circumstances described in this section. However, such performance involves risks and uncertainties that may cause actual results to differ materially from those expressed in the forward-looking statements. See "Cautionary Statements."
Market risk is defined as the sensitivity of income 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 we are exposed is interest rate risk. Substantially all of our interest rate risk arises from instruments, positions and transactions entered into for purposes other than trading. They include loans, MSR, securities, deposits, borrowings, long-term debt and derivative financial instruments.
Interest rate risk is managed within an overall asset/liability management framework. 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 policies reviewed and approved annually by our Board. The Board has delegated the responsibility to oversee the administration of these policies to the Directors' Loan and Investment Committee.
Overview of Our Interest Rate Risk Profile
Increases or decreases in interest rates can cause changes in net income, fluctuations in the fair value of assets and liabilities, such as MSR and investment securities, and changes in noninterest income and noninterest expense, particularly gain from mortgage loans. Our interest rate risk arises because assets and liabilities reprice, mature or prepay at different times or frequencies as market interest rates change. Our loan volume and mix also vary as interest rates change. Our net interest income generally increases in a falling interest rate environment and decreases in a rising interest rate environment. In addition, gain from mortgage loans tends to increase in a falling interest rate environment and decrease as interest rates rise. The changes in net interest income and gain from mortgage loans are inversely related to the changes in the value of MSR, which decrease as interest rates fall and increase as interest rates rise.
The increase in the net interest spreadmargin in a falling interest rate environment is because our deposits and borrowings typically reprice faster than our mortgage loans and securities, contributing to an expansion in the net interest margin. AverageThe slower repricing of assets results mainly from the lag effect inherent in loans and MBS 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 to the 11th District FHLB monthly weighted average cost of funds index ("COFI").
In a falling interest rate environment, we also experience faster prepayments and increased loan volume with a shift to fixed-rate loan production. As most of the fixed-rate production is sold in the secondary market, we potentially face balance sheet shrinkage. In spite of this shrinkage, net income tends to increase in a falling interest rate environment as a result of the growthexpansion in loans originated, purchases of specialty mortgage
finance loans, and the acquisition of Long Beach Mortgage on October 1, 1999.
Noninterest income was $141 million in 2000, $56 million in 1999, and $10
million in 1998. The increase during the comparative periods was primarily due
to an increase in gains on sales of loans originated by Long Beach Mortgage.
Noninterest expense was $274 million in 2000 compared with $164 million in 1999
and $127 million in 1998. The increase in 2000 was primarily due to the
inclusion of Long Beach Mortgage operating expenses.

Total assets increased $2.88 billion to $10.25 billion at December 31, 2000
from $7.37 billion at year-end 1999. This increase was primarily due to
purchases of specialty mortgage finance loans, in addition to loans originated
and purchased by Washington Mutual Finance.

ASSET AND LIABILITY MANAGEMENT STRATEGY

Our long-term profitability depends not only on the success of the services
we offer to our customers and the credit quality of our loans and securities,
but also the extent to which our earnings are not negatively affected by changes
in interest rates. We engage in a comprehensive asset and liability management
program that attempts to reduce the risk of significant decreases in net
interest income caused by interest rate changes

43
46

without unduly penalizing current earnings. As part of this strategy, we
actively manage the amounts and maturities of our assets and liabilities.

A key component of our strategy is the origination and retention of
short-term and adjustable-rate assets whose repricing characteristics more
closely match the repricing characteristics of our liabilities. At December 31,
2000, approximately 78% of our total SFR loan and MBS portfolio had adjustable
rates.

During periods of moderate to high market interest rates, our customers
prefer ARMs. ARMs are also well received whenever long-term rates remain
appreciably higher than short-term rates. During 2000, market interest rates
rose 50 to 100 basis points; and the difference between the yields on a
three-month U.S. Treasury bill and a ten-year U.S. Government note averaged 4
basis points, compared with 88 basis points in 1999. Even though short-term
rates were not significantly lower than long-term rates, 85% of our SFR loan
originations were ARMs, while 15% were fixed rate during 2000 due to higher
long-term rates compared with recent years.

Prior to the upward trend in interest rates in late 1999 and 2000, a low
and flat yield curve and significant repricings during 1998 and early 1999
resulted in lowered asset yields. Subsequently, when short-term interest rates
rose, the higher funding costs compressed the net interest margin. This
compression began to lessenThe increased loan production combined with a higher percentage of fixed-rate loans results in the latter half of 2000 as interest rates
stabilized and the yield on assets tied to lagging market indices rose. We
estimate that it takes three to four quarters for asset yields to catch up with
increases in funding costs after an increase in short-termgain from mortgage loans. The fair value of MSR decreases in falling interest rates.
However, continuedrate environments due to the higher short-term rates duringprepayment activity, resulting in the latter halfpotential for impairment. This impairment is normally offset by
47

the increased net interest margin and gain from mortgage loans as well as gains from the sale of 2000
limitedbonds and the wideningextinguishment of borrowings with embedded interest rate floors.
Conversely, in a rising interest rate environment, we normally experience slower prepayments, decreased loan volume and a shift to adjustable-rate production. Balance sheet growth typically occurs, despite the decrease in loan production, due to the increased volume of adjustable-rate loans, which we typically hold in our portfolio. In spite of balance sheet growth, net interest income tends to decrease in a rising interest rate environment as a result of the compressed net interest margin. To manageGain from mortgage loans normally decreases as rates rise due to the riskdecrease in loan production and the lower percentage of timing differencesfixed-rate loans. However, the fair value of MSR increases in this environment, resulting in the repricingpotential recovery of assets and
liabilities, our interest-earning assets are matched with interest-bearing
liabilities that have similar repricing characteristics. For example, in
general, our fixed-rate loans are matched with long-term deposits and
borrowings, and our ARMs are matched with short-term deposits and borrowings.
Periodically, mismatches are identified and managedany MSR reserves. We may offset the recovery of the MSR reserves by adjusting the repricing
characteristics of our interest-bearing liabilities with derivatives.
Derivatives such asselling securities, interest rate floors or other derivatives at a loss. The intent would be to reset these instruments to current market rates to enhance their ability to hedge against MSR impairment in falling interest rate environments.
Types of Interest Rate Risk
We are exposed to different types of interest rate risks. These risks include: lag, repricing, basis, prepayment, and lifetime cap and exchange agreementsrisk. These risks are generally
utilized to matchdescribed in further detail in the duration of liabilities to that of the assets.

We also continue to sell fixed-rate loans to adjust the balance between
interest-sensitive liabilities and interest-sensitive assets. During 2000, we
started to sell adjustable-rate loans with three-to five-year initial fixed
rates. To establish balance sheet flexibility and diversity, we also began to
sell some monthly option ARMs in 2000. We continued to purchase specialty
mortgage finance loans during 2000.following paragraphs.
Lag risk. Lag risk During 2000, lag risk was our primary interest rate risk. In times of
rising interest rates, we are negatively affected by anresults from the inherent timing difference between the repricing of our adjustable-rate assets and our 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. Although the effect of thisThis lag generally balances out over the life of a given loan, itrisk can produce short-term volatility in our net interest income during periods of interest rate movement.movements even though the effect of this lag generally balances out over time. One example of thislag risk is the delayrepricing of assets indexed to the monthly treasury average ("MTA"). The MTA index is based on a moving average of rates outstanding during the previous twelve months. A sharp movement in interest rates in a month will not be fully reflected in the index for twelve months resulting in a lag in the repricing of COFI-based assets, commonly
referred to as "COFI lag."loans and securities based on this index. This lag results from the two-month delay in reported
COFI because of the time required to gather the data necessary to compute the
index. The COFI used tocontrasts with borrowings which generally reprice ARMs and adjustable-rate MBS generally reflects
the cost of funds for a period two months prior to the adjustment date. As a
result, COFI loans reprice more slowly than our liabilities.based on current market interest rates.
Repricing riskrisk. Repricing risk is caused by the mismatch in the maturities and/or repricing periods between interest-earning assets and interest-bearing liabilities. In periods of rising interest rates, the net interest margin will compress ifnormally contracts since the repricing period of liabilities is shorter than the repricing period of assets
becauseassets. This results in funding costs will riserising faster than asset yields. The impactnet interest margin expands in periods of falling interest rates would be positive.as borrowing costs reprice downward faster than asset yields. Repricing risk can beis managed by changing the repricing characteristics of interest-bearing liabilities with derivatives.

44
47derivatives and by selling fixed-rate and adjustable-rate loans and securities.
Basis risk. Basis risk results from our assets and liabilities reacting differently to interest rate movements due to their dependency on different indices. For example, most adjustable-rate loans are indexed to COFI, MTA, Prime or Treasury based indexes. The rates on the majority of our borrowings are derived from the London Interbank Offered Rates ("LIBOR") or interest rate swap curves. This results in basis risk as the loan indices may move at a different rate or in a different direction than the rate on our borrowings or deposits.
Prepayment risk. Prepayment risk In a decliningresults from the ability of customers to pay off their loans prior to maturity. Generally, prepayments increase in falling interest rate environment with a flat yield curve,
customers' preference for fixed-rate loans usuallyenvironments and decrease in rising interest rate environments. In falling interest rate environments, this normally results in the prepayment and refinancing of existing loans, fixed-ratefixed- and ARMs,adjustable-rate loans to lower coupon, fixed-rate mortgage loans. This preference, when combined with our policy of selling most of our fixed-rate loan production, may make it more difficult for us to increase or even maintain the size of our loan and MBS portfolio during these periods. During such periods, it is likely that we would continue to securitize ARMs, but
hold themdecrease the percentage of adjustable-rate loans that are
48

sold. This could result in an increase in our held for sale portfolio, offsetting some of the potential balance sheet shrinkage resulting from the faster prepayments of existing loans and securities.
In rising interest rate environments, the decline in prepayments would normally result in an increase in the portfolio, rather than selling them, to offsetsize of our loan and MBS portfolios. During these periods, we may increase the percentage of adjustable-rate loans that are sold. This could result in a decrease in our held for sale portfolio. These additional sales may generate gain on sale offsetting some of this
risk. Whenthe reduction in the net interest margin.
Prepayment risk also has a significant impact on the fair value of MSR. Faster prepayments occur onof loans within our loan servicing portfolio can be expected to result in a reduction in the fair value of MSR, may decline aswhile slower prepayments of loans within our servicing cash flows diminish.portfolio can be expected to result in an increase in the fair value. In addition, the amortization of premiums and discounts related to loans and MBS on our Consolidated Statement of Financial Condition must be
written off at the time of repayment and can have an adverse impact on earnings.

Basis risk

The repricing of our assets and liabilities is also at risk from interest
rate movements because generally our assets and liabilities are tied to a
variety of indices which may react differently to changesaffected by increases or decreases in interest rates.
Loans tied to the COFI index create a form of basisprepayments.
Lifetime cap risk. Our general cost of
funds is higher than most other savings institutions whose costs are a component
of the COFI index because a larger portion of our liabilities are borrowings,
rather than lower costing deposits. To reduce basis risk, we offer the MTA loan.
This loan has all the same borrower advantages as the COFI product, such as a
7.5% annual payment cap and four payment options. However, the MTA loan is
indexed to the 12-month moving average of the one-year Treasury bills, which
more closely reflects our borrowing costs. Management has reduced potential net
interest income volatility caused by COFI basis risk by increasing production of
MTA and other non-COFI adjustable-rate products and short-term fixed-rate
products, such as consumer loans. There continues to be basis risk with the MTA
index, as it moves with the Treasury rates, and most of our borrowings are tied
to LIBOR indices.

Borrowings are generally more rate sensitive than deposits and reprice more
quickly as market interest rates (such as treasury rates) change. To the extent
that loan indices move at a different rate or in a different direction from our
cost of funds, the general cost of funds basis risk may be realized.

Loan indices

As discussed previously, the majority of our loans and MBS have adjustable
rates that are tied to a market index. Our cost of funds (representing the cost
of total interest-bearing liabilities) compared to various indices was as
follows:

WASHINGTON
MUTUAL'S COST OF
FUNDS LESS THAN
(GREATER THAN)
WASHINGTON MUTUAL'S -----------------
FOR THE QUARTER ENDED COST OF FUNDS COFI MTA COFI MTA
--------------------- ------------------- ---- ---- ------ -----

December 31, 2000........................................ 5.60% 5.60% 6.11% --% 0.51%
September 30, 2000....................................... 5.51 5.50 5.96 (0.01) 0.45
June 30, 2000............................................ 5.27 5.21 5.69 (0.06) 0.42
March 31, 2000........................................... 5.08 4.96 5.34 (0.12) 0.26

Cap risk The lifetime interest rate caps that we offer to ARM borrowerson adjustable-rate loans held in portfolio introduce another element of interest rate risk to our earnings. In periods of rising interest rates, it is possible for the repricedfully indexed interest ratesrate (index rate plus the margin) to exceed the lifetime interest rate cap. This feature prevents the loan from repricing to a level that exceeds the cap's specified interest rate, thus adversely impacting net interest income in periods of relatively high interest rates. Typically, the lifetime cap is 300 to 500 basis points above the fully indexed initial rate. The lifetime caps on our existing loan and MBS portfolios would not have a material adverse effect on net interest income unless interest rates increased substantially from current levels.
Management of existing ARMInterest Rate Risk
To mitigate the impact of changes in market interest rates on our interest-earning assets and interest-bearing liabilities, we actively manage the amounts and maturities of these assets and liabilities. A key component of this strategy is the origination and retention of short-term and adjustable-rate assets and the origination and sale of fixed-rate loans. LIQUIDITY

LiquidityWe retain short-term and adjustable-rate assets because they have repricing characteristics that more closely match the repricing characteristics of our liabilities. In addition to selling fixed-rate loans, we also sell a portion of our ARMs with three- to five-year initial fixed interest rates. We have also established additional balance sheet flexibility and diversity by designating some monthly option ARMs as held for sale.
To further mitigate the risk of timing differences in the repricing of assets and liabilities, our interest-earning assets are matched with interest-bearing liabilities that have similar repricing characteristics. For example, the interest rate risk of holding fixed-rate loans is managed with long-term deposits and borrowings, and the risk of holding ARMs is managed with short-term deposits and borrowings. Periodically, mismatches are identified and managed by adjusting the repricing characteristics of our interest-bearing liabilities with derivatives, such as interest rate caps, collars, corridors, interest rate swaps and swaptions.
Through the use of these derivative instruments, management focusesattempts to reduce or offset increases in interest expense related to deposits and borrowings. We use interest rate caps, collars, corridors, pay-fixed interest rate swaps and swaptions to protect against rising interest rates. We use receive-fixed interest rate swaps to reduce the interest expense on long-term, fixed-rate borrowings during stable or falling interest rate environments.
The interest rate caps, collars, corridors, pay-fixed interest rate swaps and swaptions are designed to provide an additional layer of protection should interest rates on deposits and borrowings rise, by effectively lengthening the repricing period. At December 31, 2001, we held an aggregate notional value of $25.84 billion of caps, collars, corridors, pay-fixed interest rate swaps and swaptions. This included $5.90 billion of swaptions and $696 million of interest rate caps embedded in adjustable-rate borrowings. None of the interest rate caps had strike rates that were in effect at December 31, 2001, as current LIBOR
49

rates were below the strike rates. The swaptions are exercisable upon maturity, which range from February 2002 to September 2003. Thus, we have a degree of interest rate protection when interest rates rise, because these instruments provide a mechanism for fixing the rate on our deposits and borrowings to an interest rate that could be lower than market levels.
Using receive-fixed interest rate swaps, we can effectively reduce the interest expense on long-term, fixed-rate borrowings during periods when the receive-fixed rate is greater than the short-term floating rate on the needinterest rate swap. Long-term borrowings, such as subordinated debt, also provide an excellent source of long-term funds. The issuance of subordinated debt, which generally qualifies as a component of Tier 2 risk-based capital, combined with a receive-fixed rate swap provides capital at an attractive funding rate. At December 31, 2001, we held $3.63 billion of receive-fixed interest rate swaps. We are also striving to increase the proportion of transaction deposits to total deposits to mitigate our exposure to adverse changes in interest rates. In particular, noninterest-bearing checking accounts and custodial accounts are not sensitive to interest rate fluctuations. Additionally, checking accounts provide a growing source of noninterest income through depositor and other retail banking fees.
We analyze the change in fair value of our MSR portfolio under a variety of parallel shifts in yield curves. Since most loans within our servicing portfolio do not contain penalty provisions for early payoff, the value of our underlying MSR is subject to impairment from prepayment risk. This risk generally increases in a declining interest rate environment, as prepayments on loans in our servicing portfolio tend to move inversely with mortgage rates. Increases in prepayments shorten the expected life of MSR, thereby decreasing their fair value and creating impairment.
Within our overall approach to enterprise interest rate risk management, we currently have two main strategies designed for handling potential impairments in the fair value of MSR. The first is the "natural business hedge" that is inherent in our mortgage banking business. The current composition of the balance sheet and the response of net income to declining interest rates act, to some extent, as a hedge to MSR impairment. Net interest income generally increases in a declining interest rate environment, providing an offset for impairment. Lower interest rates also contribute to increased loan volume, particularly fixed-rate loan production. Since our strategy is to sell most of our fixed-rate loans, we are able to recognize additional gain from mortgage loans and gains from securitized loans. The effectiveness of the natural business hedge increases to the extent that our loan servicing portfolio is replenished more quickly than the loans prepay.
The second risk management strategy involves the use of investment securities and embedded derivatives. We use fixed-rate investment securities, such as agency and treasury bonds, and interest rate floors embedded in certain adjustable-rate borrowings to supplement the "natural business hedge" of our MSR. The fixed-rate securities can be sold at a gain in falling interest rate environments assisting in offsetting the MSR impairment. The embedded interest rate floors provide a benefit when the specified interest rate index drops below certain levels (strike rate). Similar to the fixed-rate securities, the borrowings with embedded interest rate floors can be terminated at a gain in falling interest environments to assist in offsetting MSR impairment. We may elect to retain some of the fixed-rate securities or the borrowings with embedded interest rate floors in declining interest rate markets. The retained instruments would increase net interest income, providing some protection against MSR impairment.
We purchased additional bonds in early 2002. We expect to purchase derivatives such as pay-fixed swaptions (options to enter into pay-fixed interest rate swaps) or swaps to hedge the risk of holding the fixed-income bonds, as market conditions warrant. Gain from the sale of bonds in a declining interest rate environment may be used to offset MSR impairment. Loss from the sale of bonds in a rising interest rate environment may generally be offset by gain on the termination of the derivatives and the recovery of the MSR impairment reserve. We expect to maintain the market position of the bond portfolio so that the gain from the sale of bonds in a falling interest rate environment combined with the increased income from the natural business hedge is sufficient to offset most of the MSR impairment. Overall, we believe this strategy
50

will minimize net income sensitivity under most interest rate environments. Our net income could be adversely affected if we are unable to effectively implement or manage our hedging strategy.
We also hedge the risks associated with our mortgage pipeline. The mortgage pipeline consists of fixed-and adjustable-rate SFR loans to be sold in the secondary market. The risk associated with the mortgage pipeline is the potential rise in interest rates between the time the customer locks in the rate on the loan and the time the loan is sold. This period is usually 60 to 90 days. To hedge this risk, we execute forward sales agreements and option contracts. A forward sales agreement protects us in a rising interest rate environment, since the sales price and delivery date are already established. A forward sales agreement is different, however, from an option contract in that we are obligated to deliver the loan to the third party on the agreed-upon future date. Consequently, if the loan does not fund, we may not have the necessary assets to meet both short-termthe commitment; therefore, we may be required to purchase other assets, at current market prices, to satisfy the forward sales agreement. To mitigate this risk, we consider fallout factors, which represent the percentage of loans that are not expected to close, in calculating the amount of forward sales agreements to execute.
2001 and 2000 Sensitivity Comparison
To analyze net income sensitivity, we project net income over a 12-month horizon based on parallel shifts in the yield curve. Management employs numerous other analyses and interest rate scenarios to evaluate interest rate risk. We project net interest income under a variety of interest rate scenarios, including non-parallel shifts in the yield curve and more extreme non-parallel rising and falling rate environments. These additional scenarios also address the risk exposure in time periods beyond the twelve months captured in the net income sensitivity analysis. Typically, net interest income sensitivity in a rising interest rate environment is not as pronounced in these longer time periods as lagging assets reprice to current market levels and balance sheet growth begins to offset a lower net interest margin. In addition, yields on new loan production gradually replace the comparatively lower yields of the more seasoned portion of the portfolio.
The table below indicates the sensitivity of net income and net interest income to interest rate movements. The comparative scenarios assume a parallel shift in the yield curve with interest rates rising or falling in even quarterly increments over the twelve month period ending December 31, 2002 and December 31, 2001. The analysis assumes increases in interest rates of 200 basis points ("bp") and decreases of 100 bp. The interest rate scenarios used below represent management's view of reasonably possible near-term interest rate movements.
Gradual Change in Rates
-100bp +200bp
Net income change for the one-year period beginning:
January 1, 2002 2.19 % (2.76 )%
January 1, 2001 6.85 % (8.68 )%
Net interest income change for the one-year period beginning:
January 1, 2002 1.47 % (5.18 )%
January 1, 2001 5.85 % (12.45 )%
Net income and net interest income sensitivity declined since the prior year mainly due to the purchase of pay-fixed derivatives and additional fixed-rate funding. The funding requirementsmix changed as the interest rate environment in 2001 was relatively attractive for obtaining fixed-rate borrowings and long-term growth objectives. Our long-term growth objectives
arederivatives. We expect to attractcontinue to add fixed-rate borrowings and retain stable consumer deposit relationships and to maintain
stable sources of wholesale funds. Becausederivatives in 2002 based on the relatively low interest rate environmentenvironment.
The acquisitions of recent years has inhibited growth of consumer deposits, we have supported our
growth through business combinations with other financial institutions and by
increasing our use of wholesale borrowings.

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48

We monitor our ability to meet short-term cash requirements using
guidelines established by our Boards of Directors. These guidelines ensure that
short-term secured borrowing capacity is sufficient to satisfy unanticipated
cash needs.

As presented in the Consolidated Statements of Cash Flows, the sources of
liquidity vary between years. The statement of cash flows includes operating,
investing and financing categories. Cash flows from operating activities
included net income for 2000 of $1.90 billion, $503 million for net noncash
items and $881 million of other net cash inflows from operating activities. Cash
flows from investing activities consisted mainly of proceeds from sales and
purchases of securities, loan and security principal repayments, loan
originations and sales of loans. In 2000, cash flows from investing activities
included sales, maturities and principal payments on securities totaling $12.22
billion. Loans originated and purchased for investment were in excess of
repayments and sales by $15.86 billion. Cash flows from financing activities
consisted of the net change in our deposit accounts and short-term borrowings,
deposits sold, the proceeds and repayments of long-term borrowings and FHLBs
advances, and the repurchase of our common stock. In 2000, the above mentioned
financing activities increased cash and cash equivalents by $4.76 billion on a
net basis. Cash and cash equivalents were $2.62 billion at December 31, 2000.
See "Consolidated Financial Statements -- Consolidated Statements of Cash
Flows."

As of December 31, 2000, we had two revolving credit facilities: a $1.20
billion 364-day facility and a $600 million four-year facility, which provide
back-up for our commercial paper programs. At December 31, 2000, we had $841
million available under these facilities, which represents the total amount of
the two revolving credit facilities, net of the amount of commercial paper
outstanding at year end.

With the acquisition ofBank United, the mortgage operations of PNC and Fleet changed our interest rate risk profile. These acquisitions increased the balances of noninterest bearing escrow accounts, our loan
51

production, and MSR. The PNC Financial
Services Group, Inc. on January 31, 2001, we paid off approximately $7 billionincrease in noninterest bearing accounts reduced our net interest income sensitivity since these types of intercompany borrowingsaccounts are relatively insensitive to their former parent company.interest rate movements. Most of the loan production from the mortgage entities consists of fixed-rate loans that are sold into the secondary market. The funds were
borrowed through additional advancessales also reduce the sensitivity of net interest income and, in falling interest rate environments, result in higher gain from FHLBsmortgage loans, which serves to offset MSR impairment. Since the loan portfolio acquired from Bank United generally reprices to market rates more quickly than our historical loan portfolio, this has reduced our sensitivity to net interest margin compression, which occurs during periods of rising interest rates.
The projection of the sensitivity of net income requires numerous behavioral assumptions. Prepayment, decay rate (the estimated runoff of deposit accounts that do not have a stated maturity) and by federal funds purchased.

CAPITAL ADEQUACY

Our capital (stockholders' equity) was $10.17 billion at December 31, 2000,
up from $9.05 billion at December 31, 1999. In order to effectively deploy
capital, we repurchased our common stock duringnew volume projections are the first halfmost significant assumptions. Prepayments affect the size of 2000. During
the second half of 2000, we used capital to facilitate balance sheet, growthwhich impacts net interest income, and retained additional capitalthey are also a major factor in anticipationthe valuation of completingMSR. The decay rate assumptions also impact net interest income by altering the announced
acquisitionsexpected deposit mix and rates in the projected interest rate environments. The prepayment and decay rate assumptions reflect management's best estimate of Bank United Corp., WMHLIfuture behavior. These assumptions are internally derived from internal and WMMSC.external analysis of customer behavior.
The decreasesensitivity of new loan volume and mix to changes in unrealized
loss on available-for-sale securitiesmarket interest rate levels is also projected. Generally, we assume loan production increases in falling interest rate scenarios with an increased proportion of fixed-rate production. We generally assume a reduction in total loan production in rising interest rate scenarios with a shift towards a greater proportion of adjustable-rate production. The gain from mortgage loans as a percentage of total loan sales also varies under different interest rate scenarios. Normally, the gain from mortgage loans as a percentage of total loan sales increases in falling interest rate environments as higher consumer demand, generated primarily from high refinancing activity, allows loans to $51 million at December 31, 2000be priced more aggressively. Conversely, the gain from $667 million at December 31, 1999 inmortgage loans as a percentage of total loan sales tends to decline when interest rates increase as loan pricing becomes more competitive, since market participants strive to retain market share as consumer demand declines.
In addition to netgain from mortgage loans, the sensitivity of noninterest income and expense are also estimated. The impairment and recovery of $1.90 billion for
2000 more than offsetMSR is the stock repurchases during the first halfmost significant element of 2000. This
caused a risesensitivity in the ratioprojection of stockholders' equity to total assets to 5.22% at
year-end 2000, compared with 4.85% at year-end 1999.noninterest income and expense. The regulatory capital ratios of WMBFA, WMB and WMBfsb and minimum
regulatory requirements to be categorized as well capitalized were as follows:

DECEMBER 31, 2000
------------------------ WELL-CAPITALIZED
WMBFA WMB WMBFSB MINIMUM
----- ----- ------ ----------------

Tier 1 capital to total assets................... 5.81% 5.83% 6.97% 5.00%
Tier 1 capital to risk-weighted assets........... 10.40 10.15 11.14 6.00
Total capital to risk-weighted assets............ 11.36 11.24 12.10 10.00

Our federal savings bank subsidiaries are also required by OTS regulations
to maintain tangible capital of at least 1.50% of assets. WMBFA and WMBfsb both
satisfied this requirement at December 31, 2000.

Our broker-dealer subsidiaries are also subject to capital requirements. At
December 31, 2000, both of our securities subsidiaries were in compliance with
their applicable capital requirements.

RECENTLY ISSUED ACCOUNTING STANDARDS ADOPTED IN THESE FINANCIAL STATEMENTS

SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, was issued in September 2000 and replaces
SFAS No. 125 of the same title. This statement revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral, and requires certain disclosures, but carries over most of SFAS No.
125's provisions without reconsideration. This

46
49

statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001 and is effective
for recognition and reclassification of collateral and for disclosures relating
to securitization transactions and collateral for fiscal years ending after
December 15, 2000. Our adoption of this statement is not expected to materially
affect our results of operations or financial condition. See "Notes to
Consolidated Financial Statements -- Note 3: Securities and Note 5: Mortgage
Banking Activities."

RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED

On January 1, 2001, we recorded a transition adjustment representing a $0.6
million loss ($0.4 million net of tax) related to the implementation of SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This loss
will be reflected in our earnings for the first quarter of 2001. This loss
represents the excess of book value over the remaining fair value of certainMSR generally increases as interest rate cap agreements designatedrates rise and decreases as cash flow hedgesinterest rates fall. The other components of noninterest income and expense, such as deposit and loan fees and expenses, generally increase or decrease in conjunction with deposit and loan volumes, although loan servicing fees are also dependent on prepayment expectations.
The analysis is predicated on the difference
between book value and fair valueeffectiveness of forward loan sale contractsour strategy for which hedge
accounting was not elected. These losses were partially offset by unrealized
gains representinghedging the fair value of commitmentsMSR and in managing the instruments used to originatehedge the fair value of MSR. We have used embedded interest rate floors and fixed-rate bonds as the primary instruments in hedging MSR. However, purchasing bonds increases our exposure to rising interest rates so this risk must also be managed. Our strategy includes purchasing derivatives such as pay-fixed swaptions or swaps to hedge the risk of holding the fixed-rate bonds.
In a falling interest rate environment, we project MSR impairment as well as gains on the termination or liquidation of MSR hedges. These gains, combined with the increase in net interest income and gain from mortgage loans, thatgenerally offset the impairment of MSR. We assume the hedges of MSR will be reset every quarter subsequent to the termination or liquidation, as the need to hedge against further impairment is still present. In a rising interest rate environment, we assume the swaptions and/or swaps hedging the fixed-rate bonds will be terminated and the bonds will be liquidated. We assume the hedges are reset every quarter to the extent gains on the swaptions and/or swaps exist.
52

Counterparty Risk
An additional risk that arises from our borrowing (including repurchase agreements) and derivative activities is counterparty risk. These activities generally involve an exchange of obligations with another financial institution, referred to in such transactions as a "counterparty." If a counterparty were to default, we could potentially be exposed to financial loss. In order to minimize this risk, we evaluate all counterparties for financial strength on at least an annual basis, then establish exposure limits for each counterparty. We obtain collateral from the counterparties for amounts in excess of the exposure limits, and we monitor our exposure and collateral requirements on a daily basis. We strive to deal with well-established, reputable and financially strong firms.
53
Maturity and Repricing Information
We use interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate maturities in order to reduce our sensitivity to interest rate fluctuations. The following table summarizes the notional amounts, expected maturities and weighted average interest rates associated with amounts to be received or paid on interest rate swaps, and the notional amounts, expected maturities and weighted average strike rates for interest rate caps and corridors. Derivatives that are embedded within certain adjustable-rate borrowings, while not accounted for as derivatives under SFAS No. 133, have been included in the table since they also function as asset/liability management tools.
December 31, 2001
Expected Maturity
Total 2002 2003 2004 2005 2006 After 2006
(notional dollars in millions)

Stand Alone Derivatives:
Pay-fixed interest rate swaps: ��
Contractual maturity $ 12,905 $ 2,914 $ 2,036 $ 2,534 $ 30 $ 4,448 $ 943
Weighted average pay rate 4.82 % 6.09 % 3.78 % 4.63 % 7.15 % 4.39 % 5.58 %
Weighted average receive rate 2.18 % 2.21 % 2.23 % 2.21 % 2.11 % 2.20 % 1.75 %
Receive-fixed interest rate swaps:
Contractual maturity $ 3,627 $ 40 $ 120 - $ 560 $ 1,005 $ 1,902
Weighted average pay rate 2.05 % 2.11 % 1.95 % - 1.89 % 2.01 % 2.13 %
Weighted average receive rate 6.63 % 7.17 % 5.55 % - 5.48 % 6.81 % 6.94 %
Interest rate caps/collars/corridors:
Contractual maturity $ 835 $ 380 $ 214 $ 191 - $ 50 -
Weighted average strike rate 7.59 % 7.47 % 7.86 % 8.14 % - 5.25 % -
Swaptions:
Contractual maturity (option) $ 5,500 $ 500 $ 5,000 - - - -
Weighted average strike rate 6.11 % 6.04 % 6.12 % - - - -
Contractual maturity (swap) $ 5,500 - - - - $ 1,000 $ 4,500
Weighted average strike rate 6.11 % - - - - 6.05 % 6.12 %
Embedded Derivatives:
Embedded caps:
Contractual maturity $ 696 - $ 196 $ 500 - - -
Weighted average strike rate 7.60 % - 7.25 % 7.75 % - - -
Embedded floors:
Contractual maturity $ 2,300 - - - $ 2,300 - -
Weighted average strike rate 5.12 % - - - 5.12 % - -
Embedded swaptions:
Contractual maturity (option) $ 5,900 - $ 5,900 - - - -
Weighted average strike rate 6.13 % - 6.13 % - - - -
Contractual maturity (swap) $ 5,900 - - - - $ 3,750 $ 2,150
Weighted average pay rate 6.13 % - - - - 5.99 % 6.37 % A conventional view of interest rate sensitivity for savings institutions is the gap report, which indicates the difference between assets maturing or repricing within a period and total liabilities maturing or repricing within the same period. In assigning assets to maturity and repricing categories, we take into consideration expected prepayment speeds rather than contractual maturities. The balances reflect actual amortization of principal and do not take into consideration reinvestment of cash. Principal prepayments are the amounts of principal reduction over and above normal amortization. We have used prepayment assumptions based on market estimates and past experience with our current portfolio. The majority of our transaction deposits are not contractually subject to repricing. Therefore, these instruments have been allocated based on expected decay rates. Certain transaction accounts that reprice based on a market index and/or typically reprice more frequently were allocated based on the expected repricing period. Non-rate sensitive items such as the allowance for loan and lease losses and deferred loan fees/costs are not included
54

in the table. Loans held for sale when originated. We consider theseare generally included in the 0-3 months category to the extent they are hedged with commitments to be derivatives
and are therefore carried at market value.sell loans.
The adoption of SFAS No. 133 on January 1, 2001 also resulted in an $11
million decrease ($7 million net of tax) in other comprehensive income. This
decrease represents $43 million ($27 million net of tax) in unrealized losses on
interest rate swap agreements and interest rate cap agreements designated as
cash flow hedges. This was partially offsetgap information is limited by the net unrealized gainfact that it is a point-in-time analysis. The date reflects conditions and assumptions as of $32
million ($20 million netDecember 31, 2001. These conditions and assumptions may not be appropriate at another point in time. The analysis is also subject to the accuracy of tax) that resulted fromvarious assumptions used, particularly the reclassificationprepayment and decay rate projections and the allocation of our
entire held-to-maturity MBSinstruments with optionality to a specific maturity category. Consequently, the interpretation of the gap information is subjective.
December 31, 2001
Projected Repricing
0-3 months 4-12 months 1-5 years Thereafter Total
(dollars in millions)

Interest-Sensitive Assets
Adjustable-rate loans⁽¹⁾ $ 70,579 $ 20,258 $ 19,836 $ 235 $ 110,908
Fixed-rate loans⁽¹⁾ 14,461 5,539 14,520 6,191 40,711
Adjustable-rate securities^(1),(2) 24,263 752 713 16 25,744
Fixed-rate securities⁽¹⁾ 455 991 5,205 28,815 35,466
Cash and cash equivalents 6,044 - - - 6,044
Derivatives matched against assets 1,040 - (100 ) (940 ) -
$ 116,842 $ 27,540 $ 40,174 $ 34,317 $ 218,873
Interest-Sensitive Liabilities
Noninterest-bearing checking accounts⁽³⁾ $ 1,464 $ 3,885 $ 11,986 $ 6,372 $ 23,707
Interest-bearing checking accounts, savings accounts and MMDAs⁽³⁾ 10,703 9,919 14,226 11,666 46,514
Time deposit accounts 12,854 17,007 6,453 578 36,892
Short-term and adjustable-rate borrowings 89,173 4,553 - - 93,726
Long-term fixed-rate borrowings 1,033 6,592 12,196 4,858 24,679
Derivatives matched against liabilities (4,680 ) 1,312 (1,382 ) 4,750 -
$ 110,547 $ 43,268 $ 43,479 $ 28,224 $ 225,518
Repricing gap $ 6,295 $ (15,728 ) $ (3,305 ) $ 6,093 $ (6,645 )
Cumulative gap $ 6,295 $ (9,433 ) $ (12,738 ) $ (6,645 ) $ (6,645 )
Cumulative gap as a percentage of total assets 2.60 % (3.89 )% (5.25 )% (2.74 )% (2.74 )%
Total assets $ 242,506
⁽¹⁾
Based on scheduled maturity or scheduled repricing and estimated prepayments of principal.
⁽²⁾
Includes investment portfolios of $16.57 billion to
availablein FHLBs.
⁽³⁾
Based on projected decay rates and/or repricing periods for sale upon adopting SFAS No. 133.

In conjunction with the reclassification of our held-to-maturity MBS
portfolio to available for sale, $126 million was allocated to MSR, representing
retained interests from securitizations of loans that we had completed after
January 1, 1996checking, savings, and for which no MSR had been previously capitalized. MSR are
capitalized for all securitizations of loans occurring after January 1, 1996
that are either sold or retained in the available-for-sale securities portfolio.

The adoption of SFAS No. 133 on January 1, 2001 also resulted in a $151
million increase in derivative-related assets, a $129 million increase in the
book values of hedged borrowings, and a $66 million increase in
derivative-related liabilities. Management does not anticipate that SFAS No. 133
will significantly increase the volatility of earnings or stockholders' equity
reported in future periods.

TAX CONTINGENCYmoney market deposit accounts.
Tax Contingency
From 1981 through 1985, Ahmanson acquired thrift institutions in six states through Federal Savings and Loan Insurance Corporation ("FSLIC")-assisted transactions. The position was that assistance received from the FSLIC included out-of-state branching rights valued at approximately $740 million. Prior to December 31, 1998, Ahmanson had sold its deposit-taking businesses and abandoned such branching rights in five states, the first of which was Missouri in 1993. Our financial statements do not contain any benefit related to our determination that we are entitled to a deduction for the amount of our tax bases in certain state branching rights when we sold our deposit-taking businesses in those states, thereby abandoning such branching rights. Our position is that the tax bases result from the tax treatment of property received as assistance from the FSLIC in conjunction with FSLIC-assisted transactions. The potential tax benefit related to these abandonments as of December 31, 20002001 could approach $238 million.
55

The Internal Revenue Service (the "Service") has completed its examination of the Ahmanson federal income tax returns for the years 1990 through 1993. The return for 1993 included the proposed adjustment related to the abandonment of the Missouri branching rights. The matter is currently beforeA tentative settlement was reached with the Appeals Branch level of the Service.Service and it is currently under review by the Joint Committee on Taxation. In accordance with accounting principles generally accepted accounting principles,in the United States of America, we do not believe it is appropriate at this time to reflect any tax benefits in our financial statements.

47
50

GOODWILL LITIGATION
Goodwill Litigation
On August 9, 1989, the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") was enacted. Among other things, FIRREA 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 regulatory capital led many savings institutions to either replace the lost capital by issuing new qualifying debt or equity securities or to reduce assets.
To date, trials have been concluded and opinions have been issued in a number of actions in the United States Court of Federal Claims (the "Court") in which savings institutions and investors in savings institutions sought damages from the U.S. Government based on breach of contract and other theories. Generally, in cases in which these opinions on the merits have been issued by the Court, either the plaintiff(s), the defendant (U.S. Government), or both the plaintiff(s) and the defendant, have opted to appeal the Court's decision. SuchOf those appeals, some are now pending before the United States Court of Appeals for the Federal Circuit (the "Federal Circuit").and others have been decided. Generally, the appeals have resulted in the cases being remanded to the Court for further trial proceedings. In one case,California Federal Bank v. United States, the plaintiff petitioned and the defendant cross petitioned the United States Supreme Court for a writ of certiorari, both of which were denied.
Home Savings

In
WMBFA, as successor to Home Savings, has continued to pursue a favorable outcome in the lawsuit filed by Home Savings in September 1992 ("Home Savings filed a lawsuitGoodwill Litigation") against the U.S. Government infor damages from the Court for unspecified damages involvingexclusion from regulatory capital of supervisory goodwill related to
itsresulting from Home Savings' acquisitions of troubled savings institutions from 1981 to 1988.

In March 1998, the U.S. Government conceded, while reserving the right to
contest certain issues on appeal, that Home Savings had entered into certain
contracts with the U.S. Government and that the U.S. Government took actions
that were inconsistent with those contracts. These contracts relate to Home
Savings' purchase of troubled savings institutions in Florida, Missouri, Texas, and Illinois, and the purchaseOhio, and of Century Federal Savings of New York, with
associatedover the period from 1981 to 1985. As of August 31, 1989, Home Savings possessed approximately $460 million in unamortized supervisory goodwill from these acquisitions.
In the Home Savings Goodwill Litigation, Home Savings and Ahmanson (the parent of $426Home Savings prior to its acquisition by WMBFA) alleged breaches of contract as well as certain other claims arising from facts substantially identical to those giving rise to the breaches of contract.
On May 18, 2001, the Court issued an opinion holding the U.S. Government liable for breaches of the contracts which permitted Home Savings to count supervisory goodwill toward regulatory capital requirements in regard to all of the supervisory acquisitions of savings institutions in the states of Florida, Missouri, Texas, and Illinois, and in regard to the acquisition of Century Federal Savings of New York. The Court's opinion further holds the U.S. Government liable for breach of the contract which permitted Home Savings to count supervisory goodwill toward regulatory capital in regard to one of the five savings institutions that Home Savings acquired in the state of Ohio. The Court held that the U.S. Government was not liable for any breach of contract in regard to the other four savings institutions in Ohio which Home Savings had acquired. Approximately $34 million of the $460 million of unamortized goodwill Home Savings had as of August 31, 1989.

The U.S. Government has denied the existence of a contract and actions
inconsistent with such a contract in connection with1989, was attributable to Home Savings' purchaseacquisition of the five savings institutions in Ohio with unamortizedOhio. WMBFA is currently assessing how much of the supervisory goodwill of
approximately $34 million as of August 31, 1989. Home Savings had also pursued
legal remedies against the U.S. Government for the loss of supervisory goodwill
relatedattributable to Home Savings' 1988 acquisitionacquisitions in Ohio remains the subject of The Bowerythe Home Savings BankGoodwill Litigation as a result of New
York.the Court's May 18 opinion.
56

On November 3, 1999, WMBFA (as successor to Home Savings) notifiedJanuary 16, 2002, the Court that WMBFA would not continue to pursue remedies in connection with The
Bowery Savings Bankissued an opinion dismissing the remaining claims of New York acquisition. Unamortized supervisory goodwill
from acquisitions that remain subjects of the lawsuit totaled approximately $460
million as of August 31, 1989.

The U.S. Government has not conceded that Home Savings was damagedother than those for breach of contract. In the same opinion, the Court denied a motion by anythe United States for summary judgment with respect to damages resulting from the U.S. Government's breaches of contract addressed by the lawsuit, andcontract. Thus, as yet, there has been no determination as to the amount of any damages, if any, that Home Savings may have
sustained asbe entitled to recover in compensation for the U.S. Government's breaches.
On February 6, 2002, at the direction of the Court, the parties submitted status reports proposing dates for a resulttrial to determine the amount of any breach of contract.damages that WMBFA (as successormight recover in the Home Savings Goodwill Litigation. Pursuant to Home
Savings) continuesan order entered on February 25, 2002, trial is now set to pursue a favorable outcome of this lawsuit.commence in October 2002.
American Savings Bank, F.A.
In December 1992, ASB, Keystone Holdings and certain related parties brought a lawsuit against the United States,U.S. Government, alleging, among other things, that in connection with the acquisition of ASB 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 Transaction, we succeeded to all of the rights of ASB, Keystone Holdings and such related parties in such litigation and will receive any recovery from the litigation. ASB is now WMBFA.
In connection with the Keystone Transaction, we delivered a specified number of shares of our common stock into an escrow. There are currently 1218 million shares in the escrow (the "Escrow Shares"). Upon our receipt of net cash proceeds from a judgment in or settlement of the litigation, all or part of the Escrow Shares will be released, 64.9% to investors in Keystone Holdings or their assigns, and 35.1% to the FSLIC Resolution Fund or its assigns. The number of Escrow Shares to be released will be equal to the case proceeds, reduced by certain tax and litigation-related costs and expenses, divided by $27.7417. The escrow will expire on 48
51

December 20, 2002, subject to extensions in certain circumstances. If not all Escrow Shares are released prior to such expiration, any remaining Escrow Shares will be returned to us for cancellation.
The allegations made in the ASB case are similar to those asserted in other cases where the United States Supreme Court affirmed decisions holding the U.S. Government liable for breach of contract. However, no record has been established in these other cases which would indicate what, if any, damages we are entitled to receive in this case. Accordingly, the ultimate outcome of the ASB case is uncertain, and there can be no assurance that we will benefit financially from it. Generally, we expect to receive financial benefit only if the cash proceeds, after reduction for certain tax and litigation-related costs and expenses, exceed $333 million.
Coast Savings Financial, Inc. and Bank United Corp.
Prior to their acquisitions, Coast Savings Financial, Inc. and Bank United Corp. ("Bank United") had similar lawsuits against the U.S. Government. Generally, securities representing interests in these lawsuits were issued to Coast Savings Financial, Inc. and Bank United Corp. shareholders. These securities, called contingent payment rights certificates, are currently traded on the NASDAQ Stock Market under the symbols CCPRZ and BNKUZ, respectively. We do not own a significant number of these securities.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is
Dime Bancorp, Inc.
In January 1995, Anchor Savings Bank FSB ("Anchor FSB"), filed suit against the exposureU.S. Government for unspecified damages involving supervisory goodwill related to loss resultingits acquisition of eight troubled savings institutions from changes1982-1985. The Dime Savings Bank of New York, FSB ("Dime FSB") acquired Anchor FSB shortly after the case was brought and Dime FSB was subsequently merged into WMBFA in interest
rates, foreign currency exchange rates, commodity pricesJanuary 2002.
57

In 1997, Dime FSB moved for partial summary judgment as to the existence of a contract and equity prices.the U.S. Government's breach of that contract in each of the related transactions. The primary market riskU.S. Government disputed the existence of a contract in each case, cross-moved for summary judgment and submitted a filing acknowledging that it was not aware of any affirmative defenses. In August 1997, the Court held a hearing on summary judgment motions in four other related cases and ruled in favor of the plaintiffs on all "common" issues. From April 1998 through July 1999, Dime FSB conducted discovery. In September 1999, the U.S. Government filed supplemental papers in support of its pending summary judgment motion. Dime FSB responded to such filings in early November 1999, at which we are exposed is interest rate risk. The majoritytime it again requested entry of our interest rate risk arises from the instruments, positions and
transactions entered into for purposes other than trading. They include loans,
securities, deposits, borrowings, long-term debt and derivative financial
instruments used for asset/summary judgment on liability management. Interest rate risk occurs when
assets and liabilities reprice or mature at different times or frequencies as
market interest rates change.

During the year, we implemented additional methodologies for analyzing
interest rate risk. These included projecting net interest income based on
parallel and non-parallel changesin its favor.
In October 1999, Dime FSB filed expert reports claiming damages under three alternative theories. Dime FSB sought lost profits in the yield curve. The resultsamount of $980 million, restitution damages in the amount of $681 million, and reliance damages in the amount of $446 million. In March 2000, the U.S. Government filed expert reports denying the existence of damages under any of these analyses are used as part of our overall framework for asset/liability
management. Accordingly, we have changed our market risk analysis from a tabular
presentationtheories.
In March 2001, the Court heard oral argument on the pending summary judgment motions with respect to a presentation of net interest income sensitivity.

The table below indicates the sensitivity of pretax net interest income to
interest rate movements. The comparative scenarios assume that interest rates
rise or fall in even quarterly increments over the next twelve months for a
total increase or decrease of 200 basis points. The interest rate scenarios are
used for analytical purposes and do not necessarily represent management's view
of future market movements.

Our net interest income sensitivity profile as of year-end 2000 and 1999 is
stated below:

GRADUAL CHANGE IN RATES
------------------------
-200BP +200BP
-------- --------

Net interest income change for the one-year period
beginning:
January 1, 2001........................................... 11.0% (12.4)%
January 1, 2000........................................... 11.3% (11.6)%

Our net interest income at risk position has not changed significantly
year-over-year. Assumptions are made in modeling the sensitivity of net interest
income. The simulation model captures expected prepayment behavior under
changing interest rate environments. Additionally, the model captures the impact
of interest rate caps and floors on adjustable-rate products. Assumptions
regarding interest rate or balance behavior of non-maturity deposits reflect
management's best estimate of future behavior. Sensitivity of new loan volume to
market interest rate levels is included as well.

We analyze additional interest rate scenarios, including more extreme
rising and falling rate environments to support interest rate risk management.
These additional scenarios also address the risk exposure in time periods beyond
the twelve months captured in this net interest income sensitivity analysis.

49
52

Management of Interest Rate Risk and Derivative Activities

To mitigate interest rate risk, we use derivative instruments, such as
interest rate exchange agreements and interest rate cap agreements. At December
31, 2000, we had entered into interest rate exchange agreements and interest
rate cap agreements with notional values of $22.18 billion. Additionally, $13.20
billion of interest rate floors and $751 million of interest rate caps have been
embedded within certain borrowings as of December 31, 2000. The majority of
these derivative contracts embedded within the borrowings will not become
effective until the first quarter of 2001 and beyond. Derivative instruments, if
not used appropriately, can subject a company to unintended financial exposure.
These instruments involve, to varying degrees, elements of credit risk in excessthree of the amount recognized ineight institutions acquired by Dime FSB. It is not possible to predict whether the StatementCourt will grant any of Financial Condition. The contractDime FSB's motions for partial summary judgment or, notional amount of these instruments reflects the extent of involvement we
have in particular classes of financial instruments.

Management, in conjunction with the Board of Directors, has established
strict policiesif so, when it will schedule a trial on damages and guidelines for the use of derivative instruments. These
instruments are not intendedany remaining liability issues.
In December 2000, Dime Bancorp, Inc., Dime FSB's parent, distributed Litigation Tracking Warrants™ to be used as techniques to generate earnings by
speculating on the movements of interest rates, nor do we act as a dealer of
these instruments. See "Notes to Consolidated Financial Statements -- Note 20:
Interest Rate Risk Management."

Our strategy is to use derivative instruments to hedge the repricing risk
associated with deposits and borrowings. For example, we have entered into
interest rate cap agreements to provide an additional layer of protection should
interest rates on deposits and borrowings rise. Through the use of these
agreements, management attempts to offset increases in interest expense related
to these deposits and borrowings and effectively lengthen the repricing period.
Thus, we have a degree of interest rate protection when interest rates increase
because the interest rate cap agreements provide a mechanism for repricing the
deposits and borrowings generally on pace with current market rates. There can
be no assurance that interest rate exchange agreements and interest rate cap
agreements will provide us with protection in all scenarios or to the full
extent of our exposure.

During 2000, we entered into borrowing arrangements which contain embedded
derivative instruments. These instruments included caps and floors. Interest
rate floors are intended to hedge prepayment risk associated with our loans, MBS
and MSR. With interest rate floors, we will receive cash flows when the interest
rate index drops below certain levels (strike rate). The amount of the cash
flows are calculated based on the difference between the strike rate and the
index rate multiplied by the notional amount. Similarly, the interest rate caps
provide us cash flows when the interest rate index exceeds the strike rate.
Interest rate caps are intended to hedge repricing of liabilities and securities
that are purchased to hedge MSR.

We also hedge the risks associated with the mortgage pipeline. The mortgage
pipeline consists of fixed-and adjustable-rate SFR loans which will be sold in
the secondary market. The risk with the mortgage pipeline is that interest rates
might rise between the time the customer locks in the interest rate on the loan
and the time the loan is sold. This period is usually 30 to 60 days. To hedge
this risk, we execute forward sales agreements and option contracts. A forward
sales agreement protects us in a rising interest rate environment since the
sales price and delivery date have already been established. A forward sales
agreement, however, is different from an option contract in that we are
obligated to deliver the loan to the third party on the agreed upon future date.
As a result, if the loans do not fund, we may not have the necessary assets to
meet our commitment. Therefore, we would be required to purchase other assets,
at current market prices, to satisfy the forward sales agreement. To mitigate
this risk, we use fallout factors,its shareholders, which represent the percentage of loans which
are not expectedright to close, when calculating the amount of forward sales
agreementspurchase Common Stock equal in value to execute.

Counterparty Risk

Our borrowing activities (including repurchase agreements) and derivative
instruments generally involve an exchange of obligations with another financial
institution, referred to in such transactions as a "counterparty." If a
counterparty were to default, we could be exposed to a financial loss. A loss
would result to the extent that the value85% of the collateral or funds held by the
counterparty exceeded the value of the collateral or funds held by us. In order
to minimize the risk, all counterparties are evaluated for financial strength on
at least an annual basis. Exposure limits are then established for each
counterparty. Our primary focus is to deal with well-established, reputablenet after-tax proceeds, if any, from this lawsuit.

Financial Statements and financially strong firms.

50
53

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATASupplementary Data
For financial statements, see Index to Consolidated Financial Statements on page 53.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE61.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
58

PART III
Part III is incorporated by reference from our definitive proxy statement issued in conjunction with our Annual Meeting of Shareholders to be held April 17, 2001.16, 2002. Certain information regarding our principal officers is set forth in "Business --– Principal Officers."

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)
(1) FINANCIAL STATEMENTSFinancial Statements
See Index to Consolidated Financial Statements on page 53.

61.
(2) FINANCIAL STATEMENT SCHEDULES
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) REPORTS ON FORMReports on Form 8-K:
Washington Mutual filed the following reports on Form 8-K during the fourth quarter of 2000:2001:
1. Report filed October 19, 2000.16, 2001. Items included: Item 5. Other Events, and Item 7. Financial Statements and Exhibits. The report included a press release announcing the Company's third quarter financial results.
2. Report filed on October 17, 2001. Items included: Item 5. Other Events, and Item 7. Financial Statements and Exhibits. The report included a transcript of remarks of Company management from the conference call held to discuss the Company's results of operations for the third quarter of 2001.
3. Report filed December 21, 2001. Items included: Item 9. Regulation FD Disclosure. The report included an announcement by the Company that it received from the Office of Thrift Supervision (OTS) approval of the Company's acquisition of Dime Bancorp, Inc.
(c) EXHIBITS:Exhibits:
The Index of Exhibits is included in the version of this Form 10-K filed with the Securities and Exchange Commission.

51
54

SIGNATURES
59

Signatures
Pursuant to the requirements of Section 13 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 February 20, 2001.

WASHINGTON MUTUAL, INC.

/s/ KERRY K. KILLINGER
--------------------------------------
Kerry K. Killinger
25, 2002.
WASHINGTON MUTUAL, INC.

/s/ KERRY K. KILLINGER
Kerry K. Killinger
Chairman, President and Chief Executive Officer
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 February 20, 2001.

25, 2002.

/s/

/s/ KERRY K. KILLINGER /s/ WILLIAM A. LONGBRAKE
- -------------------------------------------- --------------------------------------------
Kerry K. Killinger William A. Longbrake

Chairman, President and Chief Executive Officer; Director (Principal Executive Officer) /s/ WILLIAM A. LONGBRAKE
William A. Longbrake
Vice Chair, Enterprise Risk Management and Chief Financial Officer
Officer;

/s/ DOUGLAS P. BEIGHLE
Douglas P. Beighle
Director (Principal Executive (Principal Financial Officer)
Officer)

/s/

/s/ ROBERT H. MILES --------------------------------------------

Robert H. Miles
Senior Vice President and Controller
(Principal Accounting Officer)

/s/ DOUGLAS P. BEIGHLE /s/ PHILLIP D. MATTHEWS
- -------------------------------------------- --------------------------------------------
Douglas P. Beighle Phillip D. Matthews
Director Director

- -------------------------------------------- --------------------------------------------

/s/ DAVID BONDERMAN
David Bonderman Michael K. Murphy

Director

/s/ MARGARET OSMER-MCQUADE
Margaret Osmer-McQuade
Director

/s/

/s/ J. TAYLOR CRANDALL
J. Taylor Crandall
Director

/s/ MARY E. PUGH - -------------------------------------------- --------------------------------------------
J. Taylor Crandall
Mary E. Pugh
Director

/s/ ANNE V. FARRELL
Anne V. Farrell
Director

/s/ ROGER H. EIGSTI /s/

/s/ WILLIAM G. REED, JR. - -------------------------------------------- --------------------------------------------
Roger H. Eigsti
William G. Reed, Jr.
Director

/s/ STEPHEN E. FRANK
Stephen E. Frank
Director

/s/ JOHN W. ELLIS /s/

/s/ ELIZABETH A. SANDERS - -------------------------------------------- --------------------------------------------
John W. Ellis
Elizabeth A. Sanders
Director

/s/ WILLIAM P. GERBERDING
William P. Gerberding
Director

/s/ ANNE V. FARRELL
- -------------------------------------------- --------------------------------------------
Anne V. Farrell

/s/ WILLIAM D. SCHULTE
William D. Schulte
Director

/s/ ENRIQUE HERNANDEZ, JR.
Enrique Hernandez, Jr.
Director

/s/ STEPHEN E. FRANK /s/

/s/ JAMES H. STEVER - -------------------------------------------- --------------------------------------------
Stephen E. Frank
James H. Stever
Director

/s/ PHILLIP D. MATTHEWS
Phillip D. Matthews
Director

/s/ WILLIAM P. GERBERDING /s/

/s/ WILLIS B. WOOD, JR. - -------------------------------------------- --------------------------------------------
William P. Gerberding
Willis B. Wood, Jr.
Director

/s/ MICHAEL K. MURPHY
Michael K. Murphy
Director

- --------------------------------------------
Enrique Hernandez, Jr.
Director

52
55

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

60
Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Page
Independent Auditors' Report................................ 54
Report 62

Consolidated Statements of Income for the years ended December 31, 2001, 2000 1999, and 1998......................... 55
1999

Consolidated Statements of Financial Condition at December 31, 20002001 and 1999......................................... 56
2000

Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 2001, 2000 1999 and 1998....................................... 57
1999

Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 1999 and 1998.......................... 58
1999

Notes to Consolidated Financial Statements.................. 60
Statements

Supplementary Data.......................................... 106
Data (unaudited)

120

53
56

INDEPENDENT AUDITORS' REPORT
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, 20002001 and 1999,2000, 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, 2000.2001. 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 auditing standards generally accepted in the United States of America. 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 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 condition of Washington Mutual, Inc. and subsidiaries as of December 31, 20002001 and 1999,2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000,2001, in conformity with accounting principles generally accepted in the United States of America.

/s/
As discussed in Note 1 to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, on January 1, 2001.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
February 23, 2001

54
57

19, 2002
(March 1, 2002 as to Note 2)
62
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)

INTEREST INCOME
Loans....................................................... $ 9,388 $ 8,348 $ 8,167
Available-for-sale securities............................... 2,811 2,481 1,708
Held-to-maturity securities................................. 1,319 1,050 1,175
Other interest and dividend income.......................... 265 183 171
------- ------- -------
Total interest income..................................... 13,783 12,062 11,221
INTEREST EXPENSE
Deposits.................................................... 3,290 3,170 3,588
Borrowings.................................................. 6,182 4,440 3,341
------- ------- -------
Total interest expense.................................... 9,472 7,610 6,929
------- ------- -------
Net interest income....................................... 4,311 4,452 4,292
Provision for loan and lease losses......................... 185 167 162
------- ------- -------
Net interest income after provision for loan and lease
losses................................................. 4,126 4,285 4,130
NONINTEREST INCOME
Depositor and other retail banking fees..................... 976 764 569
Securities fees and commissions............................. 318 271 192
Insurance fees and commissions.............................. 44 43 42
Loan servicing income....................................... 147 112 117
Loan related income......................................... 117 103 111
Gain on sale of loans....................................... 262 109 133
Gain on sale of retail deposit branch systems............... -- -- 289
Loss from securities........................................ (1) (12) (30)
Other income................................................ 121 119 84
------- ------- -------
Total noninterest income.................................. 1,984 1,509 1,507
NONINTEREST EXPENSE
Compensation and benefits................................... 1,348 1,186 1,189
Occupancy and equipment..................................... 604 565 498
Telecommunications and outsourced information services...... 323 276 256
Depositor and other retail banking losses................... 105 107 88
Transaction-related expense................................. -- 96 508
Amortization of goodwill and other intangible assets........ 106 98 104
Other expense............................................... 640 582 625
------- ------- -------
Total noninterest expense................................. 3,126 2,910 3,268
------- ------- -------
Income before income taxes................................ 2,984 2,884 2,369
Income taxes................................................ 1,085 1,067 882
------- ------- -------
NET INCOME.................................................. $ 1,899 $ 1,817 $ 1,487
======= ======= =======
Net income attributable to common stock..................... $ 1,899 $ 1,817 $ 1,471
======= ======= =======
Net income per common share:
Basic..................................................... $ 3.55 $ 3.17 $ 2.61
Diluted................................................... 3.54 3.16 2.56

Year Ended December 31,
2001 2000 1999
(in millions,
except per share amounts)

Interest Income
Loans $ 11,233 $ 9,388 $ 8,348
Available-for-sale securities 3,573 2,811 2,481
Held-to-maturity securities - 1,319 1,050
Other interest and dividend income 259 265 183
Total interest income 15,065 13,783 12,062
Interest Expense
Deposits 3,094 3,290 3,170
Borrowings 5,095 6,182 4,440
Total interest expense 8,189 9,472 7,610
Net interest income 6,876 4,311 4,452
Provision for loan and lease losses 575 185 167
Net interest income after provision for loan and lease losses 6,301 4,126 4,285
Noninterest Income
Depositor and other retail banking fees 1,290 976 764
Securities fees and commissions 303 318 271
Insurance income 100 49 43
Single-family residential ("SFR") mortgage banking (expense) income (285 ) 433 237
Portfolio loan related income 193 82 73
Gain (loss) from other securities 744 (3 ) (12 )
Other income 282 129 133
Total noninterest income 2,627 1,984 1,509
Noninterest Expense
Compensation and benefits 1,924 1,348 1,223
Occupancy and equipment 804 604 575
Telecommunications and outsourced information services 441 323 276
Professional fees 201 101 76
Advertising and promotion 185 132 111
Depositor and other retail banking losses 144 105 107
Amortization of goodwill and other intangible assets 172 106 98
Other expense 746 407 444
Total noninterest expense 4,617 3,126 2,910
Income before income taxes and extraordinary item 4,311 2,984 2,884
Income taxes 1,579 1,085 1,067
Income before extraordinary item 2,732 1,899 1,817
Extraordinary item – gain on extinguishment of securities sold under agreements to repurchase ("repurchase agreements"), net of taxes of $239 million 382 - -
Net Income $ 3,114 $ 1,899 $ 1,817
Net Income Attributable to Common Stock $ 3,107 $ 1,899 $ 1,817
Basic earnings per common share:
Income before extraordinary item $ 3.20 $ 2.37 $ 2.12
Extraordinary item 0.45 - -
Net income $ 3.65 $ 2.37 $ 2.12
Diluted earnings per common share:
Income before extraordinary item $ 3.15 $ 2.36 $ 2.11
Extraordinary item 0.44 - -
Net income $ 3.59 $ 2.36 $ 2.11
Dividends declared per common share $ 0.90 $ 0.76 $ 0.65
Basic weighted average common shares outstanding 850.2 801.3 859.0
Diluted weighted average common shares outstanding 864.7 804.7 861.8 See Notes to Consolidated Financial Statements.

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)

ASSETS
Cash and cash equivalents................................... $ 2,622 $ 3,040
Available-for-sale securities, total amortized cost of
$42,288 and $42,564:
Encumbered................................................ 23,576 17,531
Unencumbered.............................................. 18,583 23,854
-------- --------
42,159 41,385
Held-to-maturity securities, total fair value of $16,486 and
$19,037:
Encumbered................................................ 9,566 10,074
Unencumbered.............................................. 6,999 9,327
-------- --------
16,565 19,401
Loans held for sale......................................... 3,404 794
Loans:
Loans held in portfolio................................... 119,626 113,746
Allowance for loan and lease losses....................... (1,014) (1,042)
-------- --------
Total loans, net of allowance for loan and lease
losses................................................ 118,612 112,704
Mortgage servicing rights ("MSR")........................... 1,017 643
Investment in Federal Home Loan Banks ("FHLBs")............. 3,260 2,917
Goodwill and other intangible assets........................ 1,084 1,200
Other assets................................................ 5,993 4,430
-------- --------
Total assets........................................... $194,716 $186,514
======== ========
LIABILITIES
Deposits:
Checking accounts......................................... $ 14,500 $ 13,490
Savings accounts and money market deposit accounts
("MMDAs").............................................. 30,656 30,048
Time deposit accounts..................................... 34,418 37,592
-------- --------
Total deposits......................................... 79,574 81,130
Federal funds purchased and commercial paper................ 4,115 867
Securities sold under agreements to repurchase ("repurchase
agreements").............................................. 29,756 30,163
Advances from FHLBs......................................... 57,855 57,094
Other borrowings............................................ 9,930 6,203
Other liabilities........................................... 3,320 2,004
-------- --------
Total liabilities...................................... 184,550 177,461
STOCKHOLDERS' EQUITY
Common stock, no par value: 1,600,000,000 shares authorized,
539,855,720 and 571,589,272 shares issued and
outstanding............................................... -- --
Capital surplus -- common stock............................. 1,425 2,205
Accumulated other comprehensive loss:
Unrealized loss on securities............................. (51) (667)
Minimum pension liability adjustment...................... (3) (7)
Retained earnings........................................... 8,795 7,522
-------- --------
Total stockholders' equity............................. 10,166 9,053
-------- --------
Total liabilities and stockholders' equity............. $194,716 $186,514
======== ========

December 31,
2001 2000
(dollars in millions)

Assets
Cash and cash equivalents $ 6,044 $ 2,622
Available-for-sale securities, total amortized cost of $58,783 and $42,288:
Encumbered 38,649 23,576
Unencumbered 19,700 18,583
58,349 42,159
Held-to-maturity securities, total fair value of zero and $16,486:
Encumbered - 9,566
Unencumbered - 6,999
- 16,565
Loans held for sale 23,842 3,404
Loans held in portfolio 132,991 119,626
Allowance for loan and lease losses (1,404 ) (1,014 )
Total loans held in portfolio, net of allowance for loan and lease losses 131,587 118,612
Mortgage servicing rights ("MSR") 6,241 1,017
Investment in Federal Home Loan Banks ("FHLBs") 3,873 3,260
Goodwill and other intangible assets 2,330 1,084
Other assets 10,240 5,993
Total assets $ 242,506 $ 194,716

Liabilities
Deposits:
Noninterest-bearing deposits $ 22,441 $ 8,755
Interest-bearing deposits 84,741 70,819
Total deposits 107,182 79,574
Federal funds purchased and commercial paper 4,690 4,115
Securities sold under agreements to repurchase 39,447 29,756
Advances from FHLBs 61,182 57,855
Other borrowings 12,576 9,930
Other liabilities 3,264 3,320
Total liabilities 228,341 184,550
Redeemable preferred stock 102 -
Stockholders' Equity
Common stock, no par value: 1,600,000,000 shares authorized, 873,089,120 and
809,783,580 shares issued and outstanding - -
Capital surplus - common stock 3,178 1,425
Accumulated other comprehensive loss (243 ) (54 )
Retained earnings 11,128 8,795
Total stockholders' equity 14,063 10,166
Total liabilities, redeemable preferred stock, and stockholders' equity $ 242,506 $ 194,716
See Notes to Consolidated Financial Statements.

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
CAPITAL ACCUMULATED COMMON
SURPLUS -- OTHER STOCK
PREFERRED COMMON COMPREHENSIVE RETAINED IN
TOTAL STOCK STOCK INCOME (LOSS) EARNINGS TREASURY
------- --------- ---------- ------------- -------- --------
(IN MILLIONS)

BALANCE, December 31, 1997............... $ 7,601 $ 597 $ 2,630 $ 62 $5,244 $(932)
Comprehensive income:
Net income -- 1998..................... 1,487 -- -- -- 1,487 --
Other comprehensive income (loss), net
of tax:
Net unrealized gains on securities
arising during the year, net of
reclassification adjustments....... 25 -- -- 25 -- --
Minimum pension liability
adjustment......................... (13) -- -- (13) -- --
-------
Total comprehensive income............... 1,499 -- -- -- -- --
Cash dividends declared on preferred
stock.................................. (20) -- -- -- (20) --
Cash dividends declared on common
stock.................................. (436) -- -- -- (436) --
Repurchase of common stock............... (24) -- -- -- -- (24)
Redemption or conversion of preferred
stock.................................. (313) (597) (112) -- -- 396
Common stock issued to acquire Coast
Savings Financial, Inc. ("Coast")...... 925 -- 373 -- -- 552
Common stock issued through employee
stock plans, including tax benefit..... 112 -- 115 -- -- (3)
Treasury shares retired.................. -- -- (11) -- -- 11
------- ----- ------- ----- ------ -----
BALANCE, December 31, 1998............... 9,344 -- 2,995 74 6,275 --
------- ----- ------- ----- ------ -----
Comprehensive income:
Net income -- 1999..................... 1,817 -- -- -- 1,817 --
Other comprehensive income (loss), net
of tax:
Net unrealized losses on securities
arising during the year, net of
reclassification adjustments....... (754) -- -- (754) -- --
Minimum pension liability
adjustment......................... 6 -- -- 6 -- --
-------
Total comprehensive income............... 1,069 -- -- -- -- --
Cash dividends declared on common
stock.................................. (570) -- -- -- (570) --
Common stock repurchased and retired..... (1,082) -- (1,082) -- -- --
Common stock issued to acquire Long Beach
Financial Corp......................... 207 -- 207 -- -- --
Common stock issued through employee
stock plans, including tax benefit..... 85 -- 85 -- -- --
------- ----- ------- ----- ------ -----
BALANCE, December 31, 1999............... 9,053 -- 2,205 (674) 7,522 --
------- ----- ------- ----- ------ -----
Comprehensive income:
Net income -- 2000..................... 1,899 -- -- -- 1,899 --
Other comprehensive income, net of tax:
Net unrealized gains on securities
arising during the year, net of
reclassification adjustments....... 616 -- -- 616 -- --
Minimum pension liability
adjustment......................... 4 -- -- 4 -- --
-------
Total comprehensive income............... 2,519 -- -- -- -- --
Cash dividends declared on common
stock.................................. (626) -- -- -- (626) --
Common stock repurchased and retired..... (869) -- (869) -- -- --
Common stock issued through employee
stock plans, including tax benefit..... 89 -- 89 -- -- --
------- ----- ------- ----- ------ -----
BALANCE, December 31, 2000............... $10,166 $ -- $ 1,425 $ (54) $8,795 $ --
======= ===== ======= ===== ====== =====

Number of
Shares Total Capital Surplus —
Common Stock Accumulated
Other
Comprehensive
Income (Loss) Retained
Earnings
(in millions)

BALANCE, December 31, 1998 890.1 $ 9,344 $ 2,995 $ 74 $ 6,275
Comprehensive income:
Net income – 1999 - 1,817 - - 1,817
Other comprehensive income (loss), net of tax:
Net unrealized losses on securities arising during the year, net of reclassification adjustments - (754 ) - (754 ) -
Minimum pension liability adjustment - 6 - 6 -
Total comprehensive income - 1,069 - - -
Cash dividends declared on common stock - (570 ) - - (570 )
Common stock repurchased and retired (47.3 ) (1,082 ) (1,082 ) - -
Common stock issued to acquire Long Beach Financial Corp 9.5 207 207 - -
Common stock issued 5.1 85 85 - -
BALANCE, December 31, 1999 857.4 9,053 2,205 (674 ) 7,522
Comprehensive income:
Net income – 2000 - 1,899 - - 1,899
Other comprehensive income, net of tax:
Net unrealized gains on securities arising during the year, net of reclassification adjustments - 616 - 616 -
Minimum pension liability adjustment - 4 - 4 -
Total comprehensive income - 2,519 - - -
Cash dividends declared on common stock - (626 ) - - (626 )
Common stock repurchased and retired (52.2 ) (869 ) (869 ) - -
Common stock issued 4.6 89 89 - -
BALANCE, December 31, 2000 809.8 10,166 1,425 (54 ) 8,795
Comprehensive income:
Net income – 2001 - 3,114 - - 3,114
Other comprehensive income (loss), net of tax:
Net unrealized losses on securities arising during the year, net of reclassification adjustments - (191 ) - (191 ) -
Minimum pension liability adjustment - (1 ) - (1 ) -
Net unrealized gain on cash flow hedging instruments - 3 - 3 -
Total comprehensive income - 2,925 - - -
Cash dividends declared on common stock - (774 ) - - (774 )
Cash dividends declared on redeemable preferred stock - (7 ) - - (7 )
Common stock repurchased and retired (7.3 ) (231 ) (231 ) - -
Common stock warrants issued,
net of issuance costs - 398 398 - -
Common stock issued to acquire Bank United Corp. 63.9 1,389 1,389 - -
Common stock issued 6.7 197 197 - -
BALANCE, December 31, 2001 873.1 $ 14,063 $ 3,178 $ (243 ) $ 11,128
See Notes to Consolidated Financial Statements.

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(IN MILLIONS)

CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $ 1,899 $ 1,817 $ 1,487
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan and lease losses................... 185 167 162
Gain on sale of loans................................. (262) (109) (133)
Loss from securities.................................. 1 12 30
Depreciation and amortization......................... 539 400 313
Stock dividends from FHLBs............................ (221) (139) (112)
Transaction-related expense........................... -- -- 82
Origination of loans held for sale.................... (13,123) (4,996) (13,501)
Proceeds from sales of loans held for sale............ 12,610 8,960 18,238
Decrease (increase) in other assets................... 802 (506) 256
Increase (decrease) in other liabilities.............. 592 (336) 93
-------- -------- --------
Net cash provided by operating activities........... 3,022 5,270 6,915
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities.................................... (2,843) (17,091) (17,389)
Sales and maturities of securities......................... 3,842 1,680 2,585
Principal payments on securities........................... 8,373 12,411 10,010
Purchases of investment in FHLBs........................... (136) (787) (344)
Purchases of loans......................................... (6,752) (7,357) (3,069)
Proceeds from sales of loans............................... 13,164 55 49
Origination of loans, net of principal payments............ (22,271) (16,571) (7,733)
Proceeds from sales of foreclosed assets................... 265 354 609
Cash (used for) provided by acquisitions................... (23) (144) 400
Purchases of premises and equipment, net................... (272) (319) (320)
Purchases of bank owned life insurance..................... (1,000) -- --
-------- -------- --------
Net cash used by investing activities, carried
forward.......................................... (7,653) (27,769) (15,202)

Year Ended December 31,
2001 2000 1999
(in millions)

Cash Flows from Operating Activities
Net income $ 3,114 $ 1,899 $ 1,817
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses 575 185 167
Gain from mortgage loans (967 ) (262 ) (109 )
(Gain) loss from securities (861 ) 1 12
Extraordinary item – gain on extinguishment of repurchase agreements, net of taxes (382 ) - -
Depreciation and amortization 1,590 539 400
MSR impairment (recovery) 1,749 9 (4 )
Stock dividends from FHLBs (216 ) (221 ) (139 )
Origination and purchases of loans held for sale, net of principal payments (133,534 ) (13,123 ) (4,996 )
Proceeds from sales of loans held for sale 118,131 12,610 8,960
Decrease (increase) in other assets 1,418 793 (502 )
(Decrease) increase in other liabilities (1,394 ) 592 (336 )
Net cash (used) provided by operating activities (10,777 ) 3,022 5,270

Cash Flows from Investing Activities
Purchases of securities (60,077 ) (2,843 ) (17,091 )
Proceeds from sales of mortgage-backed securities ("MBS") 20,202 2,366 1,409
Proceeds from sales and maturities of other available-for-sale securities 31,691 1,476 271
Principal payments on securities 11,830 8,373 12,411
Purchases of investment in FHLBs - (136 ) (787 )
Proceeds from sales of loans - 13,164 55
Origination and purchases of loans, net of principal payments (1,677 ) (29,023 ) (23,928 )
Proceeds from sales of foreclosed assets 257 265 354
Net cash used for acquisitions (13,818 ) (23 ) (144 )
Purchases of premises and equipment, net (753 ) (272 ) (319 )
Purchases of bank-owned life insurance - (1,000 ) -
Net cash used by investing activities,carried forward (12,345 ) (7,653 ) (27,769 )See Notes to Consolidated Financial Statements.

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(IN MILLIONS)

Net cash used by investing activities, brought
forward.......................................... (7,653) (27,769) (15,202)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in deposits....................................... (1,553) (4,289) (1,103)
Deposits sold.............................................. (3) (73) (3,236)
(Decrease) increase in short-term borrowings............... (6,373) 5,413 2,335
Proceeds from long-term borrowings......................... 32,615 15,881 1,383
Repayments of long-term borrowings......................... (19,817) (9,911) (3,650)
Proceeds from FHLBs advances............................... 88,749 87,174 67,189
Repayments of FHLBs advances............................... (87,990) (69,828) (53,882)
Cash dividends paid on preferred and common stock.......... (626) (570) (456)
Redemption of preferred stock.............................. -- -- (313)
Repurchase of common stock................................. (869) (1,082) (24)
Other...................................................... 80 67 81
-------- -------- --------
Net cash provided by financing activities........... 4,213 22,782 8,324
-------- -------- --------
(Decrease) increase in cash and cash equivalents.... (418) 283 37
Cash and cash equivalents, beginning of year........ 3,040 2,757 2,720
-------- -------- --------
Cash and cash equivalents, end of year.............. $ 2,622 $ 3,040 $ 2,757
======== ======== ========
NONCASH ACTIVITIES
Loans exchanged for MBS.................................... $ 7,414 $ 14,764 $ 754
Real estate acquired through foreclosure................... 255 338 512
Loans originated to facilitate the sale of foreclosed
assets................................................... 36 65 55
Loans held for sale originated to refinance existing
loans.................................................... 631 2,512 5,289
Loans held in portfolio originated to refinance existing
loans.................................................... 3,361 4,347 2,556
Loans held in portfolio transferred to loans held for
sale..................................................... 1,314 -- --
Trade date purchases not yet settled....................... 306 -- 2,610
Trade date sales not yet settled........................... 301 -- --
CASH PAID DURING THE YEAR FOR
Interest on deposits....................................... 3,287 3,151 3,610
Interest on borrowings..................................... 6,257 4,251 3,195
Income taxes............................................... 389 827 814
(Continued)
Year Ended December 31,
2001 2000 1999
(in millions)

Net cash used by investing activities,brought forward (12,345 ) (7,653 ) (27,769 )

Cash Flows from Financing Activities
Increase (decrease) in deposits 19,932 (1,553 ) (4,289 )
Deposits sold (423 ) (3 ) (73 )
Increase (decrease) in short-term borrowings 24,220 (6,373 ) 5,413
Proceeds from long-term borrowings 12,799 32,615 15,881
Repayments of long-term borrowings (25,252 ) (19,817 ) (9,911 )
Proceeds from advances from FHLBs 135,015 88,749 87,174
Repayments of advances from FHLBs (139,302 ) (87,990 ) (69,828 )
Cash dividends paid on preferred and common stock (781 ) (626 ) (570 )
Repurchase of common stock (231 ) (869 ) (1,082 )
Common stock warrants issued 398 - -
Other 169 80 67
Net cash provided by financing activities 26,544 4,213 22,782
Increase (decrease) in cash and cash equivalents 3,422 (418 ) 283
Cash and cash equivalents, beginning of year 2,622 3,040 2,757
Cash and cash equivalents, end of year $ 6,044 $ 2,622 $ 3,040

Noncash Activities
Loans exchanged for MBS $ 2,399 $ 7,414 $ 14,764
Real estate acquired through foreclosure 345 255 338
Loans originated to facilitate the sale of foreclosed assets 13 36 65
Loans held in portfolio transferred to loans held for sale - 1,314 -
Fair value of Bank United Corp. assets acquired 19,034 - -
Fair value of Bank United Corp. liabilities acquired 17,374 - -

Cash Paid During the Year For
Interest on deposits 3,070 3,287 3,151
Interest on borrowings 5,388 6,257 4,251
Income taxes 1,477 444 855 See Notes to Consolidated Financial Statements.

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Summary of Significant Accounting Policies
Basis of Presentation
Washington Mutual, Inc. ("WMI" and together with its subsidiaries, "Washington Mutual" or the "Company") is a financial services company committed to serving consumers and small to mid-sized businesses. Through its
subsidiaries, Washington Mutual engages in the following lines of business:
consumer banking, mortgage banking, commercial banking, financial services and
consumer finance. The Company's principal banking subsidiaries are Washington
Mutual Bank, FA ("WMBFA"), Washington Mutual Bank ("WMB") and Washington Mutual
Bank fsb ("WMBfsb"). The banking subsidiaries acceptCompany accepts deposits from the general public, make, buymakes, buys and sellsells residential loans, consumer loans, and commercial loans, and engageengages in certain commercial banking activities. The Company originates, purchases, sells and services specialty mortgage finance loans
through its subsidiaries, Washington Mutual Finance Corporation ("Washington
Mutual Finance") and Long Beach Mortgage Company ("Long Beach Mortgage"). In
addition, WMBFA purchases specialty mortgage finance loans. Through licensed
subsidiaries, Washington Mutual also markets annuities and other insurance
products, offers full service securities brokerage operations, and acts as the
investment advisor to and the distributor of mutual funds.
The Company has a concentration of operations in California. At December 31, 2000, 52%2001, 51% of the Company's loan portfolio and 71%63% of the Company's deposits were concentrated in California.
Certain reclassifications have been made to the 19992000 and 19981999 financial statements to conform to the 20002001 presentation. All intercompany transactions and balances have been eliminated.

On October 1, 1998, H.F. Ahmanson & Company ("Ahmanson") merged with and
into WMI and all of the subsidiaries of Ahmanson, including Home Savings of
America, FSB ("Home Savings"), became subsidiaries of the Company (the "Ahmanson
Merger"). The Ahmanson Merger was accounted for as a pooling of interests. When
Washington Mutual acquires a company through a pooling of interests, current and
prior period financial statements are restated to include the accounts of merged
companies. As a result, the accompanying financial statements and notes thereto
are presented as if the companies were merged as of the beginning of the
earliest period shown. Previously reported balances of the merged companies have
been reclassified to conform to the Company's presentation and restated to give
effect to the combinations.

On February 13, 1998, Ahmanson had acquired Coast Savings Financial, Inc.
("Coast").
On October 1, 1999, Washington Mutual acquired Long Beach Financial Corporation, parent of Long Beach Mortgage. BothMortgage Company ("Long Beach Mortgage"). In 2001, Washington Mutual acquired Bank United Corp., Fleet Mortgage Corp., and the mortgage operations of The PNC Financial Services Group, Inc. These acquisitions were accounted for as purchases.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted accounting principlesin the United States of America 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. 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, commercial paper and repurchase agreements with an initial maturity of three months or less.

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Held-to-Maturity Securities
Investments classified as held to maturity are accounted for at amortized cost because the Company has both the positive intent and the ability to hold those securities to maturity. Other than temporary declines in fair value are recognized in the income statement as loss from securities. With the adoption of Statement of Financial Accounting Standards ("SFAS") No. 133,Accounting for Derivative Instruments and Hedging Activities, the Company reclassified its held-to-maturity MBS and investment portfolios to available-for-sale.
Available-for-Sale Securities
Securities not classified as held to maturity are considered to be available for sale. Gains and losses realized on the sale of these securities are based on the specific identification method. Unrealized gains and losses from available-for-sale securities are excluded from earnings and reported (net of tax) in accumulated other comprehensive income until realized. Other than temporary declines in fair value are recognized in the income statement as loss from securities.
68
Loans Held for Sale
Loans held for sale include originated and purchasedpurchased/correspondent mortgage loans intended for sale in the secondary market. The Company enters into forward sales agreements to manage interest rate risk associated with loans soheld for sale. Loans held for sale with designated fair value hedges are carriedrecorded at fair value. Loans held for sale without designated fair value hedges are recorded at the lower of netaggregate cost or fair value on an aggregate basis.

value.
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 or premiums on purchased loans. Deferred costs or fees, discounts and premiums are amortized using the interest method over the contractual term of the loan adjusted for actual prepayments.
Management generally ceases to accrue interest income on all loans that become four payments delinquent and reverses all interest accrued up to that time. Thereafter, interest income is accrued only if and when, in management's opinion, projected cash proceeds are deemed sufficient to repay both principal and interest. All loans for which interest is not being accrued are referred to as loans on nonaccrual status.
Commercial real estate loans over $1 million and all commercial business and builder construction loans are individually evaluated for impairment. Management generally identifies loans to be evaluated for impairment when such loans are on nonaccrual status or have been restructured. However, not all nonaccrual loans are impaired. Loans are considered impaired when it is probable that the Company will be unable to collect all amounts contractually due, including scheduled interest payments. Restructured loans are evaluated for impairment based on the contractual terms specified by the original loan agreement, rather than the contractual terms specified by the restructuring agreement. Loans performing under restructured terms beyond a specified performance period are classified as accruing, but may still be deemed impaired. Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, the value of the underlying collateral, and current economic conditions. All other loans are reviewed on a collective basis.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses represents management's estimate of credit losses inherent in the Company's loan and lease portfolios as of the balance sheet date. Management performs periodicregular, ongoing reviews of its portfolios to identify these inherent losses, and to assess the overall probability of collection of these portfolios. The process by whichCompany monitors delinquency, default, and loss rates, among other factors impacting portfolio risk. The Company's methodology for assessing the appropriate level of the allowance consists of several key elements, which include the allocated allowance, specific allowances for identified loans and the unallocated allowance.
The allocated allowance is determined
encompassesassessed on both homogeneous and non-homogeneous loan portfolios. The amount is calculated by applying loss factors to the outstanding loan balances and commitments of these portfolios. Loss factors are based on analysis of the historical performance of each loan category and an assessment of current economic and portfolio trends and conditions, as well as specific risk factors impacting the loan and lease portfolios. The Company
monitors delinquency, default, and loss rates, among other factors impactingEach homogeneous portfolio, risk. In addition, non-homogeneoussuch as single family residential or specialty mortgage finance, is evaluated collectively.
Non-homogeneous type loans, such as commercial business, and commercial real estate and builder SFR construction loans, are analyzed and segregated by risk according to the Company's internal risk rating
69

scale. These loans are reviewed on an individual loan basis in order to identify impairment and forloss factors are applied based on the risk rating purposes.

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)assigned to the loan. A specific allowance may be assigned to non-homogeneous type loans that have been individually determined to be impaired. Any specific allowance considers all available evidence including, as appropriate, the present value of payments expected to be received, or for loans that are solely dependent on collateral for repayment, the estimated fair value of the collateral.
The unallocated allowance is based upon management's evaluation and judgment of various conditions that are not directly measured in the determination of the allocated and specific allowances. The conditions evaluated in connection with the unallocated allowance may include existing general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions within portfolio segments, recent loss experience in particular segments of the portfolio, duration of the current business cycle, bank regulatory examination results and findings of the Company's internal credit examiners.
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 criteria will generally confirm that a loss has been incurred: the loan is significantly delinquent and the borrower has not evidenced the ability or intent to bring the loan current; the Company has no recourse to the borrower, or if it does, the borrower has insufficient assets to pay the debt; or the fair value of the loan collateral is significantly below the current loan balance and there is little or no near-term prospect for improvement.
Consumer finance loans secured by collateral other than real estate are charged off if and when they exceed a specified number of days contractually delinquent (180 days for substantially all loans). Single-family residential loans and consumer loans secured by real estate are written down to the fair value of the underlying collateral (less projected cost to sell) when they are contractually delinquent 120 days.
The ultimate recovery of all loans is susceptible to future market factors beyond the Company's control. These factors may result in losses or recoveries differing significantly from those provided for in the Consolidated Financial Statements.

Allowance for Recourse Obligations

The Company records an allowance for recourse obligations to cover inherent
losses on loans securitized
Restructured Loans
In cases where a borrower experiences financial difficulties and retained in its mortgage-backed securities
("MBS") portfolio for which the Company retainsmakes certain concessionary modifications to contractual terms, the creditloan 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 may be excluded from the impairment assessment and may cease to cover
estimated losses onbe considered impaired loans and MBS sold to third parties for which a recourse
obligation exists. A regular review is performed to determinein the adequacy of
the allowance for recourse obligations. The review is substantially similarcalendar years subsequent to the reviewrestructuring if they are not impaired based on the modified terms.
Generally, a nonaccrual loan that is restructured remains on nonaccrual for a period of six months to demonstrate that the adequacy ofborrower can meet the allowance for loan and lease losses, because
the sold loans and securities, as to which a recourse obligation exists, are
similarrestructured terms. However, performance prior to the Company's single-family residential ("SFR")restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan portfolio.
Increasesbeing returned to accrual at the allowance for recourse obligations are recordedtime 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 loss from
securities.

a nonaccrual loan.
70

Foreclosed Assets
Foreclosed assets include properties acquired through foreclosure that are transferred at fair value, less estimated selling costs, which represents the new recorded basis of the property. Subsequently, properties are evaluated and any additional declines in value are recorded in current period earnings. 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 or development of the property.
Transfers and Servicing of Financial Assets
SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in September 2000 and replaces SFAS No. 125 of the same title. This statementStatement revises the standards for accounting for securitizations and other transfers of financial assets and collateral, and requires certain disclosures, but carries over most of SFAS No. 125's provisions without reconsideration. This statement isStatement was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and iswas effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The
adoption of this statement bySee Notes to the Company is not expected to materially affect
the results of operations or financial condition of the Company. See "Notes to Consolidated Financial Statements --– Note 3: Securities"Securities", and Note 5: Mortgage"Mortgage Banking Activities."

In connection with securitizations
Washington Mutual securitizes, sells and services interests in single family residential, specialty mortgage finance, and commercial real estate loans. When the Company sells or transfers, certainsecuritizes 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 including MSR,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 to the retained interests. Previous carrying amounts are recorded at their allocated carrying value based
on theirin proportion to the relative fair value. Initiallyvalues of the assets sold and at subsequent measurement dates,the interests retained.
Quoted market prices, if available, are used to obtain fair value is determined by computingvalues of senior, subordinate and residual interests. Generally, quoted market prices for subordinate and residual interests are not available; therefore, the Company estimates the fair values based upon the present value of the estimatedassociated expected future cash flowsflows. In determining the fair value of subordinate and residual interests, management is required to estimate future prepayment rates, discount rates, expected credit losses, and other factors that impact the value of retained using the dates that such cash flows are expected to be releasedinterests. See Note 5 to the Company, at a discount rate considered to be

62
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

commensurate with the risks associated with the cash flows.Consolidated Financial Statements – "Mortgage Banking Activities."
The amounts and
timingfair value of the cash flowsMSR is determined as of the sale date by reference to internally developed estimates of fair value 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)
Those estimated fair values are estimated after considering various economic
factors including prepayment, delinquency, defaultupdated based on the results of internal valuations, market pricing, and loss assumptions.
Valuationsurvey results. Any changes made to those values are reviewed and approved by an appropriate level of retained interests in securitizations may also involve the use of
quoted market prices on same or similar securities.

MSR are capitalized at their allocated carrying value and amortized in
proportion to, and over the period of, estimated future net servicing income.management.
The Company assesses impairment of thestratifies its MSR based on the fair valuepredominant characteristics of the underlying financial assets. The effect of changes in market interest rates on estimated rates of loan prepayments represents the predominant risk characteristic underlying the MSR portfolio. For purposes of measuring impairment, the Company has determined that three interest rate bands adequately stratify loans with similar prepayment
71

characteristics. Product-specific risk characteristics such as adjustable-rate mortgage ("ARM") loans, conventional, Government, and other mortgage loans also affect the MSR valuation, as discount rates, costs to service, and other important valuation factors differ by those rights onproduct types.
The following is a stratum-by-stratum basis, with any impairmentsummary of the MSR strata used by the Company to assess impairment:
Loan Type
Rate Band
ARM All loans
Conventional 0.00% to 7.49%
Conventional 7.50% to 8.99%
Conventional 9.00% and above
Government 0.00% to 7.49%
Government 7.50% to 8.99%
Government 9.00% and above
Private 0.00% to 7.49%
Private 7.50% to 8.99%
Private 9.00% and above
Master servicing All loans
Specialty home loans All loans
Impairment is recognized through a valuation allowance for each impairedindividual stratum. For purposesThe valuation allowance is adjusted to reflect the amount, if any, by which the cost basis of measuring
impairment, the MSR for a given stratum exceeds its fair value. Any fair value in excess of the cost basis of MSR for a given stratum is not recognized.
Because quoted market prices from active markets are stratifiednot readily available, a present value cash flow model is used to estimate the value which the MSR could be sold for in the open market as of the valuation date. While the Company's model estimates a value, the specific value used is based on a variety of factors, such as documented observable data and anticipated changes in market conditions.
The most important assumptions used in the following characteristicsMSR valuation model are anticipated loan prepayments and discount rates. Other assumptions such as the cost to service the underlying loans, foreclosure costs, ancillary income and float rates, are used in determining the value of the underlying loans: fixed-rate mortgage loans by loan type (conforming,
nonconforming, and government) and by coupon rate (less than 7.5%, between 7.5%
and less than 9.0%, and greater than or equal to 9.0%) and adjustable-rate
mortgage ("ARM") loans.MSRs.
The Company changed the stratificationfactors used for impairment review in the fourth quarterthose assumptions are selected based on market interest rates and other market assumptions, and their reasonableness is confirmed through surveys conducted with independent brokers. They are reviewed and approved on a quarterly basis by an appropriate level of 2000 and such change did not have a
material effect on the financial statements.management. In order to determineaddition, independent broker appraisals of the fair value of the MSR portfolio are obtained at least annually to confirm the reasonableness of the value generated by the MSR valuation model.
Investment in FHLBs
The Company's investment in the stock of the FHLBs is carried at cost and is classified as restricted, as the Company uses a model
that estimatescan only sell stock back to the presentFHLBs at par value of expected future cash flows. Assumptions used
in the model include market discount ratesor to other member banks. Dividends are included within other interest and anticipated prepayment speeds.
The prepayment speeds are determined in relation to forecasted yield curves of
selected government securities. In addition, the Company uses market comparables
for estimates of the cost of servicing per loan, inflation rates, ancillary
income per loan and default rates.

dividend income.
Premises and Equipment
Land, 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. Leasehold improvements are amortized over the shorter of their useful lives or lease terms. The Company reviews
72
buildings, leasehold improvements, and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment exists when the estimated undiscounted cash flows for the property isare less than its carrying value. If identified, an impairment loss is recognized through a charge to earnings based on the fair value of the property.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets represent the excess of purchase price over the fair value of net assets acquired by the Company. The excess cost over fair value of net assets acquired consists of goodwill, core deposit premiums, and other intangible assets. Substantially all of the Company's goodwill is being amortized using the straight-line method over 10 to 25 years. Other intangible assets are amortized over their estimated useful lives. The Company reviews its intangible assets periodically for other-than-temporary impairment. If such impairment is indicated, recoverability of the asset is assessed based on expected undiscounted net cash flows.
As of January 1, 2002, the Company adopted SFAS No. 142,Goodwill and Other Intangible Assets, which eliminates the amortization of goodwill relating to past and future acquisitions. See further discussion under the headingRecently Issued Accounting Standards.
Repurchase Agreements
The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Company transfers legal control over 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 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 dollar amount of securities underlying the agreements remains in the respective asset accounts. TheseThose securities are classified as encumbered.

63
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 incomethe tax provision in the period that includes the enactment date of the change.

The
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.
Earnings Per Share
Earnings per share ("EPS") are presented under two formats: basic EPS and diluted EPS. Basic EPS is computed by dividing net income (after deducting dividends on preferred stock) by the weighted average number of common shares outstanding during the year. Diluted EPS is computed by dividing net income (after deducting dividends on preferred stock) by the weighted average number of common shares outstanding during the year, plus the impact of dilutive potential common shares, such as stock options.

Derivative Instruments

The Company uses derivative instruments, such as interest rate exchange
agreements, interest rate cap agreements, and forward sales contracts of
financial instruments to reduce its exposure to interest rate risk. All of the
Company's derivative instruments are used for purposes other than trading.
Interest rate exchange agreements and interest rate cap agreements are used only
if they have the effect of changing the interest rate characteristics of the
assets or liabilities to which they are designated. Such effect is measured
through ongoing correlation or effectiveness tests.

Interest rate exchange agreements and interest rate cap agreements are
designated against interest-earning assets, deposits and borrowings. Interest
rate exchange agreements and interest rate cap agreements designated against
deposits and borrowings are reported at historical cost.

The interest differential paid or received on interest rate exchange
agreements and interest rate cap agreements is recorded as an adjustment to
interest income or interest expense. The purchase premium of interest rate cap
agreements is capitalized and amortized as a component of interest income or
interest expense over the original term of the interest rate cap agreement. No
purchase premiums are paid at the time of entering into interest rate exchange
agreements.

From time to time, the Company terminates interest rate exchange agreements
and interest rate cap agreements prior to maturity. Such circumstances arise if,
in the judgment of management, such instruments no longer effectively meet
policy objectives.

Usually such instruments are within one year of maturity. Gains and losses
from terminated interest rate exchange agreements and interest rate cap
agreements are recognized, consistent with the gain or loss on the asset or
liability associated with the agreement. When the asset or liability is not sold
or paid off, the gains or losses are deferred and amortized as additional
interest income or interest expense over the original terms of the agreements or
the remaining life of the designated asset or liability, whichever is less.

From time to time, the Company redesignates interest rate exchange
agreements and interest rate cap agreements between interest-earning assets and
deposits and borrowings. Such redesignations are recorded at fair value at the
time of transfer.

64
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company may write covered call options on its available-for-sale
portfolio. If the option is exercised, the option fee is recorded as an
adjustment to the gain or loss on the sale of the security. If the option is not
exercised, the option fee is recognized as fee income.

Recently Issued Accounting Standards Not Yet Adopted
73
Derivatives
On January 1, 2001, the Company recorded a transition adjustment
representing a $0.6 million loss ($0.4 million net of tax) related toadopted the implementationprovisions of SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities. This loss willActivities. That Statement requires derivatives to be reflected in the Company's earnings for
the first quarter of 2001. This loss represents the excess of book value over
the remainingrecorded at fair value of certain interest rate cap agreements designated as
cash flow hedges and the difference between book value andwith changes in fair value recognized through earnings. Certain derivative instruments can qualify as a hedge of forward
loan sale contracts for which hedge accounting was not elected. These losses
were partially offset by unrealized gains representingchanges in the fair value of recognized assets and liabilities or firm commitments or changes in expected future cash flows. In a fair value hedge, changes in the fair value of the hedging derivative recognized in earnings are offset by recognizing changes in the fair value of the hedged item attributable to originate loansthe risk being hedged. To the extent that the hedging derivative is ineffective, the changes in fair value will be held for sale when originated.not offset and the difference is reflected in earnings. In a cash flow hedge, changes in the fair value of the hedging derivative is recorded initially in other comprehensive income to the extent that the hedge is effective. Amounts recorded in other comprehensive income subsequently are reclassified into earnings during the same period in which the hedged item affects earnings. The Company considers these commitments to be derivativeschange in fair value of any ineffective portion of the hedging derivative is recognized in earnings immediately.
The initial application of SFAS No. 133 did not have a significant impact on earnings and are therefore carried
at market value.other comprehensive income and had the following impact on the Company's assets and liabilities as of January 1, 2001 (in millions):
Increase in fair value of derivatives classified as assets $ 151
Increase in the book value of MSR 126
Increase in available-for-sale securities 14,651
Increase in other assets 1,788
Decrease in held-to-maturity securities (16,565 )
Total impact on assets 151
Increase in fair value of derivatives classified as liabilities 66
Increase in the book value of hedged borrowings 129
Total impact on liabilities 195
The adoption of SFAS No. 133 on January 1, 2001 also resulted in the recognition of derivative-related assets, derivative-related liabilities, and an $11
million decrease ($7 million netincrease in the recorded value of tax) in other comprehensive income. This
decrease represents $43 million ($27 million nethedged borrowings. A portion of tax) in unrealized losses on
interest rate swap agreements and interest rate cap agreements designated as
cash flow hedges. This was partially offset by the net unrealized gain of $32
million ($20 million net of tax) that resulted from the reclassification of the
Company's entire held-to-maturity MBS and investment portfolios of $16.57
billion to available for sale upon adopting SFAS No. 133.

In conjunction with the reclassification of the Company's held-to-maturity MBS portfolio to available for sale, $126 millionavailable-for-sale was allocated to MSR, representing retained interests from securitizations of loans that the Company had completed after January 1, 1996 and for which no MSR had been previously
capitalized.capitalized previously. Since January 1, 1996, MSR arehave been capitalized for all securitizations of loans occurring
after January 1, 1996 that arewere either sold or retained in the available-for-sale securities portfolio.
Hedging Activities
The Company enters into derivative contracts to hedge certain assets, liabilities, and probable forecasted transactions. To qualify for hedge accounting, the derivatives and related hedged items must be designated as a hedge. The hedge must be effective in reducing the designated risk. The effectiveness of the derivatives is evaluated on an initial and ongoing basis using quantitative measures of correlation.
Interest rate swaps wherein the Company receives a fixed rate of interest are designated as fair value hedges against fixed-rate liabilities. The fair value of these derivatives is reported in other assets or 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 recorded in interest expense on borrowings. Any
74

portion of the changes in the fair value of derivatives designated as a hedge that is deemed ineffective is recorded in earnings.
Interest rate swaps wherein the Company pays a fixed rate of interest and stand alone interest rate caps are designated as cash flow hedges against variable-rate liabilities. Similarly, the Company uses stand alone swaptions to change the interest rate characteristics of certain probable forecasted transactions. Stand alone interest rate swaptions, in which the Company has an option to engage in an interest rate swap, are designated as cash flow hedges of anticipated issuances of debt. For these cash flow hedges, changes in the fair value of derivatives that offset changes in cash flows of a hedged item are recorded initially in other comprehensive income. The fair value of these derivatives is reported in other assets or other liabilities. Amounts recorded in other comprehensive income are subsequently reclassified to interest expense on borrowings during the same period in which the hedged item affects interest expense. In the event that the probable forecasted transactions are no longer likely to occur, the amount recorded in other comprehensive income is immediately recognized in other income.
Certain interest rate floors, caps and swaptions are embedded within financial instruments, such as borrowings. These embedded derivatives are used as economic hedges of MSR, floating rate debt and forecasted borrowings. Embedded derivatives are not required to be accounted for separately as derivatives under SFAS No. 133, provided that they are considered to be clearly and closely related to the host contract. If such borrowings are terminated early, the resulting gain or loss is required to be reported as an extraordinary item.
Loans held for sale expose the Company to interest rate risk. The Company manages the interest rate risk associated with loans held for sale by entering into forward sales agreements. Certain of these forward sales agreements are accounted for as fair value hedges of loans held for sale. The fair value of these forward sales agreements is recorded in other assets and other liabilities. The changes in the fair value of these forward sales agreements are recorded in gain from mortgage loans. In these cases, the change in fair value of the hedged loans is also recorded in gain from mortgage loans.
Commitments to Originate Loans
The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Therefore, they are recorded at fair value with changes in fair value recorded in gain from mortgage loans. For purposes of determining their fair value, the Company performs a net present value analysis of the anticipated cash flows associated with the rate lock commitments. Included in the net present value analysis are anticipated cash flows associated with the expected retained servicing of the loans. Rate lock commitments expose the Company to interest rate risk. The Company manages that risk by acquiring forward sales contracts and purchased put options which are recorded at fair value with changes in fair value recorded in gain from mortgage loans.
Recently Issued Accounting Standards
In June 2001, SFAS No. 141,Business Combinations, and SFAS No. 142,Goodwill and Other Intangible Assets were issued. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. SFAS No. 142 became effective January 1, 2002 and eliminates the amortization of goodwill relating to past and future acquisitions (except that goodwill related to business combinations initiated after June 30, 2001 and consummated before January 1, 2002 was not required to be amortized). Instead, goodwill is subject to an impairment assessment that must be performed upon adoption of SFAS No. 133142 and at least annually thereafter.
75
The impairment assessment in connection with the initial adoption of SFAS No. 142 will not have a material impact on Januarythe results of operations or financial condition of the Company. For acquisitions initiated prior to July 1, 2001, also resulted in a $151pretax goodwill amortization of approximately $110 million increase in derivative-relatedwill no longer be expensed. Certain other identifiable intangible assets a $129 million increase inwill continue to be amortized.
Note 2: Business Combinations
The Company's business combinations during 2001 have been accounted for using the bookpurchase method, and, accordingly, the total purchase price of each acquired company was allocated to the tangible assets and liabilities and identifiable intangible assets based on their estimated fair values as of hedged borrowings, and a $66 million increase in
derivative-related liabilities. Management does not anticipate that SFAS No. 133
will significantly increase the volatilityclosing date of earnings or stockholders' equity
reported in future periods.

NOTE 2: BUSINESS COMBINATIONSthe acquisition. The excess purchase price over the fair values is recorded as goodwill. Results of operations for the acquired companies are included prospectively from the date of acquisition.
On January 31, 2001, Washington Mutual, Inc. acquired the mortgage operations of The PNC Financial Services Group, Inc. The principal subsidiariesfor approximately $7.0 billion in cash. With this acquisition, the Company acquired approximately $3 billion in that transaction were renamed Washington Mutual Home Loans, Inc.
("WMHLI")loans held for sale and Washington Mutual Mortgage Securities Corp. ("WMMSC"). At January
31, 2001, WMHLI and WMMSC had total assets$2 billion in mortgage servicing rights. This acquisition resulted in the recognition of goodwill of approximately $7 billion.$330 million. The final purchase price of the mortgage operations of The PNC Financial Services Group, Inc. is the subject of ongoing litigation. The values assigned to assets received and liabilities assumed for this transaction, including the amount of goodwill recorded, are subject to the outcome of the litigation.
On February 9, 2001, Washington Mutual, Inc.the Company acquired Texas-based Bank United Corp., for a purchase price of approximately $1.4 billion. With this acquisition, the Company acquired approximately $12 billion in loans held in portfolio, $1 billion in securities, $8 billion in deposits and $8 billion in FHLB advances. This acquisition resulted in the recognition of goodwill and other intangible assets of approximately $980 million. The Company issued 63.9 million shares of its common stock to acquire Bank United Corp.
On June 1, 2001, the Company acquired Fleet Mortgage Corp., a unit of FleetBoston Financial Corp., and certain other mortgage lending operations of Fleet National Bank for approximately $7.5 billion in cash. With this acquisition, the Company acquired approximately $4 billion in loans held for sale and $3 billion in mortgage servicing rights. This acquisition resulted in the recognition of goodwill of approximately $140 million.
Prior to the adoption of SFAS No. 142,Goodwill and Other Intangible Assets, goodwill created from these acquisitions was being amortized over 20 years.
On January 4, 2002, the Company acquired Dime Bancorp, Inc. ("Dime") for approximately $1.4 billion in cash and approximately 96.4 million shares of common stock, which resulted in a total purchase price of approximately $5.2 billion. This acquisition was accounted for as a purchase. At February 9,January 4, 2002, Dime had approximately $27.9 billion in assets.
On December 11, 2001, Bank United Corp. had totalthe Company announced the signing of an agreement to acquire for cash certain operating assets of approximately $18 billion.HomeSide Lending, Inc. ("HomeSide"). The Company issued approximately 42,600,000 sharespaid a $25 million premium over the value of its common stock to acquirethe acquired assets. HomeSide is the U.S. mortgage unit of the National Australia Bank United Corp. Each share of Bank United Corp. common stockLimited. The transaction was converted
into 1.3 shares of Washington Mutual, Inc. common stock.

65
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTEconsummated on March 1, 2002.
76

Note 3: SECURITIESSecurities
The amortized cost, unrealized gains, unrealized losses, and fair value of securities were as follows:
DECEMBER 31, 2000
------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE YIELD(1)
--------- ---------- ---------- ------- --------
(DOLLARS IN MILLIONS)

AVAILABLE-FOR-SALE SECURITIES
Investment securities:
U.S. Government and agency............ $ 1,432 $ 39 $ (1) $ 1,470 6.28%
Corporate debt........................ 118 -- (1) 117 6.22
Municipal............................. 40 1 (1) 40 6.04
Equity securities:
Preferred stock.................... 178 1 (5) 174 6.16
Other securities................... 15 -- (6) 9 --
------- ---- ----- -------
1,783 41 (14) 1,810
MBS:
U.S. Government and agency............ 24,639 123 (191) 24,571 6.78
Private issue......................... 15,866 64 (152) 15,778 7.08
------- ---- ----- -------
40,505 187 (343) 40,349
------- ---- ----- -------
$42,288 $228 $(357) $42,159 6.87
======= ==== ===== =======
HELD-TO-MATURITY SECURITIES
Investment securities:
Corporate debt........................ $ 20 $ -- $ -- $ 20 7.98%
Municipal............................. 117 3 (1) 119 5.48
------- ---- ----- -------
137 3 (1) 139
MBS:
U.S. Government and agency............ 10,211 30 (107) 10,134 7.04
Private issue......................... 6,217 49 (53) 6,213 6.96
------- ---- ----- -------
16,428 79 (160) 16,347
------- ---- ----- -------
$16,565 $ 82 $(161) $16,486 7.00
======= ==== ===== =======

- ---------------
December 31, 2001
Amortized
Cost Unrealized
Gains Unrealized
Losses Fair
Value Yield⁽¹⁾
(dollars in millions)

Available-for-sale securities
Investment securities:
U.S. Government and agency $ 30,459 $ 41 $ (1,143 ) $ 29,357 5.50 %
Other securities 256 5 (3 ) 258 5.92
Equity securities 171 2 (7 ) 166 5.41
Total investment securities 30,886 48 (1,153 ) 29,781 5.50
MBS:
U.S. Government and agency 17,780 441 (23 ) 18,198 6.05
Private issue 10,117 264 (11 ) 10,370 6.25
Total MBS securities 27,897 705 (34 ) 28,568 6.12
Total available-for-sale securities $ 58,783 $ 753 $ (1,187 ) $ 58,349 5.80
⁽¹⁾
Weighted average yield at end of year based on the amortized cost of the securities.

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1999
------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE YIELD(1)
--------- ---------- ---------- ------- --------
(DOLLARS IN MILLIONS)

AVAILABLE-FOR-SALE SECURITIES
Investment securities:
U.S. Government and agency............ $ 60 $-- $ (3) $ 57 5.18%
Corporate debt........................ 163 -- -- 163 6.19
Municipal............................. 7 -- -- 7 5.59
Equity securities:
Preferred stock.................... 189 2 (8) 183 6.13
Other securities................... 7 -- (5) 2 --
------- --- ------- -------
426 2 (16) 412 6.27
MBS:
U.S. Government and agency............ 27,883 17 (703) 27,197 6.33
Private issue......................... 14,255 5 (484) 13,776 6.61
------- --- ------- -------
42,138 22 (1,187) 40,973 6.43
------- --- ------- -------
$42,564 $24 $(1,203) $41,385 6.42
======= === ======= =======
HELD-TO-MATURITY SECURITIES
Investment securities:
Corporate debt........................ $ 20 $-- $ (1) $ 19 7.97%
Municipal............................. 118 2 (3) 117 5.52
------- --- ------- -------
138 2 (4) 136 5.88
MBS:
U.S. Government and agency............ 11,990 52 (283) 11,759 6.41
Private issue......................... 7,273 -- (131) 7,142 6.52
------- --- ------- -------
19,263 52 (414) 18,901 6.45
------- --- ------- -------
$19,401 $54 $ (418) $19,037 6.45
======= === ======= =======

- ---------------

December 31, 2000
Amortized
Cost Unrealized
Gains Unrealized
Losses Fair
Value Yield⁽¹⁾
(dollars in millions)

Available-for-sale securities
Investment securities:
U.S. Government and agency $ 1,432 $ 39 $ (1 ) $ 1,470 6.28 %
Other securities 158 1 (2 ) 157 6.48
Equity securities 193 1 (11 ) 183 5.88
Total investment securities 1,783 41 (14 ) 1,810 6.26
MBS:
U.S. Government and agency 24,639 123 (191 ) 24,571 6.78
Private issue 15,866 64 (152 ) 15,778 7.08
Total MBS securities 40,505 187 (343 ) 40,349 6.90
Total available-for-sale securities $ 42,288 $ 228 $ (357 ) $ 42,159 6.87
Held-to-maturity securities
Investment securities:
Other securities $ 137 $ 3 $ (1 ) $ 139 5.85
Total investment securities 137 3 (1 ) 139 5.85
MBS:
U.S. Government and agency 10,211 30 (107 ) 10,134 7.04
Private issue 6,217 49 (53 ) 6,213 6.96
Total MBS securities 16,428 79 (160 ) 16,347 7.01
Total held-to-maturity securities $ 16,565 $ 82 $ (161 ) $ 16,486 7.00
⁽¹⁾
Weighted average yield at end of year based on the amortized cost of the securities.

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
77
Fair value of debt securities by contractual maturity was as follows:
DECEMBER 31, 2000
-----------------------------------------------------------------------------
DUE AFTER ONE AFTER FIVE
FAIR WITHIN BUT WITHIN BUT WITHIN
VALUE YIELD(1) ONE YEAR YIELD(1) FIVE YEARS YIELD(1) TEN YEARS
------- -------- -------- -------- ---------- -------- ----------
(DOLLARS IN MILLIONS)

AVAILABLE-FOR-SALE SECURITIES
Investment securities:
U.S. Government and
agency................... $ 1,470 6.28% $ -- --% $240 5.97% $1,224
Corporate debt............. 117 6.22 17 6.18 67 6.33 11
Municipal.................. 40 6.04 -- -- -- -- --
MBS(2):
U.S. Government and
agency................... 24,571 6.78 151 7.63 355 7.66 217
Private issue.............. 15,778 7.08 -- -- -- -- --
------- ---- ---- ------
$41,976 6.87 $168 7.48 $662 6.91 $1,452
======= ==== ==== ======
HELD-TO-MATURITY SECURITIES
Investment securities:
Corporate debt............. $ 20 7.98% $ -- --% $ -- --% $ --
Municipal.................. 119 5.48 4 5.34 14 5.45 20
MBS(2):
U.S. Government and
agency................... 10,134 7.04 -- -- 6 6.78 78
Private issue.............. 6,213 6.96 18 6.55 -- -- 3
------- ---- ---- ------
$16,486 7.00 $ 22 6.34 $ 20 5.86 $ 101
======= ==== ==== ======

DECEMBER 31, 2000
-------------------------------

AFTER
YIELD(1) TEN YEARS YIELD(1)
-------- --------- --------
(DOLLARS IN MILLIONS)

AVAILABLE-FOR-SALE SECURITIES
Investment securities:
U.S. Government and
agency................... 6.34% $ 6 7.42%
Corporate debt............. 6.56 22 7.48
Municipal.................. -- 40 6.04
MBS(2):
U.S. Government and
agency................... 5.98 23,848 6.77
Private issue.............. -- 15,778 7.08
-------
6.29 $39,694 6.89
=======
HELD-TO-MATURITY SECURITIES
Investment securities:
Corporate debt............. --% $ 20 7.98%
Municipal.................. 5.54 81 5.48
MBS(2):
U.S. Government and
agency................... 6.62 10,050 7.04
Private issue.............. 7.60 6,192 6.96
-------
6.44 $16,343 7.00
=======

Amortized cost of debt securities by contractual maturity was as follows:

DECEMBER 31, 2000
-------------------------------------------------------------------------------
DUE AFTER ONE AFTER FIVE
AMORTIZED WITHIN BUT WITHIN BUT WITHIN
COST YIELD(1) ONE YEAR YIELD(1) FIVE YEARS YIELD(1) TEN YEARS
--------- -------- -------- -------- ---------- -------- ----------
(DOLLARS IN MILLIONS)

AVAILABLE-FOR-SALE SECURITIES
Investment securities:
U.S. Government and agency... $ 1,432 6.28% $ -- --% $238 5.97% $1,188
Corporate debt............... 118 6.22 17 6.18 68 6.34 11
Municipal.................... 40 6.04 -- -- -- -- --
MBS(2):
U.S. Government and agency... 24,639 6.78 151 7.63 354 7.66 217
Private issue................ 15,866 7.08 -- -- -- -- --
------- ---- ---- ------
$42,095 6.87 $168 7.48 $660 6.91 $1,416
======= ==== ==== ======
HELD-TO-MATURITY SECURITIES
Investment securities:
Corporate debt............... $ 20 7.98% $ -- --% $ -- --% $ --
Municipal.................... 117 5.48 4 5.34 14 5.45 19
MBS(2):
U.S. Government and agency... 10,211 7.04 -- -- 6 6.78 78
Private issue................ 6,217 6.96 18 6.55 -- -- 3
------- ---- ---- ------
$16,565 7.00 $ 22 6.34 $ 20 5.86 $ 100
======= ==== ==== ======

DECEMBER 31, 2000
-------------------------------

AFTER
YIELD(1) TEN YEARS YIELD(1)
-------- --------- --------
(DOLLARS IN MILLIONS)

AVAILABLE-FOR-SALE SECURITIES
Investment securities:
U.S. Government and agency... 6.34% $ 6 7.42%
Corporate debt............... 6.56 22 7.48
Municipal.................... -- 40 6.04
MBS(2):
U.S. Government and agency... 5.98 23,917 6.77
Private issue................ -- 15,866 7.08
-------
6.29 $39,851 6.89
=======
HELD-TO-MATURITY SECURITIES
Investment securities:
Corporate debt............... --% $ 20 7.98%
Municipal.................... 5.54 80 5.48
MBS(2):
U.S. Government and agency... 6.62 10,127 7.04
Private issue................ 7.60 6,196 6.96
-------
6.44 $16,423 7.00
=======

- ---------------
December 31, 2001
Total
Amount Yield⁽¹⁾ Due Within
One Year Yield⁽¹⁾ After One
But Within
Five Years Yield⁽¹⁾ After Five
But Within
Ten Years Yield⁽¹⁾ After
Ten Years Yield⁽¹⁾
(dollars in millions)

Available-for-sale securities
Investment securities:
U.S. Government and agency $ 29,357 5.50 % $ 13 6.34 % $ 1,980 3.94 % $ 25,547 5.58 % $ 1,817 5.97 %
Other securities 258 5.92 11 6.21 62 6.17 33 5.62 152 5.86
Equity securities 166 5.41 155 5.82 11 6.31 - - - -
Total investment securities 29,781 5.50 179 5.88 2,053 4.02 25,580 5.58 1,969 5.96
MBS⁽²⁾:
U.S. Government and agency 18,198 6.05 115 6.48 171 6.45 223 6.08 17,689 6.04
Private issue 10,370 6.25 - - - - 2 7.42 10,368 6.25
Total MBS securities 28,568 6.12 115 6.48 171 6.45 225 6.09 28,057 6.12
Total fair value of available-for-sale securities $ 58,349 5.80 $ 294 6.18 $ 2,224 4.20 $ 25,805 5.58 $ 30,026 6.11
⁽¹⁾
Weighted average yield at end of year based on the amortized cost of the securities.
⁽²⁾
MBS were allocated based on contractual principal maturities assuming no prepayments.
In addition to U.S. Government and agency MBS, the securities portfolio contained investment grade private issue MBS of $16.66$9.02 billion at December 31, 2001, which included $6.25 billion of MBS originated by Washington Mutual Bank, FA ("WMBFA"), and $14.40$16.66 billion at December 31, 2000, and 1999. At December 31, 2000, the Company had private issuewhich included $14.64 billion of MBS from the
following issuers, each of which exceeded 10% of the Company's equity: General
Electric Capital Mortgage Services with an amortized cost of $1.12 billion and a
fair value of $1.11 billion;

68
71
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Norwest Asset Securities Corp. with an amortized cost of $1.05 billion and a
fair value of $1.03 billion; and Residential Funding Mortgage Services Inc. with
an amortized cost of $1.23 billion and a fair value of $1.21 billion; and
Washington Mutual Bank, FA, with an amortized cost of $14.61 billion and a fair
value of $14.64 billion.originated by WMBFA.
Proceeds from sales of securities in the available-for-sale portfolio during 2001, 2000 and 1999 and 1998 were $50.18 billion, $4.14 billion and $1.44 billionbillion. The Company realized $800 million in gains and $2.16 billion.$95 million in losses on these sales during 2001. The Company realized $27 million in gains and $29 million in losses on these
sales during 2000. TheSimilarly, the Company realized $4 million in gains and $13 million in losses on sales during 1999. Similarly, the Company realized $19 million in
gains and $1 million in losses during 1998.
Pledged securities having a fair value of $33.07$38.65 billion and an amortized cost of $33.22$39.32 billion are also subject to certain agreements which may allow the secured party to either sell, rehypothecate or otherwise pledge the securities. In accordance with SFAS No. 140, theseThese amounts have been separately identified in the statement of financial condition.condition as encumbered. In addition, securities with an amortized cost of $13.21$5.40 billion and a fair value of $13.03$5.62 billion were pledged to secure public deposits, other borrowings, FHLB advances and access to the Federal Reserve discount window. The Company had not accepted any securities as collateral that it was permitted to sell or repledge as of December 31, 2000.
With the adoption of SFAS No. 133 on January 1, 2001, the Company reclassified
its entire held-to-maturity MBS and investment portfolios of $16.57 billion to
available for sale.

NOTE2001.
78

Note 4: LOANS

Loans Held in Portfolio
Loans held in portfolio consisted of the following:
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
LOAN BALANCE(1) LOAN COMMITMENTS(2)
-------------------- --------------------
(IN MILLIONS)

SFR............................................... $ 83,113 $ 80,628 $ 2,722 $ 3,528
SFR construction.................................. 1,431 1,243 958 966
Second mortgage and other consumer:
Banking subsidiaries............................ 7,992 6,393 5,192 3,777
Washington Mutual Finance....................... 2,486 2,134 240 251
Specialty mortgage finance........................ 7,254 4,452 487 427
Commercial business............................... 2,274 1,452 1,076 952
Commercial real estate:
Apartment buildings............................. 15,658 15,261 184 185
Other commercial real estate.................... 2,822 2,977 50 203
Allowance for loan and lease losses............... (1,014) (1,042) -- --
Outstanding letters of credit..................... -- -- 327 292
-------- -------- ------- -------
$122,016 $113,498 $11,236 $10,581
======== ======== ======= =======

- ---------------
December 31,
2001 2000
Loan Balance⁽¹⁾
(in millions)

Loans held in portfolio:
SFR $ 82,021 $ 80,181
Specialty mortgage finance⁽²⁾ 9,821 6,783
Total SFR loans 91,842 86,964
SFR construction:
Builder⁽³⁾ 2,127 1,040
Custom⁽⁴⁾ 475 391
Second mortgage and other consumer:
Home equity lines and loans 9,320 6,521
Other 3,728 3,957
Commercial business 5,390 2,274
Commercial real estate⁽⁵⁾:
Multi-family 15,608 15,657
Other commercial real estate 4,501 2,822
Total loans held in portfolio $ 132,991 $ 119,626
⁽¹⁾
Includes net unamortized deferred loan origination costs of $537 million at December 31, 2001 and $401 million at December 31, 2000 and $186 million at December 31, 1999.

2000.
⁽²⁾
Includes commitments by the Company to originatepurchased subprime loans as well as undisbursed amountsfirst mortgages originated by Washington Mutual Finance Corporation ("Washington Mutual Finance").
⁽³⁾
Represents loans to builders for the purpose of closed loans.

69
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)financing the acquisition, development and construction of single-family residences for sale.
⁽⁴⁾
Represents construction loans made directly to the intended occupant of a single-family residence.
⁽⁵⁾
Includes commercial real estate construction balances of $993 million in 2001 and $267 million in 2000.
The amount of impaired loans and the related allowances were as follows:
DECEMBER 31,
--------------
2000 1999
----- -----
(IN MILLIONS)

Impaired loans:
With allowances........................................... $226 $305
Without allowances........................................ 285 316
---- ----
$511 $621
==== ====
Allowance for impaired loans................................ $ 40 $ 82
December 31,
2001 2000
(in millions)

Impaired loans:
With allowances $ 358 $ 226
Without allowances 713 285
$ 1,071 $ 511
Allowance for impaired loans $ 69 $ 40 The average balance of impaired loans and the related interest income recognized were as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(IN MILLIONS)

Average balance of impaired loans........................... $566 $670 $834
Interest income recognized.................................. 38 46 59
Year Ended December 31,
2001 2000 1999
(in millions)

Average balance of impaired loans $ 910 $ 566 $ 670
Interest income recognized 76 38 4679
Loans totaling $62.43$73.17 billion and $69.34$62.43 billion at December 31, 20002001 and 19992000 were pledged to secure advances from FHLBs.

70
73
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,
--------------------------
2000 1999 1998
------ ------ ------
(IN MILLIONS)

Balance, beginning of year............................... $1,042 $1,068 $1,048
Provision for loan and lease losses...................... 185 167 162
Identified allowance for loans sold or securitized....... (36) (1) (74)
Allowance acquired through business combinations......... -- -- 108
------ ------ ------
1,191 1,234 1,244
Loans charged off:
SFR and SFR construction............................... (20) (38) (66)
Second mortgage and other consumer:
Banking subsidiaries................................ (43) (46) (34)
Washington Mutual Finance........................... (120) (97) (90)
Specialty mortgage finance............................. (5) -- --
Commercial business.................................... (11) (5) (5)
Commercial real estate:
Apartments.......................................... (2) (15) (22)
Other commercial real estate........................ (2) (22) (10)
------ ------ ------
Total charge offs.............................. (203) (223) (227)
Recoveries of loans previously charged off:
SFR and SFR construction............................... 1 4 18
Second mortgage and other consumer:
Banking subsidiaries................................ 4 3 2
Washington Mutual Finance........................... 17 16 16
Specialty mortgage finance............................. 1 -- --
Commercial business.................................... 1 1 1
Commercial real estate:
Apartments.......................................... 1 3 6
Other commercial real estate........................ 1 4 8
------ ------ ------
Total recoveries............................... 26 31 51
------ ------ ------
Net charge offs.......................................... (177) (192) (176)
------ ------ ------
Balance, end of year..................................... $1,014 $1,042 $1,068
====== ====== ======

Changes
Year Ended December 31,
2001 2000 1999
(in millions)

Balance, beginning of year $ 1,014 $ 1,042 $ 1,068
Allowance acquired through business combinations/other 120 (36 ) (1 )
Provision for loan and lease losses 575 185 167
1,709 1,191 1,234
Loans charged off:
SFR (29 ) (19 ) (38 )
Specialty mortgage finance⁽¹⁾ (26 ) (5 ) -
Total SFR charge offs (55 ) (24 ) (38 )
SFR construction⁽²⁾ - (1 ) -
Second mortgage and other consumer (200 ) (163 ) (143 )
Commercial business (74 ) (11 ) (5 )
Commercial real estate:
Multi-family - (2 ) (15 )
Other commercial real estate (10 ) (2 ) (22 )
Total charge offs (339 ) (203 ) (223 )
Recoveries of loans previously charged off:
SFR 2 1 4
Specialty mortgage finance⁽¹⁾ - 1 -
Total SFR recoveries 2 2 4
Second mortgage and other consumer 23 21 19
Commercial business 6 1 1
Commercial real estate:
Multi-family - 1 3
Other commercial real estate 3 1 4
Total recoveries 34 26 31
Net charge offs (305 ) (177 ) (192 )
Balance, end of year $ 1,404 $ 1,014 $ 1,042
⁽¹⁾
Includes purchased sub-prime loans as well as first mortgages originated by Washington Mutual Finance and Long Beach Mortgage.
⁽²⁾
Includes custom construction loans to the intended occupant of a house to finance the house's construction and residential builder construction loans to borrowers who are in the allowancebusiness of acquiring land and building homes for recourse obligations were as follows:

YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(IN MILLIONS)

Balance, beginning of year.................................. $113 $144 $ 80
Transfers................................................... -- (15) 74
Charge offs, net of provision for recourse losses........... (9) (16) (10)
---- ---- ----
Balance, end of year........................................ $104 $113 $144
==== ==== ====
resale.
80
Note 5: Mortgage Banking Activities
During 1998, in connection with the Ahmanson Merger, $74 million was
transferred from the allowance for loan2001 and lease losses to the allowance for
recourse obligations to conform with Washington Mutual's policy.

71
74
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5: MORTGAGE BANKING ACTIVITIES

During 2000, the Company sold residential mortgage loans in securitization transactions and retained servicing responsibilities as well as senior and subordinated interests. The Company receives annual servicing fees equal to a percentage of the outstanding balance and rights to cash flows remaining after the investors in the securitization trust have received their contractual payments. The book
balanceallocated carrying value of loans securitized and sold during the yearyears ended December 31, 2001 and 2000 waswere $102.05 billion and $16.90 billion.billion, respectively. Of thosethe loans $812 million aresecuritized and sold during the years ended December 31, 2001 and 2000, the amounts held by investors and securitization trusts that have recourse to the Company.Company totaled zero and $812 million. The Company recognized pretax gains of $189$899 million on these securitizations. The Company's retained
interests are subordinate to investors' interests.securitizations for 2001 and $189 million for 2000. During 2001, the Company sold $5.75 billion allocated carrying value of loans securitized in prior years and recorded pretax gains of $103 million from these sales.
Key economic assumptions used in measuring the value of allretained interests (excluding MSR) resulting from securitizations completed during the retained
interestsyears ended December 31, 2001 and 2000, and accounted for as sales (excluding MSR) at the date of securitization, during the year were as follows (rates are per annum and are weighted based on the principal amounts securitized):
YEAR ENDED DECEMBER 31, 2000
-------------------------------------------
ADJUSTABLE-RATE MORTGAGE LOANS
------------------------------
GOVERNMENT NON-GOVERNMENT SPECIALTY
SPONSORED SPONSORED MORTGAGE
ENTERPRISE ENTERPRISE FINANCE
----------- --------------- ---------
(DOLLARS IN MILLIONS)

Constant prepayment rate ("CPR")............... 20.00% 20.00% 33.30%
Weighted-average life (in years)............... 8.3 9.7 9.1
Spread to risk free rate(1).................... 1.20 2.98 n.a.
Risk free rate................................. 5.45 4.92 n.a.
Expected annual credit losses as a percentage
of average principal balance................. n.a. n.a. 2.82
Residual cash flows discounted at.............. n.a. n.a. 30.00
Other(2)....................................... $ 3 $ (26) n.a.

- ---------------
Adjustable-Rate
Mortgage Loans
Government
Sponsored
Enterprise Non-Government
Sponsored
Enterprise Specialty
Home
Loans
(dollars in millions)

Year Ended December 31, 2001
Constant prepayment rate ("CPR")⁽¹⁾ - 23.22 % 33.70 %
Weighted-average life (in years) - 3.6 2.1
Discount rate⁽²⁾ - 5.45 % 30.00 %
Expected annual credit losses as a percentage of average principal balance - - 5.54

Year Ended December 31, 2000
CPR⁽¹⁾ 20.00 % 20.00 % 33.30 %
Weighted-average life (in years) 8.3 9.7 9.1
Discount rate⁽²⁾ 6.65 % 7.90 % 30.00 %
Expected annual credit losses as a percentage of average principal balance - - 2.82
Other⁽³⁾ $ 3 $ (26 ) $ -
⁽¹⁾
Represents the Company'sexpected lifetime average.
⁽²⁾
Represents the return of U.S. Treasury instruments of a particular duration plus an estimate of the incremental rate of return over the
U.S. Treasurythose instruments of similar duration demanded by investors taking into consideration the additional risks (e.g., credit or liquidity) associated with a particular security.

(2)
⁽³⁾
Represents the assumed value/(cost) of a hypothetical derivative used to reduce the LIBORLondon Interbank Offered Rates ("LIBOR") to COFIthe 11th District FHLB monthly weighted-average cost of funds index ("COFI") basis risk inherent in certain retained interests. The assumed value/(cost) of the hypothetical derivative was included in the determination of the fair value of the retained interests.

Key economic
Static pool losses are calculated by summing the actual and projected future credit losses and dividing them by the original balance of each pool of assets. As of December 31, 2001, static pool losses for all adjustable- and fixed-rate government and non-government sponsored enterprise assets and specialty home loans assets that were valued using specific credit loss assumptions used in measuring the value of all capitalized MSR
created during the year, inclusive of securitizations recorded as sales,
securitizations entirely retained, and whole loan sales, were as follows (rates
per annum):

YEAR ENDED DECEMBER 31, 2000
---------------------------------------------------------------------------
FIXED-RATE MORTGAGE LOANS ADJUSTABLE-RATE MORTGAGE LOANS
---------------------------- ------------------------------
GOVERNMENT NON-GOVERNMENT GOVERNMENT NON-GOVERNMENT SPECIALTY
SPONSORED SPONSORED SPONSORED SPONSORED MORTGAGE
ENTERPRISE ENTERPRISE ENTERPRISE ENTERPRISE FINANCE
---------- -------------- ----------- --------------- ---------

CPR......................... 10.50% 12.00% 23.00% 24.00% 30.90%
Cash flows discounted at.... 9.50 12.00 13.00 13.00 14.00

72
75
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)not material.
81

At December 31, 2000,2001, 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:
DECEMBER 31, 2000
------------------------------------------------
FIXED-RATE ADJUSTABLE-RATE MORTGAGE LOANS
-------------- ------------------------------
NON-GOVERNMENT GOVERNMENT NON-GOVERNMENT
SPONSORED SPONSORED SPONSORED
ENTERPRISE ENTERPRISE ENTERPRISE
-------------- ----------- ---------------
(DOLLARS IN MILLIONS)

Fair value of retained interests.......... $ 932 $1,103 $1,951
Weighted-average life (in years).......... 6.9 8.8 9.5

CPR....................................... 11.00% 18.00% 17.01%
Impact on fair value of 25% decrease.... $ 1 $ 6 $ 6
Impact on fair value of 50% decrease.... 3 14 19
Impact on fair value of 100% increase... 1 (14) (9)
Impact on fair value of 200% increase... 2 (21) (10)

Spread to risk free rate(1)............... 1.42% 1.37% 2.46%
Impact on fair value of 10% decrease.... $ 7 $ 10 $ 25
Impact on fair value of 25% decrease.... 19 23 70
Impact on fair value of 25% increase.... (18) (23) (67)
Impact on fair value of 50% increase.... (35) (45) (129)

Risk free rate............................ 5.55% 5.55% 5.55%
Impact on fair value of 10% decrease.... $ 24 $ 5 $ 11
Impact on fair value of 25% decrease.... 64 12 28
Impact on fair value of 25% increase.... (56) (12) (28)
Impact on fair value of 50% increase.... (107) (24) (53)

Other(2).................................. n.a. 9 (43)
Impact on fair value of 10% decrease.... n.a. 8 6
Impact on fair value of 25% decrease.... n.a. 13 15
Impact on fair value of 25% increase.... n.a. (11) (15)
Impact on fair value of 50% increase.... n.a. (24) (31)

- ---------------
December 31, 2001
Fixed-Rate
Mortgage Loans Adjustable-Rate
Mortgage Loans
Non-Government
Sponsored
Enterprise Government
Sponsored
Enterprise Non-Government
Sponsored
Enterprise Specialty
Home
Loans
(dollars in millions)

Fair value of retained interests $ 442 $ 1,122 $ 5,226 $ 90
Weighted-average life (in years) 5.4 6.8 3.4 2.2
CPR⁽¹⁾ 15.00 % 20.00 % 29.00 % 33.90 %
Impact on fair value of 25% decrease $ 1 $ 12 $ 39 $ 12
Impact on fair value of 50% decrease 2 29 101 52
Impact on fair value of 25% increase - - - (9 )
Impact on fair value of 50% increase (2 ) (17 ) (51 ) (18 )
Impact on fair value of 100% increase (2 ) (28 ) (83 ) -
Discount rate 6.51 % 4.54 % 4.68 % 30.00 %
Impact on fair value of 10% decrease $ 12 $ 1 $ 2 $ 4
Impact on fair value of 25% decrease 31 1 6 10
Impact on fair value of 25% increase (27 ) (1 ) (6 ) (8 )
Impact on fair value of 50% increase (51 ) (3 ) (12 ) (15 )
Expected credit losses as a percentage of average principal balance - - - 5.54 %
Impact on fair value of 25% decrease - - - $ 28
Impact on fair value of 50% decrease - - - 67
Impact on fair value of 25% increase - - - (26 )
Impact on fair value of 50% increase - - - (53 )
Other⁽²⁾ - $ 20 $ 37 -
Impact on fair value of 10% decrease - (2 ) (4 ) -
Impact on fair value of 25% decrease - (5 ) (9 ) -
Impact on fair value of 25% increase - 5 9 -
Impact on fair value of 50% increase - 10 19 -
⁽¹⁾
Represents the Company's estimate of the incremental rate of return over the
U.S. Treasury instruments of similar duration demanded by investors taking
into consideration the additional risks (e.g., credit or liquidity)
associated with a particular security.

expected lifetime average.
⁽²⁾
Represents the assumed value/(cost)value of a hypothetical derivative used to
reduce thepay LIBOR, toreceive COFI basis risk inherentswaps embedded in certainthe retained interests. The assumed value/(cost) of the hypothetical derivative was included in the
determination of the fairaggregate notional value of the retained interests.

Atsuch basis swaps at December 31, 2000, Specialty2001 was $2.19 billion for Adjustable-Rate Non-Government Sponsored Enterprise Mortgage FinanceLoans and $1.24 billion for Adjustable-Rate Government Sponsored Enterprise Mortgage Loans.
In 2001, the Company recognized $58 million in pretax gains for specialty home loans retained interests that are marked to market through earnings.
82

The table below summarizes retained interests (excluding MSR) categorized by credit rating:
December 31, 2001
(in millions)

Credit rating:
AAA $ 4,639
Agency insured 1,122
BBB 7
Not rated 1,112
Total $ 6,880
Key economic assumptions used in measuring the value of all capitalized MSR created during the years ended December 31, 2001 and 2000, including securitizations recorded as sales, securitizations entirely retained, and whole loan sales, were not material.

73
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)as follows (rates per annum):
Fixed-Rate
Mortgage Loans Adjustable-Rate
Mortgage Loans
Government
Sponsored
Enterprise Non-Government
Sponsored
Enterprise Government
Sponsored
Enterprise Non-Government
Sponsored
Enterprise Specialty
Home
Loans
Year Ended December 31, 2001
CPR⁽¹⁾ 9.50 % 10.50 % 28.00 % 23.00 % 32.00 %
Cash flows discounted at (base MSR) 9.00 11.00 12.00 15.00 14.00
Cash flows discounted at (excess MSR) 12.00 19.00 13.00 18.00 n.a.

Year Ended December 31, 2000
CPR⁽¹⁾ 10.50 % 12.00 % 23.00 % 24.00 % 30.90 %
Cash flows discounted at 9.50 12.00 13.00 13.00 14.00
⁽¹⁾
Represents the expected lifetime average.
83
At December 31, 2000,2001, key economic assumptions and the sensitivity of the current fair value for all capitalized MSR to immediate changes in those assumptions were as follows:
DECEMBER 31, 2000
----------------------------------
MORTGAGE SERVICING RIGHTS
----------------------------------
ADJUSTABLE- FIXED- SPECIALTY
RATE RATE MORTGAGE
LOANS LOANS FINANCE
----------- ------ ---------
(DOLLARS IN MILLIONS)

Fair value of capitalized MSR......................... $ 513 $ 580 $ 32
Weighted-average life (in years)...................... 4.1 5.7 2.6
CPR................................................... 19.20% 10.60% 30.60%
Impact on fair value of 25% decrease................ $ 67 $ 124 $ 5
Impact on fair value of 50% decrease................ 164 275 13
Impact on fair value of 100% increase............... (142) (276) n.a.
Impact on fair value of 200% increase............... (206) (384) n.a.
Impact on fair value of 25% increase................ n.a. n.a. (4)
Impact on fair value of 50% increase................ n.a. n.a. (7)
Future cash flows discounted at....................... 12.00% 10.70% 14.00%
Impact on fair value of 10% decrease................ n.a. n.a. 1
Impact on fair value of 25% decrease................ $ 14 $ 40 $ 2
Impact on fair value of 50% decrease................ 29 81 n.a.
Impact on fair value of 25% increase................ (14) (37) (2)
Impact on fair value of 50% increase................ (29) (74) (3)
December 31, 2001
Mortgage Servicing Rights
Adjustable-Rate
Loans Fixed-Rate
Loans Specialty
Home Loans
(dollars in millions)

Fair value of capitalized MSR $ 885 $ 5,332 $ 49
Weighted-average life (in years) 4.4 5.3 2.1
CPR⁽¹⁾ 17.55 % 15.42 % 36.90 %
Impact on fair value of 25% decrease $ 152 $ 879 $ 8
Impact on fair value of 50% decrease 341 2,009 20
Impact on fair value of 100% increase (426 ) (2,101 ) -
Impact on fair value of 200% increase (657 ) (2,970 ) -
Impact on fair value of 25% increase - - (6 )
Impact on fair value of 50% increase - - (11 )
Future cash flows discounted at 13.25 % 10.38 % 14.00 %
Impact on fair value of 10% decrease $ - $ - $ 1
Impact on fair value of 25% decrease 95 525 2
Impact on fair value of 50% decrease 218 1,179 -
Impact on fair value of 25% increase (75 ) (431 ) (2 )
Impact on fair value of 50% increase (136 ) (791 ) (4 )
⁽¹⁾
Represents the expected lifetime average.
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a variation 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 interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which mightmay magnify or counteract the sensitivities.

Static pool losses are calculated by summing the actual and projected
future credit losses and dividing them by the original balance of each pool of
assets. As of December 31, 2000, static pool losses for all Adjustable
Non-Government Sponsored Enterprise assets and Specialty Mortgage Finance assets
that were valued using specific credit loss assumptions were not material.
The table below summarizes certain cash flows received from and paid to securitization trusts:
YEAR ENDED
DECEMBER 31, 2000
------------------
(IN MILLIONS)

Proceeds from new securitizations........................... $17,012
Principal and interest received on retained interests....... 360
Servicing fees received (1)................................. 276
Loan repurchases (1)........................................ 177

- ---------------
Year Ended December 31,
2001 2000
(in millions)

Proceeds from new securitization sales $ 109,188 $ 17,012
Principal and interest received on retained interests 1,633 360
Servicing fees received⁽¹⁾ 1,260 276
Loan repurchases⁽¹⁾ 1,502 177
⁽¹⁾
Amounts include cash received/paid related to all transfers of loans, including securitizations accounted for as sales, securitizations retained, and whole loan sales.

74
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
84
The tabletables below presentspresent quantitative information about delinquencies, net credit losses, and components of securitized financial assets and other assets managed together with them: (Excludesthem (excludes securitized assets that an entity continues to service but which it has no other continuing involvement.)

YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2000
--------------------------------------------- -----------------
UNPAID PRINCIPAL PRINCIPAL AMOUNT OF LOANS
BALANCE ON NONACCRUAL STATUS NET CREDIT LOSSES
---------------- ------------------------- -----------------
(IN MILLIONS)

Mortgage loans.................. $115,058 $563 $30
Specialty Mortgage Finance
loans......................... 6,005 267 9
-------- ---- ---
Total loans managed... $121,063 $830 $39
======== ==== ===
Comprised of:
Loans sold, including
securitizations............ $ 9,432
Loans held in portfolio....... 79,178
Loans securitized and
retained................... 32,453
--------
Total loans managed... $121,063
========
involvement):
December 31, 2001 Year Ended
December 31, 2001
Unpaid
Principal
Balance Principal Amount
of Loans on
Nonaccrual Status Net
Credit Losses
(in millions)

Mortgage loans $ 143,361 $ 1,289 $ 36
Specialty home loans 9,481 1,036 21
Total loans managed $ 152,842 $ 2,325 $ 57
Comprised of:
Loans sold, including securitizations $ 36,956
Loans held for sale and held in portfolio 101,995
Loans securitized and retained 13,891
Total loans managed $ 152,842

December 31, 2000
Year Ended December 31, 2000
Unpaid Principal Balance Principal Amount of Loans on Nonaccrual Status Net
Credit Losses
(in millions)

Mortgage loans $ 115,058 $ 563 $ 30
Specialty home loans 6,005 267 9
Total loans managed $ 121,063 $ 830 $ 39
Comprised of:
Loans sold, including securitizations $ 9,432
Loans held for sale and held in portfolio 79,178
Loans securitized and retained 32,453
Total loans managed $ 121,063
85
SFR mortgage banking (expense) income consisted of the following:
Year Ended December 31,
2001 2000 1999
(in millions)

Loan servicing fees $ 1,375 $ 295 $ 291
Amortization of MSR (1,006 ) (133 ) (88 )
Impairment of MSR (1,749 ) (9 ) 4
Other, net (141 ) (19 ) (109 )
Net SFR loan servicing (expense) income (1,521 ) 134 98
Loan related income 156 35 30
Gain from mortgage loans 963 262 109
Gain from sale of originated MBS 117 2 -
Total SFR mortgage banking (expense) income $ (285 ) $ 433 $ 237
Changes in the balance of MSR, net of the valuation allowance, were as follows:
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999 1998
------- ----- -----
(IN MILLIONS)

Balance, beginning of year.................................. $ 643 $461 $311
Additions................................................... 516 266 240
Amortization of MSR......................................... (133) (88) (89)
Impairment adjustment....................................... (9) 4 (1)
------ ---- ----
Balance, end of year........................................ $1,017 $643 $461
====== ==== ====
Year Ended December 31,
2001 2000 1999
(in millions)

Balance, beginning of year $ 1,017 $ 643 $ 461
SFR:
Additions through acquisitions 4,818 - -
Additions 3,323 516 266
Amortization (1,006 ) (133 ) (88 )
Impairment adjustment (1,749 ) (9 ) 4
Sales (174 ) - -
Net change in commercial real estate MSR 12 - -
Balance, end of year⁽¹⁾ $ 6,241 $ 1,017 $ 643
⁽¹⁾
At December 31, 2001, 2000 the loan servicing portfolio with capitalizedand 1999, aggregate MSR totaled $79.34fair value was $6.27 billion, compared with $55.27$1.13 billion at December 31, 1999.and $825 million, respectively.
Changes in the valuation allowance for impairment of MSR were as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(IN MILLIONS)

Balance, beginning of year.................................. $ 4 $ 8 $7
Net change.................................................. 9 (4) 1
--- --- --
Balance, end of year........................................ $13 $ 4 $8
=== === ==
Year Ended December 31,
2001 2000 1999
(in millions)

Balance, beginning of year $ 13 $ 4 $ 8
Additions 1,749 9 -
Write-offs - - (4 )
Balance, end of year $ 1,762 $ 13 $ 4
86
Changes in the portfolio of loans serviced with MSR were as follows:
Year Ended December 31,
2001 2000
(in millions)

Balance, beginning of year $ 79,335 $ 55,268
SFR:
Additions through acquisitions 255,434 -
Additions 143,235 32,060
Sales (6,538 ) -
Loan payments and other (94,251 ) (7,993 )
Net change in commercial real estate loan servicing portfolio 1,168 -
Balance, end of year $ 378,383 $ 79,335
As of December 31, 2000,2001, the Company serviced 30639,959 Government National Mortgage Association ("GNMA") loan pools with an outstanding security balance of $179 million. The Company did not issue any additional GNMA loan pools during
2000.$61.48 billion.
As of December 31, 2000,2001, Long Beach Mortgage did not service any FHA-insured mortgage loans. Long Beach Mortgage also did not originate any FHA-insured mortgage loans during 2000.

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE2001.
Note 6: OTHER ASSETSOther Assets
Other assets consisted of the following:
DECEMBER 31,
----------------
2000 1999
------ ------
(IN MILLIONS)

Premises and equipment...................................... $1,568 $1,559
Investment in bank owned life insurance..................... 1,456 417
Accrued interest receivable................................. 1,157 980
Foreclosed assets........................................... 153 199
Other assets................................................ 1,659 1,275
------ ------
$5,993 $4,430
====== ======
Year Ended December 31,
2001 2000
(in millions)

Premises and equipment $ 1,999 $ 1,568
Investment in bank-owned life insurance 1,535 1,456
Accrued interest receivable 1,416 1,157
Foreclosed assets 228 153
GNMA early pool buy-outs 1,849 -
Other assets 3,213 1,659
Total other assets $ 10,240 $ 5,993
GNMA pool buy-outs are advances made to GNMA mortgage pools that are guaranteed by the Federal Housing Administration or by the Department of Veterans Affairs (collectively, the "guarantors"). These advances are made to buy out government agency-guaranteed delinquent loans, pursuant to the Company's servicing agreements. The Company, on behalf of the guarantors, undertakes the collection and foreclosure process. After the foreclosure process is complete, the Company is reimbursed for substantially all costs incurred, including the advances, by the guarantors. For certain guarantor loans, the Company may not be fully reimbursed and, accordingly, has a reserve of $42 million at December 31, 2001.
Depreciation expense for 2001, 2000 and 1999 and 1998 was $288 million, $246 million and $207 million
and $146 million.
The Company leases various branchfinancial center offices, office facilities and equipment under capital and noncancelable operating leases which expire at various dates through 2072.2071. Some leases contain escalation provisions for adjustments in the consumer price index and provide for renewal options for five- to
87

ten-year periods. Rental expense, including amounts paid under month-to-month cancelable leases, amounted to $289 million, $197 million and $191 million in 2001, 2000 and $183 million in 2000, 1999
and 1998.

Future minimum net rental commitments, including maintenance and other
associated costs, for all noncancelable leases were as follows:

OPERATING LEASE CAPITAL LEASE
-------------------------- --------------------------
LAND AND FURNITURE AND LAND AND FURNITURE AND
BUILDINGS EQUIPMENT BUILDINGS EQUIPMENT
--------- ------------- --------- -------------
(IN MILLIONS)

Year ending December 31,
2001................................ $ 159 $23 $ 8 $2
2002................................ 148 21 8 --
2003................................ 133 15 8 --
2004................................ 117 2 8 --
2005................................ 95 -- 6 --
Thereafter............................ 376 -- 48 --
------ --- --- --
$1,028 $61 $86 $2
====== === === ==

76
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE1999.
Note 7: DEPOSITSDeposits
Deposits consisted of the following:
DECEMBER 31,
------------------
2000 1999
------- -------
(IN MILLIONS)

Checking accounts:
Interest bearing.......................................... $ 5,925 $ 6,215
Noninterest bearing....................................... 8,575 7,275
------- -------
14,500 13,490
Savings accounts............................................ 5,436 5,654
MMDAs....................................................... 25,220 24,394
Time deposit accounts:
Due within one year....................................... 30,678 32,202
After one but within two years............................ 2,633 4,100
After two but within three years.......................... 440 764
After three but within four years......................... 254 210
After four but within five years.......................... 380 264
After five years.......................................... 33 52
------- -------
34,418 37,592
------- -------
$79,574 $81,130
======= =======
Year Ended December 31,
2001 2000
(in millions)

Checking accounts:
Interest bearing $ 15,350 $ 5,925
Noninterest bearing 22,386 8,575
37,736 14,500
Savings accounts 6,970 5,436
Money market deposit accounts ("MMDAs") 25,514 25,220
Time deposit accounts:
Due within one year 30,530 30,678
After one year but within two years 2,679 2,633
After two but within three years 1,732 440
After three but within four years 468 254
After four but within five years 976 380
After five years 577 33
36,962 34,418
Total deposits $ 107,182 $ 79,574
Accrued but unpaid interest on deposits included in other liabilities totaled $79$54 million and $68$79 million at December 31, 20002001 and 1999.

NOTE2000.
Note 8: FEDERAL FUNDS PURCHASED AND COMMERCIAL PAPERFederal Funds Purchased and Commercial Paper
Federal funds purchased and commercial paper consisted of the following:
DECEMBER 31,
--------------
2000 1999
------ ----
(IN MILLIONS)

Federal funds purchased..................................... $3,156 $525
Commercial paper............................................ 959 342
------ ----
$4,115 $867
====== ====
December 31,
2001 2000
(in millions)

Federal funds purchased $ 4,339 $ 3,156
Commercial paper 351 959
Total federal funds and commercial paper $ 4,690 $ 4,115
Federal funds purchased had remaining average maturities of 3342 days at December 31, 2000.2001. Commercial paper had remaining average maturities of 1714 days at December 31, 2000.

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)2001.
88

Financial data pertaining to federal funds purchased and commercial paper were as follows:
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)

FEDERAL FUNDS PURCHASED
Weighted average interest rate, end of year.............. 6.57% 5.74% 5.25%
Weighted average interest rate during the year........... 6.52 5.11 5.60
Average balance of federal funds purchased............... $2,856 $2,001 $3,758
Maximum amount outstanding at any month end.............. 6,668 2,836 6,070
COMMERCIAL PAPER
Weighted average interest rate, end of year.............. 6.95% 6.20% 5.63%
Weighted average interest rate during the year........... 6.51 5.54 5.65
Average balance of commercial paper...................... $ 586 $ 420 $ 364
Maximum amount outstanding at any month end.............. 959 651 516

NOTE
Year Ended December 31,
2001 2000 1999
(dollars in millions)

Federal funds purchased
Weighted average interest rate, end of year 2.02 % 6.57 % 5.74 %
Weighted average interest rate during the year 3.96 6.52 5.11
Average balance of federal funds purchased $ 4,337 $ 2,856 $ 2,001
Maximum amount outstanding at any month end 6,167 6,668 2,836
Commercial paper
Weighted average interest rate, end of year 3.03 % 6.95 % 6.20 %
Weighted average interest rate during the year 5.49 6.51 5.54
Average balance of commercial paper $ 469 $ 586 $ 420
Maximum amount outstanding at any month end 973 959 651 Note 9: REPURCHASE AGREEMENTSRepurchase Agreements
Scheduled maturities of repurchase agreements were as follows:
DECEMBER 31,
------------------
2000 1999
------- -------
(IN MILLIONS)

Due within 30 days.......................................... $ 7,125 $ 4,450
After 30 but within 90 days................................. 5,549 10,543
After 90 but within 180 days................................ 5,926 4,539
After 180 days but within one year.......................... 1,550 1,656
After one year.............................................. 9,606 8,975
------- -------
$29,756 $30,163
======= =======
December 31,
2001 2000
(in millions)

Due within 30 days $ 28,177 $ 7,125
After 30 but within 90 days 2,126 5,549
After 90 but within 180 days - 5,926
After 180 days but within one year 518 1,550
After one year 8,626 9,606
Total maturities of repurchase agreements $ 39,447 $ 29,756
Financial data pertaining to repurchase agreements were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)

Weighted average interest rate, end of year........... 6.61% 5.81% 5.38%
Weighted average interest rate during the year........ 6.33 5.36 5.67
Average balance of repurchase agreements.............. $28,491 $26,082 $17,695
Maximum amount outstanding at any month end........... 30,726 30,163 18,340
Year Ended December 31,
2001 2000 1999
(dollars in millions)

Weighted average interest rate, end of year 1.74 % 6.61 % 5.81 %
Weighted average interest rate during the year 4.04 6.33 5.36
Average balance of repurchase agreements $ 29,582 $ 28,491 $ 26,082
Maximum amount outstanding at any month end 39,447 30,726 30,163 89
At December 31, 2000,2001, interest rate floors, caps and capsswaptions embedded in repurchase agreements were as follows:
WEIGHTED WEIGHTED
AVERAGE INDEX AT AVERAGE
NOTIONAL AMOUNT STRIKE INDEX DECEMBER 31, 2000 LIFE(1)
--------------------- -------- ------------- ----------------- -----------
(DOLLARS IN MILLIONS) (IN MONTHS)

Floors(2)............ $13,200 5.99% 3 month LIBOR 6.40% 49
Caps(3).............. 680 7.62 3 month LIBOR 6.40 43

- ---------------
Notional Amount Weighted Average Strike Index Index at December 31, 2001 Weighted Average Remaining Life
(dollars in millions)

(in months)

Floors⁽¹⁾ $ 2,300 5.12 % 3 month LIBOR 1.88 % 41
Caps 640 7.64 3 month LIBOR 1.88 29
Swaptions 5,900 6.13 3 month LIBOR 1.88 19
^{(1) Weighted average life is computed from the}
$500 million notional amount of floors had a contractual start date to the
maturity date.

(2) Contractual start dates rangeof September 15, 2002.
Note 10: Advances from December 20, 2000 to July 17, 2003.

(3) Contractual start dates range from May 26, 2000 to January 15, 2001.

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10: ADVANCES FROM FHLBSFHLBs
As members of the FHLBs of San Francisco and Seattle, WMBFA, WMB,Washington Mutual Bank ("WMB"), and WMBfsbWashington Mutual Bank fsb ("WMBfsb") maintain credit lines that are percentages of their total regulatory assets, subject to collateralization requirements. Advances are collateralized in the aggregate by all stock owned of the FHLBs, by deposits with the FHLBs, and by certain mortgages or deeds of trust and securities of the U.S. Government and its agencies. The maximum amount of credit, which 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 upon maturity, the cost of funds in the individual FHLB and the purpose of the borrowing.
Scheduled maturities of advances from FHLBs were as follows:
DECEMBER 31,
----------------------------------------------------
2000 1999
------------------------ ------------------------
RANGES OF RANGES OF
INTEREST INTEREST
AMOUNT RATES AMOUNT RATES
------- ------------- ------- -------------
(DOLLARS IN MILLIONS)

Due within one year.............. $42,596 5.74% - 6.72% $34,107 4.50% - 9.34%
After one but within two years... 12,051 3.50 - 6.73 18,444 5.21 - 6.40
After two but within three
years.......................... 1,627 5.19 - 6.94 2,960 3.50 - 6.55
After three but within four
years.......................... 1,225 6.33 - 8.65 200 5.76 - 6.03
After four but within five
years.......................... 175 5.39 - 7.45 1,225 6.05 - 8.65
After five years................. 181 2.80 - 8.57 158 2.80 - 8.57
------- -------
$57,855 $57,094
======= =======
December 31,
2001 2000
Amount Ranges of Interest Rates Amount Ranges of Interest Rates
(dollars in millions)

Due within one year $ 36,676 1.75% - 8.04% $ 42,596 5.74% - 6.72%
After one but within two years 13,576 1.75 - 6.03 12,051 3.50 - 6.73
After two but within three years 6,338 1.82 - 8.65 1,627 5.19 - 6.94
After three but within four years 184 2.05 - 7.45 1,225 6.33 - 8.65
After four but within five years 4,211 1.85 - 5.32 175 5.39 - 7.45
After five years 197 2.80 - 8.57 181 2.80 - 8.57
Total advances from FHLBs $ 61,182 $ 57,855
Financial data pertaining to advances from FHLBs were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)

Weighted average interest rate, end of year........... 6.57% 5.92% 5.35%
Weighted average interest rate during the year........ 6.33 5.37 5.65
Average balance of advances from FHLBs................ $56,979 $47,008 $30,110
Maximum amount outstanding at any month end........... 59,325 57,094 39,749
Year Ended December 31,
2001 2000 1999
(dollars in millions)

Weighted average interest rate, end of year 2.45 % 6.57 % 5.92 %
Weighted average interest rate during the year 4.58 6.33 5.37
Average balance of advances from FHLBs $ 63,859 $ 56,979 $ 47,008
Maximum amount outstanding at any month end 67,281 59,325 57,094 90
At December 31, 2000,2001, interest rate caps embedded in advances from FHLBs were as follows:
WEIGHTED WEIGHTED
AVERAGE INDEX AT AVERAGE
NOTIONAL AMOUNT STRIKE INDEX DECEMBER 31, 2000 LIFE(1)
--------------- -------- ------------- ----------------- -----------
(DOLLARS IN MILLIONS) (IN MONTHS)

$71(2) 7.25% 3 month LIBOR 6.40% 37

- ---------------
(1) Weighted average life is computed from the contractual start date to the
maturity date.

(2) Contractual start date is July 20, 2000.

79
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE
Notional Amount Weighted Average
Strike Index Index at
December 31, 2001 Weighted Average Remaining Life
(dollars in millions)

(in months)

$56 7.25 % 3 month LIBOR 1.88 % 18
Note 11: OTHER BORROWINGSOther Borrowings
Other borrowings consisted of the following:
DECEMBER 31,
---------------------------------------------------
2000 1999
---------------------- -------------------------
INTEREST INTEREST
AMOUNT RATE(S) AMOUNT RATE(S)
------ ------------ ------ ---------------
(DOLLARS IN MILLIONS)

Senior notes:
Due in 2000....................... $ -- --% $ 552 6.13% - 7.65%
Due in 2001....................... 650 5.88 - 7.75 649 5.88 - 7.75
Due in 2002....................... 764 6.00 - 8.60 763 6.00 - 8.60
Due in 2003....................... 150 6.50 149 6.50
Due in 2004....................... 200 5.85 200 5.85
Due in 2005....................... 598 7.25 - 8.25 149 7.25
Due in 2006....................... 1,238 7.25 - 7.50 1,236 7.25 - 7.50
Subordinated notes:
Due in 2000....................... -- -- 325 5.23 - 6.15
Due in 2001....................... 150 9.88 150 9.88
Due in 2004....................... 548 6.50 - 7.88 548 6.50 - 7.88
Due in 2006....................... 99 6.63 99 6.63
Due in 2010....................... 495 8.25 -- --
Trust preferred securities(1):
Due in 2025....................... 100 8.25 99 8.25
Due in 2026....................... 149 8.36 149 8.36
Due in 2027....................... 694 8.21 - 8.38 693 8.21 - 8.38
Asset transfers accounted for as
secured financing due in 2001..... 4,044 6.67 -- --
Other............................... 51 4.20 - 15.21 442 4.20 - 15.20
------ ------
$9,930 $6,203
====== ======

- ---------------
December 31,
2001 2000
Amount Interest
Rate(s) Amount Interest
Rate(s)
(dollars in millions)

Senior notes⁽¹⁾:
Due in 2001 $ - -% $ 650 5.88 - 7.75%
Due in 2002 1,183 1.92 - 8.60 764 6.00 - 8.60
Due in 2003 967 2.05 - 6.84 150 6.50
Due in 2004 1,898 2.28 - 7.38 200 5.85
Due in 2005 599 7.25 - 8.25 598 7.25 - 8.25
Due in 2006 3,062 2.24 - 7.50 1,238 7.25 - 7.50
Due in 2011 497 6.88 - -
Subordinated notes:
Due in 2001 - - 150 9.88
Due in 2004 249 6.50 - 7.88 548 6.50 - 7.88
Due in 2006 99 6.63 99 6.63
Due in 2007 240 8.88 - -
Due in 2009 160 8.00 - -
Due in 2010 564 8.25 495 8.25
Due in 2011 1,018 6.88 - -
Trust preferred securities⁽¹⁾:
Due in 2025 93 8.25 100 8.25
Due in 2026 149 8.36 149 8.36
Due in 2027 727 8.21 - 8.38 694 8.21 - 8.38
Due in 2041 730 5.38 - -
Asset transfers accounted for as secured financing:
Due in 2001 - - 4,044 6.67
Other 341 - 51 -
Total other borrowings $ 12,576 $ 9,930
⁽¹⁾
Inclusive of capitalized issuance costs.
The Company is the guarantor of fourfive separate issues of trust preferred securities, as discussed below:
On May 31, 1997, Washington Mutual Capital I ("WMC I"), a wholly-owned subsidiary of Washington Mutual, issued $400 million of 8.375% Subordinated Capital Income Securities. In connection with WMC I's issuance of these securities, Washington Mutual issued to WMC I $412 million principal amount of its 8.375% Junior Subordinated Debentures, due 2027 (the "subordinated debentures"debentures due 2027"). The sole assets of WMC I are and will be the subordinated debentures.debentures due 2027.
91

On January 27, 1997, Great Western Financial Trust II ("GWFT II"), a wholly-owned subsidiary of Great Western, issued $300 million of 8.206% Trust Originated Preferred Securities. In connection with GWFT II's issuance of these securities, Great Western issued to GWFT II $309 million principal amount of its 8.206% subordinated deferrable interest notes, due 2027 (the "subordinated notes due 2027"). The sole assets of GWFT II are and will be the subordinated notes due 2027.
In December 1996, Ahmanson Trust I (the "capital trust"), a wholly-owned subsidiary of H.F. Ahmanson & Co. ("Ahmanson"), issued $150 million of 8.36% Company-obligated
mandatorily redeemable capital securities, Series A, of subsidiary trust holding solely Junior Subordinated Deferrable Interest Debentures of Ahmanson. In

80
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) connection with the capital trust's issuance of these securities, Ahmanson issued to the capital trust $155 million principal amount of its 8.36% subordinated notes, due December 2026 (the "subordinated notes due 2026"). The sole assets of the capital trust are and will be the subordinated notes due 2026.
In December 1995, Great Western Financial Trust I ("GWFT I"), a wholly-owned subsidiary of Great Western, issued $100 million of 8.25% Trust Originated Preferred Securities. In connection with GWFT I's issuance of these securities, Great Western issued to GWFT I $103 million principal amount of its 8.25% subordinated deferrable interest notes, due 2025 (the "subordinated notes due 2025"). The sole assets of GWFT I are and will be the subordinated notes due 2025.
In the second quarter of 2001, Washington Mutual Capital Trust 2001 (the "Trust"), a wholly-owned subsidiary of Washington Mutual, issued 23 million units, totaling $1,150 million, of Trust Preferred Income Equity Redeemable Securities^SM (PIERS^SM). Each unit consists of a preferred security having a stated liquidation amount of $50 and a current yield of 5.375%, 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. In connection with the Trust's issuance of these securities, Washington Mutual, Inc. issued to the Trust $1,185 million of 5.375% subordinated debentures, due in 2041. The sole assets of the Trust are the subordinated debentures.
Obligations of Great Western and Ahmanson under the above described arrangements were assumed by the Company. Washington Mutual's obligations under these and related agreements, taken together, constitute a full and unconditional guarantee by the Company of the obligations specified above.
The Company has a right to defer payment of interest on the debentures at any time or from time to time for a period not exceeding the extension period described in the table below with respect to each deferral period, provided that no extension period may extend beyond the stated maturity of the respective debentures. Distributions paid on the securities are recorded as interest expense in the Consolidated Statements of Income.
92

Financial data pertaining to trust preferred securities were as follows:
DECEMBER 31, 2000 AND 1999
-------------------------------------------------------------------------------------------
AGGREGATE
LIQUIDATION AGGREGATE AGGREGATE PER
AMOUNT OF LIQUIDATION PRINCIPAL STATED ANNUM
TRUST AMOUNT OF AMOUNT MATURITY INTEREST
PREFERRED COMMON OF OF RATE OF EXTENSION REDEMPTION
NAME OF TRUST SECURITIES SECURITIES NOTES NOTES NOTES PERIOD OPTION
------------- ----------- ----------- --------- -------- -------- --------------- ------------
(DOLLARS IN MILLIONS)

Great Western Financial Trust $100 $ 3 $103 2025 8.250% 20 consecutive On or after
I........................... quarters December 31,
2000
Great Western Financial Trust 300 9 309 2027 8.206 Ten consecutive On or after
II.......................... semi-annual February 1,
periods 2007
Washington Mutual Capital I... 400 12 412 2027 8.375 Ten consecutive On or after
semi-annual June 1, 2007
periods
Ahmanson Trust I.............. 150 5 155 2026 8.360 Ten consecutive On or after
semi-annual December 1,
periods 2026
---- --- ----
$950 $29 $979 8.306
==== === ====
December 31, 2001
Name of Trust
Aggregate
Liquidation
Amount of
Trust
Preferred
Securities Aggregate
Liquidation
Amount of
Common
Securities Aggregate
Principal
Amount
of
Notes Stated
Maturity
of
Notes Per Annum Interest Rate of Notes Extension Period Redemption Option
(dollars in millions)

Name of Trust

Aggregate Liquidation Amount of Trust Preferred Securities
Aggregate Liquidation Amount of Common Securities
Aggregate Principal Amount of Notes
Stated Maturity of Notes
Per Annum Interest Rate of Notes
Extension Period
Redemption Option
(dollars in millions)

Great Western Financial Trust I $ 100 $ 3 $ 103 2025 8.250 % 20 consecutive quarters On or after December 31, 2000
Great Western Financial Trust II 300 9 309 2027 8.206 Ten consecutive semi-annual periods On or after February 1, 2007
Washington Mutual Capital I 400 12 412 2027 8.375 Ten consecutive semi-annual periods On or after June 1, 2007
Ahmanson Trust I 150 5 155 2026 8.360 Ten consecutive semi-annual periods On or after December 1, 2026
$ 950 $ 29 $ 979 8.306
At December 31, 20002001 and 1999,2000, the Company had unused secured borrowing lines of credit
totaling $243$960 million and $793$243 million with the Federal Reserve Bank discount window.
93
The Company, through Long Beach Mortgage, had credit facilities in the aggregate amount of $1 billion available at December 31, 2001, of which $500 million expires in April 2002 and $500 million expires in September 2002.
At December 31, 2000,2001, the Company had two revolving credit facilities with TheJP Morgan Chase Manhattan Bank as administrative agent: a $1.20 billion$600 million 364-day facility and a $600 million four-year facility, which provide back-up for the Company's commercial paper programs. At December 31, 2000,2001, the Company had $841$849 million available under these facilities, which represents the total amount of the two revolving credit facilities, net of the amount of commercial paper outstanding at year-end.
As of December 31, 2000,2001, the Company had entered into eight letters of credit with the FHLBs of San Francisco and Seattle, for a total of $248$240 million. These letters of credit provide credit enhancement on housing revenue bonds and certain of the Company's private issue MBS.

81
84
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE
Note 12: INCOME TAXESIncome Taxes
Income taxes (benefits) from continuing operations consisted of the following:
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(IN MILLIONS)

Current:
Federal................................................ $ 524 $ 443 $ 866
State and local........................................ 99 34 183
Payments in lieu....................................... 34 34 35
------ ------ ------
657 511 1,084
Deferred:
Federal................................................ 435 397 (325)
State and local........................................ 42 156 (43)
Payments in lieu....................................... (49) 3 166
------ ------ ------
428 556 (202)
------ ------ ------
$1,085 $1,067 $ 882
====== ====== ======
Year Ended December 31,
2001 2000 1999
(in millions)

Current:
Federal $ 1,438 $ 524 $ 443
State and local 165 99 34
Payments in lieu 58 34 34
Total current 1,661 657 511
Deferred:
Federal (4 ) 435 397
State and local (12 ) 42 156
Payments in lieu (66 ) (49 ) 3
Total deferred (82 ) 428 556
Total income taxes (benefits) $ 1,579 $ 1,085 $ 1,067
Total income tax provision (benefit) was recorded as follows:
Year Ended December 31,
2001 2000 1999
(in millions)

Income (loss) from continuing operations $ 1,579 $ 1,085 $ 1,067
Extraordinary gain 239 - -
Total income taxes (benefits) $ 1,818 $ 1,085 $ 1,067
Provisions of the Small Business Job Protection Act of 1996 (the "Job Protection Act") significantly altered the Company's tax bad debt deduction method and the circumstances that would require a tax bad debt reserve recapture. Prior to enactment of the Job Protection Act, savings institutions were permitted to compute their tax bad debt deduction through use of either the reserve method or the percentage of taxable income method. The Job Protection Act repealed both of these methods for large savings institutions and allows bad debt deductions based only on actual current losses. While repealing the reserve method for computing tax bad debt deductions, the Job Protection Act allows thrifts to retain their
94

existing base year bad debt reserves but requires that reserves in excess of the balance at December 31, 1987 be recaptured into taxable income. The tax liability for this recapture is included in the accompanying Consolidated Financial Statements.
The base year reserve is recaptured into taxable income only in limited situations, such as in the event of certain excess distributions or complete liquidation. None of the limited circumstances requiring recapture are contemplated by the Company. The amount of the Company's tax bad debt reserves subject to recapture in these circumstances approximates $2.01$2.06 billion at December 31, 2000.2001. Due to the remote nature of events that may trigger the recapture provisions, no tax liability has been established in the accompanying Consolidated Financial Statements.

During 1998,
In January 2002, the Company completed a settlement with the Internal Revenue Service (the "Service") for Great Western for 1987 and 1986, and Washington
Mutual for 1993 and 1992. During 1999, the Service completed its examination of
Great Western fortax years 1988 through 1992. The case has been referred toamount payable under the Appeals
Branchsettlement agreement was previously provided for review.in the accrual for income taxes payable.
The Service is currently examining Ahmanson for 1994 through September 1998, Washington Mutual for 1994 through 1997,2000, and Great Western for 1993 through 1997. The Service has completed its examination of Ahmanson for 1990 through 1993. All issues have been resolved except for one, for which a tentative settlement at Appeals is under review by the Appeals Branch.Joint Committee on Taxation. The Service's National Office has issued an adverse ruling on this issue. Accordingly, the Company has not recorded any benefit with respect to this issue.
As of December 31, 2000,2001, the Company's accrual for income taxes payable is sufficient to cover any expected liabilities arising from these examinations.

82
85
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
95

The significant components of the Company's net deferred tax asset (liability) were as follows:
DECEMBER 31,
------------------
2000 1999
------- -------
(IN MILLIONS)

Deferred tax assets:
Net operating loss carryforwards.......................... $ 452 $ 504
Provision for loan and lease losses and foreclosed
assets................................................. 367 371
Unrealized losses on securities........................... 31 437
Merger costs.............................................. 164 172
Compensation differences.................................. 65 68
State and local taxes..................................... 30 70
Other..................................................... 80 56
------- -------
1,189 1,678
Payments in lieu............................................ (185) (139)
Valuation allowance......................................... (164) (239)
------- -------
Deferred tax asset, net of payments in lieu and valuation
allowance................................................. 840 1,300
Deferred tax liabilities:
Loan fees................................................. (479) (460)
Stock dividends from FHLBs................................ (500) (436)
Basis difference on premises and equipment................ (147) (147)
Gain on loan sales........................................ (320) (81)
Other..................................................... (218) (157)
------- -------
(1,664) (1,281)
------- -------
Net deferred tax (liability) asset.......................... $ (824) $ 19
======= =======
December 31,
2001 2000
(in millions)

Deferred tax assets:
Provision for loan and lease losses and foreclosed assets $ 549 $ 367
Net operating loss carryforwards 440 452
Unrealized losses on securities 152 31
Merger costs 144 164
Compensation differences 65 65
State and local taxes 21 30
Other 339 80
Total deferred tax assets 1,710 1,189
Payments in lieu (140 ) (185 )
Valuation allowance (164 ) (164 )
Deferred tax asset, net of payments in lieu and valuation allowance 1,406 840
Deferred tax liabilities:
Stock dividends from FHLBs (614 ) (500 )
Gain on loan sales (445 ) (320 )
Loan fees (253 ) (479 )
Basis difference on premises and equipment (181 ) (147 )
Other (231 ) (218 )
Total deferred tax liabilities (1,724 ) (1,664 )
Net deferred tax (liability) asset $ (318 ) $ (824 )
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 $164 million at December 31, 20002001 and $239 million at December 31, 1999 relate2000 relates primarily to net operating losses that are limited by Internal Revenue Code Section 382 as a result of the acquisition of Keystone Holdings, Inc. (the "Keystone Transaction").
As a result of the Keystone Transaction, the Company and certain of its affiliates are parties to an agreement (the "Assistance Agreement") with a predecessor of the Federal Savings and LoanDeposit Insurance Corporation ("FSLIC")
Resolution Fund (the "FRF"FDIC"), which generally provides that 75% of most of the federal tax savings and approximately 19.5% of most of the California tax savings (as computed in accordance with the Assistance Agreement), 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 FRF.Federal Savings and Loan Insurance Corporation ("FSLIC") Resolution Fund (the "FRF"). These amounts are considered payments in lieu. The Assistance Agreement sets forth certain special adjustments to federal taxable income to arrive at "FSLIC taxable income," which is then offset by utilizable net operating losses to compute the benefit due to the FRF.

83
86
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the acquisition of Bank United, the Company and certain of its affiliates are also parties to another agreement with the FRF, which provides that one-third of the sum of federal and state tax benefits (as computed in accordance with the original acquisition agreement), attributable to the Company's utilization of certain tax loss carryovers of Bank United are to be paid by the Company to the FRF. The obligation to share tax benefit utilization will continue through 2003.
96

Federal and state income tax net operating loss carryforwards due to expire under current law during the years indicated were as follows:
DECEMBER 31, 2000
------------------
FEDERAL STATE
-------- ------
(IN MILLIONS)

Expiring in:
2001...................................................... $ -- $402
2002...................................................... -- 536
2004...................................................... 316 --
2005...................................................... 668 --
2008...................................................... 16 --
------ ----
$1,000 $938
====== ====
December 31, 2001
Federal State
(in millions)

Expiring in:
2002 $ - $ 536
2004 195 -
2005 787 -
2006 33 -
2008 23 -
Total $ 1,038 $ 536
Reconciliations between income taxes computed at statutory rates and income taxes included in the Consolidated Statements of Income were as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
AS A AS A AS A
PERCENTAGE PERCENTAGE PERCENTAGE
OF PRETAX OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------ ---------- ------ ---------- ------ ----------
(DOLLARS IN MILLIONS)

Income taxes computed at statutory rates.... $1,044 35.00% $1,009 35.00% $829 35.00%
Tax effect of:
State income tax, net of federal tax
benefit................................. 93 3.12 122 4.24 95 4.03
Payments in lieu.......................... 46 1.54 34 1.18 202 8.51
Valuation allowance change from prior
year.................................... (75) (2.51) (45) (1.57) (258) (10.90)
Other..................................... (23) (0.78) (53) (1.85) 14 0.61
------ ------ ----
Income taxes included in the
Consolidated Statements of
Income........................... $1,085 36.37 $1,067 37.00 $882 37.25
====== ====== ====

NOTE
Year Ended December 31,
2001 2000 1999
Amount As a Percentage of Pretax Income Amount As a Percentage of Pretax Income Amount As a Percentage of Pretax Income
(dollars in millions)

Income taxes computed at statutory
rates $ 1,509 35.00 % $ 1,044 35.00 % $ 1,009 35.00 %
Tax effect of:
State income tax, net of federal tax benefit 99 2.29 93 3.12 122 4.24
Payments in lieu - - 46 1.54 34 1.18
Valuation allowance change from prior year - - (75 ) (2.51 ) (45 ) (1.57 )
Other (29 ) (0.66 ) (23 ) (0.78 ) (53 ) (1.85 )
Total $ 1,579 36.63 $ 1,085 36.37 $ 1,067 37.00
Note 13: CONTINGENCIESCommitments and Contingencies
The Company has certain litigation and negotiations in progress resulting from activities arising from normal operations. InThese include actions which are or purport to be class actions, some of which seek large damage awards. Nevertheless, in the opinion of management, none of thesethe pending litigation matters is likely to have a materially adverse effect on the Company's results of operations or financial condition.
As part of the administration and oversight of the Assistance Agreement and other agreements among American Savings Bank, F.A. ("ASB"), certain of its affiliates, Bank United Holdings and the Federal Deposit Insurance Corporation ("FDIC"),FDIC, the FDIC has a variety of review and audit rights, including the right to review and audit computations of payments in lieu of taxes.
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 financially from it.
97

Unfunded commitments to extend credit totaled $29.63 billion at December 31, 2001 and $13.03 billion at December 31, 2000. In order to meet the needs of its customers, Washington Mutual also issues direct-pay, standby and other letters of credit. The credit risk in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Washington Mutual holds collateral to support letters of credit when deemed necessary. At December 31, 2001 and 2000, outstanding letters of credit issued by Washington Mutual totaled $434 million and $327 million.
Future minimum net rental commitments, including maintenance and other associated costs, for all noncancelable leases were as follows:
Operating Lease Capital Lease
Land and Buildings Furniture and Equipment Land and Buildings
(in millions)

Year ending December 31,
2002 $ 230 $ 46 $ 8
2003 211 32 8
2004 185 14 8
2005 155 - 8
2006 115 - 6
Thereafter 376 - 51
Total $ 1,272 $ 92 $ 89
Note 14: Redeemable Preferred Stock
In August 1999, Bank United Corp. issued 2,000,000 shares of 8% Corporate Premium Income Equity Securities ("PIES") for a price of $50 per Corporate PIES or $100 million in aggregate. As a result of the Bank United Corp. merger on February 9, 2001, each Bank United PIES was converted into a Washington Mutual PIES with an estimated fair value of $102 million. Each of the Corporate PIES consists of a purchase contract for shares of Company common stock and a share of redeemable preferred stock. At December 31, 2001 all of the 2,000,000 authorized shares were issued and outstanding.
The purchase contract obligates the holder of the Corporate PIES to purchase shares of Company common stock in August 2002. Upon purchase of the common stock, the holder of the Corporate PIES must remit $50 per Corporate PIES owned in exchange for shares of the Company's common stock and one Contingent Payment Rights Certificate⁽¹⁾ for each 1.3 shares of Washington Mutual Common stock the holder is obligated to purchase. The number of shares of common stock ultimately issued to the holder will depend on the average closing price of the common stock over a 20-day trading period preceding the time of purchase.
The redeemable preferred stock, which has a liquidation preference of $50 per share and certain voting rights, may be redeemed at the option of the Company on or after October 16, 2002 at 100% of its liquidation preference and is subject to mandatory redemption in full in August 2004. The redeemable preferred stock will be pledged to the Company to secure the holders' obligation to purchase the common stock under the purchase contract. The Company is a partymakes quarterly payments consisting of dividends equal to goodwill litigation that may result in a gain.
The ultimate outcome is uncertain7.25% per annum of the $50 liquidation preference and there can be no assurance thatcontract adjustment payments payable by the Company will benefit financiallyequal to 0.75% per annum of the stated amount until August 16, 2002.
⁽¹⁾
"Contingent Payment Rights Certificate" means a certificate representing a partial beneficial ownership interest in the Bank United Litigation Contingent Payment Rights Trust, a Delaware trust established by Bank United Corp. to receive Bank United Corp.'s portion of the proceeds, if any, realized from it.

84
87
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14: STOCKHOLDERS' EQUITY

Common Stock

Changesthe litigation filed by Bank United Corp., its indirect subsidiary Bank United, and Hyperion Partners L.P. against the United States in commonthe U.S. Court of Federal Claims on July 25, 1995, for alleged failure of the United States to adhere to its agreement to waive or forbear from enforcing certain provisions concerning regulatory capital requirements.
98
Note 15: Earnings Per Share
On April 17, 2001, the Company's Board of Directors declared a 3-for-2 stock issuedsplit which was paid in the form of a 50 percent stock dividend. The dividend was paid on May 15, 2001 to shareholders of record as of April 30, 2001. All prior share and outstanding were as follows:

YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(NUMBER OF SHARES IN THOUSANDS)

Shares issued and outstanding, beginning of year...... 571,589 593,409 589,790
Common stock issued through employee stock plans...... 3,097 3,386 4,158
Common stock issued for acquisitions.................. -- 6,338 --
Common stock repurchased and retired.................. (34,830) (31,544) (539)
------- ------- -------
Shares issued and outstanding, end of year............ 539,856 571,589 593,409
======= ======= =======

Cash dividends paid per share were as follows(1):

YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------

Fourth quarter........................................... $0.300 $0.260 $0.220
Third quarter............................................ 0.290 0.250 0.207
Second quarter........................................... 0.280 0.240 0.200
First quarter............................................ 0.270 0.230 0.193

- ---------------
(1) These dividendsamounts have not been restated to reflect pooling combinations.

Priorthe stock split.
Information used to calculate EPS was as follows:
Year Ended December 31,
2001 2000 1999
(dollars in millions, except per share amounts)

Net income
Income before extraordinary item $ 2,732 $ 1,899 $ 1,817
Accumulated dividends on preferred stock (7 ) - -
Income before extraordinary item attributable to common stock 2,725 1,899 1,817
Extraordinary item 382 - -
Net income attributable to common stock $ 3,107 $ 1,899 $ 1,817

Weighted average shares
Basic weighted average number of common shares outstanding 850,245,345 801,261,983 858,978,416
Dilutive effect of potential common shares from:
Stock options 8,468,825 3,432,612 2,851,131
Premium Income Equity Securities 1,345,817 - -
Trust Preferred Income Equity Redeemable Securities^SM 4,597,881 - -
Diluted weighted average number of common shares outstanding 864,657,868 804,694,595 861,829,547

Basic earnings per common share
Income before extraordinary item $ 3.20 $ 2.37 $ 2.12
Extraordinary item 0.45 - -
Net income 3.65 2.37 2.12
Diluted earnings per common share
Income before extraordinary item 3.15 2.36 2.11
Extraordinary item 0.44 - -
Net income 3.59 2.36 2.11 Weighted average options to purchase an additional 3,712,976, 10,773,446 and 6,780,110 shares of common stock were outstanding during 2001, 2000 and 1999, respectively, but were not included in the computation of diluted EPS because their inclusion would have had an antidilutive effect.
Additionally, as part of the business combination with Washington Mutual, acquired
companies paidKeystone Holdings, Inc. (the parent of ASB), 18 million shares of common stock, with an assigned value of $18.49 per share, are held in an escrow for the benefit of the general and limited partners of Keystone Holdings Inc., the Federal Savings and Loan Insurance Corporation Resolution Fund and their transferees. The conditions under which these shares can be released from escrow are related to the outcome of certain litigation and not based on future
99

earnings or market prices. At December 31, 2001, the conditions were not met, and, therefore, the shares were not included in the above computations.
Note 16: Comprehensive Income
The following table presents the components of other comprehensive income and the related tax effect allocated to each component:
Before Tax
Amount Tax Effect Net of
Tax
(in millions)

1999
Unrealized loss on securities:
Net unrealized losses on securities available for sale arising during the year $ (1,243 ) $ (493 ) $ (750 )
Reclassification of net losses on securities available for sale included in net income 9 3 6
Amortization of market adjustment for MBS transferred in 1997 from available-for-sale to held-to-maturity (17 ) (7 ) (10 )
Net unrealized losses (1,251 ) (497 ) (754 )
Minimum pension liability adjustment 10 4 6
Other comprehensive loss $ (1,241 ) $ (493 ) $ (748 )

2000
Unrealized gain on securities:
Net unrealized gains on securities available for sale arising during the year $ 1,004 $ 384 $ 620
Reclassification of net losses on securities available for sale included in net income 2 1 1
Amortization of market adjustment for MBS transferred in 1997 from available-for-sale to held-to-maturity (8 ) (3 ) (5 )
Net unrealized gains 998 382 616
Minimum pension liability adjustment 6 2 4
Other comprehensive income $ 1,004 $ 384 $ 620

2001
Unrealized loss on securities:
Net unrealized gains on securities available for sale arising during the year $ 409 $ 156 $ 253
Reclassification of net gains on securities available for sale included in net income (705 ) (268 ) (437 )
Net unrealized gains on cash flow hedging instruments 5 2 3
Amortization of market adjustment for MBS transferred in 1997 from available-for-sale to held-to-maturity (12 ) (5 ) (7 )
Net unrealized losses (303 ) (115 ) (188 )
Minimum pension liability adjustment (2 ) (1 ) (1 )
Other comprehensive loss $ (305 ) $ (116 ) $ (189 )
100
The following table presents cumulative other comprehensive income balances:
Net
Unrealized
Gains (Losses)
on Securities Net
Unrealized
Gains on
Cash Flow
Hedging
Instruments Amortization
Adjustment
for MBS
Transferred
in 1997 Minimum
Pension
Liability
Adjustment Cumulative
Other
Comprehensive
Income (Loss)
(in millions)

BALANCE, December 31, 1998 $ 44 $ - $ 43 $ (13 ) $ 74
Net change (744 ) - (10 ) 6 (748 )
BALANCE, December 31, 1999 (700 ) - 33 (7 ) (674 )
Net change 621 - (5 ) 4 620
BALANCE, December 31, 2000 (79 ) - 28 (3 ) (54 )
Net change (184 ) 3 (7 ) (1 ) (189 )
BALANCE, December 31, 2001 $ (263 ) $ 3 $ 21 $ (4 ) $ (243 )
Note 17: Regulatory Capital Requirements and Dividend Restrictions
WMI is not subject to regulatory capital requirements. However, each of its subsidiary depository institutions is subject to various regulatory capital requirements. WMB is subject to FDIC capital requirements while WMBFA and WMBfsb are subject to Office of Thrift Supervision ("OTS") capital requirements.
The capital adequacy requirements are quantitative measures established by regulation that require WMBFA, WMB and WMBfsb to maintain minimum amounts and ratios of capital. The FDIC requires WMB to maintain minimum ratios of Tier 1 and total commoncapital to risk-weighted assets as well as Tier 1 capital to average assets. The OTS requires WMBFA 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.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("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 Tier 1 capital to risk-weighted assets is 6.00% or more, its leverage capital ratio is 5.00% or more and it is not subject to any federal supervisory order or directive to meet a specific capital level.
Under these same regulations, an institution is treated as adequately capitalized if its ratio of total capital to risk-weighted assets is 8.00% or more, its ratio of Tier 1 capital to risk-weighted assets is 4.00% or more, its leverage capital ratio is 4.00% or more, and it is not subject to any federal supervisory order or directive to meet a specific capital level. Additionally, 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
101

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. FDICIA 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 actual regulatory capital ratios calculated for WMBFA, WMB and WMBfsb, along with the minimum 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, 2001
Actual Minimum
Regulatory
Requirement Minimum to be
Categorized as Well
Capitalized Under
Prompt Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(dollars in millions)

WMBFA
Total capital to risk-weighted assets $ 12,873 10.93 % $ 9,418 8.00 % $ 11,773 10.00 %
Tier 1 capital to risk-weighted assets 10,592 9.00 4,709 4.00 7,064 6.00
Tier 1 capital to adjusted total assets
(leverage) 10,592 5.18 8,173 4.00 ⁽¹⁾ 10,216 5.00
Tangible capital to tangible assets
(tangible equity) 10,591 5.18 3,065 1.50 n.a. n.a.

WMB
Total capital to risk-weighted assets 2,234 12.08 1,479 8.00 1,849 10.00
Tier 1 capital to risk-weighted assets 2,008 10.86 740 4.00 1,109 6.00
Tier 1 capital to average assets
(leverage) 2,008 6.45 1,246 4.00 ⁽¹⁾ 1,557 5.00

WMBfsb
Total capital to risk-weighted assets 88 12.78 55 8.00 69 10.00
Tier 1 capital to risk-weighted assets 79 11.53 28 4.00 41 6.00
Tier 1 capital to adjusted total assets
(leverage) 79 7.30 43 4.00 ⁽¹⁾ 54 5.00
Tangible capital to tangible assets
(tangible equity) 79 7.30 16 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.
102
December 31, 2000
Actual Minimum
Regulatory
Requirement Minimum to be
Categorized as Well
Capitalized Under
Prompt Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(dollars in millions)

WMBFA
Total capital to risk-weighted assets $ 9,763 11.36 % $ 6,873 8.00 % $ 8,591 10.00 %
Tier 1 capital to risk-weighted assets 8,942 10.40 3,436 4.00 5,155 6.00
Tier 1 capital to adjusted total assets
(leverage) 8,942 5.81 6,158 4.00 ⁽¹⁾ 7,698 5.00
Tangible capital to tangible assets
(tangible equity) 8,941 5.81 2,309 1.50 n.a. n.a.

WMB
Total capital to risk-weighted assets 2,241 11.24 1,595 8.00 1,994 10.00
Tier 1 capital to risk-weighted assets 2,023 10.15 798 4.00 1,196 6.00
Tier 1 capital to average assets
(leverage) 2,023 5.83 1,388 4.00 ⁽¹⁾ 1,735 5.00

WMBfsb
Total capital to risk-weighted assets 83 12.10 55 8.00 69 10.00
Tier 1 capital to risk-weighted assets 76 11.14 27 4.00 41 6.00
Tier 1 capital to adjusted total assets
(leverage) 76 6.97 44 4.00 ⁽¹⁾ 55 5.00
Tangible capital to tangible assets
(tangible equity) 76 6.97 16 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.
Management believes that WMBFA, WMB and WMBfsb individually met all capital adequacy requirements, as of December 31, 2001, to which they were subject. Additionally, as of the most recent notifications from the FDIC (for WMB) and the OTS (for WMBFA and WMBfsb), the FDIC and OTS individually categorized WMBFA, 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, Tier 1 risk-based and Tier 1 or leverage capital 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 WMBFA, WMB and WMBfsb.
WMI's principal sources of funds are cash dividends of $70 million in 1998. No common
cash dividends were paid to it by acquired companies in 1999 or 2000.

In addition to being influenced by legal, regulatoryits banking and economic
restrictions,other subsidiaries, investment income and borrowings. WMI's ability to pay dividends is also predicated on the ability of its subsidiaries to declare and pay dividends to WMI. TheseFederal 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.
103

OTS regulations limit the ability of savings associations such as WMBFA and WMBfsb to pay dividends and make other capital distributions. WMBFA and WMBfsb, as subsidiaries are
subjectof a savings and loan holding company, must file an application with the OTS at least 30 days before the proposed declaration of a dividend 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 legal,meet certain regulatory andconditions, 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.
Our retained earnings at December 31, 2001 included a pre-1988 thrift bad debt covenant restrictions on theirreserve for tax purposes of $2.06 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, we will incur a federal income tax liability, at the then prevailing corporate tax rate, to the extent of such subsidiaries' pre-1988 thrift bad debt reserve. As a result, our ability to pay dividends in excess of current earnings may be limited.
Note 18: Stock-Based Compensation Plans
Stock Option Plans
On March 8, 1984, the Company's stockholders approved the adoption of the 1983 incentive stock option plan, providing for the award of incentive stock options or nonqualified stock options to certain officers of the Company at the discretion of the Board of Directors. 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 (the "1994 Plan") in which the right to purchase common stock of WMI may be granted to officers, directors, consultants and advisers of the Company. The 1994 Plan is generally similar to the 1983 plan, which terminated according to its terms in 1993. The 1994 Plan does not affect any options granted under the 1983 plan.
Under the 1994 Plan, the exercise price of the option must at least equal the market value per share of WMI's common stock on the date of the grant. The 1994 Plan originally provided for the granting of options for a maximum of 27 million common shares. During 2000, the Board of Directors approved an increase in the maximum number of common shares available for grant to 45 million.
WAMU Shares
On September 16, 1997, December 15, 1998 and February 13, 2001, the Company's Board of Directors approved the adoption of broad-based stock option plans called "WAMU Shares." These plans provide for awards of nonqualified stock options to all eligible employees who were employed by the Company on September 1, 1997, January 4, 1999 and February 12, 2001.
Generally, eligible full-time and part-time employees on the award dates were granted options to purchase shares of WMI common stock. All grants were made using the fair market value of WMI's common stock on designated dates, and all options vest two years after the award date.
104

For each plan, the award date, number of options per employee and maximum number of options was as follows:
WAMU Shares WAMU Shares II WAMU Shares III
Award date September 1, 1997 January 4, 1999 February 12, 2001
Number of options per employee:
Full-time 225 150 150
Part-time 113 75 75
Maximum number of options 4,950,000 4,950,000 5,064,000 Stock options under all stock plans were generally exercisable on a phased-in schedule over one to three years, depending upon the terms of the grant, and expire three to ten years from the grant date. Options to purchase 17,889,901 and 15,067,550 shares of common stock were fully exercisable at December 31, 2001 and 2000.
Stock options granted, exercised, or forfeited were as follows:
Number of
Option Shares Weighted Average
Exercise Price of
Option Shares Weighted Average
Fair Value Per
Share of Options at
Date of Grant
Balance, December 31, 1998 19,918,841 $ 20.07
Granted in 1999 9,460,250 19.12 $6.34
Exercised in 1999 (3,049,040 ) 9.72
Forfeited in 1999 (3,197,179 ) 24.75
Grants in connection with acquisitions 2,389,175 8.95
Balance, December 31, 1999 25,522,047 19.29
Granted in 2000 8,061,278 32.20 10.18
Exercised in 2000 (2,565,754 ) 21.09
Forfeited in 2000 (1,087,912 ) 21.94
Balance, December 31, 2000 29,929,659 23.30
Granted in 2001 16,714,087 31.96 9.66
Exercised in 2001 (11,073,699 ) 18.37
Forfeited in 2001 (1,800,219 ) 28.36
Grants in connection with acquisitions 6,563,589 16.31
Balance, December 31, 2001 40,333,417 26.87
The fair value of options granted under the Company's stock option plans was estimated on the date of grant using the Binomial option-pricing model with the following weighted average assumptions:

Year Ended December 31,

2001 2000 1999
Annual dividend yield 2.33% - 2.58% 2.37% - 2.57% 2.24% - 2.45%
Expected volatility 31.03 - 35.66 30.46 - 34.26 27.51 - 31.61
Risk free interest rate 3.50 - 4.91 5.11 - 6.71 4.54 - 6.29
Granted options expected life 5 – 7 years 5 – 7.25 years 4 – 5 years
105
Financial data pertaining to outstanding stock options were as follows:
December 31, 2001
Ranges of
Exercise Prices Number of
Option Shares Weighted Average
Remaining
Years Weighted Average
Exercise Price of
Option Shares Number of
Exercisable
Option Shares Weighted Average
Exercise Price
of Exercisable
Option Shares
$ 5.52 - $19.93 9,055,356 6.19 $ 15.01 7,237,520 $ 14.52
20.32 - 29.95 8,253,279 5.40 24.60 8,127,376 24.62
30.36 - 30.91 10,727,817 9.96 30.79 1,500 30.36
31.27 - 42.08 12,296,965 7.42 33.72 2,523,505 33.39
40,333,417 26.87 17,889,901 21.77
Employee Stock Purchase Plan
Under the terms of the Company's Employee Stock Purchase Plan ("ESPP"), an employee may purchase WMI common stock at a 15% discount without paying brokerage fees or commissions on purchases. The Company pays for the program's administrative expenses. The plan is open to all employees who are at least 18 years old, have completed at least one year of service, and work at least 20 hours per week. Participation can be by either payroll deduction or lump sum payments with a maximum annual contribution of 10% of each employee's previous year's eligible cash compensation. Under the ESPP, dividends are automatically reinvested.
SFAS No. 123: Accounting for Stock-Based Compensation
The Company measures its employee stock-based compensation arrangements under the provisions of the AICPA Accounting Principles Board Opinion 25. Accordingly, no compensation cost has been recognized for its stock option plans and its ESPP. Had compensation cost for the Company's compensation plans been determined consistent with SFAS No. 123, the Company's net 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,
2001 2000 1999
(dollars in millions, except per share amounts)

Net income attributable to common stock
Basic:
As reported $ 3,107 $ 1,899 $ 1,817
Pro forma 3,079 1,880 1,803
Diluted:
As reported 3,107 1,899 1,817
Pro forma 3,079 1,880 1,803
Net income per common share
Basic:
As reported $ 3.65 $ 2.37 $ 2.12
Pro forma 3.62 2.35 2.10
Diluted:
As reported 3.59 2.36 2.11
Pro forma 3.56 2.34 2.09106
Equity Incentive Plan
The Equity Incentive Plan (previously named the Restricted Stock Plan) permits grants of restricted stock, and awards denominated in units of stock ("performance shares"), with or without performance-based vesting restrictions, for the benefit of all employees, officers, directors, consultants and advisors of the Company. The maximum aggregate number of shares of stock that may be issued is 18,112,683, and the maximum aggregate number of shares that may be issued subject to awards that vest solely on continuous service is 9,000,000. Restricted stock and units of stock accrue dividends. All canceled or forfeited shares become available for future grants.
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. Under the Equity Incentive Plan, the Company granted 536,169, 1,026,735 and 712,340 shares of restricted stock in 2001, 2000 and 1999. The balance of unearned compensation related to these restricted shares as of December 31, 2001 was $22 million.
Performance shares awarded generally vest at the end of a three-year period, and the actual shares delivered can range from zero to 250% of the shares awarded, depending on the degree to which the performance objectives are met. Under the plan, the target number of performance shares awarded was 423,027 and 344,955 in 2001 and 2000. The value of performance shares awarded is determined annually based on the Company's operating performance, as defined in the plan, and compensation expense is recognized over the vesting period.
The total compensation expense recognized for the Equity Incentive Plan was $27 million in 2001, $21 million in 2000, and $9 million in 1999.
Bank United Plans
In connection with the acquisition of Bank United Corp., the Company assumed the Bank United Corp. 1996 Stock Incentive Plan, 1999 Stock Incentive Plan and 2000 Stock Incentive Plan (collectively the "Bank United Plans"), under which incentive options and nonqualified options to purchase common stock, restricted common stock and other performance awards, may be granted to officers, employees and consultants. Options under the Bank United Plans generally expire ten years from the date of grant, and vest over varying periods that were determined at grant. All options granted under the Bank United Plans included a limited stock appreciation right, which entitle the holder to surrender the vested and exercisable option for cash following the closing of an acquisition. With the Company's acquisition of Bank United Corp., the Company assumed approximately 6.6 million options to purchase Bank United Corp. common stock, which were converted into options to purchase Washington Mutual, Inc. common stock. During 2001, approximately 6.2 million of the options assumed were exercised.
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.

Preferred Stock

There was no preferred stock (10,000,000 shares authorized) issued or
outstanding at December 31, 2000 and 1999. The preferred stock previously
outstanding was redeemed in 1998.

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 15: EARNINGS PER SHARE

Information used to calculate EPS was as follows:

YEAR ENDED DECEMBER 31,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

Net income
Net income................................... $ 1,899 $ 1,817 $ 1,487
Accumulated dividends on preferred stock..... -- -- (16)
------------ ------------ ------------
Net income attributable to common stock...... 1,899 1,817 1,471
Accumulated dividends on convertible
preferred stock............................ -- -- 9
------------ ------------ ------------
Diluted net income attributable to common
stock...................................... $ 1,899 $ 1,817 $ 1,480
============ ============ ============
Weighted average shares
Basic weighted average number of common
shares outstanding......................... 534,174,655 572,652,277 564,420,541
Dilutive effect of potential common shares... 2,288,408 1,900,754 14,141,764
------------ ------------ ------------
Diluted weighted average number of common
shares outstanding......................... 536,463,063 574,553,031 578,562,305
============ ============ ============
Net income per common share
Basic........................................ $ 3.55 $ 3.17 $ 2.61
Diluted...................................... 3.54 3.16 2.56

Options to purchase an average of 7,182,297 shares of common stock at an
average exercise price of $36.21 per share were outstanding during the year, but
were not included in the computation of diluted EPS because the exercise price
of the options was greater than the average market price of the common stock
during the year.

Additionally, as part of the business combination with Keystone Holdings,
Inc. (the parent of ASB) 12 million shares of common stock, with an assigned
value of $27.74 per share, were issued to an escrow for the benefit of the
general and limited partners of Keystone Holdings, Inc. and the FRF and their
transferees. The conditions upon which these shares are contingently issuable
are based on the outcome of certain litigation and not based on earnings or
market price. At December 31, 2000, the contingencies were not met, and
therefore, the contingently issuable shares were not included in the above
computations.

On February 9, 2001, Washington Mutual, Inc. issued approximately
42,600,000 shares of common stock for the acquisition of Bank United Corp.

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 16: COMPREHENSIVE INCOME

The following table presents the components of other comprehensive income
and the related tax effect allocated to each component:

BEFORE TAX NET OF
AMOUNT TAX EFFECT TAX
---------- ---------- ----------
(IN MILLIONS)

1998
Unrealized gain on securities:
Net unrealized gains on securities available for
sale arising during the year.................. $ 85 $ 32 $ 53
Reclassification of net gains on securities
available for sale included in net income..... (18) (7) (11)
Amortization of market adjustment for MBS
transferred in 1997 from available-for-sale to
held-to-maturity.............................. (27) (10) (17)
------- ----- -----
Net unrealized gains............................... 40 15 25
------- ----- -----
Minimum pension liability adjustment............... (22) (9) (13)
------- ----- -----
Other comprehensive income......................... $ 18 $ 6 $ 12
======= ===== =====
1999
Unrealized loss on securities:
Net unrealized losses on securities available for
sale arising during the year.................. $(1,243) $(493) $(750)
Reclassification of net losses on securities
available for sale included in net income..... 9 3 6
Amortization of market adjustment for MBS
transferred in 1997 from available-for-sale to
held-to-maturity.............................. (17) (7) (10)
------- ----- -----
Net unrealized losses.............................. (1,251) (497) (754)
------- ----- -----
Minimum pension liability adjustment............... 10 4 6
------- ----- -----
Other comprehensive loss........................... $(1,241) $(493) $(748)
======= ===== =====
2000
Unrealized gain on securities:
Net unrealized gains on securities available for
sale arising during the year.................. $ 1,004 $ 384 $ 620
Reclassification of net losses on securities
available for sale included in net income..... 2 1 1
Amortization of market adjustment for MBS
transferred in 1997 from available-for-sale to
held-to-maturity.............................. (8) (3) (5)
------- ----- -----
Net unrealized gains............................... 998 382 616
------- ----- -----
Minimum pension liability adjustment............... 6 2 4
------- ----- -----
Other comprehensive income......................... $ 1,004 $ 384 $ 620
======= ===== =====

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 17: REGULATORY CAPITAL REQUIREMENTS

WMI is not subject to regulatory capital requirements. However, each of its
subsidiary depository institutions is subject to various regulatory capital
requirements. WMB is subject to FDIC capital requirements while WMBFA and WMBfsb
are subject to Office of Thrift Supervision ("OTS") capital requirements.

The capital adequacy requirements are quantitative measures established by
regulation that require WMBFA, WMB and WMBfsb to maintain minimum amounts and
ratios of capital. The FDIC requires WMB 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 WMBFA 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.

The Federal Deposit Insurance Corporation Improvement Act of 1991
("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, 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 Tier 1 capital to risk-weighted assets is 6.00% or more, its
leverage capital ratio is 5.00% or more and it is not subject to any federal
supervisory order or directive to meet a specific capital level.

Under these same regulations, an institution is treated as adequately
capitalized if its ratio of total capital to risk-weighted assets is 8.00% or
more, its ratio of Tier 1 capital to risk-weighted assets is 4.00% or more, its
leverage capital ratio is 4.00% or more, and it is not subject to any federal
supervisory order or directive to meet a specific capital level.

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. FDICIA 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.

88
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The actual regulatory capital ratios calculated for WMBFA, WMB and WMBfsb,
along with the minimum capital amounts and ratios for the regulatory minimum
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, 2000
---------------------------------------------------------
MINIMUM TO BE
CATEGORIZED AS WELL
REGULATORY CAPITALIZED UNDER
MINIMUM PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
--------------- --------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- -------- -------
(DOLLARS IN MILLIONS)

WMBFA
Total capital to risk-weighted assets... $9,763 11.36% $6,873 8.00% $8,591 10.00%
Tier 1 capital to risk-weighted
assets................................ 8,942 10.40 3,436 4.00 5,155 6.00
Tier 1 capital to adjusted total assets
(leverage)............................ 8,942 5.81 6,158 4.00(1) 7,698 5.00
Tangible capital to tangible assets..... 8,941 5.81 2,309 1.50 n.a. n.a.
WMB
Total capital to risk-weighted assets... 2,241 11.24 1,595 8.00 1,994 10.00
Tier 1 capital to risk-weighted
assets................................ 2,023 10.15 798 4.00 1,196 6.00
Tier 1 capital to average assets
(leverage)............................ 2,023 5.83 1,388 4.00(1) 1,735 5.00
WMBfsb
Total capital to risk-weighted assets... 83 12.10 55 8.00 69 10.00
Tier 1 capital to risk-weighted
assets................................ 76 11.14 27 4.00 41 6.00
Tier 1 capital to adjusted total assets
(leverage)............................ 76 6.97 44 4.00(1) 55 5.00
Tangible capital to tangible assets..... 76 6.97 16 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.

89
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1999
---------------------------------------------------------
MINIMUM TO BE
CATEGORIZED AS WELL
REGULATORY CAPITALIZED UNDER
MINIMUM PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
--------------- --------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- -------- -------
(DOLLARS IN MILLIONS)

WMBFA
Total capital to risk-weighted assets... $9,065 11.15% $6,503 8.00% $8,129 10.00%
Tier 1 capital to risk-weighted
assets................................ 8,091 9.95 3,252 4.00 4,877 6.00
Tier 1 capital to adjusted total assets
(leverage)............................ 8,091 5.53 5,856 4.00(1) 7,320 5.00
Tangible capital to tangible assets..... 8,089 5.53 2,196 1.50 n.a. n.a.
WMB
Total capital to risk-weighted assets... 2,103 10.90 1,543 8.00 1,929 10.00
Tier 1 capital to risk-weighted
assets................................ 1,963 10.18 772 4.00 1,157 6.00
Tier 1 capital to average assets
(leverage)............................ 1,963 5.67 1,385 4.00(1) 1,732 5.00
WMBfsb
Total capital to risk-weighted assets... 77 15.21 40 8.00 51 10.00
Tier 1 capital to risk-weighted
assets................................ 70 13.94 20 4.00 30 6.00
Tier 1 capital to adjusted total assets
(leverage)............................ 70 8.58 33 4.00(1) 41 5.00
Tangible capital to tangible assets..... 70 8.58 12 1.50 n.a. n.a.

Management believes that WMBFA, WMB and WMBfsb individually met all capital
adequacy requirements, as of December 31, 2000, to which they were subject.
Additionally, as of the most recent notifications from the FDIC (for WMB) and
the OTS (for WMBFA and WMBfsb), the FDIC and OTS individually categorized WMBFA,
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, Tier 1 risk-based and Tier 1 or leverage capital
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 WMBFA, WMB and WMBfsb.

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.
In 1994, the federal banking agencies jointly revised their capital standards to
specify that concentration of credit and nontraditional activities are among the
factors that the agencies will consider in evaluating capital adequacy. In that
year, the OTS and FDIC amended their risk-based capital standards with respect
to the risk weighting of loans made to finance the purchase or construction of
multi-family residences. The OTS adopted final regulations adding an interest
rate risk component to the risk-based capital requirements for savings
associations (such as WMBFA and WMBfsb), although implementation of the
regulation has been delayed. Management believes that the effect of including
such an interest rate risk component in the calculation of risk-adjusted capital
would not cause WMBFA or WMBfsb to cease to be well capitalized. In June 1996,
the FDIC and certain other federal banking agencies (not including the OTS)
issued a joint policy statement providing guidance on prudent interest rate risk
management principles. The agencies stated that they would

90
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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

determine banks' interest rate risk on a case-by-case basis, and would not adopt
a standardized measure or establish an explicit minimum capital charge for
interest rate risk.

NOTE 18: STOCK OPTION PLANS, EMPLOYEE STOCK PURCHASE PLAN, AND RESTRICTED STOCK
PLANS

On March 8, 1984, the Company's stockholders approved the adoption of the
1983 incentive stock option plan, providing for the award of incentive stock
options or nonqualified stock options to certain officers of the Company at the
discretion of the Board of Directors. On April 19, 1994, the Company's
stockholders approved the adoption of the 1994 stock option plan (the "1994
Plan") in which the right to purchase common stock of WMI may be granted to
officers, directors, consultants and advisers of the Company. The 1994 Plan is
generally similar to the 1983 plan, which terminated according to its terms in
1993. The 1994 Plan does not affect any options granted under the 1983 plan.

Under the 1994 Plan, on the date of the grant, the exercise price of the
option must at least equal the market value per share of WMI's common stock. The
1994 Plan provides for the granting of options for a maximum of 30 million
common shares. During 2000, the Board of Directors approved an increase in the
maximum number of common shares available for grant from 18 million to 30
million.

On September 16, 1997, the Company's Board of Directors approved the
adoption of a broad-based stock option plan called "WAMU Shares" as part of the
Company's effort to build a unified team and to appropriately compensate its
employees. This plan provides for an award of nonqualified stock options to all
eligible employees who were employed by the Company on September 1, 1997.
Generally, full-time employees have an option to purchase 150 shares of WMI
common stock, while part-time employees have an option to purchase 75 shares.
Employees who were designated to receive options under the 1994 Plan were
excluded. All grants were made using the fair market value of WMI's common stock
on September 1, 1997, and all options vested on September 1, 1999. The WAMU
Shares plan provides for the granting of options for a maximum of 3,300,000
common shares.

On December 15, 1998, the Company's Board of Directors approved the
adoption of a broad-based stock option plan ("WAMU Shares II") to provide a
performance incentive and encourage stock ownership by employees of the Company.
This plan provides for an award of nonqualified stock options to all eligible
employees who were employed by the Company on January 4, 1999. Full-time
employees received an option to purchase 100 shares of WMI common stock, while
part-time employees received an option to purchase 50 shares. Employees who were
designated to receive options under the 1994 Plan were excluded. These employee
stock options were in addition to the Company's previous broad-based stock
option plan described above. Options under the WAMU Shares II plan were granted
at the fair market value of WMI's common stock on December 14, 1998, and all
options vested on January 4, 2001. The WAMU Shares II plan provides for the
granting of options up to a maximum of 3,300,000 common shares.

Stock options under all stock plans were generally exercisable on a
phased-in schedule over two to five years, depending upon the terms of the
grant, and expire three to ten years from the grant date. Options to purchase
10,045,033 and 9,128,792 shares of common stock were fully exercisable at
December 31, 2000 and 1999.

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock options granted, exercised, or forfeited were as follows:

WEIGHTED WEIGHTED AVERAGE
AVERAGE FAIR VALUE PER
NUMBER OF EXERCISE PRICE OF SHARE OF OPTIONS
OPTION SHARES OPTION SHARES AT DATE OF GRANT
------------- ----------------- ----------------

Balance, December 31, 1997...................... 13,491,363 25.46
Granted in 1998................................. 3,486,639 32.94 7.83
Exercised in 1998............................... (3,359,459) 13.93
Forfeited in 1998............................... (339,316) 34.52
----------
Balance, December 31, 1998...................... 13,279,227 30.11
Granted in 1999................................. 6,306,833 28.68 9.51
Exercised in 1999............................... (2,032,693) 14.58
Forfeited in 1999............................... (2,131,452) 37.12
Grants in connection with acquisitions.......... 1,592,783 13.42
----------
Balance, December 31, 1999...................... 17,014,698 28.94
Granted in 2000................................. 5,374,185 48.30 15.27
Exercised in 2000............................... (1,710,503) 31.64
Forfeited in 2000............................... (725,275) 32.91
----------
Balance, December 31, 2000...................... 19,953,105 34.95
==========

Financial data pertaining to outstanding stock options were as follows:

DECEMBER 31, 2000
- ---------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE NUMBER OF EXERCISE PRICE
RANGES OF NUMBER OF REMAINING EXERCISE PRICE OF EXERCISABLE OF EXERCISABLE
EXERCISE PRICES OPTION SHARES YEARS OPTION SHARES OPTION SHARES OPTION SHARES
- --------------- ------------- --------- ----------------- ------------------ ------------------

$ 5.63 - $10.97 455,493 2.7 $ 9.80 455,493 $ 9.80
11.52 - 20.66 1,567,956 4.5 15.57 1,567,956 15.57
21.00 - 30.49 5,143,503 8.2 25.52 2,613,126 25.60
31.44 - 35.58 4,507,681 6.3 33.07 2,157,111 33.29
36.07 - 40.56 1,690,624 3.1 39.29 1,659,752 39.30
41.13 - 44.92 1,584,424 7.0 44.85 1,564,234 44.89
45.54 - 50.13 5,003,424 10.0 50.11 27,361 47.90
---------- ----------
19,953,105 34.95 10,045,033 30.30
========== ==========

Under the terms of the Company's
107

Note 19: Employee Stock Purchase Plan ("ESPP"), an
employee may purchase WMI common stock at a 15% discount without paying
brokerage fees or commissions on purchases. The Company pays for the program's
administrative expenses. The plan is open to all employees who are at least 18
years old, have completed at least one year of service, and work at least 20
hours per week. Participation can be by either payroll deduction or lump sum
payments with a maximum annual contribution of 10% of each employee's previous
year's eligible cash compensation. Under the ESPP, dividends are automatically
reinvested.

The Company adopted the disclosure requirements of SFAS No. 123, and will
continue to measure its employee stock-based compensation arrangements under the
provisions of the AICPA Accounting Principles Board Opinion 25. Accordingly, no
compensation cost has been recognized for its stock option plans and its ESPP.
Had compensation cost for the Company's compensation plans been determined
consistent with SFAS

92
95
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

No. 123, the Company's net 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,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)

Net income attributable to common stock
Basic:
As reported.................................... $1,899 $1,817 $1,471
Pro forma...................................... 1,880 1,803 1,446
Diluted:
As reported.................................... 1,899 1,817 1,480
Pro forma...................................... 1,880 1,803 1,455
Net income per common share
Basic:
As reported.................................... $ 3.55 $ 3.17 $ 2.61
Pro forma...................................... 3.52 3.15 2.56
Diluted:
As reported.................................... 3.54 3.16 2.56
Pro forma...................................... 3.50 3.14 2.52

The fair value of options granted under the Company's stock option plans
was estimated on the date of grant using the Binomial option-pricing model with
the following weighted average assumptions:

YEAR ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
-------------- -------------- -------

Annual dividend yield..................... 2.37% - 2.57% 2.24% - 2.45% 2.68%
Expected volatility....................... 30.46 - 34.26 27.51 - 31.61 27.71
Risk free interest rate................... 5.11 - 6.71 4.54 - 6.29 5.44
Granted options expected life............. 5 - 7.25 years 4 - 5 years 5 years

The Company maintains a restricted stock plan for the benefit of directors,
key officers, loan officers and investment representatives. Under the plan, the
Company granted 684,490, 474,893 and 203,904 shares of restricted stock in 2000,
1999 and 1998. Upon grant, shares are issued to a trustee and are released to
recipients when the restrictions lapse. The restrictions are based upon either a
continuous service or performance requirement. 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 as of December 31, 2000 was $23
million.

The total compensation expense recognized for the restricted shares was $21
million, $9 million and $9 million in 2000, 1999 and 1998. Restricted shares
accrue dividends. All canceled or forfeited shares become available for future
grants.

NOTE 19: EMPLOYEE BENEFITS PROGRAMS

Benefits Programs
Pension Plan
Washington Mutual maintains a noncontributory cash balance defined benefit pension plan (the "Pension Plan") for substantially all 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 benefit balance. It is the 93
96
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company's policy to fund the Pension Plan on a current basis to the extent deductible under federal income tax regulations. The Pension Plan's assets consist primarilymostly of mutual funds and equity securities.
Changes in the projected benefit obligation were as follows:
YEAR ENDED
DECEMBER 31,
--------------
2000 1999
----- -----
(IN MILLIONS)

Benefit obligation, beginning of year....................... $604 $681
Actuarial (gain) loss....................................... 67 (61)
Interest cost............................................... 51 45
Service cost................................................ 26 31
Benefits paid............................................... (53) (64)
Amendments.................................................. 16 (28)
---- ----
Benefit obligation, end of year............................. $711 $604
==== ====
Year Ended December 31,
2001 2000
(in millions)

Benefit obligation, beginning of year $ 711 $ 604
Actuarial loss 52 67
Interest cost 53 51
Service cost 29 26
Benefits paid (47 ) (53 )
Amendments - 16
Benefit obligation, end of year $ 798 $ 711
Changes in Pension Plan assets were as follows:
YEAR ENDED
DECEMBER 31,
--------------
2000 1999
----- -----
(IN MILLIONS)

Fair value of assets, beginning of year..................... $786 $756
Actual return on assets..................................... (14) 94
Benefits paid............................................... (53) (64)
---- ----
Fair value of assets, end of year........................... $719 $786
==== ====
Year Ended December 31,
2001 2000
(in millions)

Fair value of assets, beginning of year $ 719 $ 786
Actual return on assets (5 ) (14 )
Benefits paid (47 ) (53 )
Employer contribution 87 -
Fair value of assets, end of year $ 754 $ 719
Reconciliations of funded status were as follows:
DECEMBER 31,
--------------
2000 1999
----- -----
(IN MILLIONS)

Funded status............................................... $ 8 $182
Unrecognized net (gain) loss................................ 82 (59)
Unamortized prior service cost.............................. (4) (24)
Remaining unamortized, unrecognized net asset............... (2) (2)
--- ----
Prepaid benefit cost........................................ $84 $ 97
=== ====
Year Ended December 31,
2001 2000
(in millions)

Funded status $ (44 ) $ 8
Unrecognized net loss 194 82
Unamortized prior service cost (1 ) (4 )
Remaining unamortized, unrecognized net asset (1 ) (2 )
Prepaid benefit cost $ 148 $ 84
108
Net periodic expense for the Pension Plan was as follows:
YEAR ENDED
DECEMBER 31,
--------------------
2000 1999 1998
---- ---- ----
(IN MILLIONS)

Interest cost............................................... $51 $45 $42
Service cost................................................ 26 31 33
Expected return on assets................................... (61) (62) (62)
Amortization of prior service credit........................ (4) (5) (5)
Recognized net actuarial loss............................... -- 1 --
Curtailment gain............................................ -- (3) --
--- --- ---
Net periodic expense........................................ $12 $ 7 $ 8
=== === ===

94
97
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Year Ended December 31,
2001 2000 1999
(in millions)

Interest cost $ 53 $ 51 $ 45
Service cost 29 26 31
Expected return on assets (55 ) (61 ) (62 )
Amortization of prior service credit (4 ) (4 ) (5 )
Recognized net actuarial loss 1 - 1
Curtailment gain - - (3 )
Net periodic expense $ 24 $ 12 $ 7
Weighted average assumptions used in accounting for the Pension Plan were as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----

Assumed discount rate....................................... 7.75% 7.75% 6.75%
Assumed rate of compensation increase....................... 6.00 5.15 4.83
Expected return on assets................................... 8.00 8.56 9.00
Year Ended December 31,
2001 2000 1999
Assumed discount rate 7.25 % 7.75 % 7.75 %
Assumed rate of compensation increase 5.50 6.00 5.15
Expected return on assets 8.00 8.00 8.56 Nonqualified Defined Benefit Plans and Other Postretirement Benefit Plans
The Company, as successor to previously acquired companies, has assumed responsibility for nonqualified, noncontributory unfunded postretirement benefit plans, including retirement restoration plans for certain employees, a number of 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 are generally based on years of service. Benefits under the outside directors' retirement plans generally are payable for a period equal to the participants' service on the Board of Directors, with a lifetime benefit payable to participants with 15 or more 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 dependents. The expected cost of providing these benefits to retirees, their beneficiaries and covered dependents was accrued during the years each employee provided services.
109

Changes in the benefit obligation were as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
NONQUALIFIED OTHER NONQUALIFIED OTHER
DEFINED POSTRETIREMENT DEFINED POSTRETIREMENT
BENEFIT PLANS BENEFITS BENEFIT PLANS BENEFITS
------------- -------------- ------------- --------------
(IN MILLIONS)

Benefit obligation, beginning of
year................................. $99 $30 $104 $39
Interest cost.......................... 7 2 7 2
Actuarial (gain) loss.................. 1 (1) (2) (9)
Service cost........................... -- 1 -- 1
Benefits paid.......................... (9) (3) (10) (2)
Curtailment gain....................... -- -- -- (1)
--- --- ---- ---
Benefit obligation, end of year........ $98 $29 $ 99 $30
=== === ==== ===
Year Ended December 31,
2001 2000
Nonqualified
Defined
Benefit Plans Other
Postretirement
Benefits Nonqualified
Defined
Benefit Plans Other
Postretirement
Benefits
(in millions)

Benefit obligation, beginning of year $ 98 $ 29 $ 99 $ 30
Interest cost 8 2 7 2
Actuarial (gain) loss 5 - 1 (1 )
Service cost - 1 - 1
Benefits paid (9 ) (3 ) (9 ) (3 )
Benefit obligation, end of year $ 102 $ 29 $ 98 $ 29
For measurement of the net periodic cost of other postretirement benefit plans, a 5.75%5.00% annual increase in the medical cardcare trend rate was assumed for 20002001 and thereafter. The assumed discount rate was 7.25% for 2001 and 7.75% for 2000 and 1999, and
6.75% for 1998.

1999.
Account Balance Plans
Savings Plans. The Company sponsors a retirement savings and investment plan (the "RSIP") for all eligible employees that allows participants to make contributions by salary deduction equal to 15%19% or less of their salary pursuant to Section 401(k) of the Internal Revenue Code. Employee contributions vest immediately. The Company's matching contributions and any profit sharing contributions made to employees vest based on years of service.
Company contributions to savings plans were $65 million, $41 million and $39 million in 2001, 2000 and $36 million in 2000, 1999, and 1998.

95
98
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)respectively.
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.

NOTE
Note 20: INTEREST RATE RISK MANAGEMENT

From timeDerivative Financial Instruments
The Company uses a variety of derivative financial instruments to time,manage interest rate risk and reduce the following strategieseffects that changing interest rates may have on net interest income. These instruments include interest rate swaps, interest rate caps and collars, interest rate corridors, swaptions, forward sales agreements and options. The contract or notional amount of a derivative, along with the other terms of the derivative, is used to determine the amounts to be usedexchanged between the parties. Because the contract or notional amount does not represent amounts exchanged by the Companyparties, it is not a measure of loss exposure related to
reduce its exposure to interest rate risk: the origination and purchase of ARMs
and the purchase of adjustable-rate MBS; the sale of fixed-rate SFR loan
production or fixed-rate MBS; and the use of derivative instruments, such as
interest rate exchange agreements, interest rate cap agreements, forward sales
contracts, interest rate floors, and purchased puts.

The Company uses forward sales contracts to hedge itsderivatives nor of exposure to increasing interest rates with respect to fixed-rate loans and loan commitments
which the Company intends to sell in the secondary market. Forward sales
contracts are used to sell fixed-rate loans at a future date for a specified
price. Gains or losses are recognized at the time the contracts mature and are
recorded as a component of gain on sale of loans. As of December 31, 2000 and
1999, the Company had $2.36 billion and $635 million in forward sales contracts
to hedge loan commitments, which were expected to close, and SFR loans, which
were held for sale.

Interest rate exchange agreements, interest rate cap agreements, and
forward sales contractsliquidity risk.
These 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. As of December 31, 2001 and 2000, the Company's credit risk amount related to derivative financial instruments totaled $784 million and $175 million, respectively. The Company controls the credit risk associated with its various derivative agreements through counterparty credit review, counterparty
110

exposure limits and monitoring procedures. The Company's useCompany obtains collateral from the counterparties for amounts in excess of derivative instruments reduces the effect that
changing interest rates may haveexposure limits and monitors its exposure and collateral requirements on net interest income. The Company uses such
instruments to reduce the volatility of net interest income over an interest
rate cycle. The Company does not invest in leveraged derivative instruments.
During 2000, the Company did terminate interest rate exchange agreements and
interest rate cap agreements. However, during 1999, the Company did not
terminate any such agreements.

Scheduled maturities of interest rate exchange agreements were as follows:

DECEMBER 31, 2000
---------------------------------------------------
NOTIONAL RECEIVE PAY CARRYING FAIR
AMOUNT RATE(1) RATE(1) VALUE VALUE
-------- ------- ------- -------- -----
(DOLLARS IN MILLIONS)

Designated against deposits and borrowings:
Due within one year.......................... $ 8,644 6.67% 6.29% $-- $(10)
After one but within two years............... 2,524 6.75 6.59 -- (24)
After two but within three years............. 478 6.36 6.02 -- (2)
After three years............................ 2,252 7.18 6.65 -- 130
------- --- ----
$13,898 6.76 6.39 $-- $ 94
======= === ====

- ---------------
(1)a daily basis.
As of December 31, 2000,2001, other comprehensive income included $35 million of deferred net losses on derivative instruments that are expected to be reclassified as earnings during the notional amountnext twelve months along with the effects of interest rate exchange
agreements in whichthe forecasted transactions being hedged. The maximum elapsed time before the occurrence of all forecasted transactions that the Company paid a fixed rate was $11.01 billion.is hedging is two years.
The Company paidhas not discontinued any derivative instruments due to a variable rate forchange in the remaining interest rate exchange
agreements. The termsprobability of each agreement had specific LIBOR or COFI reset and
index requirements that resulted in different rates for each agreement. The
rate represented the weighted average rate asa forecasted transaction.
Note 21: Fair Value of the last reset date for
each agreement.

96
99
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31, 1999
-----------------------------------------------
NOTIONAL RECEIVE PAY CARRYING FAIR
AMOUNT RATE(1) RATE(1) VALUE VALUE
-------- ------- ------- -------- -----
(DOLLARS IN MILLIONS)

Designated against deposits and borrowings:
Due within one year.................................. $ 5,376 6.15% 5.40% $-- $33
After one but within two years....................... 2,756 6.01 5.37 -- 31
After two but within three years..................... 769 6.11 6.21 -- 9
After three years.................................... 1,502 6.59 6.17 -- 5
------- --- ---
$10,403 6.17 5.56 $-- $78
======= === ===

- ---------------
(1) As of December 31, 1999, the Company paid a fixed rate on all of its
interest rate exchange agreements. The terms of each agreement had specific
LIBOR or COFI reset and index requirements that resulted in different rates
for each agreement. The rate represented the weighted average rate as of the
last reset date for each agreement.

Scheduled maturities of interest rate cap agreements were as follows:

DECEMBER 31, 2000
-------------------------------------------------
SHORT-TERM
NOTIONAL STRIKE RECEIPT CARRYING FAIR
AMOUNT RATE RATE(1) VALUE VALUE
-------- ------ ---------- -------- -----
(DOLLARS IN MILLIONS)

Designated against deposits and borrowings:
Due within one year(2).............................. $7,502 6.01% 6.73% $ 6 $16
After one but within two years(3)................... 380 7.47 6.46 2 --
After two but within three years(4)................. 214 7.86 6.26 1 --
After three years(5)................................ 190 8.14 5.59 2 --
------ --- ---
$8,286 6.17 6.68 $11 $16
====== === ===

- ---------------
(1) The terms of each agreement had specific LIBOR or COFI reset and index
requirements, which resulted in different short-term receipt rates for each
agreement. The receipt rate represented the weighted average rate as of the
last reset date for each agreement.
(2) Included corridors of $349 million notional amount with a weighted average
ceiling of 6.88%.
(3) Included corridors of $80 million notional amount with a weighted average
ceiling of 9.50%.
(4) Included corridors of $90 million notional amount with a weighted average
ceiling of 9.50%.
(5) Included corridors of $191 million notional amount with a weighted average
ceiling of 9.48%.

DECEMBER 31, 1999
-------------------------------------------------
SHORT-TERM
NOTIONAL STRIKE RECEIPT CARRYING FAIR
AMOUNT RATE RATE(1) VALUE VALUE
-------- ------ ---------- -------- -----
(DOLLARS IN MILLIONS)

Designated against deposits and borrowings:
Due within one year(2).............................. $ 2,640 5.88% 6.08% $ 1 $ 6
After one but within two years(3)................... 7,704 6.01 6.14 33 48
After two but within three years(4)................. 380 7.47 5.81 2 2
After three years(5)................................ 405 7.99 5.13 4 1
------- --- ---
$11,129 6.10 6.08 $40 $57
======= === ===

- ---------------
(1) The terms of each agreement had specific LIBOR or COFI reset and index
requirements, which resulted in different short-term receipt rates for each
agreement. The receipt rate represented the weighted average rate as of the
last reset date for each agreement.
(2) Included collars of $1.88 billion notional amount with a weighted average
floor of 5.01% and corridors of $612 million notional amount with a weighted
average ceiling of 6.52%.
(3) Included corridors of $349 million notional amount with a weighted average
ceiling of 6.88%.
(4) Included corridors of $80 million notional amount with a weighted average
ceiling of 9.50%.
(5) Included corridors of $281 million notional amount with a weighted average
ceiling of 9.49%.

97
100
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Financial data pertaining to interest rate exchange agreements were as
follows:

YEAR ENDED DECEMBER 31,
----------------------------
2000 1999 1998
------- ------- ------
(DOLLARS IN MILLIONS)

Weighted average net effective (benefit) cost, end of
year...................................................... (0.37)% (0.61)% 0.54%
Weighted average net effective (benefit) cost during the
year...................................................... (0.33) 0.15 0.37
Monthly average notional amount of interest rate exchange
agreements................................................ $14,340 $ 7,801 $3,042
Maximum notional amount of interest rate exchange agreements
at any month end.......................................... 15,634 10,403 3,824
Net cost included in interest income on available-for-sale
securities................................................ -- 2 2
Net cost included in interest expense on deposits........... 1 4 3
Net (benefit) cost included in interest expense on
borrowings................................................ (48) 6 6

Financial data pertaining to interest rate cap agreements were as follows:

YEAR ENDED DECEMBER 31,
----------------------------
2000 1999 1998
------- ------- ------
(IN MILLIONS)

Monthly average notional amount of interest rate cap
agreements................................................ $ 9,520 $ 7,657 $3,260
Maximum notional amount of interest rate cap agreements at
any month end............................................. 11,129 11,411 3,875
Net cost included in interest income on available-for-sale
securities................................................ -- -- 1
Net cost included in interest expense on deposits........... 2 3 5
Net cost included in interest expense on borrowings......... 27 14 1

Changes in interest rate exchange agreements and interest rate cap
agreements were as follows:

YEAR ENDED DECEMBER 31, 2000
------------------------------
INTEREST RATE INTEREST RATE
EXCHANGE CAP
AGREEMENTS AGREEMENTS
------------- -------------
(IN MILLIONS)

Notional balance, beginning of year......................... $10,403 $11,129
Additions................................................... 9,771 --
Maturities.................................................. (5,476) (2,643)
Terminations................................................ (800) (200)
------- -------
Notional balance, end of year............................... $13,898 $ 8,286
======= =======

NOTE 21: FAIR VALUE OF FINANCIAL INSTRUMENTSInstruments
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.

98
101
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair value estimates were determined for existing balance sheet and
off-balance sheet financial instruments, including derivative instruments, without attempting to estimate the value of anticipated future business and the value of certain assets and liabilities that were not considered financial instruments. Significant assets that were not considered financial instruments include premises and equipment, net tax assets, real estate held for investment, foreclosed assets and 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. Deposit intangibles were also excluded from the fair value estimates. 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, available-for-sale securities, investment in FHLBs, checking accounts, savings accounts and MMDAs, and federal funds purchased and commercial paper.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument as of December 31, 20002001 and 1999:

Cash and cash equivalents --2000:
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.
Available-for-sale and held-to-maturity 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.

Held-to-maturity 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.
Loans held for sale --– Fair values were derived from quoted market prices, internal estimates and pricing of similar instruments.
111

Loans held in portfolio --– Loans were priced using an option adjustedoption-adjusted cash flow valuation methodology. 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.

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.
Deposits --– The fair value of checking accounts, savings accounts and MMDAs was the amount payable on demand at the reporting date. For time deposit accounts, the fair value was determined using an option adjustedoption-adjusted cash flow methodology. The discount rate was derived from the rate currently offered on alternate funding sources with similar maturities. Core deposit intangibles were not included in the valuation.

Federal
Other financial liabilities – These liabilities include federal funds purchased, and commercial paper, -- The value was determinedrepurchase agreements and other borrowings. These were valued using an option adjustedoption-adjusted cash flow methodology. The discount rate for the respective financial liabilities was derived from the rate currently offered on similar borrowings.

Repurchase agreements -- These were valued using an option adjusted cash
flow methodology. The discount rate was derived from the rate currently offered
on similar borrowings. The fair value of embedded purchased floors and caps was
determined using dealer quotations, when available. If a quoted market price was not available, fair value was estimated using an internal analysis based on the market prices of similar instruments. The fair value of purchased floors and caps embedded in repurchase agreements was determined using dealer quotations, when available.
Advances from FHLBs --– These were valued using an option adjustedoption-adjusted cash flow methodology. The discount rate was derived from the rate currently offered on similar borrowings.

99
102
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Trust preferred 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.

Other borrowings -- These
Redeemable preferred stock – Fair values were valued using an option adjusted cash flow
methodology. The discount rate was derived from the rate currently offeredbased on similar borrowings.quoted market prices.
Derivative financial instruments --– The estimated fair value for interest rate
exchange agreements and interest rate cap agreementsof these financial instruments was determined using dealer
quotations, when available. If abased on broker quotes, an internal analysis based on the quoted market price was not available, fair
valueprices or rates for the same or similar instruments, or was estimated using an internal analysis based on the market prices of
similar instruments. The market prices for similar instruments were used to
value interest rate cap agreements.

Forward sales contracts designated against loans -- The fair value of
forward sales contracts purchased as a hedge of fixed-rate commitments and
commitments to fund real estate loans was estimated using current market prices adjusted for various risk factors and market volatility.

Off-balance sheet loan commitments -- The fair value of loan commitments
was estimated based on current levels of interest rates versus the committed
interest rates. The balance shown represents the differential between committed
value and fair value.
112

The estimated fair value of the Company's financial instruments was as follows:
DECEMBER 31,
--------------------------------------------
2000 1999
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN MILLIONS)

FINANCIAL ASSETS:
Held-to-maturity securities................... $ 16,565 $ 16,486 $ 19,401 $ 19,037
Loans held for sale........................... 3,404 3,447 794 794
Loans held in portfolio....................... 118,612 117,689 112,704 112,094
MSR........................................... 1,017 1,125 643 825
FINANCIAL LIABILITIES:
Time deposits................................. 34,418 34,539 37,592 37,398
Repurchase agreements......................... 29,756 29,596 30,163 30,158
Advances from FHLBs........................... 57,855 57,951 57,094 57,065
Trust preferred securities.................... 943 888 941 898
Other borrowings.............................. 8,987 9,070 5,262 5,244
DERIVATIVE FINANCIAL INSTRUMENTS(1):
Interest rate exchange agreements:
Designated against deposits and
borrowings............................... -- 94 -- 78
Interest rate cap agreements:
Designated against deposits and
borrowings............................... 11 16 40 57
OTHER OFF-BALANCE SHEET INSTRUMENTS:
Forward sales contracts designated against
loans...................................... -- 8 -- 8
Off-balance sheet loan commitments............ -- 2 -- (3)

- ---------------
(1) See
December 31,
2001 2000
Carrying
Amount Fair
Value Carrying
Amount Fair
Value
(in millions)

Financial Assets:
Held-to-maturity securities $ - $ - $ 16,565 $ 16,486
Loans held for sale 23,842 23,842 3,404 3,447
Loans held in portfolio 131,587 133,531 118,612 117,689
MSR 6,241 6,266 1,017 1,125
Financial Liabilities:
Time deposits 36,962 37,202 34,418 34,539
Repurchase agreements 39,447 39,280 29,756 29,596
Advances from FHLBs 61,182 61,091 57,855 57,951
Trust preferred securities 1,699 1,694 943 888
Other borrowings 10,877 11,311 8,987 9,070
Redeemable preferred stock 102 73 - -
Derivative Financial Instruments:
Interest rate swaps 215 215 - 94
Interest rate caps, collars and corridors - - 11 16
Swaptions 119 119 - -
Rate lock commitments 3 3 - 2
Forward sales agreements 274 274 - 8
Put options 19 19 - -113
Note 20: Interest Rate Risk Management.

100
103
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 22: FINANCIAL INFORMATION --Financial Information — WMI
The following WMI (parent company only) financial information should be read in conjunction with the other Notes to Consolidated Financial Statements.

STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(IN MILLIONS)

INTEREST INCOME
Notes receivable from subsidiaries.......................... $ 34 $ 12 $ 36
Other interest income....................................... 1 14 2
------ ------ ------
Total interest income..................................... 35 26 38
INTEREST EXPENSE
Notes payable to subsidiaries............................... 49 49 55
Other borrowings............................................ 163 106 85
------ ------ ------
Total interest expense.................................... 212 155 140
------ ------ ------
Net interest expense...................................... (177) (129) (102)
Provision for loan and lease losses......................... 1 -- --
------ ------ ------
Net interest expense after provision...................... (178) (129) (102)
NONINTEREST INCOME
Other income................................................ 5 10 2
------ ------ ------
Total noninterest income.................................. 5 10 2
NONINTEREST EXPENSE
Compensation and benefits................................... 28 16 27
Transaction-related expense................................. -- 12 58
Other expense............................................... 34 19 13
------ ------ ------
Total noninterest expense................................. 62 47 98
------ ------ ------
Net loss before income tax benefit, dividends from
subsidiaries and equity in undistributed income of
subsidiaries........................................... (235) (166) (198)
Income tax benefit.......................................... 105 65 86
Dividends from subsidiaries................................. 784 1,140 849
Equity in undistributed earnings of subsidiaries............ 1,245 778 750
------ ------ ------
NET INCOME.................................................. $1,899 $1,817 $1,487
====== ====== ======

101
104
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Year Ended December 31,
2001 2000 1999
(in millions)

Interest Income
Notes receivable from subsidiaries $ 38 $ 34 $ 12
Other interest income 1 1 14
Total interest income 39 35 26
Interest Expense
Notes payable to subsidiaries 93 49 49
Other borrowings 130 163 106
Total interest expense 223 212 155
Net interest expense (184 ) (177 ) (129 )
Provision for loan and lease losses 1 1 -
Net interest expense after provision (185 ) (178 ) (129 )
Noninterest Income
Other income 6 5 10
Total noninterest income 6 5 10
Noninterest Expense
Compensation and benefits 28 28 16
Transaction-related expense - - 12
Other expense 74 34 19
Total noninterest expense 102 62 47
Net loss before income tax benefit, dividends from subsidiaries and equity in undistributed income of subsidiaries (281 ) (235 ) (166 )
Income tax benefit 111 105 65
Dividends from subsidiaries 1,642 784 1,140
Equity in undistributed earnings of subsidiaries 1,642 1,245 778
Net Income $ 3,114 $ 1,899 $ 1,817
114

STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
------------------
2000 1999
------- -------
(IN MILLIONS)

ASSETS
Cash and cash equivalents................................... $ 388 $ 284
Available-for-sale securities............................... 6 5
Loans....................................................... 5 333
Accounts and notes receivable from subsidiaries............. 363 132
Investment in subsidiaries.................................. 12,479 10,614
Other assets................................................ 280 198
------- -------
Total assets.............................................. $13,521 $11,566
======= =======
LIABILITIES
Notes payable to subsidiaries............................... $ 567 $ 566
Other borrowings............................................ 2,400 1,804
Other liabilities........................................... 388 143
------- -------
Total liabilities......................................... 3,355 2,513
STOCKHOLDERS' EQUITY........................................ 10,166 9,053
------- -------
Total liabilities and stockholders' equity................ $13,521 $11,566
======= =======

102
105
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 31,
2001 2000
(in millions)

Assets
Cash and cash equivalents $ 1,391 $ 388
Available-for-sale securities 11 6
Loans 4 5
Accounts and notes receivable from subsidiaries 765 363
Investment in subsidiaries 15,850 12,479
Other assets 553 280
Total assets $ 18,574 $ 13,521
Liabilities
Notes payable to subsidiaries $ 1,333 $ 567
Other borrowings 2,436 2,400
Other liabilities 640 388
Total liabilities 4,409 3,355
Redeemable preferred stock 102 -
Stockholders' Equity 14,063 10,166
Total liabilities, redeemable preferred stock, and stockholders' equity $ 18,574 $ 13,521
115

STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(IN MILLIONS)

CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $1,899 $1,817 $1,487
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for loan and lease losses.................... 1 -- --
Increase in income taxes receivable.................... 65 80 15
Equity in undistributed earnings of subsidiaries....... (1,245) (778) (742)
(Increase) decrease in other assets.................... (147) 117 (85)
(Decrease) increase in other liabilities............... (134) 466 31
------ ------ ------
Net cash provided by operating activities............ 439 1,702 706
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments on available-for-sale securities......... -- 4 1
Origination of loans, net of principal payments............. 327 (287) (32)
(Increase) decrease in notes receivable from subsidiaries... (232) 82 (45)
Investment in subsidiaries.................................. (404) (2,052) (892)
Dividends received from subsidiaries........................ 784 1,140 849
------ ------ ------
Net cash provided (used) by investing activities..... 475 (1,113) (119)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable to subsidiaries................. 1 (108) (4)
Proceeds from (repayments of) other borrowings.............. 596 846 (189)
Issuance of common stock through employee stock plans....... 88 84 81
Issuance of common stock to acquire Long Beach Mortgage..... -- 207 --
Redemption of preferred stock............................... -- -- (313)
Repurchase of common stock, net............................. (869) (1,082) (24)
Cash dividends paid......................................... (626) (570) (456)
------ ------ ------
Net cash used by financing activities................ (810) (623) (905)
------ ------ ------
Increase (decrease) in cash and cash equivalents..... 104 (34) (318)
Cash and cash equivalents, beginning of year......... 284 318 636
------ ------ ------
Cash and cash equivalents, end of year............... $ 388 $ 284 $ 318
====== ====== ======

103
106
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE
Year Ended December 31,
2001 2000 1999
(in millions)

Cash Flows from Operating Activities
Net income $ 3,114 $ 1,899 $ 1,817
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Provision for loan and lease losses 1 1 -
Increase in income taxes receivable - 65 80
Equity in undistributed earnings of subsidiaries (1,642 ) (1,245 ) (778 )
(Increase) decrease in other assets (273 ) (147 ) 117
Increase (decrease) in other liabilities 368 (134 ) 466
Net cash provided by operating activities 1,568 439 1,702
Cash Flows from Investing Activities
Purchases of available-for-sale securities (8 ) - -
Sales of available-for-sale securities 2 - -
Principal payments on available-for-sale securities - - 4
Origination of loans, net of principal payments 1 327 (287 )
(Increase) decrease in notes receivable from subsidiaries (401 ) (232 ) 82
Investment in subsidiaries (3,676 ) (404 ) (2,052 )
Dividends received from subsidiaries 1,642 784 1,140
Net cash provided (used) by investing activities (2,440 ) 475 (1,113 )
Cash Flows from Financing Activities
Proceeds (repayments) of notes payable to subsidiaries 765 1 (108 )
Proceeds from other borrowings 138 596 846
Common stock issued 197 88 84
Common stock warrants issued, net 398 - -
Common stock issued for acquisitions 1,389 - 207
Repurchase of common stock, net (231 ) (869 ) (1,082 )
Cash dividends paid (781 ) (626 ) (570 )
Net cash provided (used) by financing activities 1,875 (810 ) (623 )
Increase (decrease) in cash and cash equivalents 1,003 104 (34 )
Cash and cash equivalents, beginning of year 388 284 318
Cash and cash equivalents, end of year $ 1,391 $ 388 $ 284
116
Note 23: OPERATING SEGMENTSOperating Segments
Effective January 1, 2001, the Company realigned its business segments.
Separately,lines of business. In connection with this realignment, the Company identified three major operating segments for the purpose of management reporting: Banking and Financial Services, Home Loans and Insurance Services and Specialty Finance. Unlike financial accounting, there is in the process of enhancing its segmentno comprehensive, authoritative guidance for management reporting. The management reporting process methodologies and allocations and will be reporting segment results
under these new methodologies and as realigned beginning withmeasures the first quarter
of 2001.

For the historical periods presented in these financial statements, the
Company managed its business along five major operating segments: Consumer
Banking, Mortgage Banking, Commercial Banking, Financial Services, and Consumer
Finance. Although the Company did not consider the Treasury group to be an
operating segment, it managed investments and interest rate risk. Generally, MBS
that the Company purchased were allocated to Treasury.

Each line of business is managed by a member of the Executive Committee
under the direction of the Chief Executive Officer. The Executive Committee,
which is the senior decision making group of the Company, is comprised of nine
members including the Chairman, President and Chief Executive Officer. Other
Executive Committee members are responsible for managing the centralized support
functions.

The financial performance of the business lines is measured by the
Company's profitability reporting process, which utilizes various management
accounting techniques to ensure that each business line's financial results
reflect the underlying performance of that business. To better assess the
profitability of its business lines, the Company generates segment results that
include balances directly attributable to business line activities as well as
balances that are allocated from traditionally undistributed units. In this way,
management can better assess the fully burdened performance of a particular
business line. Washington Mutual is constantly analyzing its line of business
performance and developing better ways to measure profitability.

Consumer banking includes deposit products (with their related fee income)
and all consumer loan products originated through its financial centers. These
consumer loan products include second equity mortgage loans, lines of credit,
manufactured housing loans, automobile, boat and recreational vehicle loans, and
education loans. The principal activities conducted by mortgage banking are the
origination of SFR and residential construction loans, and all loan servicing
activities. Commercial banking offers a full range of commercial banking
products and services, including commercial business loans, multi-family
residential loans and loans secured by nonresidential real estate. Financial
Services offers a wide range of investment products to the Company's customers,
including mutual funds, variable and fixed annuities and general securities.
Consumer Finance offers direct consumer installment loans and retail sales
financing, and manages the Company's portfolio of purchased specialty mortgage
finance loans.

Whenever feasible, revenues and expenses are directly assigned to business
lines in evaluating their performance. Some of the loans originated by the
Company's mortgage banking line of business are transferred to the consumer
banking line of business at a transfer price that reflects the risk-adjusted
value of such loans. Additionally, corporate overhead, centralized support
costs, and other costs are allocated to each business lineoperating segments based on appropriate
allocation methodologies.

The organizationalthe management structure of the Company and the allocation
methodologies it employs result in business line financial results that areis not necessarily comparable across companies. As such, Washington Mutual's business
line performance may not be directly comparable with similar information fromfor any other financial institutions.

104
107
institution. The Company's operating segments are defined by product type and customer segments. The Company continues to enhance its segment reporting process methodologies. These methodologies are based on the Company's management reporting process, which assigns certain balance sheet and income statement items to the responsible operating segment. New methodologies that are now applied to the measurement of segment profitability include: (1) a funds transfer pricing system, which allocates net interest income between funds users and funds providers; (2) 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 differs from the "losses inherent in the loan portfolio" methodology that is used to measure the allowance for loan and lease losses under generally accepted accounting principles; and (3) the utilization of an activity-based costing approach to measure allocations of operating expenses between the segments. Historical periods have been restated to conform to this new presentation.
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. In addition to traditional banking products, Banking & FS offers investment management and securities brokerage services, and distributes annuity products through the Company's subsidiaries and affiliates. The group's services are offered through multiple delivery channels, including financial centers, business banking centers, ATMs, the internet and 24-hour telephone banking centers.
The Home Loans and Insurance Services Group ("Home Loans Group") originates, purchases, sells, securitizes and services the Company's SFR mortgage assets. These mortgage loans may either be retained in the Company's portfolio, sold or securitized. The group's loan products are made available to consumers through various distribution channels, which include retail home loan centers, financial centers, correspondent financial institutions, prime and specialty wholesale home loan centers, consumer direct contact through call centers, and the internet. The Home Loans Group also includes the activities of Washington Mutual Insurance Services, Inc., an insurance agency that supports the mortgage lending process, as well as the insurance needs of consumers doing business with the Company. Additionally, the Home Loans Group manages the activities of the Company's captive reinsurance programs.
The Specialty Finance Group conducts operations through the Company's banking subsidiaries and Washington Mutual Finance. The Specialty Finance Group provides real estate secured financing primarily for multi-family properties. Commercial real estate lending and residential builder construction finance are also part of the group's secured financing activities. Syndicated lending, asset-based financing and mortgage banker financing are also part of the lending activities conducted by this group. This group offers commercial banking services through Washington Mutual Bank and Washington Mutual Bank, FA and conducts a consumer finance business through Washington Mutual Finance.
The Corporate Support/Treasury & Other category includes management of the Company's interest rate risk, liquidity, capital, borrowings and purchased investment securities portfolios. To the extent not allocated to the business segments, this category also includes the costs of the Company's legal, accounting, human resources and community reinvestment functions. Also reported in this category are the net impact of transfer pricing for loan and deposit balances, the difference between the normalized provision for loan
117

and lease losses for the operating segments and the Company's provision, the effects of inter-segment allocations of financial hedge gains and losses, and the elimination of inter-segment noninterest income and noninterest expense. The inter-segment allocation process includes elements that allow MSR interest rate risk to be hypothetically managed at the segment level with techniques that may differ, in some respects, with the actual techniques used for enterprise-level interest rate risk management.
Financial highlights by operating segment were as follows:
Year Ended December 31, 2001
Banking and
Financial Services Home Loans and
Insurance Services Specialty
Finance Corporate Support/
Treasury & Other Total
(in millions)

Condensed income statement:
Net interest income $ 2,265 $ 2,143 $ 984 $ 1,484 $ 6,876
Provision for loan and lease losses 86 137 199 153 575
Noninterest income 1,778 1,481 ⁽¹⁾ 77 (709 ) 2,627
Noninterest expense 2,406 1,343 256 612 4,617
Income taxes 596 792 228 (37 ) 1,579
Extraordinary item, net of tax - - - 382 382
Net income $ 955 $ 1,352 $ 378 $ 429 $ 3,114
Total average loans $ 12,570 $ 107,123 $ 28,224 $ 397 $ 148,314
Total average assets 16,465 147,710 29,193 32,205 225,573
Total average deposits 83,375 7,882 2,609 2,656 96,522

Year Ended December 31, 2000
Banking and
Financial Services Home Loans and
Insurance Services Specialty
Finance Corporate Support/
Treasury & Other Total
(in millions)

Condensed income statement:
Net interest income $ 1,898 $ 1,628 $ 734 $ 51 $ 4,311
Provision for loan and lease losses 65 101 148 (129 ) 185
Noninterest income 1,403 548 43 (10 ) 1,984
Noninterest expense 1,967 607 190 362 3,126
Income taxes 482 558 165 (120 ) 1,085
Net income $ 787 $ 910 $ 274 $ (72 ) $ 1,899
Total average loans $ 9,315 $ 86,045 $ 22,382 $ - $ 117,742
Total average assets 12,014 124,180 22,655 28,723 187,572
Total average deposits 78,074 1,212 192 798 80,276

Year Ended December 31, 1999
Banking and
Financial Services Home Loans and
Insurance Services Specialty
Finance Corporate Support/
Treasury & Other Total
(in millions)

Condensed income statement:
Net interest income $ 1,714 $ 1,410 $ 703 $ 625 $ 4,452
Provision for loan and lease losses 23 27 117 - 167
Noninterest income 1,135 302 43 29 1,509
Noninterest expense 2,036 582 164 128 2,910
Income taxes 300 419 175 173 1,067
Net income $ 490 $ 684 $ 290 $ 353 $ 1,817
⁽¹⁾
Includes a $1.49 billion allocation of pretax financial hedge gains transferred from the Corporate Support/Treasury & Other category.
118
Note 24: Subsequent Event
On January 4, 2002, the Company completed the acquisition of Dime. In connection with this acquisition, Washington Mutual obtained 9.33% Capital Securities, Series A (the "Trust Preferred Securities"), which were issued by Dime Capital Trust I ("Dime Capital"). As a result of the acquisition, Dime Capital, which was a wholly-owned subsidiary of Dime, became a wholly-owned subsidiary of WMI.
In May 1997, Dime Capital issued $200 million of the Trust Preferred Securities, which are due May 6, 2027. In connection with Dime Capital's issuance of these securities, Dime issued to Dime Capital $206 million principal amount of 9.33% Junior Subordinated Deferrable Interest Debentures, Series A, due May 6, 2027 (the "Series A Subordinated Debentures due 2027"). The Series A Subordinated Debentures due 2027 are and will be the sole assets of Dime Capital. The carrying value of the Trust Preferred Securities, net of unamortized issuance costs, was $152 million at December 31, 2001 and 2000.
119

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Financial highlights by line

SUPPLEMENTARY DATA
Quarterly Results of business were as follows:

YEAR ENDED DECEMBER 31, 2000
------------------------------------------------------------------------------
CONSUMER MORTGAGE COMMERCIAL FINANCIAL CONSUMER TREASURY/
BANKING BANKING BANKING SERVICES FINANCE OTHER TOTAL
-------- -------- ---------- --------- -------- --------- --------
(IN MILLIONS)

Condensed income statement
Net interest income after provision for loan
and lease losses............................. $ 2,501 $ 741 $ 362 $ -- $ 354 $ 168 $ 4,126
Noninterest income............................. 1,036 431 34 371 141 (29) 1,984
Noninterest expense............................ 1,852 575 128 240 274 57 3,126
Income taxes................................... 606 215 98 49 88 29 1,085
------- ------- ------- ---- ------- ------- --------
Net income..................................... $ 1,079 $ 382 $ 170 $ 82 $ 133 $ 53 $ 1,899
======= ======= ======= ==== ======= ======= ========

DECEMBER 31, 2000
------------------------------------------------------------------------------

Total assets................................... $81,973 $54,984 $21,563 $131 $10,250 $25,815 $194,716
======= ======= ======= ==== ======= ======= ========

YEAR ENDED DECEMBER 31, 1999
------------------------------------------------------------------------------
CONSUMER MORTGAGE COMMERCIAL FINANCIAL CONSUMER TREASURY/
BANKING BANKING BANKING SERVICES FINANCE OTHER TOTAL
-------- -------- ---------- --------- -------- --------- --------
(IN MILLIONS)

Condensed income statement
Net interest income after provision for loan
and lease losses............................. $ 2,495 $ 796 $ 376 $ 1 $ 255 $ 362 $ 4,285
Noninterest income............................. 817 259 30 317 56 30 1,509
Transaction-related expense.................... 69 19 1 3 -- 4 96
Noninterest expense............................ 1,788 532 104 200 164 26 2,814
Income taxes................................... 535 185 111 45 58 133 1,067
------- ------- ------- ---- ------ ------- --------
Net income..................................... $ 920 $ 319 $ 190 $ 70 $ 89 $ 229 $ 1,817
======= ======= ======= ==== ====== ======= ========

DECEMBER 31, 1999
------------------------------------------------------------------------------

Total assets................................... $83,713 $46,373 $20,180 $124 $7,371 $28,753 $186,514
======= ======= ======= ==== ====== ======= ========

YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------------------------
CONSUMER MORTGAGE COMMERCIAL FINANCIAL CONSUMER TREASURY/
BANKING BANKING BANKING SERVICES FINANCE OTHER TOTAL
-------- -------- ---------- --------- -------- --------- --------
(IN MILLIONS)

Condensed income statement
Net interest income after provision for loan
and lease losses............................. $ 2,557 $ 833 $ 368 $ 2 $ 203 $ 167 $ 4,130
Noninterest income............................. 626 326 24 230 10 291 1,507
Transaction-related expense.................... 366 122 6 7 -- 7 508
Noninterest expense............................ 1,734 534 101 165 127 99 2,760
Income taxes................................... 401 186 106 25 34 130 882
------- ------- ------- ---- ------ ------- --------
Net income..................................... $ 682 $ 317 $ 179 $ 35 $ 52 $ 222 $ 1,487
======= ======= ======= ==== ====== ======= ========

DECEMBER 31, 1998
------------------------------------------------------------------------------

Total assets................................... $88,369 $36,105 $19,540 $115 $2,764 $18,600 $165,493
======= ======= ======= ==== ====== ======= ========

105
108

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

SUPPLEMENTARY DATA

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)Operations (Unaudited)
Results of operations on a quarterly basis were as follows:
YEAR ENDED DECEMBER 31, 2000
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

Interest income......................................... $3,304 $3,362 $3,485 $3,632
Interest expense........................................ 2,220 2,270 2,451 2,531
------ ------ ------ ------
Net interest income..................................... 1,084 1,092 1,034 1,101
Provision for loan and lease losses..................... 41 44 47 53
Noninterest income...................................... 423 500 511 550
Noninterest expense..................................... 744 775 785 822
------ ------ ------ ------
Income before income taxes.............................. 722 773 713 776
Income taxes............................................ 264 282 260 279
------ ------ ------ ------
Net income.............................................. $ 458 $ 491 $ 453 $ 497
====== ====== ====== ======
Net income attributable to common stock................. $ 458 $ 491 $ 453 $ 497
====== ====== ====== ======
Net income per common share:
Basic................................................. $ 0.83 $ 0.92 $ 0.86 $ 0.94
Diluted............................................... 0.83 0.92 0.86 0.94

YEAR ENDED DECEMBER 31, 1999
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

Interest income......................................... $2,854 $2,960 $3,059 $3,189
Interest expense........................................ 1,727 1,811 1,939 2,133
------ ------ ------ ------
Net interest income..................................... 1,127 1,149 1,120 1,056
Provision for loan and lease losses..................... 41 43 41 42
Noninterest income...................................... 352 364 370 423
Noninterest expense..................................... 730 749 700 731
------ ------ ------ ------
Income before income taxes.............................. 708 721 749 706
Income taxes............................................ 264 268 279 256
------ ------ ------ ------
Net income.............................................. $ 444 $ 453 $ 470 $ 450
====== ====== ====== ======
Net income attributable to common stock................. $ 444 $ 453 $ 470 $ 450
====== ====== ====== ======
Net income per common share:
Basic................................................. $ 0.76 $ 0.78 $ 0.83 $ 0.80
Diluted............................................... 0.76 0.78 0.83 0.80

106
109

Year Ended December 31, 2001
Fourth
Quarter Third
Quarter Second
Quarter First
Quarter
(dollars in millions,
except per share amounts)

Interest income $ 3,525 $ 3,690 $ 3,936 $ 3,914
Interest expense 1,498 1,874 2,263 2,555
Net interest income 2,027 1,816 1,673 1,359
Provision for loan and lease losses 200 200 92 82
Noninterest income 334 738 805 750
Noninterest expense 1,331 1,154 1,119 1,013
Income before income taxes and extraordinary item 830 1,200 1,267 1,014
Income taxes 295 443 469 373
Income before extraordinary item 535 757 798 641
Extraordinary item 307 75 - -
Net income $ 842 $ 832 $ 798 $ 641
Net income attributable to common stock $ 840 $ 830 $ 796 $ 640
Basic earnings per common share⁽¹⁾:
Income before extraordinary item $ 0.62 $ 0.88 $ 0.93 $ 0.77
Extraordinary item 0.36 0.09 - -
Net income 0.98 0.97 0.93 0.77
Diluted earnings per common share⁽¹⁾:
Income before extraordinary item 0.62 0.85 0.91 0.76
Extraordinary item 0.35 0.09 - -
Net income 0.97 0.94 0.91 0.76
Common stock price per share⁽¹⁾:
High 39.10 42.69 39.39 36.50
Low 28.56 35.03 32.78 29.38
Cash dividends declared per common share 0.24 0.23 0.22 0.21
⁽¹⁾
All prior per share amounts have been restated to reflect the 3-for-2 stock split paid on May 15, 2001.

Year Ended December 31, 2000
Fourth
Quarter Third
Quarter Second
Quarter First
Quarter
(dollars in millions,
except per share amounts)

Interest income $ 3,632 $ 3,485 $ 3,362 $ 3,304
Interest expense 2,531 2,451 2,270 2,220
Net interest income 1,101 1,034 1,092 1,084
Provision for loan and lease losses 53 47 44 41
Noninterest income 550 511 500 423
Noninterest expense 822 785 775 744
Income before income taxes 776 713 773 722
Income taxes 279 260 282 264
Net income $ 497 $ 453 $ 491 $ 458
Net income attributable to common stock $ 497 $ 453 $ 491 $ 458
Net income per common share⁽¹⁾:
Basic $ 0.63 $ 0.57 $ 0.61 $ 0.55
Diluted 0.62 0.57 0.61 0.55
Common stock price per share⁽¹⁾:
High 37.25 27.04 21.75 18.00
Low 25.25 20.13 16.42 14.54
Cash dividends declared per common share 0.20 0.19 0.19 0.18
⁽¹⁾
All prior per share amounts have been restated to reflect the 3-for-2 stock split paid on May 15, 2001.
120

WASHINGTON MUTUAL, INC.

INDEX OF EXHIBITS

DESCRIPTION
EXHIBIT
NUMBER 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 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 (filed herewith).

3.3 RP.

3.3†

Articles of Amendment to the Amended and Restated Articles of Incorporation of Washington Mutual, Inc. creating a class of preferred stock, Series H (filed herewith).H.

3.4

Bylaws 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)(filed herewith).

4.1

Rights Agreement dated December 20, 2000 between Registration and Mellon Investor Services, L.L.C. (Incorporated by reference fromto the Company's Current Report on Form 8-K filed January 8, 2001. File No. 0-25188).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

Form of Warrant Agreement, among Dime Bancorp, EquiServe Trust Company, N.A. and EquiServe Limited Partnership, pertaining to the Litigation Tracking Warrants. (Incorporated by reference to Dime Bancorp, Inc.'s Registration Statement on Form 8-A filed on December 15, 2000. File No. 0-32125.)

4.5

Agreement Concerning Litigation Tracking Warrants™ and Replacement Warrant Agent dated January 4, 2002 (filed herewith).

10.1

Intentionally omitted.

10.2*

Lease Agreement between Third and University Limited Partnership and Washington Mutual Savings Bank, dated September 1, 1988.

10.3

Escrow Agreement, dated December 20, 1996, by and among the Company, Keystone Holdings Partners, L.P., the Federal Deposit Insurance Corporation as manager of the FSLIC Resolution Fund, and The Bank of New YorkYork. (Incorporated by reference to the Company's Current Report on Form 8-K dated January 3, 1997. File No. 0-25188).

0-25188.)

10.4

364-Day Credit Agreement by and among the Company, Washington Mutual Finance Corporation, The Chase Manhattan Bank as Administrative Agent, and certain lenderslenders. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. File No. 0-25188).

0-25188.)

10.5

Four-Year Credit Agreement by and among the Company, Washington Mutual Finance Corporation (formerly known as Aristar, Inc.), The Chase Manhattan Bank as Administrative Agent, and certain lenderslenders. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. File No. 0-25188).
0-25188.)

110
Management Contracts and Compensatory Plans and Arrangements (Exhibits
10.6-10.73)

10.6
Management Contracts and Compensatory Plans and Arrangements (Exhibits 10.6-10.73)

10.6†

Washington Mutual 1994 Stock Option Plan As Amended and Restated as of February 15, 2000 (filed herewith).

10.6.1 2000.

10.6.1†

First Amendment to the Washington Mutual 1994 Stock Option Plan Amended and Restated as of February 15, 2000.

10.6.2

Second Amendment to the Washington Mutual 1994 Stock Option Plan Amended and Restated as of February 15, 2000 (filed herewith).

10.7

Washington Mutual Equity Incentive Plan (formerly known as Washington Mutual Restricted Stock Plan AsPlan) as Amended and Restated as of January 18, 200016, 2001 (filed herewith).

10.7.1 Amendment to the Washington Mutual Restricted Stock Plan As
Amended and Restated as of January 18, 2000 (filed herewith).

10.7.2 Amendment to the Washington Mutual Restricted Stock Plan As
Amended and Restated as of January 18, 2000 (filed herewith).

10.8*

Washington Mutual Employees' Stock Purchase Program.

10.8.1

10.8.1†

Amendment to the Washington Mutual Employees' Stock Purchase Plan
(filed herewith).

10.8.2 Program.

10.8.2†

Amendment to the Washington Mutual Employees' Stock Purchase Plan
(filed herewith).

Program.

10.8.3

Fourth Amendment to the Washington Mutual Employees' Stock Purchase Program (filed as an exhibitProgram. (Incorporated by reference to the Company's Current Report on Form 8-K dated December 22, 1998. File No. 0-25188).

10.8.4 0-25188.)

10.8.4†

Third Amendment to the Washington Mutual Employees' Stock Purchase Program (filed herewith).

10.8.5 Program.

10.8.5†

Second Amendment to the Washington Mutual Employees' Stock Purchase Program.

10.8.6

Amendment to the Washington Mutual Employee Stock Purchase Program (filed herewith).

10.9

Washington Mutual, Inc. Retirement Savings and Investment Plan Amended and Restated Effective September 30, 1998 (filed as an
exhibitOctober 1, 1998. (Incorporated by reference to the Company's Current Report on Form 8-K dated December 22, 1998. File No. 0-25188).

10.9.1 0-25188.)

10.9.1†

Amendment to the Washington Mutual, Inc. Retirement Savings and Investment Plan Amended and Restated Effective September 30,
1998 (filed herewith).

10.9.2 October 1, 1998.

10.9.2†

Amendment to the Washington Mutual, Inc. Retirement Savings and Investment Plan Amended and Restated Effective September 30,
1998 (filed herewith).

10.9.3 October 1, 1998.

10.9.3†

Amendment to the Washington Mutual, Inc. Retirement Savings and Investment Plan Amended and Restated Effective September 30,
1998 (filed herewith).

10.9.4 October 1, 1998.

10.9.4†

Amendment to the Washington Mutual, Inc. Retirement Savings and Investment Plan Amended and Restated Effective September 30,October 1, 1998.

10.9.5

Amendment to the Washington Mutual, Inc. Retirement Savings and Investment Plan Amended and Restated Effective October 1, 1998 (filed herewith).

10.10*

Washington Mutual Employee Service Award Plan.

10.11***

Supplemental Employee's Retirement Plan for Salaried Employees of Washington Mutual.

10.12***

Washington Mutual Supplemental Executive Retirement Accumulation Plan.

10.13

10.13†

Washington Mutual, Inc. Cash Balance Pension Plan Amended and Restated Effective September 30, 1998 (filed herewith).

10.13.1 October 1, 1998.

10.13.1†

Amendment to the Washington Mutual, Inc. Cash Balance Pension Plan Amended and Restated Effective September 30, 1998 (filed
herewith).

10.13.2 October 1, 1998.

10.13.2†

Amendment to the Washington Mutual, Inc. Cash Balance Pension Plan Amended and Restated Effective September 30, 1998 (filed
herewith).

10.13.3 October 1, 1998.

10.13.3†

Amendment to the Washington Mutual, Inc. Cash Balance Pension Plan Amended and Restated Effective September 30,October 1, 1998.

10.13.4

Amendment to the Washington Mutual, Inc. Cash Balance Pension Plan Amended and Restated Effective October 1, 1998 (filed herewith).

10.14

Washington Mutual Deferred Compensation Plan for Directors and Certain Highly Compensated Employees as Amended and Restated Effective January 1, 2000April 17, 2001 (filed as an exhibit to the Company's
Registration Statement on Form S-8. File No. 333-87675)herewith).

10.15

10.15†

Washington Mutual Bonus and Incentive Plan for Executive Officers and Senior Management Asas Amended and Restated Effective January 1, 1999 (filed herewith).

1999.

10.16**

Employment Contract of Kerry K. Killinger.

10.17**

Employment Contract for Executive Officers.

10.18

Form of Employment Contract for Senior Vice Presidents (filed as
an exhibitPresidents. (Incorporated by reference to the Washington Mutual, Inc. Annual Report on Form 10-K for the year ended December 31, 1998. File No. 0-25188).

0-25188.)

10.19

The 1988 Stock Option and Incentive Plan (as amended effective July 26, 1994) (filed as an exhibit. (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).

001-04075.)

10.19.1

Amendment No. 1996-1 to the Great Western Financial Corporation 1988 Stock Option and Incentive Plan, effective December 10, 1996
(filed as an exhibit1996. (Incorporated by reference to Great Western's Annual Report on Form 10-K for the year ended December 31, 1996. File No. 001-04075).

001-04075.)

10.19.2

Form of Director Stock Option Agreement (filed as an exhibitAgreement. (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).

Plan.)

10.19.3

Form of Director Stock Option Agreement effective January 3, 1994 (filed as an exhibit1994. (Incorporated by reference to Great Western's Annual Report on Form 10-K for the year ended December 31, 1993. File No. 001-04075).

001-04075.)

10.20

Great Western Financial Corporation Directors' Deferred Compensation Plan (1992 Restatement) (filed as an exhibit. (Incorporated by reference to Great Western's Annual Report on Form 10-K for the year ended December 31, 1991. File No. 001-04075).

001-04075.)

10.20.1

Amendment to Great Western Financial Corporation Directors' Senior Officers' and basic Deferred Compensation Plans (1992 Restatement) (filed as an exhibit. (Incorporated by reference to Great Western's Annual Report on Form 10-K for the year ended December 31, 19941994. File No. 001-04075).

001-04075.)

10.20.2

Amendment No. 2 to Directors' Deferred Compensation Plan 1992 Restatement (filed as an exhibitRestatement. (Incorporated by reference to Great Western's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. File No. 001-04075).

001-04075.)

10.20.3

Amendment No. 1996-2 to Directors' Deferred Compensation Plan, dated December 10, 1996 (filed as an exhibit1996. (Incorporated by reference to Great Western's Annual Report on Form 10-K for the year ended December 31, 1996. File No. 001-04075).

2
111

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
001-04075.)
10.21

Great Western Financial Corporation Umbrella Trust for Directors
(filed as an exhibitDirectors. (Incorporated by reference to Great Western's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989. File No. 001-04075).

001-04075.)

10.21.1

Amendment No. 1996-1 to Umbrella Trust for Directors, dated December 16, 1996 (filed as an exhibit1996. (Incorporated by reference to Great Western's Annual Report on Form 10-K for the year ended December 31, 1996. File No. 001-04075).

001-04075.)

10.21.2

Omnibus Amendment 1995-1 to the Umbrella Trusts replacing the Finance Committee of the Board of Directors with the Compensation Committee of the Board of Directors as administrator of the plans
(filed as an exhibitplans. (Incorporated by reference to Great Western's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. File No. 001-04075).

001-04075.)

10.22

Restated Retirement Plan for Directors (filed as an exhibitDirectors. (Incorporated by reference to Great Western's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993. File No. 001-04075).

001-04075.)

10.23

Employee Home Loan Program (filed as an exhibitProgram. (Incorporated by reference to Great Western's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993. File No. 001-04075).

001-04075.)

10.23.1

Amendment No. 1996-1 to Employee Home Loan Program, effective December 10, 1996 (filed as an exhibit1996. (Incorporated by reference to Great Western's Annual Report on Form 10-K for the year ended December 31, 1996. File No. 001-04075).

001-04075.)

10.24

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, the Umbrella Trust for Directors as amended December 10, 1996, and the Employee Home Loan Program (revised and restated as of April 27, 1993), as amended December 10, 1996 (filed as an exhibit1996. (Incorporated by reference to Great Western's Annual Report on Form 10-K for the year ended December 31, 1996. File No. 001-04075).

001-04075.)

10.25

H.F. Ahmanson & Company 1984 Stock Incentive Plan (filed as an
exhibitPlan. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1984. File No. 1-08930).

1-08930.)

10.25.1

Amendment to H.F. Ahmanson & Company 1984 Stock Incentive Plan
(filed as an exhibitPlan. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1989. File No. 1-08930).

1-08930.)

10.26

H.F. Ahmanson & Company 1993 Stock Incentive Plan as amended
(filed as an exhibitamended. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1996. File No. 1-08930).

1-08930.)

10.27

H.F. Ahmanson & Company 1998 Directors' Stock Incentive Plan, as amended (filed as an exhibitamended. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1989. File No. 1-08930).

1-08930.)

10.28

H.F. Ahmanson & Company 1996 Nonemployee Directors' Stock Incentive Plan (filed as an exhibitPlan. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1995. File No. 1-08930).

1-08930.)

10.29

1989 Contingent Deferred Compensation Plan of H.F. Ahmanson & Company (filed as an exhibitCompany. (Incorporated by reference to Ahmanson's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991. File No. 1-08930).

3
112

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1-08930.)
10.29.1

First Amendment to 1989 Contingent Deferred Compensation Plan of H.F. Ahmanson & Company (filed as an exhibitCompany. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1995. File No. 1-08930).

1-08930.)

10.29.2

Second Amendment to 1989 Contingent Deferred Compensation Plan of H.F. Ahmanson & Company (filed as an exhibitCompany. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1996. File No. 1-08930).

1-08930.)

10.30

Elective Deferred Compensation Plan of H.F. Ahmanson & Company
(filed as an exhibitCompany. (Incorporated by reference to Ahmanson's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991. File No. 1-08930).

1-08930.)

10.30.1

First Amendment to Elective Deferred Compensation Plan of H.F. Ahmanson & Company (filed as an exhibitCompany. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1995. File No. 1-08930).

1-08930.)

10.30.2

Second Amendment to Elective Deferred Compensation Plan of H.F. Ahmanson & Company (filed as an exhibitCompany. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1996. File No. 1-08930).

1-08930.)

10.31

Capital Accumulation Plan of H.F. Ahmanson & Company (filed as an
exhibitCompany. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1996. File No. 1-08930).

1-08930.)

10.31.1

First Amendment to Capital Accumulation Plan of H.F. Ahmanson & Company (filed as an exhibitCompany. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1996. File No. 1-08930).

1-08930.)

10.32

Supplemental Executive Retirement Plan of H.F. Ahmanson & Company, as amended and restated (filed as an exhibitrestated. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1995. File No. 1-08930).

1-08930.)

10.32.1

First Amendment to Supplemental Executive Retirement Plan of H.F. Ahmanson & Company (filed as an exhibitCompany. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1996. File No. 1-08930).

1-08930.)

10.33

Senior Supplemental Executive Retirement Plan of H.F. Ahmanson and Company, as amended and restated (filed as an exhibitrestated. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1995. File No. 1-08930).

1-08930.)

10.34

Executive Life Insurance Plan of H.F. Ahmanson & Company (filed
as an exhibitCompany. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1989. File No. 1-08930).

1-08930.)

10.34.1

First Amendment to Executive Life Insurance Plan of H.F. Ahmanson & Company (filed as an exhibitCompany. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1995. File No. 1-08930).

1-08930.)

10.34.2

Second Amendment to Executive Life Insurance Plan of H.F. Ahmanson & Company (filed as an exhibitCompany. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1996. File No. 1-08930).

1-08930.)

10.35

Senior Executive Life Insurance Plan of H.F. Ahmanson & Company, as amended and restated (filed as an exhibitrestated. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1995. File No. 1-08930).

1-08930.)

10.36

H.F. Ahmanson & Company Supplemental Long Term Disability Plan
(filed as an exhibitPlan. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1989. File No. 1-08930).

1-08930.)

10.37

Outside Directors' Elective Deferred Compensation Plan of H.F. Ahmanson & Company (filed as an exhibitCompany. (Incorporated by reference to Ahmanson's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991. File No. 1-08930).

4
113

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1-08930.)
10.37.1

First Amendment to Outside Directors' Elective Deferred Compensation Plan of H.F. Ahmanson & Company (filed as an exhibitCompany. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1995. File No. 1-08930).

1-08930.)

10.37.2

Second Amendment to Outside Directors' Elective Deferred Compensation Plan of H.F. Ahmanson & Company (filed as an exhibitCompany. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1996. File No. 1-08930).

1-08930.)

10.38

Outside Directors' Capital Accumulation Plan of H.F. Ahmanson & Company (filed as an exhibitCompany. (Incorporated by reference to Ahmanson's Annual Report on Form10-K for the year ended December 31, 1996. File No. 1-08930.)

10.38.1

First Amendment to Outside Directors' Capital Accumulation Plan of H.F. Ahmanson & Company. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1996. File No. 1-08930).

10.38.1 First Amendment to Outside Directors' Capital Accumulation Plan
of H.F. Ahmanson & Company (filed as an exhibit to Ahmanson's
Annual Report on Form 10-K for the year ended December 31, 1996.
File No. 1-08930).

1-08930.)

10.39

Outside Director Retirement Plan of H.F. Ahmanson & Company, as amended and restated (filed as an exhibitrestated. (Incorporated by reference to Ahmanson's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991. File No. 1-08930).

1-08930.)

10.39.1

First Amendment to Outside Director Retirement Plan of H.F. Ahmanson & Company (filed as an exhibitCompany. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1995. File No. 1-08930).

1-08930.)

10.40

Amended Form of Indemnity Agreement between H.F. Ahmanson & Company and directors and executive officers (filed as an exhibitofficers. (Incorporated by reference to Ahmanson's Annual Report on Form 10-K for the year ended December 31, 1989. File No. 1-08930).

1-08930.)

10.41

Board of Directors Retirement Plan of Coast (filed as an exhibitCoast. (Incorporated by reference to the Current Report of Coast Savings Financial Inc. ("Coast") on Form 8-K dated September 1, 1989. File No. 1-10264).

1-10264.)

10.42

Form of Post-Retirement Compensation Arrangement of Coast (filed
as an exhibitCoast. (Incorporated by reference to Coast's Annual Report on Form 10-K for the year ended December 31, 1989. File No. 1-10264).

1-10264.)

10.43

Amended and Restated Executive Supplemental Retirement Plan of Coast, dated February 28, 1996 (filed as an exhibit1996. (Incorporated by reference to Coast's Annual Report on Form 10-K for the year ended December 31, 1995. File No. 1-10264).

1-10264.)

10.44

Long Beach Financial Corporation 1997 Stock Incentive Plan. (Incorporated by reference to Exhibit 10.6 to the Long Beach Financial Corporation's Registration Statement on Form S-1,
CommissionS-1. File No. 333-22013)

10.45

Bank United Corp. ("Bank United") 1996 Stock Incentive Plan. (Incorporated by reference to Bank United's Registration Statement on Form S-1 dated July 25, 1996. File No. 333-06229.)

10.46

Bank United 1999 Stock Incentive Plan (filed herewith).

10.47

Bank United 2000 Stock Incentive Plan (filed herewith).

10.48

Bank United Director Stock Plan. (Incorporated by reference to Bank United's Registration Statement on Form S-1 dated July 25, 1996. File No. 333-06229.)

10.48.1

Bank United Director Stock Plan, Amended and Restated as of March 16, 2000. (Incorporated by reference to Bank United's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. File No. 0-21017.)

10.49

Dime Bancorp, Inc. ("Dime") Stock Incentive Plan, as amended by an amendment effective April 27, 1994 (the "Stock Incentive Plan") (incorporated by reference to Dime's Registration Statement on Form S-8, filed on January 18, 1995 (File No. 33-88552)), as amended by an Amendment, effective September 19, 1997, to the Stock Incentive Plan (incorporated by reference to Dime's 1997 10-K).

10.50

Dime 1991 Stock Incentive Plan, as amended and restated effective February 29, 1996 (the "1991 Stock Incentive Plan") (incorporated by reference to Dime's Registration Statement on Form S-8 filed on May 24, 1996 (File No. 333-04477)), as amended by (i) an Amendment, effective as of October 1, 1996, to the 1991 Stock Incentive Plan (incorporated by reference to Dime's 1996 10-K), (ii) an Amendment, effective September 19, 1997, to the 1991 Stock Incentive Plan (incorporated by reference to Dime's 1997 10-K), (iii) an Amendment, effective as of March 27, 1998, to the 1991 Stock Incentive Plan (incorporated by reference to Dime's 1998 10-K), and (iv) an Amendment, effective June 25, 1998, to the 1991 Stock Incentive Plan (incorporated by reference to Dime's 1998 10-K).

10.50.1

Amendment to Dime's 1991 Stock Incentive Plan, effective December 12, 2000. (Incorporated by reference to Dime's Annual Report on Form 10-K for year ended December 31, 2000. File No. 1-13094.)

10.51

Dime Stock Incentive Plan for Outside Directors (the "Outside Directors Plan"), as amended effective April 27, 1994 (incorporated by reference to Dime's Registration Statement on Form S-8, filed on January 18, 1995 (File No. 33-88560)), as amended by an Amendment, effective September 19, 1997, to the Outside Directors Plan (incorporated by reference to Dime's 1997 10-K).

10.52

The Dime Savings Bank of New York, FSB ("DSB") Deferred Compensation Plan, as amended by the First Amendment through the Fourth Amendment thereof (incorporated by reference to Dime's Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994 10-K") (File No. 001-13094)), as amended by an Amendment to DSB's Deferred Compensation Plan, effective May 18, 2000 (incorporated by reference to Amendment No. 11 to the Schedule 14d-9, Solicitation / Recommendation Statement, filed on May 19, 2000 (the "14d-9 Amendment No. 11") (File No. 005-48389)).

10.53

Deferred Compensation Plan for Board Members of DSB (the "DSB 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 an Amendment to the DSB Director Deferred Compensation Plan, effective May 18, 2000 (incorporated by reference to the 14d-9 Amendment No. 11).

10.54

Benefit Restoration Plan of DSB (the "Benefit Restoration Plan"), amended and restated effective as of October 1, 1996 (incorporated by reference to Dime's 1996 10-K), as amended by an Amendment to the Benefit Restoration Plan, effective May 18, 2000 (incorporated by reference to the 14d-9 Amendment No. 11).

10.54.1

Amendment to the Benefit Restoration Plan, effective December 20, 2000. (Incorporated by reference to Dime's Annual Report on Form 10-K for year ended December 31, 2000. File No. 1-13094.)

10.55

Retainer Continuation Plan for Independent Directors of DSB (the "Retainer Continuation Plan") (incorporated by reference to DSB's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, filed on September 16, 1994 as Exhibit A to Dime's 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 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).

10.56

Key Executive Life Insurance/Death Benefit Plan of DSB, amended and restated effective as of April 1, 1999 (the "Key Life Plan"), as amended by and Amendment, effective as of April 1, 1999 (incorporated by reference to Dime's 1999 10-K), as amended by an Amendment to the Key Life Plan, effective May 18, 2000 (incorporated by reference the 14d-9 Amendment No. 11).

10.57

Dime 1990 Stock Option Plan (formerly Anchor Bancorp, Inc. 1990 Stock Option Plan), as amended effective as of January 13, 1995 (incorporated by reference to Exhibit 4.1 to Dime's Registration Statement on Form S-8, filed on January 18, 1995 (File No. 33-88554)).

10.68

Dime 1992 Stock Option Plan (formerly Anchor Bancorp, Inc. 1992 Stock Option Plan), as amended effective as of January 13, 1995 (the "1992 Stock Option Plan") (incorporated by reference to Dime's Registration Statement on Form S-8, filed on January 18, 1995 (File No. 33-88556)), as amended by (i) an Amendment, effective June 1, 1996, to the 1992 Stock Option Plan (incorporated by reference to Dime's 1996 10-K), (ii) an Amendment, effective September 19, 1997, to the 1992 Stock Option Plan (incorporated by reference to Dime's 1997 10-K), and (iii) an Amendment, effective as of March 27, 1998, to the 1992 Stock Option Plan (incorporated by reference to Dime's 1998 10-K).

10.58

Dime Supplemental Executive Retirement Plan (the "SERP"), amended and restated effective as of December 2, 1997 (incorporated by reference to Dime's 1997 10-K), as amended by (i) an Amendment, effective January 29, 1998, to the SERP (incorporated by reference to Dime's 1997 10-K), (ii) an Amendment, effective June 24, 1999, to the SERP (incorporated by reference to Dime's 1999 10-K), and (iii) an Amendment to the SERP, effective May 18, 2000 (incorporated by reference to the 14d-9 Amendment No. 11).

10.58.1

Amendment to Dime's SERP, effective December 12, 2000. (Incorporated by reference to Dime's Annual Report on Form 10-K for year ended December 31, 2000. File No. 1-13094.)

10.59

Dime Voluntary Deferred Compensation Plan (the "Voluntary Deferred Compensation Plan"), as amended and restated effective as of July 24, 1997 (incorporated by reference to Exhibit 10.36 to the 1997 10-K), as amended by an Amendment to the Voluntary Deferred Compensation Plan, effective May 18, 2000 (incorporated by reference to Exhibit (e)(12) to the 14d-9 Amendment No. 11).

10.59.1

Amendment to the Dime Voluntary Deferred Compensation Plan, effective November 14, 2000. (Incorporated by reference to Dime's Annual Report on Form 10-K for year ended December 31, 2000. File No. 1-13094.)

10.60

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 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).

10.61

Dime Officer Incentive Plan (the "Officer Incentive Plan"), as amended and restated effective as of July 24, 1997 (incorporated by reference Dime's 1997 10-K), as amended by (i) an Amendment, effective as of January 1, 1998, to the Officer Incentive Plan (incorporated by reference to Dime's 1998 10-K), (ii) an Amendment, effective as of January 1, 2000, to the Officer Incentive Plan (incorporated by reference to Dime's 1999 10-K); and (iii) an Amendment to the Officer Incentive Plan, effective May 18, 2000 (incorporated by reference to the 14d-9 Amendment No. 11).

10.62

Dime Senior Officer Incentive Plan ("Senior Officer Incentive Plan"), effective April 30, 1998 (incorporated by reference to Dime's 1998 10-K), as amended by an Amendment to the Senior Officer Incentive Plan, effective May 18, 2000 (incorporated by reference to the 14d-9 Amendment No. 11).

10.62.1

Amendment to the Dime Senior Officer Incentive Plan, effective as of January 1, 2000. (Incorporated by reference to Dime's Annual Report on Form 10-K for year ended December 31, 2000. File No. 1-13094.)

10.62.2

Amendment to the Dime Senior Officer Incentive Plan, effective December 12, 2000. (Incorporated by reference to Dime's Annual Report on Form 10-K for year ended December 31, 2000. File No. 1-13094.)

10.63

Anchor Savings Bank FSB Supplemental Executive Retirement Plan, assumed by Dime. (Incorporated by reference to the Anchor Bancorp Annual Report on Form 10-K for the fiscal year ended June 30, 1992. File No. 33-37720.)

10.64

Dime 1997 Stock Incentive Plan for Outside Directors, as amended and restated effective March 27, 1998 (the "1997 Outside Director Plan") (incorporated by reference to Dime's 1998 10-K).

10.64.1

Amendment to the Dime 1997 Outside Director Plan, effective December 12, 2000. (Incorporated by reference to Dime's Annual Report on Form 10-K for year ended December 31, 2000. File No. 1-13094.)

10.65

Dime Incentive Stock Option Plan, effective as of October 15, 1997 (incorporated by reference to Dime's Amendment No. 1 to the Registration Statement on Form S-4 on Form S-8, filed on October 15, 1997 (File No. 333-35565) ).

12.(a)

Computation of Ratios of Earnings to Fixed Charges (filed herewith).

(b)

Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends (filed herewith).

21.

List of Subsidiaries of the Registrant (filed herewith).

23.

Consent of Deloitte & Touche LLP (filed herewith).

- --------------------
* Filed as an exhibit to the Company's Current Report on Form 8-K dated
November 29, 1994. File No. 0-25188.

** Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997. File No. 0-25188).

*** Filed as an exhibit to the Washington Mutual, Inc. Annual Report on Form
10-K for the year ended December 31, 1996. File No. 0-25188.

Exhibits followed by a parenthetical reference are incorporated by
reference herein from the documents described therein. Documents relating
to Ahmanson filed prior to May 1985 were filed by H.F. Ahmanson & Company,
a California corporation, Commission File No. 1-7108.

5
*
Incorporated by reference to the Company's Current Report on Form 8-K dated November 29, 1994. File No. 0-25188.

**
Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. File No. 0-25188.

***
Incorporated by reference to the Company's. Annual Report on Form 10-K for the year ended December 31, 1996. File No. 0-25188.

†
Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. File No. 1-14667.
Exhibits followed by a parenthetical reference are incorporated by reference herein from the documents described therein. Documents relating to Ahmanson filed prior to May 1985 were filed by H.F. Ahmanson & Company, a California corporation, File No. 1-7108.

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WASHINGTON MUTUAL, INC. 2001 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PART I
Business
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
PART II
Market for our Common Stock and Related Security Holder Matters
Five-Year Summary of Selected Financial Data
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
PART IV
Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF INCOME
STATEMENTS OF FINANCIAL CONDITION
STATEMENTS OF CASH FLOWS
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES SUPPLEMENTARY DATA
WASHINGTON MUTUAL, INC. INDEX OF EXHIBITS DESCRIPTION

[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROMTO:
Commission File Number 1-14667

Washington		91-1653725 ~~(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER OR ORGANIZATION) IDENTIFICATION NUMBER)~~
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
1201 ~~THIRD AVENUE, SEATTLE, WASHINGTON~~ Third Avenue, Seattle, Washington		98101 ~~(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)~~
(Address of Principal Executive Offices)		(Zip Code)

Title of each class		Name of each exchange on which registered
Common Stock		New York Stock Exchange
8% Corporate Premium Income Equity Securities		New York Stock Exchange
Litigation Tracking Warrants^TM		NASDAQ

			Page
PART ~~I......................................................~~ I			1 ~~ITEM~~
	Item 1. ~~BUSINESS..........................................~~ Business		1 ~~Overview...............................................~~
		Overview	1
		Banking and Financial Services ~~Group...................~~ Group	1
		Home Loans and Insurance Services ~~Group................ 3~~ Group	2
		Specialty Finance Group................................ 6 Treasury Division...................................... 7 Employees.............................................. 8 Competitive Environment................................ 8 Group	4
		Employees	5
		Factors That May Affect Future ~~Results................. 9~~ Results	5
		Business ~~Combinations.................................. 11 Taxation............................................... 11~~ Combinations	8
		Taxation	8
		Environmental ~~Regulation............................... 12~~ Regulation	9
		Regulation and ~~Supervision............................. 13~~ Supervision	10
		Principal ~~Officers..................................... 24 ITEM~~Officers	21
	Item 2. ~~PROPERTIES........................................ 25 ITEM~~Properties		23
	Item 3. ~~LEGAL PROCEEDINGS................................. 25 ITEM~~Legal Proceedings		23
	Item 4. ~~SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 26~~ Submission of Matters to a Vote of Security Holders		23
PART ~~II..................................................... 26 ITEM~~II			24
	Item 5. ~~MARKET FOR OUR COMMON STOCK AND RELATED SECURITY HOLDER MATTERS......................................... 26 ITEM~~Market for our Common Stock and Related Security Holder Matters		24
	Item 6. ~~SELECTED FINANCIAL DATA........................... 27 ITEM~~Selected Financial Data		25
	Item 7. ~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 29 Overview............................................... 29~~Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 30 Review of Financial Condition.......................... 35 Provision and Allowance for Loan and Lease Losses...... 38 Operating Segments..................................... 42 Asset and Liability Management Strategy................ 43 Liquidity.............................................. 45 Capital Adequacy....................................... 46 Operations		25
		Cautionary Statements	25
		Overview	26
		Recently Issued Accounting Standards ~~Adopted~~	26
		Critical Accounting Policies	27
		Earnings Performance	27
		Review of Financial Condition	34
		Asset Quality	38
		Operating Segments	44
		Liquidity	45
		Capital Adequacy	46
		Market Risk Management	47
		Maturity and Repricing Information	54
		Tax Contingency	55
		Goodwill Litigation	56
	Item 7A. Quantitative and Qualitative Disclosures about Market Risk		47
	Item 8. Financial Statements and Supplementary Data		58
	Item 9. Changes in ~~These~~and Disagreements with Accountants on Accounting and Financial Statements.................................. 46 Recently Issued Accounting Standards Not Yet Adopted... 47 Tax Contingency........................................ 47 Goodwill Litigation.................................... 48 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................ 49 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....... 51 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................... 51 Disclosure		58
PART ~~III.................................................... 51~~ III			59
PART ~~IV..................................................... 51 ITEM~~IV			59
	Item 14. ~~EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................................... 51~~ Exhibits, Financial Statement Schedules and Reports on Form 8-K		59