Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

  x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003  

 

or

 

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

 

Commission File Number 1-14667

 


 

WASHINGTON MUTUAL, INC.

(Exact name of registrant as specified in its charter)

 

Washington   91-1653725

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

1201 Third Avenue, Seattle, Washington   98101
(Address of principal executive offices)   (Zip Code)

 

(206) 461-2000

(Registrant’s telephone number, including area code)

 


 

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x      No ¨

 

The number of shares outstanding of the issuer’s classes of common stock as of July 31, 2003:

 

Common Stock – 923,252,415 (1)

 

(1)   Includes 16,650,000 shares held in escrow pending resolution of the Company’s asserted right to the return of such shares.

 



Table of Contents

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

 

FORM 10-Q

 

FOR THE QUARTER ENDED JUNE 30, 2003

 

TABLE OF CONTENTS

 

     Page

PART I    Financial Information

   1

Item 1.    Financial Statements

   1

Consolidated Statements of Income—
Three and Six Months Ended June 30, 2003 and 2002

   1

Consolidated Statements of Financial Condition—
June 30, 2003 and December 31, 2002

   2

Consolidated Statements of Stockholders’ Equity and Comprehensive Income—
Six Months Ended June 30, 2003 and 2002

   3

Consolidated Statements of Cash Flows—
Six Months Ended June 30, 2003 and 2002

   4

Notes to Consolidated Financial Statements

   6

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

   17

Cautionary Statements

   17

Controls and Procedures

   17

Critical Accounting Policies

   17

Recently Issued Accounting Standards

   18

Summary Financial Data

   19

Earnings Performance

   20

Review of Financial Condition

   32

Operating Segments

   35

Off-Balance Sheet Activities

   39

Asset Quality

   39

Liquidity

   43

Capital Adequacy

   44

Market Risk Management

   45

Maturity and Repricing Information

   48

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

   45

Item 4.     Controls and Procedures

   17

PART II    Other Information

   55

Item 4.    Submission of Matters to a Vote of Security Holders

   55

Item 6.    Exhibits and Reports on Form 8-K

   55


Table of Contents

PART I—FINANCIAL INFORMATION

 

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended
June 30,


     Six Months Ended
June 30,


 
     2003

     2002

     2003

     2002

 
     (in millions, except per share amounts)  

Interest Income

                                   

Loans held for sale

   $ 626      $ 361      $ 1,216      $ 804  

Loans held in portfolio

     2,050        2,335        4,155        4,746  

Available-for-sale securities

     469        812        986        1,759  

Other interest and dividend income

     72        77        152        159  
    


  


  


  


Total interest income

     3,217        3,585        6,509        7,468  

Interest Expense

                                   

Deposits

     548        666        1,135        1,317  

Borrowings

     644        819        1,332        1,655  
    


  


  


  


Total interest expense

     1,192        1,485        2,467        2,972  
    


  


  


  


Net interest income

     2,025        2,100        4,042        4,496  

Provision for loan and lease losses

     118        160        243        335  
    


  


  


  


Net interest income after provision for loan and lease losses

     1,907        1,940        3,799        4,161  

Noninterest Income

                                   

Home loan mortgage banking income (expense):

                                   

Loan servicing fees

     593        560        1,206        1,100  

Amortization of mortgage servicing rights

     (1,032 )      (504 )      (2,000 )      (983 )

Mortgage servicing rights impairment

     (309 )      (1,107 )      (272 )      (1,062 )

Revaluation gain from derivatives

     598        857        815        842  

Net settlement income from certain interest-rate swaps

     84        101        224        107  

Gain from mortgage loans

     622        220        1,210        471  

Other home loan mortgage banking income, net

     149        117        246        156  
    


  


  


  


Total home loan mortgage banking income

     705        244        1,429        631  

Depositor and other retail banking fees

     454        398        875        759  

Securities fees and commissions

     100        98        189        180  

Insurance income

     53        39        105        86  

Portfolio loan related income

     111        75        227        140  

Gain (loss) from other available-for-sale securities

     137        137        131        (161 )

(Loss) gain on extinguishment of securities sold under agreements to repurchase

     (49 )      121        (136 )      195  

Other income

     118        96        215        186  
    


  


  


  


Total noninterest income

     1,629        1,208        3,035        2,016  

Noninterest Expense

                                   

Compensation and benefits

     867        732        1,638        1,422  

Occupancy and equipment

     375        283        679        571  

Telecommunications and outsourced information services

     143        134        287        273  

Depositor and other retail banking losses

     50        48        102        98  

Amortization of other intangible assets

     15        17        31        34  

Advertising and promotion

     83        69        146        113  

Professional fees

     68        52        124        107  

Other expense

     317        251        619        490  
    


  


  


  


Total noninterest expense

     1,918        1,586        3,626        3,108  
    


  


  


  


Income before income taxes

     1,618        1,562        3,208        3,069  

Income taxes

     598        572        1,185        1,123  
    


  


  


  


Net Income

   $ 1,020      $ 990      $ 2,023      $ 1,946  
    


  


  


  


Net Income Attributable to Common Stock

   $ 1,020      $ 988      $ 2,023      $ 1,942  
    


  


  


  


Net income per common share:

                                   

Basic

   $ 1.12      $ 1.04      $ 2.21      $ 2.04  

Diluted

     1.10        1.01        2.17        2.00  

Dividends declared per common share

     0.30        0.26        0.59        0.51  

Basic weighted average number of common shares outstanding (in thousands)

     910,921        954,662        915,974        951,177  

Diluted weighted average number of common shares outstanding (in thousands)

     929,386        974,153        932,109        968,717  

 

See Notes to Consolidated Financial Statements.

 

 

1


Table of Contents

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

     June 30,
2003


    December 31,
2002


 
     (dollars in millions)  

Assets

                

Cash and cash equivalents

   $ 7,388     $ 7,208  

Federal funds sold and securities purchased under resale agreements

     2,085       2,015  

Available-for-sale securities, total amortized cost of $43,306 and $42,592:

                

Mortgage-backed securities (including assets pledged of $7,433 and $6,570)

     24,875       28,375  

Investment securities (including assets pledged of $15,686 and $10,679)

     20,292       15,597  
    


 


       45,167       43,972  

Loans held for sale

     40,631       33,996  

Loans held in portfolio

     153,866       147,528  

Allowance for loan and lease losses

     (1,680 )     (1,653 )
    


 


Total loans held in portfolio, net of allowance for loan and lease losses

     152,186       145,875  

Investment in Federal Home Loan Banks

     3,596       3,703  

Mortgage servicing rights

     4,598       5,341  

Goodwill

     6,253       6,270  

Other assets

     21,299       19,918  
    


 


Total assets

   $ 283,203     $ 268,298  
    


 


Liabilities

                

Deposits:

                

Noninterest-bearing deposits

   $ 46,505     $ 37,515  

Interest-bearing deposits

     119,952       118,001  
    


 


Total deposits

     166,457       155,516  

Federal funds purchased and commercial paper

     3,579       1,247  

Securities sold under agreements to repurchase

     22,964       16,717  

Advances from Federal Home Loan Banks

     46,127       51,265  

Other borrowings

     14,700       15,264  

Other liabilities

     8,315       8,155  
    


 


Total liabilities

     262,142       248,164  

Stockholders’ Equity

                

Common stock, no par value: 1,600,000,000 shares authorized, 924,237,997 and 944,046,787 shares issued and outstanding

            

Capital surplus—common stock

     5,193       5,961  

Accumulated other comprehensive income

     386       175  

Retained earnings

     15,482       13,998  
    


 


Total stockholders’ equity

     21,061       20,134  
    


 


Total liabilities and stockholders’ equity

   $ 283,203     $ 268,298  
    


 


 

 

See Notes to Consolidated Financial Statements.

 

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(Unaudited)

 

     Number
of
Shares


    Capital
Surplus-
Common
Stock


    Accumulated
Other
Comprehensive
Income (Loss)


    Retained
Earnings


    Total

 
     (in millions)  

BALANCE, December 31, 2001

   873.1     $ 3,178     $ (243 )   $ 11,128     $ 14,063  

Comprehensive income:

                                      

Net income

                     1,946       1,946  

Other comprehensive income (loss), net of tax:

                                      

Net unrealized gain from securities arising during the period, net of reclassification adjustments

               507             507  

Net unrealized loss on cash flow hedging instruments

               (274 )           (274 )

Minimum pension liability adjustment

               (2 )           (2 )
                                  


Total comprehensive income

                                   2,177  

Cash dividends declared on common stock

                     (496 )     (496 )

Cash dividends declared on redeemable preferred stock

                     (4 )     (4 )

Common stock repurchased and retired

   (1.0 )     (37 )                 (37 )

Common stock issued for acquisitions

   96.4       3,672                   3,672  

Fair value of Dime stock options

         90                   90  

Common stock issued

   5.7       132                   132  
    

 


 


 


 


BALANCE, June 30, 2002

   974.2     $ 7,035     $ (12 )   $ 12,574     $ 19,597  
    

 


 


 


 


BALANCE, December 31, 2002

   944.0     $ 5,961     $ 175     $ 13,998     $ 20,134  

Comprehensive income:

                                      

Net income

                     2,023       2,023  

Other comprehensive income (loss), net of tax:

                                      

Net unrealized gain from securities arising during the period, net of reclassification adjustments

               240             240  

Net unrealized loss on cash flow hedging instruments

               (25 )           (25 )

Minimum pension liability adjustment

               (4 )           (4 )
                                  


Total comprehensive income

                                   2,234  

Cash dividends declared on common stock

                     (539 )     (539 )

Common stock repurchased and retired

   (26.4 )     (972 )                 (972 )

Common stock issued

   6.6       204                   204  
    

 


 


 


 


BALANCE, June 30, 2003

   924.2     $ 5,193     $ 386     $ 15,482     $ 21,061  
    

 


 


 


 


 

 

 

See Notes to Consolidated Financial Statements.

 

3


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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    

Six Months Ended

June 30,


 
     2003

    2002

 
     (in millions)  

Cash Flows from Operating Activities

                

Net income

   $ 2,023     $ 1,946  

Adjustments to reconcile net income to net cash (used) provided by operating activities:

                

Provision for loan and lease losses

     243       335  

Gain from mortgage loans

     (1,210 )     (471 )

(Gain) loss from securities

     (132 )     141  

Revaluation gain from derivatives

     (815 )     (842 )

Loss (gain) on extinguishment of securities sold under agreements to repurchase

     136       (195 )

Depreciation and amortization

     2,235       1,265  

Mortgage servicing rights impairment

     272       1,062  

Stock dividends from Federal Home Loan Banks

     (76 )     (107 )

Origination and purchases of loans held for sale, net of principal payments

     (177,297 )     (86,364 )

Proceeds from sales of loans held for sale

     168,930       96,990  

Decrease (increase) in other assets

     173       (433 )

Decrease in other liabilities

     (275 )     (190 )
    


 


Net cash (used) provided by operating activities

     (5,793 )     13,137  

Cash Flows from Investing Activities

                

Purchases of securities

     (5,537 )     (41,410 )

Proceeds from sales and maturities of mortgage-backed securities

     866       5,439  

Proceeds from sales and maturities of other available-for-sale securities

     957       34,265  

Principal payments on securities

     4,805       4,880  

Purchases of Federal Home Loan Bank stock

     (279 )     (4 )

Redemption of Federal Home Loan Bank stock

     463       503  

Proceeds from sales of mortgage servicing rights

     388       711  

Origination and purchases of loans held in portfolio

     (49,660 )     (37,333 )

Principal payments on loans held in portfolio

     42,044       34,472  

Proceeds from sales of foreclosed assets

     250       166  

Net (increase) decrease in federal funds sold and securities purchased under resale agreements

     (70 )     2,167  

Net cash used for acquisitions

           (2,215 )

Purchases of premises and equipment, net

     (483 )     (307 )
    


 


Net cash (used) provided by investing activities

   $ (6,256 )   $ 1,334  

 

(The Consolidated Statements of Cash Flows are continued on the next page.)

 

See Notes to Consolidated Financial Statements.

 

4


Table of Contents

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

(Continued from the previous page.)

 

    

Six Months Ended

June 30,


 
     2003

    2002

 
     (in millions)  

Cash Flows from Financing Activities

                

Increase in deposits

   $ 10,941     $ 6,716  

Increase (decrease) in short-term borrowings

     5,417       (9,537 )

Proceeds from long-term borrowings

     6,603       20,113  

Repayments of long-term borrowings

     (4,263 )     (19,514 )

Proceeds from advances from Federal Home Loan Banks

     42,421       22,681  

Repayments of advances from Federal Home Loan Banks

     (47,548 )     (33,363 )

Cash dividends paid on preferred and common stock

     (539 )     (500 )

Repurchase of common stock

     (972 )     (37 )

Other

     169       116  
    


 


Net cash provided (used) by financing activities

     12,229       (13,325 )
    


 


Increase in cash and cash equivalents

     180       1,146  

Cash and cash equivalents, beginning of period

     7,208       3,563  
    


 


Cash and cash equivalents, end of period

   $ 7,388     $ 4,709  
    


 


Noncash Activities

                

Loans exchanged for mortgage-backed securities

   $ 1,639     $ 2,518  

Real estate acquired through foreclosure

     239       212  

Cash Paid During the Period for

                

Interest on deposits

   $ 1,106     $ 1,275  

Interest on borrowings

     1,321       1,618  

Income taxes

     2,607       1,742  

 

 

 

See Notes to Consolidated Financial Statements.

 

5


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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1:    Accounting Policies

 

Basis of Presentation

 

The accompanying Consolidated Financial Statements are unaudited and include the accounts of Washington Mutual, Inc. (together with its subsidiaries “Washington Mutual” or the “Company”). Washington Mutual’s accounting and financial reporting policies are in accordance with accounting principles generally accepted in the United States of America. The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for such periods. Such adjustments are of a normal recurring nature unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. The interim financial information should be read in conjunction with Washington Mutual, Inc.’s 2002 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to current period classifications.

 

Recently Adopted Accounting Standards

 

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities . This Interpretation provides guidance on how to identify a variable interest entity and determine when the assets, liabilities, noncontrolling interests and results of operations of a variable interest entity should be consolidated by the primary beneficiary. The primary beneficiary is the enterprise that will absorb a majority of the variable interest entity’s expected losses or receive a majority of the expected residual returns as a result of holding variable interests. The recognition and measurement provisions of this Interpretation apply at inception to any variable interest entity formed after January 31, 2003, and become effective for existing variable interest entities on the first interim or annual reporting period beginning after June 15, 2003. The Company adopted the provisions of FIN 46 for variable interest entities formed on or after February 1, 2003, which did not have a material effect on the Company’s Consolidated Financial Statements. The Company adopted the provisions of FIN 46 for existing variable interest entities on July 1, 2003. As of June 30, 2003, the Company had variable interests in securitization trusts, which are discussed in the 2002 Annual Report on Form 10-K in Note 5 to the Consolidated Financial Statements— “Mortgage Banking Activities.” These trusts are qualifying special-purpose entities, which are exempt from the consolidation requirements of FIN 46. The Company reports its rights and obligations related to these qualifying special-purpose entities according to the requirements of Statement of Financial Accounting Standards (“Statement” or “SFAS”) No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities . The Company has not identified any unconsolidated investments in variable interest entities that are not qualifying special-purpose entities as of June 30, 2003.

 

In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure , which amends Statement No. 123, Accounting for Stock-Based Compensation . This Statement provides alternative methods of transitioning, on a voluntary basis, from the intrinsic value method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees , to the fair value method of accounting for stock-based employee compensation. Effective January 1, 2003 and in accordance with the transitional guidance of Statement No. 148, the Company elected to prospectively apply the fair value method of accounting for stock-based awards granted subsequent to December 31, 2002. Stock-based awards granted prior to January 1, 2003, and not modified after December 31, 2002, will continue to be accounted for under APB Opinion No. 25.

 

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Table of Contents

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Had compensation cost for the Company’s stock-based compensation plans been determined using the fair value method consistent with Statement No. 123 for all periods presented, the Company’s net income attributable to common stock and net income per common share would have been reduced to the pro forma amounts indicated below:

 

     Three Months Ended
June 30,


     Six Months Ended
June 30,


 
     2003

     2002

     2003

     2002

 
     (dollars in millions, except per share amounts)  

Net income attributable to common stock

   $ 1,020      $ 988      $ 2,023      $ 1,942  

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects

     22        8        33        14  

Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects

     (39 )      (22 )      (69 )      (40 )
    


  


  


  


Pro forma net income attributable to common stock

   $ 1,003      $ 974      $ 1,987      $ 1,916  
    


  


  


  


Net income per common share:

                                   

Basic:

                                   

As reported

   $ 1.12      $ 1.04      $ 2.21      $ 2.04  

Pro forma

     1.10        1.02        2.17        2.01  

Diluted:

                                   

As reported

     1.10        1.01        2.17        2.00  

Pro forma

     1.08        1.00        2.13        1.98  

 

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others , which expands on the accounting guidance of Statements No. 5, 57, and 107 and incorporates without change the provisions of FASB Interpretation No. 34, which is being superseded. This Interpretation requires a guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The recognition requirements of FIN 45 apply prospectively to guarantees issued or modified after December 31, 2002. Refer to Note 4 to the Consolidated Financial Statements—“Guarantees” for discussion on significant guarantees that have been entered into by the Company.

 

Recently Issued Accounting Standards

 

In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities . Statement No. 149 provides clarification on the definition of derivative instruments within the scope of FASB Statement No. 133. Generally, this Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003, and is not expected to have a material impact on the Consolidated Financial Statements.

 

In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity . Statement No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This Statement, which was effective for financial instruments entered into or modified after May 31, 2003 and for all financial instruments on July 1, 2003, did not have a material impact on the Consolidated Financial Statements.

 

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Note 2:    Earnings Per Share

 

Information used to calculate earnings per share (“EPS”) was as follows:

 

     Three Months Ended
June 30,


    Six Months Ended
June 30,


 
     2003

   2002

    2003

   2002

 
     (dollars in millions, except per share amounts)  

Net income

                              

Net income

   $ 1,020    $ 990     $ 2,023    $ 1,946  

Accumulated dividends on preferred stock

          (2 )          (4 )
    

  


 

  


Net income attributable to common stock

   $ 1,020    $ 988     $ 2,023    $ 1,942  
    

  


 

  


Weighted average shares (in thousands)

                              

Basic weighted average number of common shares outstanding

     910,921      954,662       915,974      951,177  

Dilutive effect of potential common shares from:

                              

Stock options

     9,435      9,911       8,403      9,256  

Premium Income Equity Securities SM

          1,671            1,516  

Trust Preferred Income Equity Redeemable Securities SM

     9,030      7,909       7,732      6,768  
    

  


 

  


Diluted weighted average number of common shares outstanding

     929,386      974,153       932,109      968,717  
    

  


 

  


Net income per common share

                              

Basic

   $ 1.12    $ 1.04     $ 2.21    $ 2.04  

Diluted

     1.10      1.01       2.17      2.00  

 

For the three and six months ended June 30, 2003, options to purchase an additional 41,700 and 1,907,973 shares of common stock were outstanding, but were not included in the computation of diluted EPS because their inclusion would have had an antidilutive effect. For the three and six months ended June 30, 2002, options to purchase an additional 269,689 and 318,187 shares of common stock were outstanding, but were not included in the computation of diluted EPS because their inclusion would have had an antidilutive effect.

 

Additionally, as part of the 1996 business combination with Keystone Holdings, Inc. (the parent of American Savings Bank, F.A.), 18 million shares of common stock, with an assigned value of $18.4944 per share, were, as of January 1, 2003, held in escrow for the benefit of the investors in Keystone Holdings, the Federal Deposit Insurance Corporation (“FDIC”) as manager of the Federal Savings and Loan Insurance Corporation Resolution Fund and their transferees. The conditions under which these shares can be released from escrow to the Keystone Holdings’ investors and the FDIC are related to the outcome of certain litigation and not based on future earnings or market prices. The escrow would have by its terms automatically expired on December 20, 2002, absent the occurrence of certain circumstances that would extend it. The Company contends that these circumstances have not occurred, while the Keystone Holdings’ investors and the FDIC contend that they have occurred.

 

Pursuant to an amended tolling agreement, the parties agreed to return to the Company 225,000 shares per month through June 30, 2003. During the six months ended June 30, 2003, 900,000 of these shares were returned to the Company and the return of an additional 450,000 shares was in process. These 450,000 shares have since been returned to the Company subsequent to June 30, 2003. At June 30, 2003, the Company continues to assert the conditions for releasing the remaining shares to the Keystone Holdings’ investors and the FDIC had not occurred, and thus the remaining shares were still in the escrow. Therefore, none of the shares in the escrow during the periods indicated above were included in the above computations.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

While the Company and Keystone Holdings have been willing to extend the tolling agreement beyond June 30, 2003, the FDIC has refused to do so. Accordingly, since the Company contends that it is entitled to the shares in the escrow, the Company expects to take all appropriate actions to seek the return of these shares, including if necessary the commencement of litigation against Keystone Holdings and the FDIC.

 

Note 3:    Mortgage Banking Activities

 

Changes in the portfolio of loans serviced for others were as follows:

 

     Three Months Ended
June 30,


    Six Months Ended
June 30,


 
     2003

    2002

    2003

    2002

 
     (in millions)  

Balance, beginning of period

   $ 591,917     $ 459,375     $ 604,504     $ 382,500  

Home loans:

                                

Additions through acquisitions

                       49,242  

Other additions

     105,992       49,795       185,508       109,157  

Sales

     (2,960 )           (2,960 )      

Loan payments and other

     (110,867 )     (31,872 )     (203,423 )     (63,619 )

Net change in commercial real estate loans serviced for others

     (259 )     11       194       29  
    


 


 


 


Balance, end of period

   $ 583,823     $ 477,309     $ 583,823     $ 477,309  
    


 


 


 


 

Changes in the balance of mortgage servicing rights (“MSR”), net of the valuation allowance, were as follows:

 

     Three Months Ended
June 30,


   

Six Months Ended

June 30,


 
     2003

    2002

    2003

    2002

 
     (in millions)  

Balance, beginning of period

   $ 5,210     $ 7,955     $ 5,341     $ 6,241  

Home loans:

                                

Additions through acquisitions

                       926  

Other additions

     976       856       1,915       2,078  

Amortization

     (1,032 )     (504 )     (2,000 )     (983 )

Impairment provision

     (309 )     (1,107 )     (272 )     (1,062 )

Sales

     (247 )     (711 )     (388 )     (711 )

Net change in commercial real estate MSR

                 2        
    


 


 


 


Balance, end of period (1)

   $ 4,598     $ 6,489     $ 4,598     $ 6,489  
    


 


 


 



(1)   At June 30, 2003 and 2002, the aggregate mortgage servicing rights fair value was $4.63 billion and $6.49 billion.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Changes in the valuation allowance for MSR were as follows:

 

     Three Months Ended
June 30,


    Six Months Ended
June 30,


 
     2003

    2002

    2003

    2002

 
     (in millions)  

Balance, beginning of period

   $ 3,864     $ 1,669     $ 4,521     $ 1,714  

Impairment provision

     309       1,107       272       1,062  

Other than temporary impairment

     (579 )           (1,115 )      

Sales

     (150 )     (208 )     (234 )     (208 )
    


 


 


 


Balance, end of period

   $ 3,444     $ 2,568     $ 3,444     $ 2,568  
    


 


 


 


 

At June 30, 2003, the expected weighted average life of the Company’s MSR was 3 years. Projected amortization expense for the gross carrying value of MSR at June 30, 2003 is estimated to be as follows (in millions):

 

Remainder of 2003

   $ 1,654  

2004

     1,938  

2005

     1,158  

2006

     799  

2007

     581  

2008

     432  

After 2008

     1,480  
    


Gross carrying value of MSR

     8,042  

Less: valuation allowance

     (3,444 )
    


Net carrying value of MSR

   $ 4,598  
    


 

The projected amortization expense of MSR is an estimate and should be used with caution. The amortization expense for future periods was calculated by applying the same quantitative factors, such as estimated MSR prepayment assumptions, that were used to determine amortization expense for the second quarter of 2003. These factors are inherently subject to significant fluctuations, primarily due to the effect that changes in mortgage rates have on loan prepayment experience. Accordingly, any projection of MSR amortization in future periods is limited by the conditions that existed at the time the calculations were performed, and may not be indicative of actual amortization expense that will be recorded in future periods.

 

Note 4:    Guarantees

 

In the ordinary course of business, the Company sells loans with recourse. For loans that have been sold with recourse, the recourse component is considered a guarantee. When the Company sells a loan with recourse, it commits to stand ready to perform, if the loan defaults, and to make payments to remedy the default. As of June 30, 2003 and December 31, 2002, loans sold with recourse totaled $3.61 billion and $4.26 billion. The Company’s recourse reserve related to these loans totaled $10 million and $11 million at June 30, 2003 and December 31, 2002.

 

The Company sells loans without recourse that may have to be subsequently repurchased due to defects that occurred during the loan’s origination process. The defects are categorized as documentation errors, underwriting errors and fraud. When a loan sold to an investor without recourse fails to perform according to its contractual terms, the investor will typically review the loan file to determine whether defects in the origination process

 

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

occurred. If a defect is identified, the Company may be required to either repurchase the loan or indemnify the investor for losses sustained. If there are no defects, the Company has no commitment to repurchase the loan. As of June 30, 2003 and December 31, 2002, the amount of loans sold without recourse totaled $583.17 billion and $600.25 billion, which substantially represents the unpaid principal balance of the Company’s loans serviced for others portfolio. The Company has reserved $115 million as of June 30, 2003 and $74 million as of December 31, 2002 to cover the estimated loss exposure related to the loan origination process defects that are inherent within this portfolio.

 

Note 5:    Operating Segments

 

The Company has 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 no comprehensive, authoritative guidance for management reporting. The management reporting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The Company’s operating segments are defined by the products and services they offer.

 

The Company uses various methodologies to assign certain balance sheet and income statement items to the responsible operating segment. Methodologies that are applied to the measurement of segment profitability include: (1) a funds transfer pricing system, which matches assets and liabilities with the market benchmark (approximation) of the Company’s cost of funds based on interest rate sensitivity and maturity characteristics and determines how much each interest margin source contributes to the Company’s total net interest income; (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 accounting principles generally accepted in the United States of America. This methodology is used to provide segment management with provision information for strategic decision making; (3) the utilization of an activity-based costing approach to measure allocations of certain operating expenses that were not directly charged to the segments; (4) the allocation of goodwill and other intangible assets to the operating segments based on benefits received from each acquisition; (5) capital charges for goodwill as a component of an internal measurement of return on the goodwill allocated to the operating segment; and (6) an economic capital model which is the framework for assessing business performance on a risk-adjusted basis. Changing economic conditions, further research and new data may lead to the update of the capital allocation assumptions.

 

The Company continues to enhance its segment reporting process methodologies. Changes to the operating segment structure and the funds transfer pricing methodology were made during the first quarter of 2003. Additionally, effective January 1, 2003, the primary management responsibilities for the Company’s originated home loan mortgage-backed securities portfolio were transferred from the Home Loans and Insurance Services Group to the Company’s corporate treasury operations. Accordingly, the earnings performance and financial condition of this portfolio are now included within the Corporate Support/Treasury and Other category. Results for the prior periods have been restated to conform to all of these changes.

 

The Banking and Financial Services Group offers a comprehensive line of financial products and services to a broad spectrum of consumers and small- to mid-sized businesses. The Group offers various deposit products including the Group’s signature Free Checking accounts as well as other personal and business checking accounts, savings accounts, money market deposit accounts and time deposit accounts. It also offers consumer loans as well as small business and commercial loans to small- and mid-sized businesses. The Group’s services are offered through multiple delivery channels, including financial center stores, business banking centers, ATMs, the internet and 24-hour telephone banking centers.

 

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The principal activities of the Home Loans and Insurance Services Group include: originating and servicing the Company’s home loans, buying and selling home loans in the secondary market and managing the home loan portfolio. Home loans are either originated or purchased, and are either held in portfolio or held for sale and subsequently sold into the secondary market. The Group offers home loans through multiple distribution channels, which include retail home loan centers, financial center stores, correspondent channels, wholesale home loan centers and directly to consumers through call centers and the internet. The Home Loans Group also includes the Company’s community reinvestment functions and the activities of Washington Mutual Insurance Services, Inc., WaMu Capital Corp. and Washington Mutual Mortgage Securities Corp.

 

The Specialty Finance Group provides financing to developers, investors, mortgage bankers and homebuilders for the acquisition, construction and development of apartment buildings (“multi-family” lending), other commercial real estate and homes. The Group also services commercial real estate mortgages as part of its commercial asset management business and conducts a consumer finance business through Washington Mutual Finance Corporation.

 

The Corporate Support/Treasury and Other category includes management of the Company’s interest rate risk, liquidity, capital, borrowings, and investment securities and home loan mortgage-backed securities portfolios. To the extent not allocated to the business segments, this category also includes the costs of the Company’s technology services, facilities, legal, accounting and human resources. Also reported in this category is the net impact of funds transfer pricing for loan and deposit balances including the effects of changes in interest rates on the Company’s net interest margin and the effects of inter-segment allocations of gains and losses related to interest rate risk management instruments. The funds transfer pricing methodology isolates the majority of interest rate risk and concentrates it in our Treasury operations. It captures historical interest rate sensitivity of the balance sheet, risk management decisions within approved limits and the temporary divergence of funds transfer pricing assumptions from the actual duration of assets and liabilities. Certain basis and other residual risk remains in the operating segments.

 

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Financial highlights by operating segment were as follows:

 

     Three Months Ended June 30, 2003

 
     Banking
and
Financial
Services


    Home
Loans and
Insurance
Services


    Specialty
Finance


    Corporate
Support/
Treasury
and Other


    Reconciling
Adjustments


    Total

 
     (dollars in millions)  

Condensed income statement:

                                                

Net interest income (expense)

   $ 891     $ 1,155     $ 344     $ (365 )   $     $ 2,025  

Provision for loan and lease losses

     38       46       52       8       (26 ) (1)     118  

Noninterest income (expense)

     624       1,002       20       (17 )           1,629  

Noninterest expense

     949       903       114       164       (212 ) (2)     1,918  

Income taxes (benefit)

     201       450       74       (215 )     88   (3)     598  
    


 


 


 


 


 


Net income (loss)

   $ 327     $ 758     $ 124     $ (339 )   $ 150     $ 1,020  
    


 


 


 


 


 


Performance and other data:

                                                

Efficiency ratio

     54.84 % (4)     38.59 % (4)     25.00 % (4)     n/a       n/a       52.49 % (5)

Average loans

   $ 25,570     $ 141,997     $ 30,933     $ 99     $ (383 ) (6)   $ 198,216  

Average assets

     33,998       176,709       34,814       38,980       (383 ) (6)     284,118  

Average deposits

     125,025       30,257       3,393       5,005       n/a       163,680  

 

     Three Months Ended June 30, 2002

 
     Banking
and
Financial
Services


    Home
Loans and
Insurance
Services


    Specialty
Finance


    Corporate
Support/
Treasury
and Other


   Reconciling
Adjustments


    Total

 
     (dollars in millions)  

Condensed income statement:

                                               

Net interest income

   $ 762     $ 750     $ 297     $ 291    $     $ 2,100  

Provision for loan and lease losses

     41       45       61       8      5  (1)     160  

Noninterest income

     541       600       19       48            1,208  

Noninterest expense

     880       668       96       150      (208 ) (2)     1,586  

Income taxes

     145       242       60       51      74   (3)     572  
    


 


 


 

  


 


Net income

   $ 237     $ 395     $ 99     $ 130    $ 129     $ 990  
    


 


 


 

  


 


Performance and other data:

                                               

Efficiency ratio

     58.67 % (4)     44.36 % (4)     23.00 % (4)     n/a      n/a       47.95 % (5)

Average loans

   $ 20,627     $ 118,996     $ 29,722     $ 13    $ (479 ) (6)   $ 168,879  

Average assets

     28,850       138,427       31,784       68,267      (479 ) (6)     266,849  

Average deposits

     111,425       11,073       2,701       5,449      n/a       130,648  

(1)   Represents the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the “losses inherent in the loan portfolio” methodology used by the Company.
(2)   Represents the corporate offset for goodwill cost of capital allocated to segments.
(3)   Represents the tax effect of reconciling adjustments.
(4)   The efficiency ratio is defined as noninterest expense, excluding a cost of capital charge on goodwill, divided by total revenue (net interest income and noninterest income).
(5)   The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
(6)   Represents the corporate offset for allowance for loan and lease losses allocated to segments.

 

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

     Six Months Ended June 30, 2003

 
     Banking
and
Financial
Services


    Home
Loans and
Insurance
Services


    Specialty
Finance


    Corporate
Support/
Treasury
and Other


    Reconciling
Adjustments


    Total

 
     (dollars in millions)  

Condensed income statement:

                                                

Net interest income (expense)

   $ 1,757     $ 2,245     $ 683     $ (643 )   $     $ 4,042  

Provision for loan and lease losses

     75       85       103       14       (34 ) (1)     243  

Noninterest income (expense)

     1,208       1,880       28       (81 )           3,035  

Noninterest expense

     1,868       1,676       219       285       (422 ) (2)     3,626  

Income taxes (benefit)

     389       881       146       (399 )     168   (3)     1,185  
    


 


 


 


 


 


Net income (loss)

   $ 633     $ 1,483     $ 243     $ (624 )   $ 288     $ 2,023  
    


 


 


 


 


 


Performance and other data:

                                                

Efficiency ratio

     55.08 % (4)     37.20 % (4)     24.39 % (4)     n/a       n/a       51.24 % (5)

Average loans

   $ 24,602     $ 139,411     $ 30,768     $ 88     $ (386 ) (6)   $ 194,483  

Average assets

     33,205       174,496       34,437       40,724       (386 ) (6)     282,476  

Average deposits

     124,716       27,757       3,198       5,138       n/a       160,809  

 

     Six Months Ended June 30, 2002

 
     Banking
and
Financial
Services


    Home
Loans and
Insurance
Services


    Specialty
Finance


    Corporate
Support/
Treasury
and Other


    Reconciling
Adjustments


    Total

 
     (dollars in millions)  

Condensed income statement:

                                                

Net interest income

   $ 1,425     $ 1,597     $ 614     $ 860     $     $ 4,496  

Provision for loan and lease losses

     75       91       128       16       25   (1)     335  

Noninterest income (expense)

     1,054       993       43       (74 )           2,016  

Noninterest expense

     1,689       1,225       195       391       (392 ) (2)     3,108  

Income taxes

     271       488       126       102       136   (3)     1,123  
    


 


 


 


 


 


Net income

   $ 444     $ 786     $ 208     $ 277     $ 231     $ 1,946  
    


 


 


 


 


 


Performance and other data:

                                                

Efficiency ratio

     59.29 % (4)     42.27 % (4)     23.11 % (4)     n/a       n/a       47.72 % (5)

Average loans

   $ 19,954     $ 122,110     $ 30,169     $ 56     $ (480 ) (6)   $ 171,809  

Average assets

     28,021       141,451       32,200       74,359       (480 ) (6)     275,551  

Average deposits

     107,820       10,854       2,700       5,895       n/a       127,269  

(1)   Represents the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the “losses inherent in the loan portfolio” methodology used by the Company.
(2)   Represents the corporate offset for goodwill cost of capital allocated to segments.
(3)   Represents the tax effect of reconciling adjustments.
(4)   The efficiency ratio is defined as noninterest expense, excluding a cost of capital charge on goodwill, divided by total revenue (net interest income and noninterest income).
(5)   The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
(6)   Represents the corporate offset for allowance for loan and lease losses allocated to segments.

 

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WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

     Year Ended December 31, 2002

 
     Banking
and
Financial
Services


    Home
Loans and
Insurance
Services


    Specialty
Finance


    Corporate
Support/
Treasury
and Other


    Reconciling
Adjustments


    Total

 
     (dollars in millions)  

Condensed income statement:

                                                

Net interest income

   $ 3,018     $ 3,409     $ 1,262     $ 652     $     $ 8,341  

Provision for loan and lease losses

     160       187       271       34       (57 ) (1)     595  

Noninterest income (expense)

     2,222       2,522       114       (68 )           4,790  

Noninterest expense

     3,508       2,661       400       631       (818 ) (2)     6,382  

Income taxes (benefit)

     602       1,143       265       (73 )     321   (3)     2,258  
    


 


 


 


 


 


Net income (loss)

   $ 970     $ 1,940     $ 440     $ (8 )   $ 554     $ 3,896  
    


 


 


 


 


 


Performance and other data:

                                                

Efficiency ratio

     58.24 % (4)     40.28 % (4)     22.55 % (4)     n/a       n/a       48.60 % (5)

Average loans

   $ 20,915     $ 124,566     $ 30,488     $ 32     $ (468 ) (6)   $ 175,533  

Average assets

     29,071       151,537       32,653       58,674       (468 ) (6)     271,467  

Average deposits

     113,250       13,730       2,836       4,885       n/a       134,701  

 

     Year Ended December 31, 2001

 
     Banking
and
Financial
Services


    Home
Loans and
Insurance
Services


    Specialty
Finance


    Corporate
Support/
Treasury
and Other


    Reconciling
Adjustments


    Total

 
     (dollars in millions)  

Condensed income statement:

                                                

Net interest income

   $ 2,142     $ 1,635     $ 1,023     $ 2,076     $     $ 6,876  

Provision for loan and lease losses

     146       189       298       32       (90 ) (1)     575  

Noninterest income (expense)

     1,793       1,474       74       (93 )           3,248  

Noninterest expense

     2,512       1,456       294       613       (258 ) (2)     4,617  

Income taxes

     483       566       189       452       128   (3)     1,818  
    


 


 


 


 


 


Net income

   $ 794     $ 898     $ 316     $ 886     $ 220     $ 3,114  
    


 


 


 


 


 


Performance and other data:

                                                

Efficiency ratio

     61.89 % (4)     42.43 % (4)     22.73 % (4)     n/a       n/a       44.23 % (5)

Average loans

   $ 13,123     $ 107,528     $ 27,684     $ 411     $ (432 ) (6)   $ 148,314  

Average assets

     17,931       121,603       29,261       57,210       (432 ) (6)     225,573  

Average deposits

     82,384       7,860       2,613       3,665       n/a       96,522  

(1)   Represents the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the “losses inherent in the loan portfolio” methodology used by the Company.
(2)   Represents the corporate offset for goodwill cost of capital allocated to segments.
(3)   Represents the tax effect of reconciling adjustments.
(4)   The efficiency ratio is defined as noninterest expense, excluding a cost of capital charge on goodwill, divided by total revenue (net interest income and noninterest income).
(5)   The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
(6)   Represents the corporate offset for allowance for loan and lease losses allocated to segments.

 

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Table of Contents

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

     Year Ended December 31, 2000

 
     Banking
and
Financial
Services


    Home
Loans and
Insurance
Services


    Specialty
Finance


    Corporate
Support/
Treasury
and Other


    Reconciling
Adjustments


    Total

 
     (dollars in millions)  

Condensed income statement:

                                                

Net interest income (expense)

   $ 2,061     $ 1,645     $ 822     $ (217 )   $     $ 4,311  

Provision for loan and lease losses

     65       101       148       (1 )     (128 ) (1)     185  

Noninterest income (expense)

     1,403       548       42       (9 )           1,984  

Noninterest expense

     2,010       679       215       361       (139 ) (2)     3,126  

Income taxes (benefit)

     528       537       190       (267 )     97   (3)     1,085  
    


 


 


 


 


 


Net income (loss)

   $ 861     $ 876     $ 311     $ (319 )   $ 170     $ 1,899  
    


 


 


 


 


 


Performance and other data:

                                                

Efficiency ratio

     56.80 % (4)     27.69 % (4)     21.94 % (4)     n/a       n/a       48.34 % (5)

Average loans

   $ 9,315     $ 86,044     $ 22,383     $       n/a     $ 117,742  

Average assets

     12,441       109,130       22,839       43,162       n/a       187,572  

Average deposits

     78,074       1,213       191       798       n/a       80,276  

(1)   Represents the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the “losses inherent in the loan portfolio” methodology used by the Company.
(2)   Represents the corporate offset for goodwill cost of capital allocated to segments.
(3)   Represents the tax effect of reconciling adjustments.
(4)   The efficiency ratio is defined as noninterest expense, excluding a cost of capital charge on goodwill, divided by total revenue (net interest income and noninterest income).
(5)   The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
(6)   Represents the corporate offset for allowance for loan and lease losses allocated to segments.

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Cautionary Statements

 

Our Form 10-Q and other documents that we file with the Securities and Exchange Commission contain 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. Some of these factors are:

 

    General business and economic conditions may significantly affect our earnings;

 

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

 

    A failure to effectively implement our business operations technology solutions could adversely affect our earnings and financial condition;

 

    The financial services industry is highly competitive; and

 

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

 

Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2003. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective.

 

We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to improve our controls and procedures over time and to correct any deficiencies that we may discover in the future. Our goal is to ensure that our senior management has timely access to all material financial and non-financial information concerning our business. While we believe the present design of our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to modify our disclosure controls and procedures.

 

Critical Accounting Policies

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in our Consolidated Financial Statements and accompanying notes. We believe that the judgments, estimates and assumptions used in the preparation of our Consolidated Financial Statements are appropriate given the factual circumstances as of June 30, 2003.

 

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Table of Contents

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified four accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, and the sensitivity of our Consolidated Financial Statements to those judgments, estimates and assumptions, are critical to an understanding of our Consolidated Financial Statements. These policies relate to the valuation of our mortgage servicing rights (“MSR”) and rate lock commitments, the methodology that determines our allowance for loan and lease losses, and the assumptions used in the calculation of our net periodic pension expense.

 

Management has discussed the development and selection of these critical accounting policies with the Audit Committee of our Board of Directors. In addition, there are other complex accounting standards that require the Company to employ significant judgment in interpreting and applying certain of the principles prescribed by those standards. These judgments include, but are not limited to, the determination of whether a financial instrument or other contract meets the definition of a derivative in accordance with Statement of Financial Accounting Standards (“Statement”) No. 133, Accounting for Derivative Instruments and Hedging Activities , and the applicable hedge deferral criteria. These policies and the judgments, estimates and assumptions are described in greater detail in the Company’s 2002 Annual Report on Form 10-K in the “Critical Accounting Policies” section of Management’s Discussion and Analysis and in Note 1 to the Consolidated Financial Statements—“Summary of Significant Accounting Policies.”

 

Recently Issued Accounting Standards

 

Refer to Note 1 to the Consolidated Financial Statements—“Accounting Policies” for discussion of the recently issued accounting standards.

 

18


Table of Contents

Summary Financial Data

 

     Three Months Ended
June 30,


    Six Months Ended
June 30,


 
     2003

    2002

    2003

    2002

 
     (dollars in millions, except per share amounts)  

Profitability

                                

Net interest income

   $ 2,025     $ 2,100     $ 4,042     $ 4,496  

Net interest margin

     3.30 %     3.54 %     3.31 %     3.65 %

Noninterest income

   $ 1,629     $ 1,208     $ 3,035     $ 2,016  

Noninterest expense

     1,918       1,586       3,626       3,108  

Net income

     1,020       990       2,023       1,946  

Net income per common share:

                                

Basic

   $ 1.12     $ 1.04     $ 2.21     $ 2.04  

Diluted

     1.10       1.01       2.17       2.00  

Basic weighted average number of common shares outstanding (in thousands)

     910,921       954,662       915,974       951,177  

Diluted weighted average number of common shares outstanding (in thousands)

     929,386       974,153       932,109       968,717  

Dividends declared per common share

   $ 0.30     $ 0.26     $ 0.59     $ 0.51  

Return on average assets

     1.44 %     1.48 %     1.43 %     1.41 %

Return on average common equity

     19.25       20.37       19.36       20.50  

Efficiency ratio (1)

     52.49       47.95       51.24       47.72  

Asset Quality

                                

Nonaccrual loans (2)

   $ 1,996     $ 2,232     $ 1,996     $ 2,232  

Foreclosed assets

     317       274       317       274  
    


 


 


 


Total nonperforming assets

     2,313       2,506       2,313       2,506  

Nonperforming assets/total assets

     0.82 %     0.96 %     0.82 %     0.96 %

Restructured loans

   $ 89     $ 119     $ 89     $ 119  
    


 


 


 


Total nonperforming assets and restructured loans

     2,402       2,625       2,402       2,625  

Allowance for loan and lease losses

     1,680       1,665       1,680       1,665  

Allowance as a percentage of total loans held in portfolio

     1.09 %     1.14 %     1.09 %     1.14 %

Provision for loan and lease losses

   $ 118     $ 160     $ 243     $ 335  

Net charge-offs

     118       116       213       215  

Capital Adequacy

                                

Stockholders’ equity/total assets

     7.44 %     7.50 %     7.44 %     7.50 %

Tangible common equity (3) /total tangible assets (3)

     5.28       5.28       5.28       5.28  

Estimated total risk-based capital/risk-weighted assets (4)

     11.72       12.32       11.72       12.32  

Per Common Share Data

                                

Book value per common share (5)

   $ 23.22     $ 20.50     $ 23.22     $ 20.50  

Market prices:

                                

High

     43.90       39.45       43.90       39.45  

Low

     35.68       33.00       32.98       31.60  

Period end

     41.30       37.11       41.30       37.11  

(1)   The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
(2)   Excludes nonaccrual loans held for sale.
(3)   Excludes unrealized net gain/loss on available-for-sale securities and derivatives, goodwill and intangible assets, but includes MSR.
(4)   Estimate of what the total risk-based capital ratio would be if Washington Mutual, Inc. was a bank holding company that complies with Federal Reserve Board capital requirements.
(5)   Excludes shares held in escrow pending resolution of the Company’s asserted right to the return of such shares; there were 17,100,000 shares in the escrow at June 30, 2003, and 18,000,000 shares at June 30, 2002.

 

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Table of Contents

Summary Financial Data (Continued)

 

     Three Months Ended
June 30,


   Six Months Ended
June 30,


     2003

   2002

   2003

   2002

     (in millions, except per share amounts and ratios)

Supplemental Data

                           

Average balance sheet:

                           

Average loans held for sale

   $ 46,727    $ 22,211    $ 44,539    $ 24,712

Average loans held in portfolio

     151,489      146,668      149,944      147,097

Average interest-earning assets

     246,021      236,504      243,868      245,789

Average total assets

     284,118      266,849      282,476      275,551

Average interest-bearing deposits

     120,144      108,231      119,560      104,743

Average noninterest-bearing deposits

     43,536      22,417      41,249      22,526

Average stockholders’ equity

     21,193      19,401      20,898      18,946

Period-end balance sheet:

                           

Loans held for sale

     40,631      21,940      40,631      21,940

Loans held in portfolio

     152,186      144,208      152,186      144,208

Total interest-earning assets

     245,345      230,852      245,345      230,852

Total assets

     283,203      261,298      283,203      261,298

Total interest-bearing deposits

     119,952      108,441      119,952      108,441

Total noninterest-bearing deposits

     46,505      20,628      46,505      20,628

Total stockholders’ equity

     21,061      19,597      21,061      19,597

Loan volume:

                           

Home loans:

                           

Adjustable rate

     24,847      16,093      48,278      32,701

Fixed rate

     78,650      30,999      148,160      70,230

Specialty mortgage finance

     4,658      3,074      9,187      6,201
    

  

  

  

Total home loan volume

     108,155      50,166      205,625      109,132

Total loan volume

     120,322      57,779      226,942      123,466

Home loan refinancing

     81,511      27,160      153,959      67,250

Total refinancing

     83,620      28,398      157,480      69,464

 

Earnings Performance

 

Net Interest Income

 

For the three and six months ended June 30, 2003, net interest income decreased $75 million or 4% and $454 million or 10% compared with the same periods in 2002. These decreases resulted from contraction of the margin, which declined to 3.30% and 3.31% for the three and six months ended June 30, 2003 from 3.54% and 3.65% for the same periods in 2002, as yields on loans and debt securities continued to reprice downward from the higher interest rate environment of 2002. The decline in the margin was partially offset by decreases in the rates paid on interest-bearing deposits. In particular, the average rate paid on interest-bearing checking (Platinum) accounts decreased to 1.89% from 3.12% on an average balance of $54.94 billion and $30.49 billion for the three months ended June 30, 2003 and 2002, and decreased to 1.99% from 3.31% on an average balance of $53.68 billion and $23.83 billion for the six months ended June 30, 2003 and 2002. The free funding impact of noninterest-bearing sources that resulted from higher average custodial and escrow balances also offset the contraction in the margin for the three and six months ended June 30, 2003, by 16 and 15 basis points when compared with the same periods in 2002. Higher average balances of loans held for sale and home equity loans and lines of credit during the second quarter and first half of 2003, as compared with the same periods in the prior year, further reduced the decline in net interest income.

 

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Table of Contents

Interest rate contracts, including embedded derivatives, held for asset/liability interest rate risk management purposes decreased net interest income by $151 million and $294 million for the three and six months ended June 30, 2003, compared with $92 million and $129 million for the same periods in 2002.

 

Certain average balances, together with the total dollar amounts of interest income and expense and the weighted average interest rates, were as follows:

 

     Three Months Ended June 30,

     2003

   2002

     Average
Balance


   Rate

    Interest
Income


   Average
Balance


   Rate

    Interest
Income


     (dollars in millions)
Assets                                

Interest-earning assets:

                                       

Federal funds sold and securities purchased under resale agreements

   $ 3,448    1.29 %   $ 11    $ 1,995    1.89 %   $ 10

Available-for-sale securities (1) :

                                       

Mortgage-backed securities

     24,087    5.22       314      22,471    5.96       335

Investment securities

     14,969    4.15       155      38,436    4.97       477

Loans held for sale (2)

     46,727    5.36       626      22,211    6.50       361

Loans held in portfolio (2)(3) :

                                       

Loans secured by real estate:

                                       

Home loans

     83,426    4.95       1,033      86,315    6.02       1,299

Purchased specialty mortgage finance

     10,475    5.50       144      9,028    6.39       144
    

        

  

        

Total home loans

     93,901    5.01       1,177      95,343    6.05       1,443

Home construction loans:

                                       

Builder (4)

     1,103    4.77       13      1,379    6.15       21

Custom (5)

     927    7.48       17      893    8.58       19

Home equity loans and lines of credit:

                                       

Banking subsidiaries

     19,238    5.13       246      12,819    6.01       193

Washington Mutual Finance

     2,041    11.77       60      2,116    12.16       64

Multi-family

     19,036    5.34       255      17,425    5.98       261

Other real estate

     7,306    6.25       114      8,410    6.71       142
    

        

  

        

Total loans secured by real estate

     143,552    5.25       1,882      138,385    6.19       2,143

Consumer:

                                       

Banking subsidiaries

     1,253    8.93       28      2,719    9.31       63

Washington Mutual Finance

     1,732    19.61       85      1,702    18.68       79

Commercial business

     4,952    4.38       55      3,862    5.13       50
    

        

  

        

Total loans held in portfolio

     151,489    5.41       2,050      146,668    6.37       2,335

Other

     5,301    4.61       61      4,723    5.67       67
    

        

  

        

Total interest-earning assets

     246,021    5.23       3,217      236,504    6.06       3,585

Noninterest-earning assets:

                                       

Mortgage servicing rights

     4,754                   7,828             

Goodwill

     6,253                   6,152             

Other

     27,090                   16,365             
    

               

            

Total assets

   $ 284,118                 $ 266,849             
    

               

            

(This table is continued on the next page.)


(1)   The average balance and yield are based on average amortized cost balances.
(2)   Nonaccrual loans are included in the average loan amounts outstanding.
(3)   Interest income for loans held in portfolio includes amortization of net deferred loan origination costs of $78 million and $47 million for the three months ended June 30, 2003 and 2002.
(4)   Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale.
(5)   Represents construction loans made directly to the intended occupant of a single-family residence.

 

21


Table of Contents

(Continued from the previous page.)

 

     Three Months Ended June 30,

     2003

   2002

     Average
Balance


   Rate

    Interest
Expense


   Average
Balance


   Rate

    Interest
Expense


     (dollars in millions)
Liabilities                                

Interest-bearing liabilities:

                                       

Deposits:

                                       

Interest-bearing checking

   $ 60,597    1.74 %   $ 262    $ 36,991    2.65 %   $ 245

Savings accounts and money market deposit accounts

     28,229    0.98       69      32,249    1.51       122

Time deposit accounts

     31,318    2.77       217      38,991    3.09       299
    

        

  

        

Total interest-bearing deposits

     120,144    1.83       548      108,231    2.47       666

Federal funds purchased and commercial paper

     3,843    1.37       13      3,562    1.96       17

Securities sold under agreements to repurchase

     20,040    2.66       134      35,812    2.44       218

Advances from Federal Home Loan Banks

     51,916    2.56       334      59,651    2.75       410

Other

     14,898    4.37       163      13,976    4.98       174
    

        

  

        

Total interest-bearing liabilities

     210,841    2.26       1,192      221,232    2.69       1,485
                 

               

Noninterest-bearing sources:

                                       

Noninterest-bearing deposits

     43,536                   22,417             

Other liabilities

     8,548                   3,799             

Stockholders’ equity

     21,193                   19,401             
    

               

            

Total liabilities and stockholders’ equity

   $ 284,118                 $ 266,849             
    

               

            

Net interest spread and net interest income

          2.97     $ 2,025           3.37     $ 2,100
                 

               

Impact of noninterest-bearing sources

          0.33                   0.17        

Net interest margin

          3.30                   3.54        

 

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Table of Contents
     Six Months Ended June 30,

     2003

   2002

     Average
Balance


   Rate

    Interest
Income


   Average
Balance


   Rate

    Interest
Income


     (dollars in millions)
Assets                                

Interest-earning assets:

                                       

Federal funds sold and securities purchased under resale agreements

   $ 4,286    1.27 %   $ 27    $ 1,569    1.79 %   $ 14

Available-for-sale securities (1) :

                                       

Mortgage-backed securities

     25,142    5.26       661      23,852    5.66       676

Investment securities

     14,979    4.35       325      43,822    4.96       1,083

Loans held for sale (2)

     44,539    5.46       1,216      24,712    6.51       804

Loans held in portfolio (2)(3) :

                                       

Loans secured by real estate:

                                       

Home loans

     83,255    5.08       2,116      87,255    6.10       2,661

Purchased specialty mortgage finance

     10,286    5.72       294      8,785    6.64       292
    

        

  

        

Total home loans

     93,541    5.15       2,410      96,040    6.15       2,953

Home construction loans:

                                       

Builder (4)

     1,080    4.90       27      1,473    6.09       44

Custom (5)

     923    7.61       35      911    8.14       37

Home equity loans and lines of credit:

                                       

Banking subsidiaries

     18,248    5.28       480      11,966    6.01       360

Washington Mutual Finance

     2,004    11.91       118      2,106    12.05       127

Multi-family

     18,758    5.50       516      17,483    6.16       539

Other real estate

     7,525    6.30       237      8,417    6.88       289
    

        

  

        

Total loans secured by real estate

     142,079    5.39       3,823      138,396    6.29       4,349

Consumer:

                                       

Banking subsidiaries

     1,293    8.94       57      2,784    9.32       130

Washington Mutual Finance

     1,728    19.57       168      1,715    18.59       159

Commercial business

     4,844    4.42       107      4,202    5.12       108
    

        

  

        

Total loans held in portfolio

     149,944    5.55       4,155      147,097    6.45       4,746

Other

     4,978    5.05       125      4,737    6.15       145
    

        

  

        

Total interest-earning assets

     243,868    5.34       6,509      245,789    6.08       7,468

Noninterest-earning assets:

                                       

Mortgage servicing rights

     5,103                   7,419             

Goodwill

     6,259                   5,875             

Other

     27,246                   16,468             
    

               

            

Total assets

   $ 282,476                 $ 275,551             
    

               

            

(This table is continued on the next page.)


(1 )   The average balance and yield are based on average amortized cost balances.
(2)   Nonaccrual loans are included in the average loan amounts outstanding.
(3)   Interest income for loans held in portfolio includes amortization of net deferred loan origination costs of $139 million and $104 million for the six months ended June 30, 2003 and 2002.
(4)   Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale.
(5)   Represents construction loans made directly to the intended occupant of a single-family residence.

 

23


Table of Contents

(Continued from the previous page.)

 

     Six Months Ended June 30,

     2003

   2002

     Average
Balance


   Rate

    Interest
Expense


   Average
Balance


   Rate

    Interest
Expense


     (dollars in millions)
Liabilities                                

Interest-bearing liabilities:

                                       

Deposits:

                                       

Interest-bearing checking

   $ 59,416    1.83 %   $ 538    $ 30,468    2.70 %   $ 407

Savings accounts and money market deposit accounts

     28,056    1.03       143      33,771    1.54       262

Time deposit accounts

     32,088    2.85       454      40,504    3.20       648
    

        

  

        

Total interest-bearing deposits

     119,560    1.91       1,135      104,743    2.52       1,317

Federal funds purchased and commercial paper

     3,118    1.42       22      4,558    1.94       45

Securities sold under agreements to repurchase

     20,205    2.71       274      44,582    1.95       431

Advances from Federal Home Loan Banks

     53,869    2.64       712      62,461    2.69       833

Other

     15,208    4.26       324      14,066    4.96       346
    

        

  

        

Total interest-bearing liabilities

     211,960    2.34       2,467      230,410    2.59       2,972
                 

               

Noninterest-bearing sources:

                                       

Noninterest-bearing deposits

     41,249                   22,526             

Other liabilities

     8,369                   3,669             

Stockholders’ equity

     20,898                   18,946             
    

               

            

Total liabilities and stockholders’ equity

   $ 282,476                 $ 275,551             
    

               

            

Net interest spread and net interest income

          3.00     $ 4,042           3.49     $ 4,496
                 

               

Impact of noninterest-bearing sources

          0.31                   0.16        

Net interest margin

          3.31                   3.65        

 

24


Table of Contents

Noninterest Income

 

Noninterest income consisted of the following:

 

     Three Months Ended
June 30,


    Percentage
Change


    Six Months Ended
June 30,


    Percentage
Change


 
     2003

    2002

      2003

    2002

   
     (dollars in millions)  

Home loan mortgage banking income (expense):

                                            

Loan servicing income:

                                            

Loan servicing fees

   $ 593     $ 560     6 %   $ 1,206     $ 1,100     10 %

Loan subservicing fees

     7       38     (82 )     12       53     (77 )

Amortization of mortgage servicing rights

     (1,032 )     (504 )   105       (2,000 )     (983 )   103  

Mortgage servicing rights impairment

     (309 )     (1,107 )   (72 )     (272 )     (1,062 )   (74 )

Other, net

     (168 )     (78 )   115       (306 )     (140 )   119  
    


 


       


 


     

Net home loan servicing expense

     (909 )     (1,091 )   (17 )     (1,360 )     (1,032 )   32  

Revaluation gain from derivatives

     598       857     (30 )     815       842     (3 )

Net settlement income from certain interest-rate swaps

     84       101     (17 )     224       107     109  

Gain from mortgage loans

     622       220     183       1,210       471     157  

GNMA pool buy-out income

     219       78     181       373       91     310  

Loan related income

     91       61     49       166       132     26  

Gain from sale of originated mortgage- backed securities

           18     (100 )     1       20     (95 )
    


 


       


 


     

Total home loan mortgage banking income

     705       244     189       1,429       631     126  

Depositor and other retail banking fees

     454       398     14       875       759     15  

Securities fees and commissions

     100       98     2       189       180     5  

Insurance income

     53       39     36       105       86     22  

Portfolio loan related income

     111       75     48       227       140     62  

Gain (loss) from other available-for-sale securities

     137       137           131       (161 )    

(Loss) gain on extinguishment of securities sold under agreements to repurchase

     (49 )     121           (136 )     195      

Other income

     118       96     23       215       186     16  
    


 


       


 


     

Total noninterest income

   $ 1,629     $ 1,208     35     $ 3,035     $ 2,016     51  
    


 


       


 


     

 

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Table of Contents

Home Loan Mortgage Banking Income (Expense)

 

The increase in home loan servicing fees for the three and six months ended June 30, 2003 was the result of the increase in our loans serviced for others portfolio, partially offset by a decline in the aggregate weighted average servicing fee. Our loans serviced for others portfolio increased from $477.31 billion at June 30, 2002 to $583.82 billion at June 30, 2003 primarily as a result of the acquisition of HomeSide Lending, Inc., including its servicing portfolio, in the fourth quarter of 2002.

 

Total loans serviced for others portfolio by type was as follows:

 

     June 30, 2003

     Unpaid
Principal
Balance


   Weighted
Average
Servicing Fee


     (in millions)    (in basis points,
annualized)

Government

   $ 74,618    53

Agency

     387,922    30

Private

     106,449    40

Specialty home loans

     14,834    50
    

    

Total loans serviced for others portfolio (1)

   $ 583,823    36
    

    

(1)   Weighted average coupon (annualized) was 6.44% at June 30, 2003.

 

The weighted average servicing fee decreased from 41 basis points at June 30, 2002 to 36 basis points at June 30, 2003 largely due to the Company’s continuing process of selling a portion of the future contractual servicing cash flows to third parties. This process decreased the net MSR balance by $664 million but had no impact on the unpaid principal balance of the loans serviced for others portfolio.

 

Historically low long-term mortgage rates led to higher anticipated prepayment rates, which resulted in MSR impairment of $309 million during the second quarter of 2003. Higher levels of prepayment activity during the three and six months ended June 30, 2003 resulted in higher MSR amortization, as compared with the same periods in 2002.

 

For the three and six months ended June 30, 2003, we recorded an other than temporary MSR impairment of $579 million and $1,115 million, which reduced both the gross carrying value of the MSR and the MSR valuation allowance. The amounts of the other than temporary impairment were determined by selecting an appropriate interest rate shock to estimate the amount of MSR fair value that might be expected to recover in the foreseeable future. To the extent that the gross carrying value of the MSR exceeded the estimated recoverable amount, that portion of the gross carrying value was written off as an other than temporary impairment. Although the writedowns had no impact on our results of operations or financial condition, they did reduce the gross carrying value of the MSR, which is used as the basis for MSR amortization.

 

The increase in other home loan mortgage banking expense for the three and six months ended June 30, 2003 resulted from higher loan pool expenses due to significant refinancing activity. Loan pool expenses represent the amount of interest expense that the Company incurs for the elapsed time between the borrower payoff date and the next monthly loan servicing investor pool cutoff date.

 

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Table of Contents

In measuring the fair value of MSR, we stratify the loans in our servicing portfolio based on loan type and coupon rate. 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 gross carrying value. A recovery of the impairment allowance for a stratum is recorded when its fair value exceeds its net carrying value. At June 30, 2003, we stratified the loans in our servicing portfolio as follows:

 

          June 30, 2003

    

Rate Band


   Gross
Carrying
Value


   Valuation
Allowance


   Net
Carrying
Value


   Fair
Value


          (in millions)

Adjustable

   All loans    $ 1,615    $ 473    $ 1,142    $ 1,142

Conventional

   6.00% and below      1,626      718      908      908

Conventional

   6.01% to 7.49%      2,068      1,115      953      953

Conventional

   7.50% and above      373      121      252      252

Government

   6.00% and below      196      85      111      111

Government

   6.01% to 7.49%      777      406      371      371

Government

   7.50% and above      399      102      297      297

Private

   6.00% and below      257      136      121      121

Private

   6.01% to 7.49%      359      195      164      164

Private

   7.50% and above      161      43      118      118
         

  

  

  

Primary Servicing

          7,831      3,394      4,437      4,437

Master servicing

   All loans      113      50      63      63

Specialty home loans

   All loans      76           76      107

Multi-family

   All loans      22           22      23
         

  

  

  

Total

        $ 8,042    $ 3,444    $ 4,598    $ 4,630
         

  

  

  

 

Since loans with coupon rates at or below 6.00% reached a significant level, the Company adjusted the strata of the loan servicing portfolio during the second quarter of 2003 to the rate bands illustrated in the table above. This change did not have a significant impact on the MSR valuation allowance as of June 30, 2003.

 

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Table of Contents

At June 30, 2003, key economic assumptions and the sensitivity of the current fair value for home loans MSR to immediate changes in those assumptions were as follows:

 

     June 30, 2003

 
     Mortgage Servicing Rights

 
    

Fixed-Rate

Mortgage Loans


    Adjustable-
Rate
Mortgage
Loans


   

Specialty
Home
Loans


 
     Government
Sponsored
Enterprise


    Privately
Issued


    All Types

   
     (dollars in millions)  

Fair value of home loans MSR

   $ 2,893     $ 402     $ 1,142     $ 107  

Expected-weighted-average life (in years)

     2.9       2.9       3.6       1.9  

Constant prepayment rate (1)

     36.21 %     40.35 %     29.40 %     41.39 %

Impact on fair value of 25% decrease

   $ 885     $ 150     $ 254     $ 26  

Impact on fair value of 50% decrease

     2,206       376       638       65  

Impact on fair value of 25% increase

     (642 )     (109 )     (185 )     (19 )

Impact on fair value of 50% increase

     (1,252 )     (210 )     (338 )     (35 )

Future cash flows discounted at

     8.36 %     9.85 %     9.98 %     19.17 %

Impact on fair value of 10% decrease

     n/a       n/a       n/a     $ 2  

Impact on fair value of 25% decrease

   $ 131     $ 20     $ 79       6  

Impact on fair value of 50% decrease

     276       43       171       n/a  

Impact on fair value of 25% increase

     (118 )     (18 )     (68 )     (5 )

Impact on fair value of 50% increase

     (225 )     (34 )     (127 )     (10 )

(1)   Represents the expected lifetime average.

 

These sensitivities are hypothetical and should be used with caution. As the table above demonstrates, 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 MSR fair value. 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 MSR is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, increases in market interest rates may result in lower prepayments, but credit losses may increase), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made as of a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time. Refer to “Market Risk Management” for discussion of how MSR prepayment risk is managed and to Note 1 to the Consolidated Financial Statements—“Summary of Significant Accounting Policies” in the Company’s 2002 Annual Report on Form 10-K for further discussion of how MSR impairment is measured.

 

As part of its mortgage banking activities, the Company enters into commitments to originate or purchase loans whereby the interest rate on the loan is set 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 on the Consolidated Statements of Financial Condition with changes in fair value recorded in gain from mortgage loans on the Consolidated Statements of Income. In measuring the fair value of rate lock commitments, the amount of the expected servicing rights is included in the valuation. This value is calculated using the same methodologies as are used to value the Company’s MSR, adjusted using an anticipated fallout factor for loan commitments that will never be funded. The fair value of rate lock commitments on the Consolidated Statements of Financial Condition at June 30, 2003 and 2002 for which the underlying loans had not been funded was $210 million and $107 million.

 

28


Table of Contents

This policy of recognizing the value of the derivative has the effect of recognizing the gain from mortgage loans before the loans are sold. The Financial Accounting Standards Board (“FASB”) staff or the Emerging Issues Task Force may issue additional guidance on this matter. Depending on what, if any, additional guidance is issued, the timing of the gain recognition inherent within our rate lock commitments could be delayed, possibly until the date that the anticipated loans are sold. Generally, loans held for sale are sold within 60 to 120 days after the initial recognition of the rate lock commitment.

 

Rate lock commitment volume, adjusted for actual and anticipated fallout factors, totaled $101.08 billion and $194.74 billion for the three and six months ended June 30, 2003, compared with $44.29 billion and $84.90 billion for the same periods in 2002.

 

The fair value changes in loans held for sale and the offsetting changes in the derivative instruments used as fair value hedges are also recorded within gain from mortgage loans when hedge accounting treatment is achieved. Loans held for sale where hedge accounting treatment is not achieved (“nonqualifying” loans held for sale) are not recorded at fair value and are instead recorded at the lower of aggregate cost or market value. Due to decreases in the fair value of derivatives acquired to mitigate the risk of fair value changes to these nonqualifying loans, losses of $147 million and $342 million were recognized in revaluation gain (loss) from derivatives during the three and six months ended June 30, 2003. A gain may be recognized when the loans are subsequently sold if the fair value of those loans is higher than the carrying amount. As of June 30, 2003, the fair value of loans held for sale and the carrying amount were $40.63 billion, and as of December 31, 2002, the fair value was $34.06 billion with a carrying amount of $34.00 billion.

 

The high levels of rate lock commitment volume and the sale of nonqualifying loans held for sale resulted in a gain from mortgage loans of $622 million and $1,210 million during the three and six months ended June 30, 2003, compared with $220 million and $471 million during the same periods in 2002.

 

The following tables separately present the MSR, loans held for sale and the asset/liability risk management activities included within noninterest income for the three and six months ended June 30, 2003.

 

     Three Months Ended June 30, 2003

     MSR Risk
Management


   Loans Held
for Sale Risk
Management


    Asset/
Liability
Risk
Management


    Total

     (in millions)

Revaluation gain (loss) from derivatives

   $ 745    $ (147 )   $     $ 598

Net settlement income from certain interest-rate swaps

     84                  84

Gain (loss) from other available-for-sale securities

     140            (3 )     137
    

  


 


 

Total

   $ 969    $ (147 )   $ (3 )   $ 819
    

  


 


 

 

     Six Months Ended June 30, 2003

     MSR Risk
Management


   Loans Held
for Sale Risk
Management


    Asset/
Liability
Risk
Management


    Total

     (in millions)

Revaluation gain (loss) from derivatives

   $ 1,157    $ (342 )   $   –     $ 815

Net settlement income from certain interest-rate swaps

     224                  224

Gain (loss) from other available-for-sale securities

     140            (9 )     131
    

  


 


 

Total

   $ 1,521    $ (342 )   $ (9 )   $ 1,170
    

  


 


 

 

29


Table of Contents

Revaluation gain from derivatives is the earnings impact of the changes in fair value from certain derivatives where the Company either has not attempted to achieve, or has attempted but did not achieve, hedge accounting treatment under Statement No. 133. The revaluation gain from derivatives during the three and six months ended June 30, 2003 resulted from the Company’s continued usage of derivative instruments for interest rate risk management purposes. Derivatives that were used for MSR risk management purposes produced a revaluation gain of $745 million and $1,157 million during the three and six months ended June 30, 2003, compared with gains of $857 million and $842 million for the same periods in 2002. The total notional amount of these MSR risk management derivatives at June 30, 2003 was $32.07 billion with a combined net fair value of $554 million.

 

Net settlement income from certain interest-rate swaps consisted of receive-fixed interest rate swaps, which were used as MSR risk management derivatives. At June 30, 2003, the total notional amount of these receive-fixed interest-rate swaps was $8.15 billion, compared with $11.58 billion at June 30, 2002.

 

Gain from other available-for-sale securities of $140 million for the three and six months ended June 30, 2003 resulted from sales of approximately $1.69 billion in mortgage-backed securities and investment securities, all of which were designated as MSR risk management instruments.

 

Government National Mortgage Association (“GNMA”) pool buy-out income was $219 million and $373 million for the three and six months ended June 30, 2003 and $78 million and $91 million for the same periods in 2002. Beginning in September of 2002, the Company began to regularly exercise its buy-back rights under the terms of its contract with GNMA. The Company has the right to repurchase certain loans that are part of GNMA securitization pools before they have reached nonperforming status. In one part of the Company’s program, loans that have been 30 days past due for three consecutive months (referred to as “rolling 30 loans”) are repurchased from GNMA and then resold in the secondary market. In the other, loans that have missed three consecutive payments are likewise purchased and resold. These loans are collectively referred to as Early Buy-Out Loans.

 

Gain from the sale of these loans was $152 million and $228 million for the three and six months ended June 30, 2003 and $19 million and $22 million for the three and six months ended June 30, 2002. The Company does not have the option of repurchasing “rolling 30 loans” from pools created after January 1, 2003, but continues to make such purchases from previously created pools. The Company does not expect this change to have a significant impact on its results of operations throughout the remainder of 2003.

 

Additionally, as part of its normal Federal Housing Administration and Department of Veterans Affairs lending program, the Company repurchases defaulted loans from GNMA and undertakes collection and, if necessary, foreclosure proceedings with respect to those loans. Upon completion of the foreclosure, the Company can also submit a claim to either the Federal Housing Administration or the Department of Veterans Affairs for payment on the insurance or guarantee, as the case may be, issued by that agency. The portion of the recovery which is attributed to interest income owed to the Company is also recorded in this category. That interest income, together with interest income on the Early Buy-Out Loans was $67 million and $145 million for the three and six months ended June 30, 2003 and $59 million and $69 million for the three and six months ended June 30, 2002.

 

Loan related income increased during the three and six months ended June 30, 2003, primarily due to increased fees charged to our correspondent lenders and late charges on the loans serviced for others portfolio.

 

All Other Noninterest Income Analysis

 

The increase in depositor and other retail banking fees for the three and six months ended June 30, 2003 was primarily due to higher levels of checking fees that resulted from an increased number of noninterest-bearing checking accounts in comparison with the three and six months ended June 30, 2002 and an increase in debit card and ATM related income. The number of noninterest-bearing checking accounts at June 30, 2003 totaled approximately 6.1 million, an increase of more than 600,000 from June 30, 2002.

 

30


Table of Contents

Insurance income increased during the three and six months ended June 30, 2003 primarily due to the continued growth in our captive reinsurance programs.

 

The growth in portfolio loan related income for the three and six months ended June 30, 2003 was primarily due to increased late charges on the loan portfolio and continued high loan prepayment fees as a result of refinancing activity.

 

Several securities sold under agreements to repurchase (“repurchase agreements”) that contained embedded pay-fixed swaps were restructured during the first half of 2003, resulting in losses on extinguishment of repurchase agreements of $49 million and $136 million for the three and six months ended June 30, 2003. The restructured repurchase agreements contain embedded pay-fixed swaps with the same terms except with a lower pay rate.

 

Other noninterest income for the three and six months ended June 30, 2003 increased largely due to a revaluation gain recognized on residual interests in collateralized mortgage obligations.

 

Noninterest Expense

 

Noninterest expense consisted of the following:

 

     Three Months Ended
June 30,


   Percentage
Change


    Six Months Ended
June 30,


   Percentage
Change


 
     2003

   2002

     2003

   2002

  
     (dollars in millions)  

Compensation and benefits

   $ 867    $ 732    18 %   $ 1,638    $ 1,422    15 %

Occupancy and equipment

     375      283    33       679      571    19  

Telecommunications and outsourced information services

     143      134    7       287      273    5  

Depositor and other retail banking losses

     50      48    4       102      98    4  

Amortization of other intangible assets

     15      17    (12 )     31      34    (9 )

Advertising and promotion

     83      69    20       146      113    29  

Professional fees

     68      52    31       124      107    16  

Postage

     59      41    44       113      87    30  

Loan expense

     61      45    36       120      89    35  

Travel and training

     42      39    8       75      71    6  

Reinsurance expense

     15      10    50       31      24    29  

Other expense

     140      116    21       280      219    28  
    

  

        

  

      

Total noninterest expense

   $ 1,918    $ 1,586    21     $ 3,626    $ 3,108    17  
    

  

        

  

      

 

The increase in employee base compensation and benefits expense for the three and six months ended June 30, 2003 over the same periods in 2002 was substantially due to the hiring of additional staff to support our expanding operations. Full-time equivalent employees were 57,516 at June 30, 2003, compared with 50,001 at June 30, 2002. Overtime and second shifts have grown in response to the increased loan production and loan payoff processing. The Company’s variable compensation and benefits expense related to loan servicing activities, which include loan payoff processing, and loan production for the three and six months ended June 30, 2003 was $243 million and $433 million compared with $197 million and $363 million for the same periods in 2002.

 

The increase in occupancy and equipment expense for the three months ended June 30, 2003 resulted partially from higher equipment depreciation expense of $21 million related to various technology related projects that were placed in service during the second quarter of 2003. Occupancy expense increased for the period by $17 million due to continued branch expansions into new markets. Additionally, during the second quarter of 2003, the Company recorded an expense of $20 million, which represented a vendor payment to obtain the rights necessary to ensure the sustained functionality of certain mortgage loan origination system software. The Company also wrote-off approximately $16 million of capitalized software that was no longer considered to have future value.

 

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Table of Contents

Professional fees increased for the three and six months ended June 30, 2003, primarily as a result of increased technology related projects and legal fees.

 

The increase in loan expense for the three and six months ended June 30, 2003 was substantially due to higher non-deferred loan closing costs and mortgage payoff expenses, resulting from an overall increase in refinancing activity.

 

Other expense increased during the periods reported mostly due to higher foreclosed asset expenses, outside services and charitable contributions.

 

Review of Financial Condition

 

Assets

 

At June 30, 2003, our assets were $283.20 billion, an increase of 6% from $268.30 billion at December 31, 2002. The increase was predominantly due to an increase in investment securities, loans held for sale and loans held in portfolio.

 

Securities

 

Securities consisted of the following:

 

     June 30, 2003

     Amortized
Cost


   Unrealized
Gains


   Unrealized
Losses


    Fair
Value


     (in millions)

Available-for-sale securities

                            

Mortgage-backed securities:

                            

U.S. Government and agency

   $ 16,860    $ 538    $ (12 )   $ 17,386

Private issue

     7,225      266      (2 )     7,489
    

  

  


 

Total mortgage-backed securities

     24,085      804      (14 )     24,875

Investment securities:

                            

U.S. Government and agency

     18,779      1,040      (5 )     19,814

Other debt securities

     314      22            336

Equity securities

     128      14            142
    

  

  


 

Total investment securities

     19,221      1,076      (5 )     20,292
    

  

  


 

Total available-for-sale securities

   $ 43,306    $ 1,880    $ (19 )   $ 45,167
    

  

  


 

 

     December 31, 2002

     Amortized
Cost


   Unrealized
Gains


   Unrealized
Losses


    Fair
Value


     (in millions)

Available-for-sale securities

                            

Mortgage-backed securities:

                            

U.S. Government and agency

   $ 19,649    $ 583    $ (5 )   $ 20,227

Private issue

     7,940      216      (8 )     8,148
    

  

  


 

Total mortgage-backed securities

     27,589      799      (13 )     28,375

Investment securities:

                            

U.S. Government and agency

     14,560      581      (4 )     15,137

Other debt securities

     309      16            325

Equity securities

     134      3      (2 )     135
    

  

  


 

Total investment securities

     15,003      600      (6 )     15,597
    

  

  


 

Total available-for-sale securities

   $ 42,592    $ 1,399    $ (19 )   $ 43,972
    

  

  


 

 

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Table of Contents
    

Three Months Ended

June 30,


    Six Months Ended
June 30,


 
     2003

    2002

    2003

    2002

 
     (in millions)  

Available-for-sale securities

                                

Realized gross gains

   $ 175     $ 201     $ 177     $ 327  

Realized gross losses

     (38 )     (46 )     (45 )     (468 )
    


 


 


 


Realized net gain (loss)

   $ 137     $ 155     $ 132     $ (141 )
    


 


 


 


 

Our mortgage-backed securities portfolio declined $3.50 billion to $24.88 billion at June 30, 2003 from $28.38 billion at December 31, 2002. Substantially all of this decrease resulted from pay-downs that occurred from refinancing activity. Our investment securities portfolio increased $4.69 billion to $20.29 billion at June 30, 2003 from $15.60 billion at December 31, 2002. This increase resulted from the purchase of U.S. Government and agency investment securities. The Company’s available-for-sale securities portfolio includes both mortgage-backed securities and investment securities that are used for MSR risk management purposes. At June 30, 2003, these MSR risk management securities had a total amortized cost of $10.63 billion and a fair value of $11.03 billion. At December 31, 2002, these MSR risk management securities had a total amortized cost of $7.85 billion and a fair value of $8.08 billion.

 

Loans

 

Loans held in portfolio consisted of the following:

 

     June 30,
2003


   December 31,
2002


     (in millions)

Loans secured by real estate:

             

Home loans

   $ 83,839    $ 82,842

Purchased specialty mortgage finance

     10,836      10,128
    

  

Total home loans

     94,675      92,970

Home construction loans:

             

Builder (1)

     1,121      1,017

Custom (2)

     963      932

Home equity loans and lines of credit:

             

Banking subsidiaries

     20,505      16,168

Washington Mutual Finance

     2,073      1,930

Multi-family

     19,482      18,000

Other real estate

     7,122      7,986
    

  

Total loans secured by real estate

     145,941      139,003

Consumer:

             

Banking subsidiaries

     1,207      1,663

Washington Mutual Finance

     1,743      1,729

Commercial business

     4,975      5,133
    

  

Total loans held in portfolio

   $ 153,866    $ 147,528
    

  


(1)   Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale.
(2)   Represents construction loans made directly to the intended occupant of a single-family residence.

 

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Table of Contents

Other Assets

 

Other assets consisted of the following:

 

     June 30,
2003


   December 31,
2002


     (in millions)

Premises and equipment

   $ 3,107    $ 2,862

Investment in bank-owned life insurance

     2,607      2,544

Accrued interest receivable

     1,374      1,439

Foreclosed assets

     317      336

GNMA pool buy-outs

     4,311      4,859

Other intangible assets

     280      311

Derivatives

     1,952      4,105

Trading securities

     1,366      336

Other

     5,985      3,126
    

  

Total other assets

   $ 21,299    $ 19,918
    

  

 

The decrease in the derivatives balance from December 31, 2002 to June 30, 2003 was largely due to a decrease in the net fair value of receive-fixed swaps held for MSR risk management purposes. The decrease in the net fair value of the receive-fixed swaps was primarily attributable to the sales of certain of those swaps with higher receive-fixed rates and thus a higher net fair value. The net fair value of the receive-fixed swaps used for MSR risk management purposes was $274 million at June 30, 2003, compared with $2.18 billion at December 31, 2002.

 

The increase in trading securities is a result of growth in mortgage-backed securities held by WaMu Capital Corp., the Company’s institutional broker-dealer.

 

A majority of the increase in other assets—other was due to the sale in June 2003 of repurchase agreements where we had not yet settled with the counterparty as of June 30, 2003.

 

Deposits

 

Deposits consisted of the following:

 

     June 30,
2003


   December 31,
2002


     (in millions)

Checking accounts:

             

Interest bearing

   $ 61,440    $ 56,132

Noninterest bearing

     43,702      35,730
    

  

       105,142      91,862

Savings accounts

     11,267      10,313

Money market deposit accounts

     19,383      19,573

Time deposit accounts

     30,665      33,768
    

  

Total deposits

   $ 166,457    $ 155,516
    

  

 

Deposits increased to $166,457 million at June 30, 2003 from $155,516 million at December 31, 2002. Substantially all of the increase in interest-bearing checking accounts was due to the growth in Platinum Accounts, which increased from $50.20 billion at December 31, 2002 to $55.90 billion at June 30, 2003. Approximately $4.10 billion of this $5.70 billion increase in Platinum Account deposits occurred during the first quarter of 2003. During the six months ended June 30, 2003, the number of Platinum Accounts increased by

 

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Table of Contents

153,847 from 683,245 to 837,092 total accounts. At June 30, 2003, total deposits included $32.95 billion in custodial/escrow deposits related to loan servicing activities, compared with $25.90 billion at December 31, 2002. Time deposit accounts decreased by $3.10 billion from year-end 2002 primarily as a result of decreases in certificates of deposit accounts.

 

Checking accounts, savings accounts and money market deposit accounts increased to 82% of total deposits at June 30, 2003, compared with 78% at year-end 2002. These products generally have the benefit of lower interest costs, compared with time deposit accounts. At June 30, 2003 deposits funded 59% of total assets compared with 58% at December 31, 2002.

 

Borrowings

 

Our borrowings largely take the form of repurchase agreements and advances from the Federal Home Loan Banks (“FHLB”) of Seattle, San Francisco, Dallas and New York. The exact mix of these two types of wholesale borrowings at any given time is dependent upon the market pricing of the individual borrowing sources.

 

Our wholesale borrowings increased by $3,441 million at June 30, 2003, compared with year-end 2002 predominantly due to an increase in federal funds purchased and repurchase agreements, which was partially offset by a decrease in advances from FHLBs. Other borrowings decreased by $564 million during the six months ended June 30, 2003 primarily as a result of a reduction in our senior debt. Refer to “Liquidity” for further discussion of funding sources at June 30, 2003, compared with year-end 2002.

 

Operating Segments

 

We manage our business along three major operating segments: Banking and Financial Services; Home Loans and Insurance Services; and Specialty Finance. Results for Corporate Support/Treasury and Other are also presented. Refer to Note 5 to the Consolidated Financial Statements—“Operating Segments” for information regarding the key elements of our management reporting methodologies used to measure segment performance.

 

Banking and Financial Services

 

     Three Months Ended
June 30,


    Percentage
Change


    Six Months Ended
June 30,


    Percentage
Change


 
     2003

    2002

      2003

    2002

   
     (dollars in millions)  

Condensed income statement:

                                            

Net interest income

   $ 891     $ 762     17 %   $ 1,757     $ 1,425     23 %

Provision for loan and lease losses

     38       41     (7 )     75       75      

Noninterest income

     624       541     15       1,208       1,054     15  

Noninterest expense

     949       880     8       1,868       1,689     11  

Income taxes

     201       145     39       389       271     44  
    


 


       


 


     

Net income

   $ 327     $ 237     38     $ 633     $ 444     43  
    


 


       


 


     

Performance and other data:

                                            

Efficiency ratio (1)

     54.84 %     58.67 %   (7 )     55.08 %     59.29 %   (7 )

Average loans

   $ 25,570     $ 20,627     24     $ 24,602     $ 19,954     23  

Average assets

     33,998       28,850     18       33,205       28,021     19  

Average deposits

     125,025       111,425     12       124,716       107,820     16  

(1)   The efficiency ratio is defined as noninterest expense, excluding a cost of capital charge on goodwill, divided by total revenue (net interest income and noninterest income).

 

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Table of Contents

Net income was $327 million and $633 million for the three and six months ended June 30, 2003, compared with $237 million and $444 million for the same periods in 2002. Net interest income increased to $891 million and $1,757 million for the three and six months ended June 30, 2003, compared with $762 million and $1,425 million for the same periods in 2002. The primary sources of net interest income are a funds transfer credit for deposits and interest income on home equity loans and lines of credit, commercial and consumer loans. These increases in net interest income for the three and six months ended June 30, 2003 were primarily due to a decrease in interest expense on money market deposit accounts and time deposit accounts resulting from declining interest rates and balances.

 

Noninterest income was $624 million and $1,208 million for the three and six months ended June 30, 2003, compared with $541 million and $1,054 million for the same periods in 2002. These increases were primarily due to higher depositor and other retail banking fees and an increase in home loan origination broker fees received from the Home Loans and Insurance Services Group, which totaled $47 million and $97 million for the three and six months ended June 30, 2003, compared with $17 million and $40 million for the same periods in 2002.

 

Noninterest expense increased to $949 million and $1,868 million for the three and six months ended June 30, 2003, compared with $880 million and $1,689 million for the same periods in 2002. These increases were predominantly due to increased allocated technology expense, compensation and benefits expense, and occupancy and equipment expense.

 

Total average assets increased to $33,998 million and $33,205 million for the three and six months ended June 30, 2003, compared with $28,850 million and $28,021 million for the same periods in 2002. The increase in average assets for the six months ended June 30, 2003 was substantially a result of a 48% increase in home equity loans and lines of credit average balances to $18,227 million from $12,334 million, partly offset by a decrease in consumer loans.

 

Total average deposits increased to $125,025 million and $124,716 million for the three and six months ended June 30, 2003, compared with $111,425 million and $107,820 million for the same periods in 2002. These increases in average deposits were predominantly due to higher levels of Platinum balances, partly offset by decreasing balances for money market deposit accounts and time deposit accounts. Average Platinum balances increased approximately 80% to $54.94 billion for the three months ended June 30, 2003 from $30.49 billion for the same period in 2002.

 

Home Loans and Insurance Services

 

     Three Months Ended
June 30,


    Percentage
Change


   

Six Months Ended

June 30,


    Percentage
Change


 
     2003

    2002

      2003

    2002

   
     (dollars in millions)  

Condensed income statement:

                                            

Net interest income

   $ 1,155     $ 750     54 %   $ 2,245     $ 1,597     41 %

Provision for loan and lease losses

     46       45     2       85       91     (7 )

Noninterest income

     1,002       600     67       1,880       993     89  

Noninterest expense

     903       668     35       1,676       1,225     37  

Income taxes

     450       242     86       881       488     81  
    


 


       


 


     

Net income

   $ 758     $ 395     92     $ 1,483     $ 786     89  
    


 


       


 


     

Performance and other data:

                                            

Efficiency ratio (1)

     38.59 %     44.36 %   (13 )     37.20 %     42.27 %   (12 )

Average loans

   $ 141,997     $ 118,996     19     $ 139,411     $ 122,110     14  

Average assets

     176,709       138,427     28       174,496       141,451     23  

Average deposits

     30,257       11,073     173       27,757       10,854     156  

(1)   The efficiency ratio is defined as noninterest expense, excluding a cost of capital charge on goodwill, divided by total revenue (net interest income and noninterest income).

 

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Table of Contents

Net income was $758 million and $1,483 million for the three and six months ended June 30, 2003, compared with $395 million and $786 million for the same periods in 2002. Net interest income increased to $1,155 million and $2,245 million for the three and six months ended June 30, 2003, compared with $750 million and $1,597 million for the same periods in 2002. These increases in net interest income were largely due to increases in interest income resulting from higher loans held for sale average balances and decreases in funding costs due to lower interest rates. Partially offsetting these increases were decreases in interest income on loans held in portfolio, primarily adjustable-rate loans, which continue to reprice downward from higher interest rate levels in 2002.

 

Noninterest income increased to $1,002 million and $1,880 million during the three and six months ended June 30, 2003, compared with $600 million and $993 million for the same periods in 2002. These increases were primarily due to higher gain from mortgage loans and GNMA pool buy-out income, partly offset by MSR impairment and higher amortization for the three and six months ended June 30, 2003.

 

Noninterest expense increased to $903 million and $1,676 million for the three and six months ended June 30, 2003 from $668 million and $1,225 million for the same periods in 2002. These increases were primarily due to higher allocated technology expense resulting from various ongoing projects, compensation and benefits expense, and foreclosed assets expense.

 

Total average assets increased to $176,709 million and $174,496 million for the three and six months ended June 30, 2003, compared with $138,427 million and $141,451 million for the same periods in 2002. These increases were primarily due to growth in average loans held for sale balances resulting from higher home loan volume of $108.16 billion for the quarter compared with $50.17 billion for the same period in 2002.

 

Total average deposits increased to $30,257 million and $27,757 million for the three and six months ended June 30, 2003, compared with $11,073 million and $10,854 million for the same periods in 2002. These increases were predominantly due to the growth of custodial and escrow balances resulting from higher loan prepayments.

 

Specialty Finance

 

     Three Months Ended
June 30,


    Percentage
Change


    Six Months Ended
June 30,


    Percentage
Change


 
     2003

    2002

      2003

    2002

   
     (dollars in millions)  

Condensed income statement:

                                            

Net interest income

   $ 344     $ 297     16 %   $ 683     $ 614     11 %

Provision for loan and lease losses

     52       61     (15 )     103       128     (20 )

Noninterest income

     20       19     5       28       43     (35 )

Noninterest expense

     114       96     19       219       195     12  

Income taxes

     74       60     23       146       126     16  
    


 


       


 


     

Net income

   $ 124     $ 99     25     $ 243     $ 208     17  
    


 


       


 


     

Performance and other data:

                                            

Efficiency ratio (1)

     25.00 %     23.00 %   9       24.39 %     23.11 %   6  

Average loans

   $ 30,933     $ 29,722     4     $ 30,768     $ 30,169     2  

Average assets

     34,814       31,784     10       34,437       32,200     7  

Average deposits

     3,393       2,701     26       3,198       2,700     18  

(1)   The efficiency ratio is defined as noninterest expense, excluding a cost of capital charge on goodwill, divided by total revenue (net interest income and noninterest income).

 

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Table of Contents

Net income for the three and six months ended June 30, 2003 was $124 million and $243 million, compared with $99 million and $208 million for the same periods in 2002. Net interest income was $344 million and $683 million for the three and six months ended June 30, 2003, compared with $297 million and $614 million for the same periods in 2002. These increases in net interest income were substantially due to increased interest income on available-for-sale mortgage-backed securities resulting from higher levels of securitized multi-family loans and lower funding costs resulting from reduced interest rates. These increases were partially offset by reduced interest income from multi-family loans held in portfolio as a result of the lower interest rate environment.

 

Noninterest income was $20 million and $28 million for the three and six months ended June 30, 2003, compared with $19 million and $43 million for the same periods in 2002. The decrease for the six months ended June 30, 2003 was substantially due to a write-down in the valuation of an equity investment and a revaluation loss from derivatives during the first quarter of 2003.

 

Noninterest expense was $114 million and $219 million for the three and six months ended June 30, 2003, compared with $96 million and $195 million for the same periods in 2002. These increases were primarily due to increased compensation and benefits expense as a result of higher multi-family loan volumes and an increase in foreclosed assets expense.

 

Total average assets increased to $34,814 million and $34,437 million for the three and six months ended June 30, 2003, compared with $31,784 million and $32,200 million for the same periods in 2002. A significant portion of these increases were driven by higher multi-family loans and an increase in the available-for-sale mortgage-backed securities portfolio.

 

Corporate Support/Treasury and Other

 

     Three Months Ended
June 30,


   Percentage
Change


    Six Months Ended
June 30,


    Percentage
Change


 
     2003

    2002

     2003

    2002

   
     (dollars in millions)  

Condensed income statement:

                                           

Net interest income (expense)

   $ (365 )   $ 291        $ (643 )   $ 860      

Provision for loan and lease losses

     8       8          14       16     (13 )%

Noninterest income (expense)

     (17 )     48          (81 )     (74 )   (9 )

Noninterest expense

     164       150    9  %     285       391     (27 )

Income taxes (benefit)

     (215 )     51          (399 )     102      
    


 

        


 


     

Net income (loss)

   $ (339 )   $ 130        $ (624 )   $ 277      
    


 

        


 


     

Performance and other data:

                                           

Average loans

   $ 99     $ 13    662     $ 88     $ 56     57  

Average assets

     38,980       68,267    (43 )     40,724       74,359     (45 )

Average deposits

     5,005       5,449    (8 )     5,138       5,895     (13 )

 

Corporate Support/Treasury and Other had a net loss of $339 million and $624 million for the three and six months ended June 30, 2003, compared with net income of $130 million and $277 million for the same periods in 2002. Net interest expense was $365 million and $643 million for the three and six months ended June 30, 2003, compared with net interest income of $291 million and $860 million for the same periods in 2002. These decreases in net interest income were predominantly due to a decrease in average investment securities balances resulting from a change in our MSR hedging strategy toward an increase in the use of derivatives and the negative impact of the funds transfer pricing process due to higher average deposit balances within the operating segments. These decreases were partially offset by a reduction in interest expense from borrowed funds, as a result of lower rates and higher average deposit balances, which reduced the need for these borrowings.

 

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Table of Contents

Noninterest expense was $164 million and $285 million for the three and six months ended June 30, 2003, compared with $150 million and $391 million for the same periods in 2002. The decrease for the six months ended June 30, 2003 was predominantly due to an increase in the technology expenses allocated to the operating segments.

 

Off-Balance Sheet Activities

 

Asset Securitization

 

We transform loans into securities, which are sold to investors—a process known as securitization. Securitization involves the sale of loans to a qualifying special-purpose entity (“QSPE”), typically a trust. The QSPEs, in turn, issue interest-bearing securities, commonly called asset-backed securities, that are secured by future collections on the sold loans. The QSPE sells securities to investors, which entitle the investors to receive specified cash flows during the term of the security. The QSPE uses proceeds from the sale of these securities to pay the Company for the loans sold to the QSPE. These entities are not consolidated within our financial statements since they satisfy the criteria established by Statement No. 140, Accounting for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities . In general, these criteria require the QSPE to be legally isolated from the transferor (the Company), be limited to permitted activities, and have defined limits on the assets it can hold and the permitted sales, exchanges or distributions of its assets.

 

When we sell or securitize loans, we generally retain the right to service the loans and may retain senior, subordinated, residual, and other interests, all of which are considered retained interests in the securitized assets. Retained interests may provide credit enhancement to the investors and generally represent the Company’s maximum risk exposure associated with these transactions. Retained interests in the form of mortgage-backed securities were $9.20 billion at June 30, 2003, of which $9.01 billion have either a AAA credit rating or are agency insured. Additional information concerning securitization transactions is included in Note 5 to the Consolidated Financial Statements—“Mortgage Banking Activities” of the Company’s 2002 Annual Report on Form 10-K.

 

Guarantees

 

The Company may incur liabilities under certain contractual agreements contingent upon the occurrence of certain events. A discussion of these contractual arrangements under which the Company may be held liable is included in Note 4—“Guarantees” to the Consolidated Financial Statements.

 

Asset Quality

 

Nonaccrual Loans, Foreclosed Assets and Restructured Loans

 

Loans are generally placed on nonaccrual status when they are 90 days or more past due or when the timely collection of the principal of the loan, 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.

 

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Table of Contents

Nonaccrual loans and foreclosed assets (“nonperforming assets”) and restructured loans consisted of the following:

 

     June 30,
2003


    March 31,
2003


    December 31,
2002


 
     (dollars in millions)  

Nonperforming assets and restructured loans:

                        

Nonaccrual loans:

                        

Home loans

   $ 804     $ 954     $ 1,068  

Purchased specialty mortgage finance

     483       479       438  
    


 


 


Total home loan nonaccrual loans

     1,287       1,433       1,506  

Home construction loans:

                        

Builder (1)

     31       38       42  

Custom (2)

     9       9       7  

Home equity loans and lines of credit:

                        

Banking subsidiaries

     49       44       36  

Washington Mutual Finance

     41       41       37  

Multi-family

     54       49       50  

Other real estate

     369       402       413  
    


 


 


Total nonaccrual loans secured by real estate

     1,840       2,016       2,091  

Consumer:

                        

Banking subsidiaries

     13       10       18  

Washington Mutual Finance

     64       67       69  

Commercial business

     79       73       79  
    


 


 


Total nonaccrual loans held in portfolio

     1,996       2,166       2,257  

Foreclosed assets

     317       334       336  
    


 


 


Total nonperforming assets

   $ 2,313     $ 2,500     $ 2,593  

As a percentage of total assets

     0.82 %     0.90 %     0.97 %

Restructured loans

   $ 89     $ 99     $ 98  
    


 


 


Total nonperforming assets and restructured loans

   $ 2,402     $ 2,599     $ 2,691  
    


 


 



(1)   Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale.
(2)   Represents construction loans made directly to the intended occupant of a single-family residence.

 

Nonaccrual loans totaled $1,996 million at June 30, 2003, compared with $2,166 million at March 31, 2003 and $2,257 million at December 31, 2002. During the first six months of 2003, declines in home loans and other real estate nonaccruals were partially offset by increases in purchased specialty mortgage finance and home equity loans and lines of credit nonaccruals.

 

Nonaccrual loans held for sale, which are excluded from the nonaccrual balances presented above, were $73 million, $72 million and $119 million at June 30, 2003, March 31, 2003 and December 31, 2002. Valuation changes on loans held for sale are reflected as gains or losses within gain from mortgage loans in noninterest income.

 

Home loan nonaccruals were $804 million at June 30, 2003, down $264 million from December 31, 2002. The decline in nonaccrual home loans was achieved through sales of nonperforming home loans.

 

During the first quarter of 2003, the Company sold a package of loans held in portfolio that totaled $131 million. Of this amount, $104 million were nonperforming loans and resulted in the Company incurring

 

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Table of Contents

$8 million in charge-offs. In the second quarter of 2003, the Company completed a sale of loans held in portfolio totaling $195 million, of which $161 million were nonperforming loans that resulted in a charge-off of $4 million. The Company will periodically evaluate nonperforming loan sales as part of its ongoing portfolio management strategy.

 

Purchased specialty mortgage finance nonaccrual loans totaled $483 million at June 30, 2003 relatively unchanged during the second quarter, but up $45 million from December 31, 2002 primarily reflecting growth and seasoning of this loan portfolio.

 

Nonaccrual home equity loans and lines of credit totaled $90 million at quarter end, an increase of $5 million during the quarter and $17 million from December 31, 2002. However, the percentage of nonaccruals to total loans in this portfolio totaled 0.40% at June 30, 2003, unchanged from December 31, 2002.

 

At quarter end, other real estate loans on nonaccrual totaled $369 million, down from $402 million last quarter and $413 million at December 31, 2002. Much of the year-to-date improvement was due to principal charge-offs totaling $13 million and reinstatements to performing status and principal paydowns within the Company’s franchise-oriented finance business.

 

The multi-family portfolio continues to exhibit strong performance, with nonaccrual loans in this category representing 0.28% of total multi-family loans at June 30, 2003, unchanged from year-end 2002.

 

At June 30, 2003, foreclosed assets were $317 million, compared with $334 million at March 31, 2003 and $336 million at December 31, 2002. The Company’s foreclosed assets include home and commercial real estate as well as a small amount of personal property.

 

90 or More Days Past Due

 

The amount of loans held in portfolio which were 90 or more days contractually past due and still accruing interest was $47 million at June 30, 2003, compared with $93 million at March 31, 2003 and $60 million at December 31, 2002. The majority of these loans are either VA- or FHA-insured with little or no risk of loss of principal or interest.

 

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Provision and Allowance for Loan and Lease Losses

 

Changes in the allowance for loan and lease losses were as follows:

 

     Three Months Ended
June 30,


    Six Months Ended
June 30,


 
     2003

    2002

    2003

    2002

 
     (dollars in millions)  

Balance, beginning of period

   $ 1,680     $ 1,621     $ 1,653     $ 1,404  

Allowance acquired through business combinations

                       148  

Allowance for transfer to loans held for sale

                 (3 )     (7 )

Provision for loan and lease losses

     118       160       243       335  
    


 


 


 


       1,798       1,781       1,893       1,880  

Loans charged off:

                                

Loans secured by real estate:

                                

Home loans

     (9 )     (11 )     (25 )     (22 )

Purchased specialty mortgage finance

     (9 )     (8 )     (19 )     (17 )
    


 


 


 


Total home loan charge-offs

     (18 )     (19 )     (44 )     (39 )

Home equity loans and lines of credit:

                                

Banking subsidiaries

     (4 )     (1 )     (7 )     (2 )

Washington Mutual Finance

     (1 )     (3 )     (4 )     (5 )

Other real estate

     (21 )     (32 )     (30 )     (42 )
    


 


 


 


Total loans secured by real estate

     (44 )     (55 )     (85 )     (88 )

Consumer:

                                

Banking subsidiaries

     (18 )     (20 )     (35 )     (40 )

Washington Mutual Finance

     (42 )     (44 )     (83 )     (84 )

Commercial business

     (31 )     (19 )     (45 )     (38 )
    


 


 


 


Total loans charged off

     (135 )     (138 )     (248 )     (250 )

Recoveries of loans previously charged off:

                                

Loans secured by real estate:

                                

Home loans

     2             2        

Purchased specialty mortgage finance

     1             1        

Other real estate

     2       1       5       2  
    


 


 


 


Total loans secured by real estate

     5       1       8       2  

Consumer:

                                

Banking subsidiaries

     3       3       6       5  

Washington Mutual Finance

     6       5       12       10  

Commercial business

     3       13       9       18  
    


 


 


 


Total recoveries of loans previously charged off

     17       22       35       35  
    


 


 


 


Net charge-offs

     (118 )     (116 )     (213 )     (215 )
    


 


 


 


Balance, end of period

   $ 1,680     $ 1,665     $ 1,680     $ 1,665  
    


 


 


 


Net charge-offs (annualized) as a percentage of average loans held in portfolio

     0.31 %     0.32 %     0.28 %     0.29 %

Allowance as a percentage of total loans held in portfolio

     1.09       1.14       1.09       1.14  

 

From the fourth quarter of 2001 through the third quarter of 2002, the Company provided for amounts significantly in excess of charge-offs reflecting risks associated with growth in nonaccrual loans and economic uncertainty. As the economy stabilizes and nonperforming loan levels continue to decrease, the Company is adjusting the provision to amounts approaching actual charge-offs. The Company believes its portfolio is adequately reserved, and accordingly, decreased its second quarter 2003 provision to $118 million compared

 

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with $160 million during the same period in 2002. As a percentage of average loans, net charge offs were 0.31% and 0.28% for the three and six months ended June 30, 2003, compared with 0.32% and 0.29% for the same periods in 2002.

 

Net charge-offs for the three and six months ended June 30, 2003 were $118 million and $213 million compared with $116 million and $215 million for the same periods in 2002. While representing less than 2% of the Company’s assets, Washington Mutual Finance accounted for 35% of total net charge-offs during the first half of 2003. This higher level of charge-offs in a consumer finance operation such as Washington Mutual Finance is expected due to the higher risk profile of the customer base as reflected in the interest rates charged for these loans.

 

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. The estimation of the allowance is based on a variety of factors, including past loan loss experience, adverse situations that have occurred but are not yet known that may affect the borrower’s ability to repay, the estimated value of underlying collateral and general economic conditions. The Company’s methodology for assessing the adequacy of the allowance includes the evaluation of three distinct elements: the formula allowance, the specific allowance (which includes the allowance for loans deemed to be impaired by Statement No. 114, Accounting by Creditors for Impairment of a Loan ) and the unallocated allowance. The formula allowance and the specific allowance collectively represent the portion of the allowance for loan and lease losses that are allocated to the various loan portfolios.

 

Refer to Note 1 to the Consolidated Financial Statements—“Summary of Significant Accounting Policies” in our 2002 Annual Report on Form 10-K for further discussion of the Allowance for Loan and Lease Losses.

 

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 Company establishes liquidity guidelines for its principal operating subsidiaries as well as for the parent holding company, Washington Mutual, Inc. The principal sources of liquidity for our banking subsidiaries are customer deposits, wholesale borrowings, the maturity and repayment of portfolio loans, securities held in our available-for-sale portfolio and mortgage loans designated as held for sale. Among these sources, transaction deposits and wholesale borrowings from FHLB advances and repurchase agreements continue to provide the Company with a significant source of stable funding. During the six months ended June 30, 2003, those sources funded 72% of average total assets. Our continuing ability to retain our transaction-deposit customer base and to attract new deposits depends on various factors, such as customer service satisfaction levels and the competitiveness of interest rates offered on our deposit products. The Company would primarily use wholesale borrowings to offset any potential declines in deposit balances. We expect that FHLB advances and repurchase agreements will continue to be our most significant sources of wholesale borrowings during 2003, and we expect to have the necessary assets available to pledge as collateral to obtain these funds.

 

In the six months ended June 30, 2003, the Company’s proceeds from the sales of loans held for sale were approximately $168.93 billion. These proceeds were, in turn, used as the primary funding source for the origination and purchases of approximately $177.30 billion of loans held for sale during the same period. As this cyclical pattern of sales and originations/purchases repeats itself during the course of a period, the amount of funding necessary to sustain our mortgage banking operations does not significantly affect the Company’s overall level of liquidity resources.

 

To supplement our funding sources, our banking subsidiaries also raise funds in domestic and international capital markets. Effective August 7, 2003, the Company established a new $20 billion Global Bank Note Program for Washington Mutual Bank, FA (“WMBFA”) and Washington Mutual Bank (“WMB”) to issue senior and subordinated notes in the United States and in international capital markets in a variety of currencies and

 

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structures. This program replaced the $15 billion program established in April, 2001. Under this program, WMBFA will be allowed to issue up to $15 billion in notes of which $5 billion can be issued as subordinated notes. WMB will be allowed to issue up to $5 billion in senior notes. The maximum aggregate principal amount of notes with maturities greater than 270 days from the date of issue offered by WMBFA may not exceed $7.5 billion.

 

Liquidity for Washington Mutual, Inc. is generated through its ability to raise funds in various capital markets and through dividends from subsidiaries, commercial paper programs and lines of credit.

 

Washington Mutual, Inc.’s primary funding source during the first six months of 2003 was from dividends paid by our banking subsidiaries. Although we expect Washington Mutual, Inc. to continue to receive banking subsidiary dividends during 2003, including the amount necessary to support the ten cent per share dividend increase approved by the Company’s Board of Directors in July 2003, various regulatory requirements related to capital adequacy and retained earnings limit the amount of dividends that can be paid by our banking subsidiaries. For more information on dividend restrictions applicable to our banking subsidiaries, refer to the Company’s 2002 Annual Report on Form 10-K, “Business—Regulation and Supervision” and Note 18 to the Consolidated Financial Statements—“Regulatory Capital Requirements and Dividend Restrictions.”

 

In February 2003, Washington Mutual, Inc. filed a shelf registration statement with the Securities and Exchange Commission to register $2 billion of debt securities, preferred stock and depository shares in the United States and in international capital markets and in a variety of currencies and structures. The shelf registration statement was declared effective on April 15, 2003. At June 30, 2003, Washington Mutual, Inc. had $2 billion available under this shelf registration.

 

Washington Mutual, Inc. and its subsidiaries also have various other credit facilities and agreements that are sources of liquidity. Washington Mutual, Inc. and Washington Mutual Finance have a revolving credit facility totaling $800 million which provides back-up for the commercial paper programs of Washington Mutual, Inc. and Washington Mutual Finance as well as funds for general corporate purposes. At June 30, 2003, there was $348 million borrowed under this credit facility. Washington Mutual Finance has agreements to participate in a $600 million asset-backed commercial paper conduit program. At June 30, 2003, Washington Mutual Finance had asset-backed commercial paper of $600 million outstanding. Long Beach Mortgage has revolving credit facilities totaling $2.0 billion that are used to fund loans held for sale. At June 30, 2003, Long Beach Mortgage had borrowed $1.40 billion under these credit facilities.

 

Capital Adequacy

 

Reflecting the increases in loans held for sale and loans held in portfolio during the six months ended June 30, 2003, the ratio of stockholders’ equity to total assets decreased to 7.44% at June 30, 2003 from 7.50% at December 31, 2002.

 

The regulatory capital ratios of WMBFA, WMB and Washington Mutual Bank fsb (“WMBfsb”) and the minimum regulatory ratios to be categorized as well-capitalized were as follows:

 

     June 30, 2003

   

Well-Capitalized

Minimum


 
     WMBFA

    WMB

    WMBfsb

   

Tier 1 capital to adjusted total assets (leverage)

   5.81 %   5.96 %   9.08 %   5.00 %

Adjusted tier 1 capital to total risk-weighted assets

   9.42     9.36     15.34     6.00  

Total risk-based capital to total risk-weighted assets

   11.55     11.59     16.59     10.00  

 

Our federal savings bank subsidiaries, WMBFA and WMBfsb, are also required by Office of Thrift Supervision regulations to maintain tangible capital of at least 1.50% of assets. WMBFA and WMBfsb both satisfied this requirement at June 30, 2003.

 

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Our broker-dealer subsidiaries are also subject to capital requirements. At June 30, 2003, both of our broker-dealer subsidiaries were in compliance with their applicable capital requirements.

 

During the three and six months ended June 30, 2003, the Company repurchased 15.3 million and 25.5 million shares of our common stock at an average price of $40.52 and $38.08 per share as part of our share repurchase program. Effective July 15, 2003, the Company adopted a new share purchase program approved by the Board of Directors. Under the new program, the Company is authorized to repurchase up to 100 million shares of its common stock, as conditions warrant. This Program replaces the Company’s previous share repurchase program. From July 1, 2003 through July 31, 2003, the Company repurchased an additional 2.2 million shares. Management may engage in future share repurchases as liquidity conditions permit and market conditions warrant.

 

Market Risk Management

 

Market risk is defined as the sensitivity of income, fair market values and capital to changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates or prices. The primary market risk to which 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.

 

We are exposed to different types of interest rate risks, including lag, repricing, basis, prepayment and lifetime cap risk. These risks are described in further detail within the “Market Risk Management” section of Management’s Discussion and Analysis in our 2002 Annual Report on Form 10-K. We manage interest rate risk within an overall asset/liability management framework. The principal objective of our asset/liability management is to manage the sensitivity of net income to changing interest rates. Asset/liability management is governed by a policy reviewed and approved annually by our Board. The Board has delegated the oversight of the administration of this policy to the Finance Committee of the Board of Directors.

 

Management of Interest Rate Risk

 

We manage our balance sheet to mitigate the impact of changes in market interest rates on net income and changes in the fair value of MSR. Key components of our balance sheet strategy include the origination and retention of short-term and adjustable-rate assets, the origination and sale of most fixed-rate and certain hybrid adjustable-rate mortgage loans, the management of MSR and the management of our deposit and borrowing portfolios. We may also modify our interest rate risk profile with interest rate contracts, including embedded derivatives and forward commitments.

 

Overall, we believe our risk management program will minimize net income sensitivity under most interest rate environments. However, the success of this program is dependent on the judgments we make regarding the direction and timing of changes in interest rates and the amount and mix of risk management instruments that we believe are appropriate to manage our interest rate risk. Our net income could be adversely affected if we are unable to effectively implement, execute or manage this strategy.

 

Asset/Liability Risk Management

 

The interest rate contracts that are classified as asset/liability risk management instruments are intended to assist in the management of our net interest income. These contracts are often used to modify the repricing period of our interest-bearing funding with the intention of reducing the volatility of changes in net interest income. The types of contracts used for this purpose consist of interest rate swaps, interest rate corridors and certain derivatives that are embedded in borrowings. The aggregate notional amount of these contracts totaled $38.01 billion at June 30, 2003.

 

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The pay-fixed swaps, interest rate corridors and embedded payor swaptions are intended to assist in reducing the sensitivity of the net interest margin to changes in interest rates. The embedded payor swaptions are exercisable upon maturity, which ranges from July 2003 to February 2004. None of the interest rate corridors had strike rates that were in the money at June 30, 2003. We also use receive-fixed swaps as part of our asset/liability risk management strategy to help us modify the repricing characteristics of certain long-term liabilities to match those of our assets. Typically, these are swaps of long-term fixed-rate debt to a short-term adjustable-rate which more closely resembles our asset repricing characteristics.

 

MSR Risk Management

 

As part of our overall approach to interest rate risk management, we manage potential impairment in the fair value of MSR and increased amortization levels of MSR by a comprehensive risk management program. Our intent is to offset the changes in fair value and higher amortization levels of MSR with changes in the fair value of risk management instruments. The risk management instruments include forward purchase commitments, interest rate contracts and available-for-sale securities. The goal is to offset decreases (increases) in the fair value of MSR with increases (decreases) in the fair value of the forward purchase commitments, interest rate contracts and available-for-sale securities.

 

The available-for-sale securities generally consist of fixed-rate debt securities, such as U.S. Government and agency bonds and mortgage-backed securities, including principal-only strips. The interest rate contracts typically consist of interest rate floors and interest rate swaps and swaptions. From time to time, we may choose to embed interest rate contracts into our borrowing instruments, such as repurchase agreements. The forward purchase commitments generally consist of agreements to purchase 15- and 30-year fixed-rate mortgage-backed securities.

 

As derivatives, the interest rate swaps, swaptions, stand alone interest rate floors and forward commitments receive mark-to-market accounting treatment. Changes in the fair value of instruments that manage MSR fair value changes are recorded as components of noninterest income.

 

We adjust the mix of instruments used to manage MSR fair value changes as interest rates and market conditions warrant. The intent is to maintain an efficient and fairly liquid mix as well as a diverse portfolio of risk management instruments with broad maturity ranges. We may elect to increase or decrease our concentration of specific instruments during certain times based on market conditions. We believe this approach will result in the most efficient strategy. However, our net income could be adversely affected if we are unable to effectively implement, execute or manage this strategy.

 

The mix of instruments is predicated, in part, on the requirement of lower of cost or market accounting treatment for MSR; i.e. each MSR stratum is recorded at its fair value unless the fair value exceeds the amortized cost. This could result in increases in the fair value of MSR that are not marked-to-market through earnings. Therefore, management may elect to decrease the emphasis on risk management instruments accorded mark-to-market accounting treatment in periods in which the fair value of MSR significantly exceeds its amortized cost.

 

We also manage the size and risk profile of the MSR asset. Depending on market conditions and our desire to expand customer relationships, we may periodically sell or purchase servicing rights. We also may structure loan sales to reduce the size of the MSR asset.

 

Other Mortgage Banking Risk Management

 

We also manage the risks associated with our mortgage warehouse and pipeline. The mortgage warehouse consists of fixed-rate and, to a lesser degree, adjustable-rate home loans to be sold in the secondary market. The pipeline consists of commitments to originate or purchase fixed-rate and, to a lesser degree, adjustable-rate home

 

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loans to be sold in the secondary market. The risk associated with the mortgage pipeline and warehouse is the potential change 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 120 days.

 

To manage the warehouse and pipeline risks, we execute forward sales commitments, mortgage option contracts and interest rate futures. A forward sales commitment protects us in a rising interest rate environment, since the sales price and delivery date are already established. A forward sales commitment is different, however, from an option contract in that we are obligated to deliver the loan to the third party on the agreed-upon future date. We also consider the fallout factor, which represents the percentage of loans that are not expected to close, when determining the appropriate amount of forward sales commitments.

 

June 30, 2003 and December 31, 2002 Sensitivity Comparison

 

To analyze net income sensitivity, we project net income over a twelve month horizon based on parallel shifts in the yield curve. Management employs other analyses and interest rate scenarios to evaluate interest rate risk. For example, we project net income and net interest income under a variety of interest rate scenarios, including immediate parallel shifts in the yield curve, non-parallel shifts in the yield curve and more extreme non-parallel rising and falling interest rate environments. These additional scenarios also address the risk exposure over longer periods of time. They also capture the net income and net interest income sensitivity due to changes in the slope of the yield curve and changes in the spread between Treasury and LIBOR rates. The Company’s net income and net interest income sensitivity analysis methodologies are described in further detail within the “Market Risk Management” section of Management’s Discussion and Analysis in our 2002 Annual Report on Form 10-K.

 

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 200 basis points in even quarterly increments over the twelve month periods ending June 30, 2004 and December 31, 2003 and interest rates decreasing by 50 basis points in even quarterly increments over the first six months of the twelve month period.

 

     Gradual Change in Rates

 
     -50 basis points

    +200 basis points

 

Net income change for the one-year period beginning:

            

July 1, 2003

   2.20 %   4.23 %

January 1, 2003

   5.11     3.90  

Net interest income change for the one-year period beginning:

            

July 1, 2003

   0.52     (3.75 )

January 1, 2003

   2.11     (5.71 )

 

The projected increase in net income in the -50 basis point scenario in the July 1st analysis was less than in the January 1st analysis due to a reduction in the anticipated increase in net interest income as well as a slightly less favorable change in the fair value of the MSR and the MSR risk management instruments. The change in net interest income was due to modest decreases in the expansion of the net interest margin and increased balance sheet shrinkage. The slight increase in net income in the +200 basis point environment was due to the reduced sensitivity of net interest income which was partially offset by further decreases in gain from mortgage loans. Net interest income improved from the levels in the January 1, 2003 analysis in the +200 basis point scenario mainly due to an increase in interest-earning assets in this environment. The projected growth in interest-earning assets was mainly due to the anticipated purchase of investment securities used to manage the fair value changes of the MSR after the fair value of the MSR begins to exceed its amortized cost and thus cannot be marked-to-market through earnings. The balance sheet was projected to decrease without these purchases of investment securities due to the expected decline in the extremely high levels of loans held for sale that are not expected to be entirely offset by increases in the loans held in portfolio balance.

 

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Maturity and Repricing Information

 

We use interest rate risk management contracts and available-for-sale securities as tools to manage our interest rate risk profile. The following tables summarize the key contractual terms associated with these contracts and available-for-sale securities. Interest rate risk management contracts that are embedded within certain adjustable- and fixed-rate borrowings, while not accounted for as derivatives under Statement No. 133, have been included in the tables since they also function as interest rate risk management tools. Substantially all of the pay-fixed swaps, receive-fixed swaps, payor swaptions, floors and embedded derivatives at June 30, 2003 are indexed to three-month LIBOR.

 

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The following estimated net fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies:

 

     June 30, 2003

 
     Maturity Range

 
     Net
Fair
Value


    Total
Notional
Amount


    2003

    2004

    2005

    2006

    2007

    After
2007


 
     (dollars in millions)  

Interest Rate Risk Management Contracts:

                                                                

Asset/Liability Risk Management

                                                                

Pay-fixed swaps:

   $ (1,186 )                                                        

Contractual maturity

           $ 22,937     $ 1,507     $ 8,834     $ 3,195     $ 4,708     $ 3,700     $ 993  

Weighted average pay rate

             4.23 %     3.25 %     4.03 %     4.08 %     4.39 %     5.02 %     4.30 %

Weighted average receive rate

             1.26 %     1.23 %     1.26 %     1.25 %     1.30 %     1.27 %     1.10 %

Receive-fixed swaps:

     662                                                          

Contractual maturity

           $ 5,640     $ 600     $ 200     $ 530     $ 1,000           $ 3,310  

Weighted average pay rate

             1.16 %     0.87 %     1.53 %     0.65 %     1.29 %           1.24 %

Weighted average receive rate

             5.79 %     5.10 %     6.75 %     5.37 %     6.81 %           5.61 %

Interest rate corridors:

                                                              

Contractual maturity

           $ 344     $ 90     $ 191     $ 63                    

Weighted average strike rate—long cap

             7.86 %     8.63 %     8.14 %     5.94 %                  

Weighted average strike rate—short cap

             9.12 %     9.50 %     9.48 %     7.44 %                  

Embedded pay-fixed swaps:

     (169 )                                                        

Contractual maturity

           $ 2,750     $ 750                       $ 2,000        

Weighted average pay rate

             4.10 %     2.93 %                       4.54 %      

Weighted average receive rate

             1.29 %     1.31 %                       1.28 %      

Embedded caps:

                                                              

Contractual maturity

           $ 534     $ 34     $ 500                          

Weighted average strike rate

             7.72 %     7.25 %     7.75 %                        

Embedded payor swaptions (1) :

                                                              

Contractual maturity (option)

           $ 5,800     $ 5,300     $ 500                          

Weighted average strike rate

             6.10 %     6.09 %     6.21 %                        

Contractual maturity (swap)

                                   $ 3,750           $ 2,050  

Weighted average pay rate

                                     5.99 %           6.31 %
    


 


                                               

Total asset/liability risk management

     (693 )   $ 38,005                                                  

Other Mortgage Banking Risk Management

                                                                

Forward purchase commitments:

     (44 )                                                        

Contractual maturity

           $ 15,662     $ 15,662                                

Weighted average price

             101.95       101.95                                          

Forward sales commitments:

     (65 )                                                        

Contractual maturity

           $ 74,252     $ 74,252                                

Weighted average price

             101.54       101.54                                          

Interest rate futures:

                                                              

Contractual maturity

           $ 81     $ 30     $ 30     $ 14     $ 6     $ 1        

Weighted average price

             98.31       98.90       98.54       97.46       96.58       96.02        

Mortgage put options:

     29                                                          

Contractual maturity

           $ 9,120     $ 9,120                                

Weighted average strike price

             100.90       100.90                                          
    


 


                                               

Total other mortgage banking risk management

   $ (80 )   $ 99,115                                                  
    


 


                                               

(1)   Interest rate swaptions are only exercisable upon maturity.

 

(This table is continued on the next page.)

 

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(Continued from the previous page.)

 

     June 30, 2003

 
     Maturity Range

 
     Net
Fair
Value


    Total
Notional
Amount


    2003

   2004

    2005

    2006

    2007

   After
2007


 
     (dollars in millions)  

Interest Rate Risk Management Contracts:

                                                            

MSR Risk Management

                                                            

Pay-fixed swaps:

   $ (62 )                                                    

Contractual maturity

           $ 2,395                               $ 2,395  

Weighted average pay rate

             4.31 %                               4.31 %

Weighted average receive rate

             1.58 %                               1.58 %

Receive-fixed swaps:

     274                                                      

Contractual maturity

           $ 8,152          $ 243           $ 200        $ 7,709  

Weighted average pay rate

             1.13 %          1.33 %           1.00 %        1.12 %

Weighted average receive rate

             4.27 %          5.34 %           5.20 %        4.22 %

Constant maturity mortgage swaps:

                                                          

Contractual maturity

           $ 100                               $ 100  

Weighted average pay rate

             4.35 %                               4.35 %

Weighted average receive rate

             4.20 %                               4.20 %

Floors (2) :

     201                                                      

Contractual maturity

           $ 4,600                               $ 4,600  

Weighted average strike rate

             3.18 %                               3.18 %

Payor swaptions:

     94                                                      

Contractual maturity (option)

           $ 4,600          $ 1,700     $ 2,900                 

Weighted average strike rate

             5.39 %          5.14 %     5.53 %               

Contractual maturity (swap)

                                           $ 4,600  

Weighted average pay rate

                                             5.39 %
    


 


                                           

Total interest rate contracts

     507     $ 19,847                                              

Forward purchase commitments:

     47                                                      

Contractual maturity

           $ 12,225     $ 12,225                            

Weighted average price

             100.18       100.18                                      
    


 


                                           

Total MSR risk management

   $ 554     $ 32,072                                              
    


 


                                           

Total interest rate risk management contracts

   $ (219 )   $ 169,192                                              
    


 


                                           

(2)   At June 30, 2003, none of these floors were effective. These contracts will become effective during January 2004.

 

     June 30, 2003

     Amortized
Cost


   Net
Unrealized
Gain/Loss


    Fair
Value


     (dollars in millions)

Available-For-Sale Securities:

                     

MSR Risk Management

                     

Mortgage-backed securities (1) :

                     

U.S. Government and agency

   $ 174    $ (8 )   $ 166

Investment securities (1) :

                     

U.S. Government and agency

     10,455      406       10,861
    

  


 

Total MSR risk management

   $ 10,629    $ 398     $ 11,027
    

  


 


(1)   Mortgage-backed securities and investment securities mature after 2007.

 

50


Table of Contents
     December 31, 2002

 
     Maturity Range

 
     Net
Fair
Value


    Total
Notional
Amount


    2003

    2004

    2005

    2006

    2007

    After
2007


 
     (dollars in millions)  

Interest Rate Risk Management Contracts:

                                                                

Asset/Liability Risk Management

                                                                

Pay-fixed swaps:

   $ (1,143 )                                                        

Contractual maturity

           $ 29,742     $ 8,416     $ 8,834     $ 3,210     $ 4,709     $ 3,700     $ 873  

Weighted average pay rate

             3.92 %     2.92 %     4.03 %     4.09 %     4.39 %     5.02 %     4.68 %

Weighted average receive rate

             1.56 %     1.56 %     1.53 %     1.57 %     1.58 %     1.66 %     1.37 %

Receive-fixed swaps:

     591                                                          

Contractual maturity

           $ 5,905     $ 825     $ 200     $ 530     $ 1,000           $ 3,350  

Weighted average pay rate

             1.39 %     1.21 %     1.65 %     0.90 %     1.40 %           1.49 %

Weighted average receive rate

             5.81 %     5.40 %     6.75 %     5.37 %     6.81 %           5.62 %

Interest rate caps:

                                                              

Contractual maturity

           $ 181     $ 181                                

Weighted average strike rate

             7.13 %     7.13 %                              

Interest rate corridors:

                                                              

Contractual maturity

           $ 345     $ 90     $ 191     $ 64                    

Weighted average strike rate—long cap

             7.86 %     8.63 %     8.14 %     5.94 %                  

Weighted average strike rate—short cap

             9.11 %     9.50 %     9.48 %     7.44 %                  

Payor swaptions (1) :

                                                              

Contractual maturity (option)

           $ 5,000     $ 5,000                                

Weighted average strike rate

             6.12 %     6.12 %                              

Contractual maturity (swap)

                                   $ 1,000     $ 750     $ 3,250  

Weighted average pay rate

                                     6.05 %     6.26 %     6.11 %

Embedded pay-fixed swaps:

     (207 )                                                        

Contractual maturity

           $ 2,750                             $ 2,750        

Weighted average pay rate

             4.73 %                             4.73 %      

Weighted average receive rate

             1.74 %                             1.74 %      

Embedded caps:

                                                              

Contractual maturity

           $ 641     $ 141     $ 500                          

Weighted average strike rate

             7.64 %     7.25 %     7.75 %                        

Embedded payor swaptions (1) :

     4                                                          

Contractual maturity (option)

           $ 6,400     $ 5,900     $ 500                          

Weighted average strike rate

             6.14 %     6.13 %     6.21 %                        

Contractual maturity (swap)

                                   $ 3,750           $ 2,650  

Weighted average pay rate

                                     5.99 %           6.34 %
    


 


                                               

Total asset/liability risk management

     (755 )   $ 50,964                                                  

Other Mortgage Banking Risk Management

                                                                

Forward purchase commitments:

     101                                                          

Contractual maturity

           $ 10,193     $ 10,193                                

Weighted average price

             102.38       102.38                                          

Forward sales commitments:

     (662 )                                                        

Contractual maturity

           $ 41,238     $ 41,238                                

Weighted average price

             102.34       102.34                                          

Mortgage put options:

     7                                                          

Contractual maturity

           $ 7,150     $ 7,150                                

Weighted average strike price

             99.28       99.28                                          
    


 


                                               

Total other mortgage banking risk management

   $ (554 )   $ 58,581                                                  
    


 


                                               

(1)   Interest rate swaptions are only exercisable upon maturity.

 

(This table is continued on the next page.)

 

51


Table of Contents

(Continued from the previous page.)

 

     December 31, 2002

 
     Maturity Range

 
     Net
Fair
Value


    Total
Notional
Amount


    2003

    2004

    2005

    2006

    2007

    After
2007


 
     (dollars in millions)  

Interest Rate Risk Management Contracts:

                                                                

MSR Risk Management

                                                                

Pay-fixed swaps:

   $ (50 )                                                        

Contractual maturity

           $ 2,903                             $ 1,950     $ 953  

Weighted average pay rate

             3.77 %                             3.41 %     4.52 %

Weighted average receive rate

             1.41 %                             1.40 %     1.42 %

Receive-fixed swaps:

     2,176                                                          

Contractual maturity

           $ 17,915           $ 561     $ 500     $ 700     $ 1,250     $ 14,904  

Weighted average pay rate

             1.57 %           1.80 %     1.41 %     1.42 %     1.50 %     1.58 %

Weighted average receive rate

             5.65 %           4.35 %     4.54 %     5.31 %     4.33 %     5.86 %

Floors (2) :

     249                                                          

Contractual maturity

           $ 3,900                             $ 3,900        

Weighted average strike rate

             6.09 %                             6.09 %      

Receiver swaptions:

     415                                                          

Contractual maturity (option)

           $ 4,000     $ 300     $ 800     $ 2,900                    

Weighted average strike rate

             6.21 %     5.42 %     5.73 %     6.43 %                  

Contractual maturity (swap)

                                               $ 4,000  

Weighted average receive rate

                                                 6.21 %
    


 


                                               

Total interest rate contracts

     2,790     $ 28,718                                                  

Forward purchase commitments:

     236                                                          

Contractual maturity

           $ 13,250     $ 13,250                                

Weighted average price

             100.35       100.35                                          
    


 


                                               

Total MSR risk management

   $ 3,026     $ 41,968                                                  
    


 


                                               

Total interest rate risk management contracts

   $ 1,717     $ 151,513                                                  
    


 


                                               

(2)   At December 31, 2002, none of these floors were effective. These contracts became effective during May and July 2003.

 

     December 31, 2002

     Amortized
Cost


   Net
Unrealized
Gain/Loss


   Fair
Value


     (dollars in millions)

Available-For-Sale Securities:

                    

MSR Risk Management

                    

Mortgage-backed securities (1) :

                    

U.S. Government and agency

   $ 583    $ 20    $ 603

Investment securities (1) :

                    

U.S. Government and agency

     7,268      212      7,480
    

  

  

Total MSR risk management

   $ 7,851    $ 232    $ 8,083
    

  

  


(1)   Mortgage-backed securities and investment securities mature after 2007.

 

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Table of Contents

Derivative Counterparty Credit Risk

 

Derivative financial instruments expose the Company to credit risk in the event of nonperformance by counterparties to such agreements. This risk consists primarily of the termination value of agreements where the company is in a favorable position. Credit risk related to derivative financial instruments is considered and provided for separately from the allowance for loan and lease losses. The Company manages the credit risk associated with its various derivative agreements through counterparty credit review, counterparty exposure limits and monitoring procedures. Substantially all of the counterparty credit risk associated with derivative financial instruments is with counterparties rated A or better by Standard & Poor’s at June 30, 2003. The Company obtains collateral from the counterparties for amounts in excess of the exposure limits and monitors its exposure and collateral requirements on a daily basis. The fair value of collateral either received from or provided to a counterparty is continually monitored and the Company may request additional collateral from counterparties or return collateral pledged as deemed appropriate. The Company’s agreements generally include master netting agreements whereby the counterparties are entitled to settle their positions “net.” At June 30, 2003 and December 31, 2002, the Company’s credit risk related to derivative financial instruments, net of the effects of collateral and master netting agreements, was $422 million and $780 million.

 

Gap Report

 

A historical 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 consider expected prepayment speeds and amortization of principal in addition to the contractual maturities. The analysis excludes reinvestment of cash. Prepayment assumptions are based on internal projections based on an analysis of market prepayment estimates and past experience with our current loan and mortgage-backed securities portfolios. The majority of our transaction deposits are not contractually subject to repricing. Therefore, these instruments have been allocated based on expected decay rates and/or repricing intervals. Certain transaction deposits that reprice based on a market index or which typically have frequent repricing intervals are allocated to the repricing or maturity buckets based on the expected repricing period. Non-rate sensitive items such as the reserve for loan losses, mark-to-market adjustments, premiums and discounts and deferred loan fees/costs are not included in the table. Loans held for sale are included in the 0-3 months category, provided that these instruments are offset with forward commitments to sell loans. In addition, MSR risk management contracts are excluded from the analysis except for the pay-fixed swaps that were fair value hedges of specified fixed-rate investment securities.

 

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Table of Contents

The gap information is limited by the fact that it is a point-in-time analysis. The data reflects conditions and assumptions as of June 30, 2003. These conditions and assumptions may not be appropriate at another point in time. The analysis is also subject to the accuracy of various assumptions used, particularly the prepayment and decay rate projections, the expected repricing period of certain deposits and the allocation of instruments with optionality to a specific maturity category, especially interest rate contracts. Consequently, the interpretation of the gap information is subjective.

 

     June 30, 2003

 
     Projected Repricing

 
     0-3
months


    4-12
months


    1-5 years

    Thereafter

    Total

 
     (dollars in millions)  

Interest-Sensitive Assets

                                        

Adjustable-rate loans (1)

   $ 81,804     $ 25,410     $ 25,721     $ 175     $ 133,110  

Fixed-rate loans (1)

     21,882       8,213       20,178       3,902       54,175  

Adjustable-rate securities (1)(2)

     23,845       160       44             24,049  

Fixed-rate securities (1)

     462       1,656       6,582       15,569       24,269  

Cash and cash equivalents, federal funds sold and securities purchased under resale agreements

     9,473                         9,473  

Derivatives matched against assets

     3,085             (472 )     (2,613 )      
    


 


 


 


 


     $ 140,551     $ 35,439     $ 52,053     $ 17,033     $ 245,076  
    


 


 


 


 


Interest-Sensitive Liabilities

                                        

Noninterest-bearing deposits (3)

   $ 2,007     $ 7,379     $ 22,921     $ 14,198     $ 46,505  

Interest-bearing checking accounts, savings accounts and money market deposit accounts (3)

     21,429       14,860       33,592       19,406       89,287  

Interest-bearing time deposit accounts

     8,894       10,926       9,623       1,219       30,662  

Short-term and adjustable-rate borrowings

     64,421       3,596       59       224       68,300  

Long-term fixed-rate borrowings

     3,056       1,433       8,661       5,730       18,880  

Derivatives matched against liabilities

     (18,003 )     3,210       16,985       (2,192 )      
    


 


 


 


 


     $ 81,804     $ 41,404     $ 91,841     $ 38,585     $ 253,634  
    


 


 


 


 


Repricing gap

   $ 58,747     $ (5,965 )   $ (39,788 )   $ (21,552 )   $ (8,558 )
    


 


 


 


 


Cumulative gap

   $ 58,747     $ 52,782     $ 12,994     $ (8,558 )   $ (8,558 )
    


 


 


 


 


Cumulative gap as a percentage of total assets

     20.74 %     18.64 %     4.59 %     (3.02 )%     (3.02 )%

Total assets

                                   $ 283,203  
                                    



(1)   Based on scheduled maturity or scheduled repricing and estimated prepayments of principal.
(2)   Includes investment in FHLBs.
(3)   Based on projected decay rates and/or repricing periods for checking, savings and money market deposit accounts.

 

54


Table of Contents

PART II—OTHER INFORMATION

 

Item 4.    Submission of Matters to a Vote of Security Holders.

 

Washington Mutual, Inc. held its annual meeting of shareholders on April 15, 2003. A brief description of each matter voted on and the results of the shareholder voting are set forth below:

 

          For

   Withheld

         

1.

   The election of five directors set forth below:                    
     Douglas P. Beighle    700,540,006    75,891,164          
     Kerry K. Killinger    756,876,805    19,554,365          
     Michael K. Murphy    760,957,644    15,473,526          
     Elizabeth A. Sanders    713,836,565    62,594,605          
     Willis B. Wood, Jr.    700,879,856    75,551,314          
          For

   Withheld

   Abstain

   Broker
Non-Votes


2.

   Approval of Company’s 2003 Equity Incentive Plan    512,168,570    115,924,281    6,363,828    141,974,491

3.

   Approval of Company’s Amended and Restated 2002 Employee Stock Purchase Plan    605,562,449    19,307,709    9,586,752    141,974,260
          For

   Withheld

   Abstain

   Broker
Non-Votes


4.

   Ratification of the appointment of Deloitte & Touche LLP as the Company’s Independent Auditors    689,948,286    81,176,504    5,305,217    1,163

 

Each of the following directors who were not up for re-election at the annual meeting of shareholders will continue to serve as directors: Anne V. Farrell, Stephen E. Frank, Phillip D. Matthews, Margaret Osmer McQuade, Mary E. Pugh, William G. Reed, Jr., William D. Schulte and James H. Stever.

 

Item 6.    Exhibits and Reports on Form 8-K

 

(a)    Exhibits

 

See Index of Exhibits on page 57.

 

(b)    Reports on Form 8-K

 

1.    The Company filed a report on Form 8-K dated April 15, 2003, under Item 9. The report included a press release reporting Washington Mutual’s results of operations for the first quarter ended March 31, 2003.

 

55


Table of Contents

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 14, 2003.

 

W ASHINGTON M UTUAL , I NC .
By:  

/s/    T HOMAS W. C ASEY

 
   

Thomas W. Casey

Executive Vice President and Chief Financial Officer

 

By:  

/s/    R OBERT H. M ILES

 
   

Robert H. Miles

Senior Vice President and Controller (Principal Accounting Officer)

 

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Table of Contents

WASHINGTON MUTUAL, INC.

 

INDEX OF EXHIBITS

 

Exhibit No.     
3.1    Restated Articles of Incorporation of Washington Mutual, Inc., as amended. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. File No. 0-25188).
3.2    Articles of Amendment to the Amended and Restated Articles of Incorporation of Washington Mutual, Inc. creating a class of preferred stock, Series RP. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000. File No. 001-14667).
3.3    Restated Bylaws of Washington Mutual, Inc., as amended (filed herewith).
4.1    Rights Agreement dated December 20, 2000 between Washington Mutual, Inc. and Mellon Investor Services, LLC (Incorporated by reference to the Company’s Current Report on Form 8-K filed January 8, 2001. File No. 0-25188).
4.2    Washington Mutual, Inc. will furnish upon request copies of all instruments defining the rights of holders of long-term debt instruments of Washington Mutual, Inc. and its consolidated subsidiaries.
4.3    Warrant Agreement dated as of April 30, 2001. (Incorporated by reference to the Company’s Registration Statement on Form S-3. File No. 333-63976).
4.4    2003 Amended and Restated Warrant Agreement, dated March 11, 2003 by and between Washington Mutual, Inc. and Mellon Investor Services LLC. (Incorporated by reference to the Company’s Current Report on Form 8-K, dated March 12, 2003. File No. 001-14667).
31.1    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1    Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2    Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
99.1    Computation of Ratios of Earnings to Fixed Charges (filed herewith).
99.2    Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends (filed herewith).

 

57

EXHIBIT 3.3

 

RESTATED 1

 

BYLAWS

 

OF

 

WASHINGTON MUTUAL, INC.

 

ARTICLE I

OFFICES

 

The principal office and place of business of the corporation in the state of Washington shall be located at 1201 Third Avenue, Seattle, Washington 98101.

 

The corporation may have such other offices within or without the state of Washington as the board of directors may designate or the business of the corporation may require from time to time.

 

ARTICLE II

NUMBER OF DIRECTORS

 

The board of directors of this corporation shall consist of sixteen (16) directors.

 

ARTICLE III

SHAREHOLDERS

 

Section 3.1.     Annual Meeting .    The annual meeting of the shareholders shall be held on the third Tuesday in the month of April in each year, beginning with the year 1995, at 10:00 a.m., or at such other date or time as may be determined by the board of directors, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the day fixed for the annual meeting shall be a legal holiday in the state of Washington, the meeting shall be held on the next succeeding business day. If the election of directors is not held on the day designated herein for any annual meeting of the shareholders or at any adjournment thereof, the board of directors shall cause the election to be held at a meeting of the shareholders as soon thereafter as may be convenient.

 

Section 3.2.     Special Meetings .    Special meetings of the shareholders for any purpose or purposes unless otherwise prescribed by statute may be called by the board

 


1 Reflects amendments adopted by the Board of Directors through and including the June 2003 meeting of the Board of Directors.


of directors or by the written request of holders of at least twenty-five percent (25%) of the votes entitled to be cast on each issue to be considered at the special meeting.

 

Section 3.3.     Place of Meetings .    Meetings of the shareholders shall be held at either the principal office of the corporation or at such other place within or without the state of Washington as the person or persons calling the meeting may designate.

 

Section 3.4.     Fixing of Record Date .    For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors may fix in advance a date as the record date for any such determination of shareholders, which date in any case shall not be more than seventy (70) days and, in the case of a meeting of shareholders, not less than 20 days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend or distribution, the day before the first notice of a meeting is dispatched to shareholders or the date on which the resolution of the board of directors authorizing such dividend or distribution is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to notice of or to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof unless the board of directors fixes a new record date, which it must do if the meeting is adjourned to a date more than one hundred twenty (120) days after the date fixed for the original meeting.

 

The record date for determining shareholders entitled to take action without a meeting is the date the first shareholder signs the consent in lieu of meeting.

 

Section 3.5.     Voting Lists .    At least ten (10) days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for shares of the corporation shall prepare an alphabetical list of all its shareholders on the record date who are entitled to vote at the meeting or any adjournment thereof, arranged by voting group, and within each voting group by class or series of shares, with the address of and the number of shares held by each, which record for a period of ten (10) days prior to the meeting shall be kept on file at the principal office of the corporation or at a place identified in the meeting notice in the city where the meeting will be held. Such record shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder, shareholder’s agent or shareholder’s attorney at any time during the meeting or any adjournment thereof. Failure to comply with the requirements of this bylaw shall not affect the validity of any action taken at the meeting.

 

Section 3.6.     Notice of Meetings .    Notice, in tangible written or printed form, in electronic form, or in any other form then allowed under the Washington Business Corporations Act or other applicable law, stating the date, time and place of a meeting of


shareholders and, in the case of a special meeting of shareholders, the purpose or purposes for which the meeting is called, shall be given by the person or persons calling the meeting or by the Secretary of the corporation at the direction of such person or persons to each shareholder of record entitled to vote at such meeting (unless required by law to send notice to all shareholders regardless of whether or not such shareholders are entitled to vote), not less than ten (10) days and not more than sixty (60) days before the meeting, except that notice of a meeting to act on an amendment to the articles of incorporation, a plan of merger or share exchange, a proposed sale, lease, exchange or other disposition of all or substantially all of the assets of the corporation other than in the usual course of business, or the dissolution of the corporation shall be given not less than twenty (20) days and not more than sixty (60) days before the meeting. Written notice may be transmitted by: mail, private carrier or personal delivery; telegraph or teletype; or telephone, wire or wireless equipment which transmits a facsimile of the notice. Such notice shall be effective upon dispatch if sent to the shareholder’s address, telephone number, or other number appearing on the records of the corporation.

 

Only such business shall be conducted at a special meeting of shareholders as shall be specified in the applicable notice of meeting given pursuant to this Section 3.6. If an annual or special shareholders’ meeting is adjourned or postponed to a different date, time or place, notice need not be given of the new date, time or place of the adjourned or postponed meeting if the new date, time or place is announced at the meeting before adjournment or postponement unless a new record date is or, under the Washington Business Corporation Act or other applicable law, must be fixed. If a new record date for the adjourned or postponed meeting is or, under the Washington Business Corporation Act or other applicable law, must be fixed, however, notice of the adjourned or postponed meeting must be given to persons who are shareholders as of the new record date.

 

Section 3.7.     Waiver of Notice .    A shareholder may waive any notice required to be given under the provisions of these bylaws, the articles of incorporation or by applicable law, whether before or after the date and time stated therein. A valid waiver is created by any of the following three methods: (a) in writing signed by the shareholder entitled to the notice and delivered to the corporation for inclusion in its corporate records; (b) by attendance at the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting; or (c) by failure to object at the time of presentation of a matter not within the purpose or purposes described in the meeting notice.

 

Section 3.8.     Manner of Acting; Proxies .    A shareholder may vote either in person or by proxy. A shareholder may vote by proxy by means of a proxy appointment form which is executed by the shareholder, his agent, or by his duly authorized attorney-in-fact. All proxy appointment forms shall be filed with the secretary of the corporation before or at the commencement of meetings. No unrevoked proxy appointment form shall be valid after eleven (11) months from the date of its execution unless otherwise expressly provided in the appointment form. No proxy appointment may be effectively revoked until notice of such revocation has been given to the secretary of the corporation by the shareholder appointing the proxy. Any proxy appointment or any revocation of


a proxy appointment may be executed in tangible written form, may be by means of an electric transmission or may be by any other means then allowed by the Washington Business Corporations Act or other applicable law.

 

Section 3.9.     Quorum .    At any meeting of the shareholders, a majority in interest of all the shares entitled to vote on a matter by the voting group, represented in person or by proxy by shareholders of record, shall constitute a quorum of that voting group for action on that matter. Once a share is represented at a meeting, other than to object to holding the meeting or transacting business, it is deemed to be present for purposes of a quorum for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be fixed for the adjourned meeting. At such reconvened meeting, any business may be transacted which might have been transacted at the adjourned meeting. If a quorum exists, action on a matter is approved by a voting group if the votes cast within the voting group favoring the action exceed the votes cast within the voting group opposing the action, unless the question is one upon which a different vote is required by express provision of law or of the articles of incorporation or of these bylaws.

 

Section 3.10.     Voting of Shares .    Each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except as may be otherwise provided in the articles of incorporation.

 

Section 3.11.     Voting for Directors .    In the election of directors every shareholder of record entitled to vote at the election shall have the right to vote in person the number of shares owned by him for as many persons as there are directors to be elected and for whose election he has a right to vote. Shareholders entitled to vote at any election of directors shall have no right to cumulate votes. In any election of directors the candidates elected are those receiving the largest numbers of votes cast by the shares entitled to vote in the election, up to the number of directors to be elected by such shares.

 

Section 3.12.     Voting of Shares by Certain Holders .

 

3.12.1. Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the board of directors of such corporation may determine. A certified copy of a resolution adopted by such directors shall be conclusive as to their determination.

 

3.12.2. Shares held by a personal representative, administrator, executor, guardian or conservator may be voted by such administrator, executor, guardian or conservator, without a transfer of such shares into the name of such personal representative, administrator, executor, guardian or conservator. Shares standing in the name of a trustee may be voted by such trustee, but no trustee shall be entitled to vote shares held in trust without a transfer of such shares into the name of the trustee.

 

3.12.3. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by the


receiver without the transfer thereof into his name if authority so to do is contained in an appropriate order of the court by which such receiver was appointed.

 

3.12.4. If shares are held jointly by three or more fiduciaries, the will of the majority of the fiduciaries shall control the manner of voting or appointment of a proxy, unless the instrument or order appointing such fiduciaries otherwise directs.

 

3.12.5. Unless the pledge agreement expressly provides otherwise, a shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred.

 

3.12.6. Shares held by another corporation shall not be voted at any meeting or counted in determining the total number of outstanding shares entitled to vote at any given time if a majority of the shares entitled to vote for the election of directors of such other corporation is held by this corporation.

 

3.12.7. On and after the date on which written notice of redemption of redeemable shares has been dispatched to the holders thereof and a sum sufficient to redeem such shares has been deposited with a bank or trust company with irrevocable instruction and authority to pay the redemption price to the holders thereof upon surrender of certificates therefor, such shares shall not be entitled to vote on any matter and shall be deemed to be not outstanding shares.

 

Section 3.13.     Conduct of Meetings .    The Chairman shall serve as chairman of a meeting of the shareholders. In the absence of the Chairman, the Chief Executive Officer or any other person designated by the board of directors shall serve as chairman of a meeting of shareholders. The Secretary or in his absence an Assistant Secretary or in the absence of the Secretary and all Assistant Secretaries a person whom the chairman of the meeting shall appoint shall act as secretary of the meeting and keep a record of the proceedings thereof.

 

The chairman of a meeting of shareholders, determined in accordance with this Section 3.13, shall have discretion to establish the rules, regulations and procedures for the conduct of such meeting of shareholders and shall have the authority to adjourn or postpone such meeting from time to time whether or not there is a quorum present, subject to any specific rules, regulations and procedures established by the board of directors.

 

Section 3.14.     Notice of Nomination .    Nominations for the election of directors and proposals for any new business to be taken up at any annual or, subject to Section 3.6 of these bylaws, special meeting of shareholders may be made by the board of directors of the corporation or by any shareholder of the corporation entitled to vote generally in the election of directors. In order for a shareholder of the corporation to make any such nomination or proposal at any annual meeting, the shareholder’s nomination or proposal must be in writing and received at the Executive Offices of the corporation by the


Secretary of the corporation not less than 120 days in advance of the date corresponding to the date in the previous year on which the corporation’s proxy statement was released to shareholders in connection with the previous year’s annual meeting of shareholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date of the previous year’s annual meeting, a proposal shall be received by the corporation in accordance with the method set forth hereafter for proposals or nominations in advance of a special meeting of shareholders. In order for a shareholder of the corporation to make any nomination or proposal to be taken up at a special meeting of shareholders, the shareholder’s nomination or proposal must be in writing and received at the Executive Offices of the corporation by the Secretary of the corporation not later than the later of the 90 th day prior to such special meeting or the 10 th day following the day on which public announcement of the date of such special meeting is made by the corporation. Each such notice given by a shareholder with respect to nominations for the election of directors shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, and (iii) the number of shares of stock of the corporation which are beneficially owned, and the number of shares of stock of the corporation concerning which there is a right to acquire, directly or indirectly, by (A) each such nominee, and (B) by each associate of such person, determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

For purposes of this Section 3.14, “public announcement” means disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Sections 13, 14, or 15(d) of the Exchange Act.

 

In no event shall the public announcement of an adjournment or postponement of an annual or special meeting commence a new time period (or extend any time period) for the giving of a shareholder’s notice of a proposal or a nomination for director at such meeting as described above.

 

Section 3.15.     Action Without a Meeting .    Any action permitted or required to be taken at a meeting of the shareholders may be taken without a meeting if one or more consents in writing setting forth the action so taken shall be signed by all the shareholders.

 

ARTICLE IV.

BOARD OF DIRECTORS

 

Section 4.1.     General Powers .    The business and affairs of the corporation shall be managed by its board of directors.

 

Section 4.2.     Number, Tenure and Qualification .    The number of directors set forth in Article II of these bylaws may be increased or decreased from time to time by


amendment to or in the manner provided in these bylaws. No decrease, however, shall have the effect of shortening the term of any incumbent director unless such director resigns or is removed in accordance with the provisions of these bylaws. The directors shall be classified and shall hold such terms as set forth in the articles of incorporation. In all cases, directors shall serve until their successors are duly elected and qualified or until their earlier resignation, removal from office or death. Directors need not be residents of the state of Washington or shareholders of the corporation.

 

Section 4.3.     Annual and Other Regular Meetings .    Regular meetings of the board shall be held at two-thirty o’clock, or an earlier hour in the discretion of the Chairman or the President, on the third Tuesday of the months of January, February, April, June, July, September, October, and December unless such day is a legal holiday, in which case the meeting shall be held on the first business day thereafter, or unless such meeting has been canceled by the Chairman or the President upon giving notice to the members of the board at least three calendar days before the date on which such meeting is scheduled. The date of any regular meeting may be changed to such other date within the month as shall be determined by the Chairman or the President, or in the absence of the Chairman or the President, by any three members of the Board, provided notice of the time and place of such meeting is given as provided in Section 4.4. In each year, the regular meeting on the day of the Annual Meeting of Shareholders shall be known as the Annual Meeting of the Board.

 

Section 4.4.     Special Meetings .    Special meetings of the board of directors may be called by the board of directors, the chairman of the board, or the president. The notice of a special meeting of the board of directors shall state the date and time and, if the meeting is not exclusively telephonic, the place of the meeting. Unless otherwise required by law, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. Notice shall be given by the person or persons authorized to call such meeting, or by the secretary at the direction of the person or persons authorized to call such meeting. The notice may be oral or written. If the notice is orally communicated in person or by telephone to the director or to the director’s personal secretary or is sent by electronic mail, telephone or wireless equipment, which transmits a facsimile of the notice to the director’s electronic mail designation or telephone number appearing on the records of the corporation, the notice of a meeting shall be timely if sent no later than twenty-four (24) hours prior to the time set for such meeting. If the notice is sent by courier to the director’s address appearing on the records of the corporation, the notice of a meeting shall be timely if sent no later than three (3) full days prior to the time set for such meeting. If the notice is sent by mail to the director’s address appearing on the records of the corporation, the notice of a meeting shall be timely if sent no later than five (5) full days prior to the time set for such meeting.

 

Section 4.5.     Waiver of Notice .    Any director may waive notice of any meeting at any time. Whenever any notice is required to be given to any director of the corporation pursuant to applicable law, a waiver thereof in writing signed by the director, entitled to


notice, shall be deemed equivalent to the giving of notice. The attendance of a director at a meeting shall constitute a waiver of notice of the meeting except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully convened. A director waives objection to consideration of a particular matter at a meeting that is not within the purpose or purposes described in the meeting notice, unless the director objects to considering the matter when it is presented.

 

Section 4.6.     Quorum .    A majority of the number of directors specified in or fixed in accordance with these bylaws shall constitute a quorum for the transaction of any business at any meeting of directors. If less than a majority shall attend a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice, and a quorum present at such adjourned meeting may transact business.

 

Section 4.7.     Manner of Acting .    If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the board of directors.

 

Section 4.8.     Participation by Conference Telephone .    Directors may participate in a regular or special meeting of the board by, or conduct the meeting through the use of, any means of communication by which all directors participating can hear each other during the meeting and participation by such means shall constitute presence in person at the meeting.

 

Section 4.9.     Presumption of Assent .    A director who is present at a meeting of the board of directors at which action is taken shall be presumed to have assented to the action taken unless such director’s dissent shall be entered in the minutes of the meeting or unless such director shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the corporation immediately after adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.

 

Section 4.10.     Action by Board Without a Meeting .    Any action permitted or required to be taken at a meeting of the board of directors may be taken without a meeting if one or more consents setting forth the action so taken, shall be executed by all the directors, either before or after the action taken, and delivered to the corporation. Such consents may be set forth in a tangible written form, in an electronic transmission or in any other form then allowed under the Washington Business Corporations Act or other applicable law. Action taken by consent is effective when the last director executes the consent, unless the consent specifies a later effective date.

 

Section 4.11.     Audit Committee .    The board of directors, at any regular meeting of the Board, shall elect from their number an Audit Committee of not less than three members, none of whom shall be employed by the corporation. At least annually the Board of Directors shall determine that each Committee member has the independence and other qualifications set forth in the Charter of the Audit Committee as approved by


the Board, and in any supplemental statements that the Board may adopt with regard to the composition of the Committee.

 

The Audit Committee shall have the authorities and responsibilities and shall perform the functions specified in the Charter of the Audit Committee, as approved by the Board, and in any supplemental statement that the Board may adopt with regard to the functions of the Committee.

 

Section 4.12.     Human Resources Committee .    The board of directors at any regular meeting of the board, shall elect from their number a Human Resources Committee which committee shall have not less than three members, none of whom shall be employed by the corporation. The Human Resources Committee shall have the authorities and responsibilities and shall perform the functions specified in the Charter of the Human Resources Committee, as approved by the Board, and in any supplemental statement or resolution that the Board may adopt with regard to the functions of the Committee.

 

Section 4.13.     Governance Committee .    The board of directors, at any regular meeting of the board, shall elect from their number a Governance Committee, none of the members of which shall be employed by the corporation. The Governance Committee shall have the composition, authorities and responsibilities and shall perform the functions specified in the Charter of the Governance Committee, as approved by the Board, and in any supplemental statement or resolution that the Board may adopt with regard to the functions of the Committee.

 

Section 4.14.     Finance Committee .    The board of directors, at any regular meeting of the board, shall elect from their number a Finance Committee. A majority of the members of the Finance Committee shall not be officers of the corporation. The board, upon the recommendation of the Governance Committee in consultation with the Chief Executive Officer, shall appoint a chairman who is not an officer of the corporation. The Finance Committee shall have the authorities and responsibilities and shall perform the functions specified in the Charter of the Finance Committee, as approved by the board, and in any supplemental statement or resolution that the board may adopt with regard to the functions of the Committee.

 

Section 4.15.     Corporate Relations Committee .    The board of directors, at any regular meeting of the board, may elect from among their number a Corporate Relations Committee which shall consist of no fewer than two Directors. The Corporate Relations Committee shall have the composition, authorities and responsibilities and shall perform the functions specified in the Charter of the Corporate Relations Committee, as approved by the Board, and in any supplemental statement or resolution that the Board may adopt with regard to the functions of the Committee.

 

Section 4.16.     Corporate Development Committee .    The board of directors, at any regular meeting of the board, may elect from among their number a Corporate Development Committee, which shall consist of the Chairman of the Board and not less


than two other directors. The Corporate Development Committee shall have the composition, authorities and responsibilities and shall perform the functions specified in the Charter of the Corporate Development Committee, as approved by the Board, and in any supplemental statement or resolution that the Board may adopt with regard to the functions of the Committee.

 

Section 4.17.     Committee Procedures .    Except as provided in the bylaws or in specific resolutions of the Board of Directors, the committees of the Board shall be governed by the same rules regarding meetings, action without meetings, notice, waiver of notice, and quorum and voting requirements as applied to the Board of Directors.

 

Section 4.18.     Resignation .    Any director may resign at any time by delivering written notice to the chairman of the board, the president, the secretary, or the registered office of the corporation, or by giving oral notice at any meeting of the directors or shareholders. Any such resignation shall take effect at any subsequent time specified therein, or if the time is not specified, upon delivery thereof and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

 

Section 4.19.     Removal .    At a meeting of the shareholders called expressly for that purpose, any director or the entire board of directors may be removed from office, with cause, by a vote of the holders of a majority of the shares then entitled to vote at an election of the director or directors whose removal is sought. If the board of directors or any one or more directors is so removed, new directors may be elected at this same meeting.

 

Section 4.20.     Vacancies .    A vacancy on the board of directors may occur by the resignation, removal or death of an existing director, or by reason of increasing the number of directors on the board of directors as provided in these bylaws. Except as may be limited by the articles of incorporation, any vacancy occurring in the board of directors may be filled by the affirmative vote of a majority of the remaining directors whether or not less than a quorum. A director elected to fill a vacancy shall be elected for a term of office continuing only until the next election of directors by shareholders.

 

If the vacant office was held by a director elected by holders of one or more authorized classes or series of shares, only the holders of those classes or series of shares are entitled to vote to fill the vacancy.

 

Section 4.21.     Compensation .    By resolution of the board of directors, the directors may be paid a fixed sum plus their expenses, if any, for attendance at meetings of the board of directors or committee thereof, or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor.

 

Section 4.22.     Chairman of the Board .    The Chairman shall preside at meetings of the board of directors. In the absence of the Chairman and the Chief Executive Officer,


the directors present may select someone from their number to preside. The Chairman shall perform such other duties as may be assigned by the board of directors.

 

ARTICLE V

OFFICERS

 

Section 5.1.     Ranks and Terms in Office .    The officers of the corporation shall be a Chief Executive Officer, a Chairman, a President of the Corporation, a General Auditor, a Chief Financial Officer, a Controller, and such Vice Chairmen, Group Presidents, Senior Executive Vice Presidents, Executive Vice Presidents, Senior Vice Presidents or First Vice Presidents as the board of directors may designate and elect, or such other officers as the board of directors may designate and elect or the Chief Executive Officer may designate and appoint.

 

Officers shall serve until the termination of their employment or their earlier removal from service as officers. Any officer may be removed, with or without cause, by the board of directors, but such removal shall be without prejudice to the contractual rights, if any, of the person so removed. Other than the General Auditor, any officer who has been elected by the board of directors may be suspended with or without pay by the Chief Executive Officer, and any other officer may be removed or suspended with or without pay by the Chief Executive Officer, but such removal or suspension shall be without prejudice to the contractual rights, if any, of the person so removed or suspended. The termination of any officer’s employment shall constitute removal of such person from office, effective as of the date of termination of employment.

 

Section 5.2.     Chief Executive Officer .    The Chief Executive Officer of the corporation shall have direct supervision and management of its affairs and the general powers and duties of supervision and management usually vested in the Chief Executive Officer of a corporation, subject to the Bylaws and policies of the corporation. The Chief Executive Officer shall perform such other duties as may be assigned by the board of directors. In the absence of the Chief Executive Officer, the duties of the Chief Executive Officer shall be assumed by the President of the Corporation, and in their absence such duties shall be assumed by a person designated by the Chief Executive Officer or the board of directors.

 

Section 5.3.     Chairman .    The Chairman shall preside over all meetings of the board of directors. In accordance with Section 3.13 of these bylaws, the Chairman shall preside over all meetings of the shareholders, which duty shall include the authority to adjourn such meetings without any action or vote by the shareholders present at such meetings. The Chairman shall perform such other duties as may be assigned by the board of directors or the Chief Executive Officer, or as may be set forth in the policies and procedural directives of the corporation. Except as set forth in Section 3.13 of these bylaws, in the event of the Chairman’s incapacity, the Chairman’s duties shall be assumed by the Chief Executive Officer or, in the event of the Chief Executive Officer’s incapacity, the duties of the Chairman shall be assumed by the


President of the Corporation, and in their absence such duties shall be assumed by a person designated by the board of directors.

 

Section 5.4.     President of the Corporation .    The President of the Corporation shall perform such duties as may be assigned by the Chief Executive Officer or the board of directors, or as may be set forth in the policies and procedural directives of the corporation.

 

Section 5.5.     General Auditor .    The General Auditor shall supervise and maintain continuous audit control of the assets and liabilities of the corporation. He shall be responsible only to the board of directors in coordination with the Chief Executive officer. He shall perform such other duties as may be assigned to him by the Chief Executive Officer or the President of the Corporation from time to time, only to the extent that such other duties do not compromise the independence of audit control.

 

Section 5.6.     Chief Financial Officer .    The Chief Financial Officer of the corporation shall have the power and duty of supervising and managing the corporation’s acquisition, retention and disposition of securities, loans and financial instruments (including but not limited to the corporation’s investments in and loans to the corporation’s subsidiaries), the power and duty of supervising the corporation’s financial reporting, and the other general powers and duties of supervision and management usually vested in the Chief Financial Officer of a corporation, subject to the Bylaws and policies of the corporation. The Chief Financial Officer shall perform such other duties as may be assigned by the board of directors or by the Chief Executive Officer. In the absence of the Chief Financial Officer, the duties of the Chief Financial Officer shall be assumed by the Controller of the corporation, and in their absence such duties shall be assumed by a person designated by the Chief Executive Officer or the board of directors.

 

Section 5.7.     Controller .    The Controller shall be the chief accounting officer of the corporation and shall have supervisory control and direction of the general accounting, accounting procedure, budgeting and general bookkeeping, and shall be the custodian of the general accounting books, records, forms and papers. He shall also perform such other duties as may be assigned from time to time by the Chief Executive Officer, the President of the Corporation, a Vice Chairman, a Group President, a Senior Executive Vice President or an Executive Vice President, or as may be set forth in the policies and procedural directives of the corporation, only to the extent that such other duties do not compromise the independence of audit control.

 

Section 5.8.     Vice Chairmen, Group Presidents, Senior Executive Vice Presidents, Executive Vice Presidents .    Any Vice Chairmen, Group Presidents, Senior Executive Vice Presidents, Executive Vice Presidents shall perform such duties as may be assigned from time to time by the Chief Executive Officer or the President of the Corporation, or as may be set forth in the policies and procedural directives of the corporation.


Section 5.9.     Senior Vice Presidents, First Vice Presidents and Vice Presidents .    Senior Vice Presidents, First Vice Presidents and Vice Presidents shall perform such duties as may be assigned from time to time by the Chief Executive Officer, the President of the Corporation, a Vice Chairmen, a Group President, a Senior Executive Vice President or a Executive Vice President, or as may be set forth in the policies and procedural directives of the corporation.

 

Section 5.10.     Secretary and Assistant Secretary .    Except as otherwise set forth in these bylaws, the Secretary of the corporation shall keep the minutes of all meetings of the board of directors and of the shareholders and give such notices to the directors or shareholders as may be required by law or by these Bylaws. The Secretary shall have the custody of the corporate seal, if any, and the contracts, papers and documents belonging to the corporation. The Secretary shall also perform such other duties as may be assigned from time to time by the Chief Executive Officer, the President of the Corporation, a Vice Chairman, a Group President, a Senior Executive Vice President or an Executive Vice President, or as may be set forth in the policies and procedural directives of the corporation. Except as otherwise set forth in these bylaws, in the absence of the Secretary, the powers and duties of the Secretary shall devolve upon an Assistant Secretary or such person as shall be designated by the Chief Executive Officer.

 

Section 5.11.     Combining Offices .    An officer who holds one office may, with or without resigning from such existing office, be elected by the board of directors to hold, in addition to such existing office, the office of Chairman, Vice Chairman, Group President Senior Executive Vice President, Senior Vice President, First Vice President or Vice President. An officer who holds one office may, with or without resigning from such existing office, be appointed by the Chief Executive Officer to hold, in addition to such existing office, another office other than the office of Chairman, Vice Chairman, Group President Senior Executive Vice President, Senior Vice President, First Vice President or Vice President.

 

Section 5.12.     Other Officers .    The other Officers shall perform such duties as may be assigned by the Chief Executive Officer, the President of the Corporation, a Vice Chairman, a Group President, a Senior Executive Vice President or an Executive Vice President, or as may be set forth in the policies and procedural directives of the corporation. The Chief Executive Officer may designate such functional titles to an officer, as the Chief Executive Officer deems appropriate from time to time.

 

Section 5.13.     Official Bonds .    The corporation may be indemnified in the event of the dishonest conduct or unfaithful performance of an officer, employee, or agent by a corporate fidelity bond, the premiums for which may be paid by the corporation.

 

Section 5.14.     Execution of Contracts and Other Documents .    The Chief Executive Officer, the President of the Corporation, or any Vice Chairman, Group President, or Senior Executive Vice President may from time to time designate the officers, employees or agents of the corporation who shall have authority to sign deeds,


contracts, satisfactions, releases, and assignments of mortgages, and all other documents or instruments in writing to be made or executed by the corporation.

 

Section 5.15.     Resignation .    Any officer may resign at any time by delivering written notice to the Chief Executive Officer, the President, the Secretary or the board of directors, or by giving oral notice at any meeting of the board. Any such resignation shall take effect at any subsequent time specified therein, or if the time is not specified, upon delivery thereof and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

 

Section 5.16.     Compensation of Officers and Employees .    The board of directors shall fix compensation of officers and may fix compensation of other employees from time to time. No officer shall be prevented from receiving a salary by reason of the fact that such officer is also a director of the corporation.

 

Section 5.17.     Voting of Shares Held by Corporation .    Shares of another corporation held by this corporation may be voted in person or by proxy by the Chief Executive Officer, by the President of the Corporation, by a Vice Chairman, by a Group President, by a Senior Executive Vice President, by an Executive Vice President, or by a Senior Vice President.

 

ARTICLE VI

SHARES

 

Section 6.1.     Certificates for Shares .    The shares of the corporation may be represented by certificates in such form as prescribed by the board of directors. Signatures of the corporate officers on the certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent, or registered by a registrar, other than the corporation itself or an employee of the corporation. All certificates shall be consecutively numbered or otherwise identified. All certificates shall bear such legend or legends as prescribed by the board of directors or these bylaws.

 

Section 6.2.     Issuance of Shares .    Shares of the corporation shall be issued only when authorized by the board of directors, which authorization shall include the consideration to be received for each share.

 

Section 6.3.     Beneficial Ownership .    Except as otherwise permitted by these bylaws, the person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. The board of directors may adopt by resolution a procedure whereby a shareholder of the corporation may certify in writing to the corporation that all or a portion of the shares registered in the name of such shareholder are held for the account of a specified person or persons. Upon receipt by the corporation of a certification complying with such procedure, the persons specified in the certification shall be deemed, for the purpose or purposes set


forth in the certification, to be the holders of record of the number of shares specified in place of the shareholder making the certification.

 

Section 6.4.     Transfer of Shares .    Transfer of shares of the corporation shall be made only on the stock transfer books of the corporation by the holder of record thereof or by his legal representative who shall furnish proper evidence of authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the secretary of the corporation, on surrender for cancellation of the certificate for the shares. All certificates surrendered to the corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled.

 

Section 6.5.     Lost or Destroyed Certificates .    In the case of a lost, destroyed or mutilated certificate, a new certificate may be issued therefor upon such terms and indemnity to the corporation as the board of directors may prescribe.

 

Section 6.6.     Stock Transfer Records .    The stock transfer books shall be kept at the principal office of the corporation or at the office of the corporation’s transfer agent or registrar. The name and address of the person to whom the shares represented by any certificate, together with the class, number of shares and date of issue, shall be entered on the stock transfer books of the corporation. Except as provided in these bylaws, the person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes.

 

Section 6.7.     Uncertificated Shares .    The shares of the Corporation may be issued in uncertificated or book entry form in the manner prescribed by the board of directors. Without limiting the foregoing, shares of the Corporation may be issued in uncertificated or book entry form in connection with new share issuances, the transfer of shares as provided in Section 6.4 of these bylaws and the replacement of shares represented by lost, destroyed or mutilated certificates as provided in Section 6.5 of these bylaws.

 

ARTICLE VII

SEAL

 

This corporation need not have a corporate seal. If the directors adopt a corporate seal, the seal of the corporation shall be circular in form and consist of the name of the corporation, the state and year of incorporation, and the words “Corporate Seal.”


ARTICLE VIII

INDEMNIFICATION OF DIRECTORS, OFFICERS,

EMPLOYEES AND AGENT

 

Section 8.1.     Director’s Right To Indemnification .    Each person who was or is made a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any actual or threatened action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a director of the corporation or, being or having been such a director, he or she is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director or in any other capacity while serving as a director, shall be indemnified and held harmless by the corporation against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) actually and reasonably incurred or suffered by such person in connection therewith; provided, however, that (a) the corporation shall not indemnify any person from or on account of any acts or omissions of such person finally adjudged to be intentional misconduct or knowing violation of the law of such person, or from conduct of the person in violation of RCW 23B.08.310, or from or on account of any transaction with respect to which it is finally adjudged that such person personally received a benefit in money, property, or services to which such person was not legally entitled, and (b) except as provided in subsection 8.3 with respect to proceedings seeking to enforce rights to indemnification, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the board of directors of the corporation. Such indemnification shall continue as to a person who has ceased to be a director and shall inure to the benefit of his or her heirs, executors and administrators. Without limiting the situations in which a person shall be considered to be serving at the request of the corporation, a director who serves as a director, officer, employee or agent of another corporation or other enterprise that is a subsidiary of the corporation shall be deemed to be serving at the request of the corporation, where “subsidiary” means a corporation or other enterprise in which a majority of the voting stock or other voting power is owned or controlled by the corporation directly or through one or more subsidiaries, or a corporation or other enterprise which is consolidated on the corporation’s financial statements or is reported using the equity method. If the Washington Business Corporation Act is amended to authorize further indemnification of directors, then directors of the corporation shall be indemnified to the fullest extent permitted by the Washington Business Corporation Act, as so amended.

 

Section 8.2.     Director’s Burden of Proof and Procedure For Payment .

 

(a) The claimant shall be presumed to be entitled to indemnification under this Article upon submission of a written claim (and, in an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition, where the undertaking in (b) below has been tendered to the corporation) and thereafter the corporation shall have the burden of proof to overcome the presumption that the claimant is so entitled.


(b) The right to indemnification shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that the payment of such expenses in advance of the final disposition of a proceeding shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director, to repay all amounts so advanced if it shall ultimately be determined that such director is not entitled to be indemnified under this Article or otherwise.

 

Section 8.3.     Right of Claimant to Bring Suit .    If a claim under this Article is not paid in full by the corporation within sixty (60) days after a written claim has been received by the corporation, except in the case of a claim for expenses incurred in defending a proceeding in advance of its final disposition, in which case the applicable period shall be twenty (20) days, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, to the extent successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. Neither the failure of the corporation (including its board of directors, its shareholders or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of or reimbursement or advancement of expenses to the claimant is proper in the circumstances nor an actual determination by the corporation (including its board of directors, its shareholders or independent legal counsel) that the claimant is not entitled to indemnification or to the reimbursement or advancement of expenses shall be a defense to the action or create a presumption that the claimant is not so entitled.

 

Section 8.4.     Nonexclusivity of Rights .    The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, Bylaws, agreement, vote of shareholders or disinterested directors or otherwise.

 

Section 8.5.     Insurance, Contracts and Funding .    The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Washington Business Corporation Act. The corporation may, without any shareholder action, enter into contracts with such director or officer in furtherance of the provisions of this Article and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Article.

 

Section 8.6.     Indemnification of Officers, Employees and Agents of the Corporation .    The corporation shall provide indemnification and pay expenses in advance of the final disposition of a proceeding to officers and employees of the corporation with the same scope and effect (including without limitation coverage when


serving at the request of the corporation as directors, officers, employees or agents of other corporations, partnerships, joint ventures, trusts or other enterprises), and observing the same procedures, as the provisions of this Article with respect to the indemnification and advancement of expenses to directors of the corporation, except that determinations and authorizations described in RCW 23B.08.550(2) and (3) may also be made by a committee of officers authorized by the board of directors. Without limiting the situations in which a person shall be considered to be serving at the request of the corporation, an officer or employee who serves as a director, officer, employee or agent of another corporation or other enterprise that is a subsidiary of the corporation shall be deemed to be serving at the request of the corporation, where “subsidiary” has the meaning set forth in Section 8.1. At its sole option, the corporation may provide indemnification and pay expenses in advance of the final disposition of a proceeding to agents of the corporation (including without limitation providing such indemnification or advance to agents serving at the request of the corporation as directors, officers, employees or agents of other corporations, partnerships, joint ventures, trusts or other enterprises), provided that such indemnification or advance (i) is made pursuant to a written contract executed and delivered on behalf of the corporation prior to the occurrence of the conduct giving rise to the liability or expense for which indemnification or payment is being sought or (ii) is approved or ratified by the board of directors, a committee thereof, or a committee of officers authorized by the board of directors.

 

Section 8.7.     Contract Right .    The rights to indemnification conferred in this Article shall be a contract right and any amendment to or repeal of this Article shall not adversely affect any right or protection of a director of the corporation for or with respect to any acts or omissions of such director or officer occurring prior to such amendment or repeal.

 

Section 8.8.     Severability .    If any provision of this Article or any application thereof shall be invalid, unenforceable or contrary to applicable law, the remainder of this Article, or the application of such provision to persons or circumstances other than those as to which it is held invalid, unenforceable or contrary to applicable law, shall not be affected thereby and shall continue in full force and effect.

 

ARTICLE IX

BOOKS AND RECORDS

 

The corporation shall keep correct and complete books and records of account, stock transfer books, minutes of the proceedings of its shareholders and the board of directors and such other records as may be necessary or advisable.

 

ARTICLE X

FISCAL YEAR

 

The fiscal year of the corporation shall be the calendar year.


ARTICLE XI

VOTING OF SHARES OF ANOTHER CORPORATION

 

Shares of another corporation held by this corporation may be voted by the Chief Executive Officer, by the President of the Corporation, by the Senior Executive Vice President, by an Executive Vice President, or by a Senior Vice President, or by proxy appointment form executed by any of them, unless the directors by resolution shall designate some other person to vote the shares.

 

ARTICLE XII

AMENDMENTS TO BYLAWS

 

These bylaws may be altered, amended or repealed, and new bylaws may be adopted, by the board of directors, subject to the concurrent power of the shareholders, by at least two-thirds affirmative vote of the shares of the corporation entitled to vote thereon, to alter amend or repeal these bylaws or to adopt new bylaws.

EXHIBIT 31.1

 

CERTIFICATION

 

I, Kerry K. Killinger, certify that:

 

1.   I have reviewed this quarterly report on Form 10-Q of Washington Mutual, Inc.;

 

2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

  (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  (b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (c)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 14, 2003

         

/s/    K ERRY K. K ILLINGER


           

Kerry K. Killinger

Chairman, President and Chief Executive Officer

    of Washington Mutual, Inc.

EXHIBIT 31.2

 

CERTIFICATION

 

I, Thomas W. Casey, certify that:

 

1.   I have reviewed this quarterly report on Form 10-Q of Washington Mutual, Inc.;

 

2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

  (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  (b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (c)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 14, 2003

     

/s/    T HOMAS W. C ASEY

     
       

Thomas W. Casey

Executive Vice President and Chief Financial Officer

     of Washington Mutual, Inc.

EXHIBIT 32.1

 

WASHINGTON MUTUAL, INC.

 

Certification of the Chief Executive Officer

 

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Kerry K. Killinger, the Chief Executive Officer of Washington Mutual, Inc., does hereby certify that this report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

By:  

/s/    K ERRY K. K ILLINGER

 
   

Kerry K. Killinger

Chairman, President and Chief Executive Officer of Washington Mutual, Inc.

 

 

A signed original of this written statement required by Section 906 has been provided to Washington Mutual, Inc. and will be retained by Washington Mutual, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EXHIBIT 32.2

 

WASHINGTON MUTUAL, INC.

 

Certification of the Chief Financial Officer

 

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Thomas W. Casey, the Chief Financial Officer of Washington Mutual, Inc., does hereby certify that this report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

By:  

/s/    T HOMAS W. C ASEY

 
   

Thomas W. Casey

Executive Vice President and Chief Financial Officer

    of Washington Mutual, Inc.

 

 

A signed original of this written statement required by Section 906 has been provided to Washington Mutual, Inc. and will be retained by Washington Mutual, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

EXHIBIT 99.1

 

WASHINGTON MUTUAL, INC.

 

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

 

    

Three Months Ended

June 30,


    Six Months Ended
June 30,


 
     2003

    2002

    2003

    2002

 
     (dollars in millions)  

Earnings, including interest on deposits (1):

                                

Income before income tax expense

   $ 1,618     $ 1,562     $ 3,208     $ 3,069  

Fixed charges

     1,229       1,516       2,538       3,029  
    


 


 


 


     $ 2,847     $ 3,078     $ 5,746     $ 6,098  
    


 


 


 


Fixed charges(1):

                                

Interest expense

   $ 1,192     $ 1,485     $ 2,467     $ 2,972  

Estimated interest component of net rental expense

     37       31       71       57  
    


 


 


 


     $ 1,229     $ 1,516     $ 2,538     $ 3,029  
    


 


 


 


Ratio of earnings to fixed charges(2)

     2.32       2.03       2.26       2.01  
    


 


 


 


Earnings, excluding interest on deposits (1):

                                

Income before income tax expense

   $ 1,618     $ 1,562     $ 3,208     $ 3,069  

Fixed charges

     681       850       1,403       1,712  
    


 


 


 


     $ 2,299     $ 2,412     $ 4,611     $ 4,781  
    


 


 


 


Fixed charges(1):

                                

Interest expense

   $ 1,192     $ 1,485     $ 2,467     $ 2,972  

Less: interest on deposits

     (548 )     (666 )     (1,135 )     (1,317 )

Estimated interest component of net rental expense

     37       31       71       57  
    


 


 


 


     $ 681     $ 850     $ 1,403     $ 1,712  
    


 


 


 


Ratio of earnings to fixed charges (2)

     3.38       2.84       3.29       2.79  
    


 


 


 



(1)   As defined in Item 503(d) of Regulation S-K.
(2)   These computations are included herein in compliance with Securities and Exchange Commission Regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there were no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there were no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates.

EXHIBIT 99.2

 

WASHINGTON MUTUAL, INC.

 

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

AND PREFERRED DIVIDENDS

 

     Three Months Ended
June 30,


    Six Months Ended
June 30,


 
     2003

    2002

    2003

    2002

 
     (dollars in millions)  

Earnings, including interest on deposits (1):

                                

Income before income tax expense

   $ 1,618     $ 1,562     $ 3,208     $ 3,069  

Fixed charges

     1,229       1,516       2,538       3,029  
    


 


 


 


     $ 2,847     $ 3,078     $ 5,746     $ 6,098  
    


 


 


 


Preferred dividend requirement

   $     $ 2     $     $ 4  

Ratio of income before income tax expense to net income

     1.59       1.58       1.59       1.58  

Preferred dividends(2)

   $     $ 3     $     $ 6  
    


 


 


 


Fixed charges(1):

                                

Interest expense

   $ 1,192     $ 1,485     $ 2,467     $ 2,972  

Estimated interest component of net rental expense

     37       31       71       57  
    


 


 


 


       1,229       1,516     $ 2,538     $ 3,029  
    


 


 


 


Fixed charges and preferred dividends

   $ 1,229     $ 1,519     $ 2,538     $ 3,035  
    


 


 


 


Ratio of earnings to fixed charges and preferred dividends(3)

     2.32       2.03       2.26       2.01  
    


 


 


 


Earnings, excluding interest on deposits (1):

                                

Income before income tax expense

   $ 1,618     $ 1,562     $ 3,208     $ 3,069  

Fixed charges

     681       850       1,403       1,712  
    


 


 


 


     $ 2,299     $ 2,412     $ 4,611     $ 4,781  
    


 


 


 


Preferred dividends(2)

   $     $ 3     $     $ 6  

Fixed charges(1):

                                

Interest expense

   $ 1,192     $ 1,485     $ 2,467     $ 2,972  

Less: interest on deposits

     (548 )     (666 )     (1,135 )     (1,317 )

Estimated interest component of net rental expense

     37       31       71       57  
    


 


 


 


       681       850       1,403       1,712  
    


 


 


 


Fixed charges and preferred dividends

   $ 681     $ 853     $ 1,403     $ 1,718  
    


 


 


 


Ratio of earnings to fixed charges and preferred dividends(3)

     3.38       2.83       3.29       2.78  
    


 


 


 



(1)   As defined in Item 503(d) of Regulation S-K.
(2)   The preferred dividends were increased to amounts representing the pretax earnings that would be required to cover such dividend requirements.
(3)   These computations are included herein in compliance with Securities and Exchange Commission Regulations. However, management believes that fixed charge ratios are not meaningful measures for the business of the Company because of two factors. First, even if there were no change in net income, the ratios would decline with an increase in the proportion of income which is tax-exempt or, conversely, they would increase with a decrease in the proportion of income which is tax-exempt. Second, even if there were no change in net income, the ratios would decline if interest income and interest expense increase by the same amount due to an increase in the level of interest rates or, conversely, they would increase if interest income and interest expense decrease by the same amount due to a decrease in the level of interest rates.