Testimony
of
Washington Mutual, Inc.
on the
Recent Proposed Mergers of Large Financial Institutions,
Including Money Center and Regional Banks,
Thrifts, and Diversified Financial Firms
before the
Committee on Banking and Financial Services
of the
U.S. House of Representatives
April 29, 1998
William A. Longbrake
Executive Vice President
and Chief Financial Officer
Washington Mutual, Inc.
Mr. Chairman and members of the Committee, it is an honor and a privilege to be here today. Washington Mutual appreciates this opportunity to testify at today’s hearing on recent proposed mergers within the financial services industry.
My name is William A. Longbrake, and I am Executive Vice President of Corporate Finance and Chief Financial Officer of Washington Mutual, Inc., headquartered in Seattle, Washington. I am responsible for our company’s accounting, auditing, financial analysis and planning, investor relations, portfolio and treasury management and risk management areas, and sit as a member of our executive committee that sets strategic direction for the overall company.
Washington Mutual is a financial services provider organized as a thrift holding company, which has been dedicated for more than a century to serving individuals and families. More recently, we have begun to serve small- to mid-sized businesses. The company’s subsidiaries, which include both Savings Association Insurance Fund- and Bank Insurance Fund-insured depository institutions, currently serve more than 3.7 million households throughout the country. Our banking subsidiaries accept deposits and make residential and consumer loans as well as commercial real estate loans, primarily for shelter-based properties. The company also engages in consumer finance and, as I alluded to earlier, certain limited commercial banking activities. In addition, Washington Mutual markets annuities and other insurance products, offers full service securities brokerage and acts as an investment advisor and distributor of mutual funds.
As of March 31, 1998, Washington Mutual and its subsidiaries reported consolidated assets of $103.1 billion and operated more than 1,600 consumer banking branches, loan offices, community banking branches and consumer finance locations throughout the nation. We currently employ more than 22,000 people.
Washington Mutual: A Consumer Banking Alternative
Washington Mutual has grown substantially through mergers over the past several years, having completed 21 transactions in the last decade. In July of last year, we merged with Great Western Financial Corporation in a transaction that expanded our presence in California and enabled our company to enter Florida. More recently, we announced the signing of an agreement to merge with H.F. Ahmanson and Company, parent of Home Savings of America, in a transaction that we anticipate will close by the end of the third quarter or early fourth quarter of this year. As of March 31, 1998, consolidated assets of the combined company would exceed $150 billion.
Washington Mutual's commitment to serving our communities -- and primarily consumers -- dates back to 1889, when the company was founded to help families rebuild their homes and lives after a fire destroyed a great part of Seattle. Since then, our company has been a leader in serving the financial needs of consumers in the communities we serve. Our business strategy is simple, and it is quite different from the strategies implemented by nearly every other large financial institution in this country.
Let me explain: Our employees focus the majority of their attention on serving individuals and families -- consumers -- and delivering a high level of personalized service.
We promote our branches and loan offices as consumer-friendly places where customers are free to come and talk to our employees without being charged a nuisance fee. In fact, we want people to visit our branches because we believe it provides a terrific opportunity to acquaint them with our complete line of products and services. And although we stress the personalized touch, Washington Mutual also offers our customers the convenience of technology -- we just don’t force them to use it.
As the result of this truly unique strategy and the hard work and dedication of our employees, more than 242,000 net new households voluntarily chose to do business with us during 1997. This was an increase of 17 percent in the number of households, and I should point out that this figure excludes any households gained through our merger with Great Western.
Thus, while our recent mergers and acquisitions have been the subject of much attention, our business philosophy and success in creating a true service alternative to large commercial banks is attracting thousands of new consumer households to Washington Mutual each and every day. So, where is this growth happening? It's happening in virtually all areas of our business.
In 1997 total loan originations increased 34 percent to $29.6 billion, up from $22.1 billion in 1996, and Washington Mutual ended 1997 as the largest single-family home mortgage lender on the West Coast. Total lending for the first quarter of 1998 was a record $8.6 billion.
The popularity of our Free Checking account, which features unlimited check writing, no monthly service fee and no minimum balance obligation or direct deposit requirements, has been overwhelming. Between January and March of 1998, we opened more than 130,000 new accounts in our newest markets of California and Florida.
Free Checking is just one example of our efforts to make access to free or low-cost financial services available to all our communities. In addition, we are deeply committed to increasing access to safe, clean and respectable affordable housing. In fact, it is our goal to be the leading lender in the low- and moderate-income neighborhoods we serve.
Washington Mutual's Community Commitment
In conjunction with our merger with Great Western last year, Washington Mutual made a ten-year, $75 billion community reinvestment pledge to our communities. Of that amount, we committed $50 billion in affordable housing loans to minority racial and ethnic borrowers, and borrowers in low- to moderate-income neighborhoods with $25 billion of that specifically targeted for borrowers earning less than 80 percent of median income. In 1997, Washington Mutual closed more than 29,000 loans for borrowers earning less than 80 percent of median income. Those loans made up nearly 21 percent of the number of mortgage loans and 10 percent of our mortgage lending dollar volume for the year.
In light of our proposed merger with Home Savings and in consultation with a wide variety of community-based organizations, we have already begun to discuss ways that this commitment can be expanded to reflect our increased presence in California and other areas. We will continue to strive to be the leader in meeting the financial needs of low- to moderate-income individuals and families.
As a result of our strong earnings record, well-capitalized balance sheet and commitment to mortgage lending, we retain more mortgage loan originations than virtually all our competitors. In fact, we are one of the largest, non-government sponsored enterprise holder of mortgages in the country. Our ability to hold loans in portfolio allows us more underwriting flexibility than other lenders that sell the majority of the loans they originate in the secondary market. That flexibility is often valuable in meeting the needs of first-time homebuyers and others who might not meet the rigid requirements of the secondary market. Our ability to be a portfolio lender is enhanced by the funding and partnering opportunities provided by the Federal Home Loan Bank system.
Another benefit to first-time and lower-income borrowers is our wide array of lending products and services, including low down payment programs, rehabilitation loans, down payment assistance programs, and lease-to-own programs. These creative financing options have helped and will continue to enable more families to realize their dreams of home ownership.
Equally important to Washington Mutual is preserving access to banking services for low-income individuals. While we have publicly announced that the combination of Washington Mutual and Ahmanson will result in the consolidation of approximately 160-170 branches, we do not plan to close any branches in low-income or under-served neighborhoods unless another full-service branch is conveniently located in that community. In fact, we anticipate that the majority of branch consolidations will be within a few blocks of each other.
In determining which branch will remain open, consistent with our past practices, we'll perform an inspection of each of the alternative branches in low-income census tracts and, in addition to our analysis of the physical characteristics of the branch, will analyze the population distribution of the neighborhood and traffic flow and foot traffic patterns for the two branch alternatives. We also will consider alternative uses for any closed branch, including sales or donations to community-based organizations.
As an example of our efforts to expand our branch network in under-served communities, we recently opened a branch in the Watts area of South-Central Los Angeles. This branch is located in one of the first commercial office developments built in South Central in over 30 years and has been a tremendous outlet for serving area residents. Over 650 families and individuals opened accounts during the financial center's first three months of business.
Obviously, our communities are instrumental to our success. That is one of the reasons why we strive to return 2 percent of pre-tax earnings to our neighborhoods. With an emphasis on under-served areas, these funds are returned through grants, sponsorships, in-kind donations of equipment and furnishings, paid employee volunteer time, and other financial support to affordable housing, consumer education -- including funding for credit counseling programs -- and the improvement of K-12 education.
In fact, supporting education is one of our company's top priorities. As an example, the focus of our upcoming grand re-opening activities at our Florida and California locations will be on the public schools in the communities where we operate. At a mock putting green set up in each branch, contestants will have an opportunity to raise money for their favorite school. By the time our 17,000 volunteers help us complete putting contests in more than 550 branches, we will have given away nearly $1.5 million, with more than half of that amount donated to over 1,000 local schools.
We believe that our proposed merger with H.F. Ahmanson will create an institution that is financially stronger than either of the two companies would be on an independent basis. Consequently, the combined company should be in an even better position to serve the financial needs of hundreds of communities throughout the country.
Safety and Soundness – The Condition of SAIF
Let me turn briefly to the condition of the SAIF, an issue recently raised by Chairman Leach. In the press release announcing these hearings, Chairman Leach noted that our recent acquisitions involve "the creation of the largest S&L in the country, with a west coast emphasis, the deposits of which account for a sizable portion of the taxpayer backed savings association deposit insurance fund…." Let me clarify that Washington Mutual Bank, our state-chartered institution whose roots date back to when we were founded, is a BIF-insured institution. It is only as a result of mergers that our company has acquired SAIF-insured deposits. As a company with deposits insured by both funds, Washington Mutual has long been on record as a proponent of the merger of the BIF and the SAIF.
While we acknowledge that the taxpayer stands behind both of the FDIC’s deposit insurance funds, all of the resources in these funds came directly from payments made by FDIC-insured institutions and from earnings on fund balances. In the case of the SAIF, the industry provided a substantial share of those resources in a single payment of $4.5 billion in the fall of 1996. The industry was healthy enough to make that payment – nearly one year’s earnings – and still maintain its strong capital position.
In addition, the prompt corrective action rules Congress imposed in the FDIC Improvement Act substantially reduce the chance that the funds will experience any losses. These rules require the regulators to step in well before an institution’s losses deplete its capital cushion.
And finally, both funds themselves stand at extraordinarily high levels, exceeding by a considerable margin their target reserve levels.
Legislative and Regulatory Framework – Competitive Issues
Finally, Washington Mutual would be remiss if we did not take this opportunity to comment on financial modernization. As many - including Chairman Leach and other Committee Members - have observed, the financial marketplace is undergoing a substantial shift. It is well documented that there has been a significant shift in where financial assets were held over the past twenty years away from depository institutions to nonbanks, such as mutual fund companies and Wall Street firms. Recent mergers are just another manifestation of the changing marketplace. Some of the laws that govern our industry are badly out of date, particularly the Glass-Steagall and Bank Holding Company Acts.
These laws make the creation of full-service financial firms unduly cumbersome and expensive, and fail to account for the increasing prevalence of nonbank financial service providers in the marketplace. At the same time, it is important to understand that there are aspects of the current laws that provide substantial flexibility that should be embraced and maintained. Washington Mutual has been able to develop an alternative, consumer-oriented franchise under the thrift holding company structure. With both state and federally-chartered institutions, we place a high value on having strong depository charter choices within the dual-banking system and believe chartering choice is an important attribute ensuring system flexibility to meet changing consumer and marketplace needs.
As Congress considers modifications to the existing financial services legal framework, it should further expand financial firms’ options, increase their ability to serve their customers and communities, and recognize the competitive role of nonbank providers of financial services in today’s marketplace. True financial modernization will maintain the positive aspects of the existing charters and strengthen the existing mechanisms that provide stable, affordable credit to consumers and small- to mid-sized businesses. The thrift charter and thrift holding company are focused on these markets.
The latest version of H.R. 10 - approved by the House Rules Committee on March 31 - substantially improved the thrift provisions by retaining the federal thrift charter and the authorities of existing thrift holding companies. The thrift charter and thrift holding company provide the most flexible chartering options for financial service providers who focus on consumers and small- to mid-sized businesses. Consequently, we view the preservation of the authorities associated with these entities to be critical to successful financial modernization as it relates to serving these markets in the future.
Despite the improvements in the thrift provisions, there remain several areas that require further refinement to ensure viable depository institution chartering choices.
Having strong, flexible depository institution charters should remain a fundamental component of financial modernization. While the focus of the thrift and commercial bank charters may differ, these institutions provide important services and economic stimulus to their communities. Any financial modernization proposal should provide charter choice to enable an institution to best serve its particular markets or communities.
Conclusion
Washington Mutual appreciates this opportunity to comment on the recent mergers in the financial industry. While we believe that Congress should modify some of the laws that govern the structure of the financial marketplace – by making them more flexible – much of the legal and regulatory system is well equipped to deal with these newly merged companies. As Congress considers further changes, we recommend that they build on the best elements of the current system rather than reduce the options of any segment of the industry.