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
(Registrants 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 issuers 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 Companys asserted right to the return of such shares. |
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003
Page
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1 | ||
Item 1. Financial Statements |
1 | |
Consolidated Statements of Income
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1 | |
Consolidated Statements of Financial Condition
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2 | |
3 | ||
Consolidated Statements of Cash Flows
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4 | |
6 | ||
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
17 | |
17 | ||
17 | ||
17 | ||
18 | ||
19 | ||
20 | ||
32 | ||
35 | ||
39 | ||
39 | ||
43 | ||
44 | ||
45 | ||
48 | ||
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
45 | |
Item 4. Controls and Procedures |
17 | |
55 | ||
55 | ||
55 |
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
June 30, |
Six Months Ended
June 30, |
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2003
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2002
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2003
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2002
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(in millions, except per share amounts) | ||||||||||||||||
Interest Income |
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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 | ||||||||||||
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Total interest income |
3,217 | 3,585 | 6,509 | 7,468 | ||||||||||||
Interest Expense |
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Deposits |
548 | 666 | 1,135 | 1,317 | ||||||||||||
Borrowings |
644 | 819 | 1,332 | 1,655 | ||||||||||||
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Total interest expense |
1,192 | 1,485 | 2,467 | 2,972 | ||||||||||||
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Net interest income |
2,025 | 2,100 | 4,042 | 4,496 | ||||||||||||
Provision for loan and lease losses |
118 | 160 | 243 | 335 | ||||||||||||
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Net interest income after provision for loan and lease losses |
1,907 | 1,940 | 3,799 | 4,161 | ||||||||||||
Noninterest Income |
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Home loan mortgage banking income (expense): |
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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 | ||||||||||||
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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 | ||||||||||||
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Total noninterest income |
1,629 | 1,208 | 3,035 | 2,016 | ||||||||||||
Noninterest Expense |
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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 | ||||||||||||
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Total noninterest expense |
1,918 | 1,586 | 3,626 | 3,108 | ||||||||||||
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Income before income taxes |
1,618 | 1,562 | 3,208 | 3,069 | ||||||||||||
Income taxes |
598 | 572 | 1,185 | 1,123 | ||||||||||||
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Net Income |
$ | 1,020 | $ | 990 | $ | 2,023 | $ | 1,946 | ||||||||
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Net Income Attributable to Common Stock |
$ | 1,020 | $ | 988 | $ | 2,023 | $ | 1,942 | ||||||||
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Net income per common share: |
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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
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
June 30,
2003 |
December 31,
2002 |
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(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: |
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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 | ||||||
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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 | ) | ||||
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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 | ||||||
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Total assets |
$ | 283,203 | $ | 268,298 | ||||
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Liabilities |
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Deposits: |
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Noninterest-bearing deposits |
$ | 46,505 | $ | 37,515 | ||||
Interest-bearing deposits |
119,952 | 118,001 | ||||||
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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 | ||||||
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Total liabilities |
262,142 | 248,164 | ||||||
Stockholders Equity |
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Common stock, no par value: 1,600,000,000 shares authorized, 924,237,997 and 944,046,787 shares issued and outstanding |
| | ||||||
Capital surpluscommon stock |
5,193 | 5,961 | ||||||
Accumulated other comprehensive income |
386 | 175 | ||||||
Retained earnings |
15,482 | 13,998 | ||||||
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Total stockholders equity |
21,061 | 20,134 | ||||||
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Total liabilities and stockholders equity |
$ | 283,203 | $ | 268,298 | ||||
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See Notes to Consolidated Financial Statements.
2
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
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(in millions) | |||||||||||||||||||
BALANCE, December 31, 2001 |
873.1 | $ | 3,178 | $ | (243 | ) | $ | 11,128 | $ | 14,063 | |||||||||
Comprehensive income: |
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Net income |
| | | 1,946 | 1,946 | ||||||||||||||
Other comprehensive income (loss), net of tax: |
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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 | ) | ||||||||||||
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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 | ||||||||||||||
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BALANCE, June 30, 2002 |
974.2 | $ | 7,035 | $ | (12 | ) | $ | 12,574 | $ | 19,597 | |||||||||
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BALANCE, December 31, 2002 |
944.0 | $ | 5,961 | $ | 175 | $ | 13,998 | $ | 20,134 | ||||||||||
Comprehensive income: |
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Net income |
| | | 2,023 | 2,023 | ||||||||||||||
Other comprehensive income (loss), net of tax: |
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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 | ) | ||||||||||||
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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 | ||||||||||||||
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BALANCE, June 30, 2003 |
924.2 | $ | 5,193 | $ | 386 | $ | 15,482 | $ | 21,061 | ||||||||||
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See Notes to Consolidated Financial Statements.
3
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, |
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2003
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2002
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(in millions) | ||||||||
Cash Flows from Operating Activities |
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Net income |
$ | 2,023 | $ | 1,946 | ||||
Adjustments to reconcile net income to net cash (used) provided by operating activities: |
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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 | ) | ||||
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Net cash (used) provided by operating activities |
(5,793 | ) | 13,137 | |||||
Cash Flows from Investing Activities |
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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 | ) | ||||
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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
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued from the previous page.)
Six Months Ended June 30, |
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2003
|
2002
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(in millions) | ||||||||
Cash Flows from Financing Activities |
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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 | ||||||
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Net cash provided (used) by financing activities |
12,229 | (13,325 | ) | |||||
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Increase in cash and cash equivalents |
180 | 1,146 | ||||||
Cash and cash equivalents, beginning of period |
7,208 | 3,563 | ||||||
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Cash and cash equivalents, end of period |
$ | 7,388 | $ | 4,709 | ||||
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Noncash Activities |
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Loans exchanged for mortgage-backed securities |
$ | 1,639 | $ | 2,518 | ||||
Real estate acquired through foreclosure |
239 | 212 | ||||||
Cash Paid During the Period for |
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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
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 Mutuals 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 entitys 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 Companys 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 CompensationTransition 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.
6
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Had compensation cost for the Companys stock-based compensation plans been determined using the fair value method consistent with Statement No. 123 for all periods presented, the Companys 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
|
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(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 | ) | ||||||||
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Pro forma net income attributable to common stock |
$ | 1,003 | $ | 974 | $ | 1,987 | $ | 1,916 | ||||||||
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Net income per common share: |
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Basic: |
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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), Guarantors 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 StatementsGuarantees 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.
7
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.
8
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
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. |
9
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
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 Companys 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 Companys 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 loans 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
10
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 Companys 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 Companys 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 Companys cost of funds based on interest rate sensitivity and maturity characteristics and determines how much each interest margin source contributes to the Companys total net interest income; (2) a calculation of the provision for loan and lease losses based on managements 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 Companys originated home loan mortgage-backed securities portfolio were transferred from the Home Loans and Insurance Services Group to the Companys 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 Groups 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 Groups services are offered through multiple delivery channels, including financial center stores, business banking centers, ATMs, the internet and 24-hour telephone banking centers.
11
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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.
12
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. |
13
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. |
14
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. |
15
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. |
16
MANAGEMENTS DISCUSSION AND ANALYSIS
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. |
An evaluation was performed under the supervision and with the participation of the Companys management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Companys disclosure controls and procedures as of June 30, 2003. Based on that evaluation, the Companys management, including the CEO and CFO, concluded that the Companys 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.
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.
17
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 Companys 2002 Annual Report on Form 10-K in the Critical Accounting Policies section of Managements Discussion and Analysis and in Note 1 to the Consolidated Financial StatementsSummary of Significant Accounting Policies.
Recently Issued Accounting Standards
Refer to Note 1 to the Consolidated Financial StatementsAccounting Policies for discussion of the recently issued accounting standards.
18
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 Companys 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. |
19
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 |
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.
20
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
(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 |
22
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
(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
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 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
25
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 Companys 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.
26
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.
27
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
|
||||||||||||||
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 StatementsSummary of Significant Accounting Policies in the Companys 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 Companys 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
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
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 Companys 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 Companys 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
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
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 Companys 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.
31
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.
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 | ||||
|
|
|
|
|
|
|
|
|
32
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 Companys 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. |
33
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 Companys institutional broker-dealer.
A majority of the increase in other assetsother was due to the sale in June 2003 of repurchase agreements where we had not yet settled with the
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
34
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.
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 StatementsOperating 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). |
35
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). |
36
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
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). |
37
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 | | |||||||||
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|
|
|
|
|
|
|||||||||||
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.
38
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.
Asset Securitization
We transform loans into securities, which are sold to investorsa 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 Companys 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 StatementsMortgage Banking Activities of the Companys 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 4Guarantees to the Consolidated Financial Statements.
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. Managements 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.
39
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 | ||||||
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|
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|
|
(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
40
$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 Companys 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 Companys 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.
41
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 | ||||||||||||
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|
|
|
|
|
|
|
|
|
|||||
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
42
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 Companys 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 managements estimate of credit losses inherent in the Companys 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 borrowers ability to repay, the estimated value of underlying collateral and general economic conditions. The Companys 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 StatementsSummary of Significant Accounting Policies in our 2002 Annual Report on Form 10-K for further discussion of the Allowance for Loan and Lease Losses.
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 Companys 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 Companys 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
43
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 Companys 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 Companys 2002 Annual Report on Form 10-K, BusinessRegulation and Supervision and Note 18 to the Consolidated Financial StatementsRegulatory 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.
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.
44
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 Companys 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 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 Managements 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.
45
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
46
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 Companys net income and net interest income sensitivity analysis methodologies are described in further detail within the Market Risk Management section of Managements 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.
47
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.
48
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 ratelong cap |
7.86 | % | 8.63 | % | 8.14 | % | 5.94 | % | | | | |||||||||||||||||||||
Weighted average strike rateshort 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.)
49
(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
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 ratelong cap |
7.86 | % | 8.63 | % | 8.14 | % | 5.94 | % | | | | |||||||||||||||||||||
Weighted average strike rateshort 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
(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. |
52
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 & Poors 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 Companys 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 Companys 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.
53
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
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 Companys 2003 Equity Incentive Plan | 512,168,570 | 115,924,281 | 6,363,828 | 141,974,491 | |||||
3. |
Approval of Companys 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 Companys 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 Mutuals results of operations for the first quarter ended March 31, 2003.
55
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) |
56
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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, shareholders agent or shareholders 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 shareholders 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 shareholders 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 corporations proxy statement was released to shareholders in connection with the previous years 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 years 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 shareholders 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 shareholders 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 oclock, 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 directors personal secretary or is sent by electronic mail, telephone or wireless equipment, which transmits a facsimile of the notice to the directors 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 directors 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 directors 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 directors 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 officers 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 Chairmans incapacity, the Chairmans duties shall be assumed by the Chief Executive Officer or, in the event of the Chief Executive Officers 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 corporations acquisition, retention and disposition of securities, loans and financial instruments (including but not limited to the corporations investments in and loans to the corporations subsidiaries), the power and duty of supervising the corporations 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 corporations 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. Directors 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 corporations 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. Directors 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 registrants 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 registrants 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 registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants 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 registrants 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 registrants internal control over financial reporting. |
Date: August 14, 2003 |
/s/ K ERRY K. K ILLINGER |
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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 registrants 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 registrants 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 registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants 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 registrants 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 registrants internal control over financial reporting. |
Date: August 14, 2003 |
/s/ T HOMAS W. C ASEY |
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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 |
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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 |
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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, |
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2003
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2002
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2003
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2002
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(dollars in millions) | ||||||||||||||||
Earnings, including interest on deposits (1): |
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Income before income tax expense |
$ | 1,618 | $ | 1,562 | $ | 3,208 | $ | 3,069 | ||||||||
Fixed charges |
1,229 | 1,516 | 2,538 | 3,029 | ||||||||||||
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$ | 2,847 | $ | 3,078 | $ | 5,746 | $ | 6,098 | |||||||||
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Fixed charges(1): |
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Interest expense |
$ | 1,192 | $ | 1,485 | $ | 2,467 | $ | 2,972 | ||||||||
Estimated interest component of net rental expense |
37 | 31 | 71 | 57 | ||||||||||||
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$ | 1,229 | $ | 1,516 | $ | 2,538 | $ | 3,029 | |||||||||
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Ratio of earnings to fixed charges(2) |
2.32 | 2.03 | 2.26 | 2.01 | ||||||||||||
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Earnings, excluding interest on deposits (1): |
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Income before income tax expense |
$ | 1,618 | $ | 1,562 | $ | 3,208 | $ | 3,069 | ||||||||
Fixed charges |
681 | 850 | 1,403 | 1,712 | ||||||||||||
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$ | 2,299 | $ | 2,412 | $ | 4,611 | $ | 4,781 | |||||||||
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Fixed charges(1): |
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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 | ||||||||||||
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$ | 681 | $ | 850 | $ | 1,403 | $ | 1,712 | |||||||||
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Ratio of earnings to fixed charges (2) |
3.38 | 2.84 | 3.29 | 2.79 | ||||||||||||
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(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, |
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2003
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2002
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2003
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2002
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(dollars in millions) | ||||||||||||||||
Earnings, including interest on deposits (1): |
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Income before income tax expense |
$ | 1,618 | $ | 1,562 | $ | 3,208 | $ | 3,069 | ||||||||
Fixed charges |
1,229 | 1,516 | 2,538 | 3,029 | ||||||||||||
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$ | 2,847 | $ | 3,078 | $ | 5,746 | $ | 6,098 | |||||||||
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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 | ||||||||
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Fixed charges(1): |
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Interest expense |
$ | 1,192 | $ | 1,485 | $ | 2,467 | $ | 2,972 | ||||||||
Estimated interest component of net rental expense |
37 | 31 | 71 | 57 | ||||||||||||
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1,229 | 1,516 | $ | 2,538 | $ | 3,029 | |||||||||||
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Fixed charges and preferred dividends |
$ | 1,229 | $ | 1,519 | $ | 2,538 | $ | 3,035 | ||||||||
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Ratio of earnings to fixed charges and preferred dividends(3) |
2.32 | 2.03 | 2.26 | 2.01 | ||||||||||||
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Earnings, excluding interest on deposits (1): |
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Income before income tax expense |
$ | 1,618 | $ | 1,562 | $ | 3,208 | $ | 3,069 | ||||||||
Fixed charges |
681 | 850 | 1,403 | 1,712 | ||||||||||||
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$ | 2,299 | $ | 2,412 | $ | 4,611 | $ | 4,781 | |||||||||
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Preferred dividends(2) |
$ | | $ | 3 | $ | | $ | 6 | ||||||||
Fixed charges(1): |
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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 | ||||||||||||
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681 | 850 | 1,403 | 1,712 | |||||||||||||
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Fixed charges and preferred dividends |
$ | 681 | $ | 853 | $ | 1,403 | $ | 1,718 | ||||||||
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Ratio of earnings to fixed charges and preferred dividends(3) |
3.38 | 2.83 | 3.29 | 2.78 | ||||||||||||
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(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. |