UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
Commission File Number 1-14667
WASHINGTON MUTUAL, INC.
(Exact name of registrant as specified in its charter)
Washington | 91-1653725 | |
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification Number) |
|
1201 Third Avenue, Seattle, Washington |
|
98101 |
(Address of principal executive offices) | (Zip Code) |
(206) 461-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o
The number of shares outstanding of the issuer's classes of common stock as of October 29, 2004:
Common Stock 873,079,411 (1)
(1) Includes 6,000,000 shares held in escrow.
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
|
Page
|
|||
---|---|---|---|---|
PART I Financial Information | 1 | |||
Item 1. Financial Statements | 1 | |||
Consolidated Statements of Income
Three and Nine Months Ended September 30, 2004 and 2003 |
1 | |||
Consolidated Statements of Financial Condition
September 30, 2004 and December 31, 2003 |
3 | |||
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Nine Months Ended September 30, 2004 and 2003 |
4 | |||
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2004 and 2003 |
5 | |||
Notes to Consolidated Financial Statements | 7 | |||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
21 |
||
Cautionary Statements | 21 | |||
Overview | 22 | |||
Controls and Procedures | 24 | |||
Critical Accounting Policies | 25 | |||
Recently Issued Accounting Standards | 25 | |||
Summary Financial Data | 26 | |||
Earnings Performance from Continuing Operations | 27 | |||
Review of Financial Condition | 39 | |||
Operating Segments | 42 | |||
Off-Balance Sheet Activities | 47 | |||
Asset Quality | 47 | |||
Liquidity | 50 | |||
Capital Adequacy | 52 | |||
Market Risk Management | 52 | |||
Maturity and Repricing Information | 56 | |||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 52 | |||
Item 4. Controls and Procedures | 24 | |||
PART II Other Information |
|
63 |
||
Item 1. Legal Proceedings | 63 | |||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 63 | |||
Item 4. Submission of Matters to a Vote of Security Holders | 63 | |||
Item 6. Exhibits | 63 |
i
PART I FINANCIAL INFORMATION
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
2004
|
2003
|
|||||||||||||
|
(in millions, except per share amounts)
|
||||||||||||||||
Interest Income | |||||||||||||||||
Loans held for sale | $ | 341 | $ | 689 | $ | 1,079 | $ | 2,061 | |||||||||
Loans held in portfolio | 2,226 | 1,843 | 6,404 | 5,701 | |||||||||||||
Available-for-sale securities | 163 | 401 | 607 | 1,384 | |||||||||||||
Other interest and dividend income | 81 | 65 | 194 | 218 | |||||||||||||
|
|
|
|
||||||||||||||
Total interest income | 2,811 | 2,998 | 8,284 | 9,364 | |||||||||||||
Interest Expense | |||||||||||||||||
Deposits | 539 | 538 | 1,440 | 1,674 | |||||||||||||
Borrowings | 532 | 551 | 1,578 | 1,803 | |||||||||||||
|
|
|
|
||||||||||||||
Total interest expense | 1,071 | 1,089 | 3,018 | 3,477 | |||||||||||||
|
|
|
|
||||||||||||||
Net interest income | 1,740 | 1,909 | 5,266 | 5,887 | |||||||||||||
Provision for loan and lease losses | 56 | 76 | 172 | 244 | |||||||||||||
|
|
|
|
||||||||||||||
Net interest income after provision for loan and lease losses | 1,684 | 1,833 | 5,094 | 5,643 | |||||||||||||
Noninterest Income | |||||||||||||||||
Home loan mortgage banking income (expense): | |||||||||||||||||
Loan servicing fees | 482 | 542 | 1,469 | 1,748 | |||||||||||||
Amortization of mortgage servicing rights | (589 | ) | (665 | ) | (1,884 | ) | (2,665 | ) | |||||||||
Net mortgage servicing rights valuation adjustments | 165 | 368 | (493 | ) | 96 | ||||||||||||
Revaluation gain (loss) from derivatives | 107 | (172 | ) | 969 | 643 | ||||||||||||
Net settlement income from certain interest-rate swaps | 126 | 130 | 485 | 354 | |||||||||||||
Gain (loss) from mortgage loans | 210 | (204 | ) | 494 | 1,186 | ||||||||||||
Other home loan mortgage banking income (expense), net | 3 | 146 | (5 | ) | 19 | ||||||||||||
|
|
|
|
||||||||||||||
Total home loan mortgage banking income | 504 | 145 | 1,035 | 1,381 | |||||||||||||
Depositor and other retail banking fees | 514 | 471 | 1,484 | 1,346 | |||||||||||||
Securities fees and commissions | 104 | 103 | 315 | 291 | |||||||||||||
Insurance income | 61 | 45 | 179 | 139 | |||||||||||||
Portfolio loan related income | 109 | 116 | 299 | 344 | |||||||||||||
Gain from other available-for-sale securities | 11 | 557 | 73 | 689 | |||||||||||||
Gain (loss) on extinguishment of borrowings | (147 | ) | 7 | (237 | ) | (129 | ) | ||||||||||
Other income | 108 | 120 | 247 | 323 | |||||||||||||
|
|
|
|
||||||||||||||
Total noninterest income | 1,264 | 1,564 | 3,395 | 4,384 | |||||||||||||
Noninterest Expense | |||||||||||||||||
Compensation and benefits | 841 | 837 | 2,589 | 2,427 | |||||||||||||
Occupancy and equipment | 404 | 352 | 1,197 | 1,024 | |||||||||||||
Telecommunications and outsourced information services | 118 | 150 | 364 | 429 | |||||||||||||
Depositor and other retail banking losses | 54 | 35 | 134 | 113 | |||||||||||||
Amortization of other intangible assets | 14 | 15 | 42 | 46 | |||||||||||||
Advertising and promotion | 76 | 51 | 219 | 190 | |||||||||||||
Professional fees | 34 | 69 | 105 | 189 | |||||||||||||
Other expense | 328 | 301 | 947 | 888 | |||||||||||||
|
|
|
|
||||||||||||||
Total noninterest expense | 1,869 | 1,810 | 5,597 | 5,306 | |||||||||||||
|
|
|
|
||||||||||||||
Income from continuing operations before income taxes | 1,079 | 1,587 | 2,892 | 4,721 | |||||||||||||
Income taxes | 405 | 588 | 1,081 | 1,749 | |||||||||||||
|
|
|
|
||||||||||||||
Income from continuing operations, net of taxes | 674 | 999 | 1,811 | 2,972 | |||||||||||||
|
|
|
|
||||||||||||||
Discontinued Operations | |||||||||||||||||
Income (loss) from discontinued operations before income taxes | | 38 | (32 | ) | 102 | ||||||||||||
Gain on disposition of discontinued operations | | | 676 | | |||||||||||||
Income taxes | | 14 | 245 | 37 | |||||||||||||
|
|
|
|
||||||||||||||
Income from discontinued operations, net of taxes | | 24 | 399 | 65 | |||||||||||||
|
|
|
|
||||||||||||||
Net Income | $ | 674 | $ | 1,023 | $ | 2,210 | $ | 3,037 | |||||||||
|
|
|
|
(This table is continued on the next page.)
See Notes to Consolidated Financial Statements.
1
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(UNAUDITED)
(This table is continued from the previous page.)
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
2004
|
2003
|
||||||||||
|
(in millions, except per share amounts)
|
|||||||||||||
Basic Earnings Per Common Share: | ||||||||||||||
Income from continuing operations | $ | 0.78 | $ | 1.11 | $ | 2.10 | $ | 3.27 | ||||||
Income from discontinued operations, net | | 0.03 | 0.46 | 0.07 | ||||||||||
|
|
|
|
|||||||||||
Net Income | 0.78 | 1.14 | 2.56 | 3.34 | ||||||||||
Diluted Earnings Per Common Share: | ||||||||||||||
Income from continuing operations | $ | 0.76 | $ | 1.09 | $ | 2.05 | $ | 3.20 | ||||||
Income from discontinued operations, net | | 0.02 | 0.45 | 0.07 | ||||||||||
|
|
|
|
|||||||||||
Net Income | 0.76 | 1.11 | 2.50 | 3.27 | ||||||||||
Dividends declared per common share |
|
|
0.44 |
|
|
0.40 |
|
|
1.29 |
|
|
0.99 |
||
Basic weighted average number of common shares outstanding (in thousands) | 862,004 | 899,579 | 861,933 | 910,449 | ||||||||||
Diluted weighted average number of common shares outstanding (in thousands) | 882,323 | 918,372 | 884,068 | 927,470 |
See Notes to Consolidated Financial Statements.
2
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
|
September 30,
2004 |
December 31,
2003 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(dollars in millions)
|
|||||||||
Assets | ||||||||||
Cash and cash equivalents | $ | 4,689 | $ | 7,018 | ||||||
Federal funds sold and securities purchased under agreements to resell | 30 | 19 | ||||||||
Available-for-sale securities, total amortized cost of $16,312 and $36,858: | ||||||||||
Mortgage-backed securities (including assets pledged of $3,483 and $3,642) | 10,168 | 10,695 | ||||||||
Investment securities (including assets pledged of $5,256 and $19,353) | 6,319 | 26,012 | ||||||||
|
|
|||||||||
Total available-for-sale securities | 16,487 | 36,707 | ||||||||
Loans held for sale | 29,184 | 20,837 | ||||||||
Loans held in portfolio | 206,158 | 175,150 | ||||||||
Allowance for loan and lease losses | (1,322 | ) | (1,250 | ) | ||||||
|
|
|||||||||
Total loans held in portfolio, net of allowance for loan and lease losses | 204,836 | 173,900 | ||||||||
Investment in Federal Home Loan Banks | 3,883 | 3,462 | ||||||||
Mortgage servicing rights | 6,112 | 6,354 | ||||||||
Goodwill | 6,196 | 6,196 | ||||||||
Assets of discontinued operations | | 4,184 | ||||||||
Other assets | 17,411 | 16,501 | ||||||||
|
|
|||||||||
Total assets | $ | 288,828 | $ | 275,178 | ||||||
|
|
|||||||||
Liabilities |
|
|
|
|
|
|
|
|||
Deposits: | ||||||||||
Noninterest-bearing deposits | $ | 32,250 | $ | 29,968 | ||||||
Interest-bearing deposits | 136,445 | 123,213 | ||||||||
|
|
|||||||||
Total deposits | 168,695 | 153,181 | ||||||||
Federal funds purchased and commercial paper | 7,025 | 2,011 | ||||||||
Securities sold under agreements to repurchase | 15,611 | 28,333 | ||||||||
Advances from Federal Home Loan Banks | 59,758 | 48,330 | ||||||||
Other borrowings | 12,747 | 15,483 | ||||||||
Liabilities of discontinued operations | | 3,578 | ||||||||
Other liabilities | 4,172 | 4,520 | ||||||||
|
|
|||||||||
Total liabilities | 268,008 | 255,436 | ||||||||
Stockholders' Equity |
|
|
|
|
|
|
|
|||
Common stock, no par value: 1,600,000,000 shares authorized, 873,085,462 and 880,985,764 shares issued and outstanding | | | ||||||||
Capital surplus common stock | 3,270 | 3,682 | ||||||||
Accumulated other comprehensive loss | (124 | ) | (524 | ) | ||||||
Retained earnings | 17,674 | 16,584 | ||||||||
|
|
|||||||||
Total stockholders' equity | 20,820 | 19,742 | ||||||||
|
|
|||||||||
Total liabilities and stockholders' equity | $ | 288,828 | $ | 275,178 | ||||||
|
|
See Notes to Consolidated Financial Statements.
3
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
|
Number
of Shares |
Capital
Surplus- Common Stock |
Accumulated
Other Comprehensive Income (Loss) |
Retained
Earnings |
Total
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in millions)
|
||||||||||||||||
BALANCE, December 31, 2002 | 944.0 | $ | 5,961 | $ | 175 | $ | 13,925 | $ | 20,061 | ||||||||
Comprehensive income: | |||||||||||||||||
Net income | | | | 3,037 | 3,037 | ||||||||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||||
Net unrealized loss from securities arising during the period, net of reclassification adjustments | | | (707 | ) | | (707 | ) | ||||||||||
Net unrealized gain from cash flow hedging instruments | | | 117 | | 117 | ||||||||||||
Minimum pension liability adjustment | | | (4 | ) | | (4 | ) | ||||||||||
|
|||||||||||||||||
Total comprehensive income | 2,443 | ||||||||||||||||
Cash dividends declared on common stock | | | | (906 | ) | (906 | ) | ||||||||||
Cash dividends returned (1) | | | | 8 | 8 | ||||||||||||
Common stock repurchased and retired | (39.0 | ) | (1,430 | ) | | | (1,430 | ) | |||||||||
Common stock returned from escrow | | | | | | ||||||||||||
Common stock issued | 8.9 | 265 | | | 265 | ||||||||||||
|
|
|
|
|
|||||||||||||
BALANCE, September 30, 2003 |
|
913.9 |
|
$ |
4,796 |
|
$ |
(419 |
) |
$ |
16,064 |
|
$ |
20,441 |
|
||
|
|
|
|
|
|||||||||||||
BALANCE, December 31, 2003 |
|
881.0 |
|
$ |
3,682 |
|
$ |
(524 |
) |
$ |
16,584 |
|
$ |
19,742 |
|
||
Comprehensive income: | |||||||||||||||||
Net income | | | | 2,210 | 2,210 | ||||||||||||
Other comprehensive income, net of tax: | |||||||||||||||||
Net unrealized gain from securities arising during the period, net of reclassification adjustments | | | 201 | | 201 | ||||||||||||
Net unrealized gain from cash flow hedging instruments | | | 205 | | 205 | ||||||||||||
Minimum pension liability adjustment | | | (6 | ) | | (6 | ) | ||||||||||
|
|||||||||||||||||
Total comprehensive income | 2,610 | ||||||||||||||||
Cash dividends declared on common stock | | | | (1,120 | ) | (1,120 | ) | ||||||||||
Common stock repurchased and retired | (16.1 | ) | (712 | ) | | | (712 | ) | |||||||||
Common stock issued | 8.2 | 300 | | | 300 | ||||||||||||
|
|
|
|
|
|||||||||||||
BALANCE, September 30, 2004 | 873.1 | $ | 3,270 | $ | (124 | ) | $ | 17,674 | $ | 20,820 | |||||||
|
|
|
|
|
See Notes to Consolidated Financial Statements.
4
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
Nine Months Ended
September 30, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
||||||||
|
(in millions)
|
|||||||||
Cash Flows from Operating Activities | ||||||||||
Net income | $ | 2,210 | $ | 3,037 | ||||||
Income from discontinued operations, net of taxes | (399 | ) | (65 | ) | ||||||
|
|
|||||||||
Income from continuing operations, net of taxes | 1,811 | 2,972 | ||||||||
Adjustments to reconcile income from continuing operations to net cash used by operating activities: | ||||||||||
Provision for loan and lease losses | 172 | 244 | ||||||||
Gain from mortgage loans | (494 | ) | (1,186 | ) | ||||||
Gain from available-for-sale securities | (73 | ) | (949 | ) | ||||||
Revaluation gain from derivatives | (969 | ) | (643 | ) | ||||||
Loss on extinguishment of borrowings | 237 | 129 | ||||||||
Depreciation and amortization | 2,412 | 2,930 | ||||||||
Provision for mortgage servicing rights impairment (recovery) | 646 | (96 | ) | |||||||
Stock dividends from Federal Home Loan Banks | (40 | ) | (101 | ) | ||||||
Origination and purchases of loans held for sale, net of principal payments | (112,179 | ) | (279,301 | ) | ||||||
Proceeds from sales of loans held for sale | 100,962 | 274,626 | ||||||||
Increase in other assets | (697 | ) | (1,663 | ) | ||||||
(Decrease) increase in other liabilities | (748 | ) | 700 | |||||||
|
|
|||||||||
Net cash used by operating activities | (8,960 | ) | (2,338 | ) | ||||||
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|||
Purchases of securities | (1,021 | ) | (22,344 | ) | ||||||
Proceeds from sales and maturities of mortgage-backed securities | 1,399 | 8,907 | ||||||||
Proceeds from sales and maturities of other available-for-sale securities | 20,090 | 14,693 | ||||||||
Principal payments on securities | 2,617 | 7,816 | ||||||||
Purchases of Federal Home Loan Bank stock | (616 | ) | (279 | ) | ||||||
Redemption of Federal Home Loan Bank stock | 235 | 663 | ||||||||
Proceeds from sale of mortgage servicing rights | | 406 | ||||||||
Origination and purchases of loans held in portfolio | (92,079 | ) | (80,036 | ) | ||||||
Principal payments on loans held in portfolio | 59,546 | 64,411 | ||||||||
Proceeds from sales of loans held in portfolio | 386 | 708 | ||||||||
Proceeds from sales of foreclosed assets | 355 | 377 | ||||||||
Net (increase) decrease in federal funds sold and securities purchased under agreements to resell | (11 | ) | 2,003 | |||||||
Purchases of premises and equipment, net | (484 | ) | (748 | ) | ||||||
Proceeds from sale of discontinued operations, net of cash sold | 1,223 | | ||||||||
|
|
|||||||||
Net cash used by investing activities | (8,360 | ) | (3,423 | ) |
(The Consolidated Statements of Cash Flows are continued on the next page.)
See Notes to Consolidated Financial Statements.
5
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(Continued from the previous page.)
|
Nine Months Ended
September 30, |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
|||||||
|
(in millions)
|
||||||||
Cash Flows from Financing Activities | |||||||||
Net increase in deposits | $ | 15,514 | $ | 8,625 | |||||
Net (decrease) increase in short-term borrowings | (8,180 | ) | 8,311 | ||||||
Proceeds from long-term borrowings | 3,227 | 8,751 | |||||||
Repayments of long-term borrowings | (5,331 | ) | (11,656 | ) | |||||
Proceeds from advances from Federal Home Loan Banks | 62,095 | 62,118 | |||||||
Repayments of advances from Federal Home Loan Banks | (50,752 | ) | (69,622 | ) | |||||
Cash dividends paid on common stock | (1,120 | ) | (906 | ) | |||||
Repurchase of common stock | (712 | ) | (1,430 | ) | |||||
Other | 250 | 230 | |||||||
|
|
||||||||
Net cash provided by financing activities | 14,991 | 4,421 | |||||||
|
|
||||||||
Decrease in cash and cash equivalents | (2,329 | ) | (1,340 | ) | |||||
Cash and cash equivalents, beginning of period | 7,018 | 7,084 | |||||||
|
|
||||||||
Cash and cash equivalents, end of period | $ | 4,689 | $ | 5,744 | |||||
|
|
||||||||
Noncash Activities |
|
|
|
|
|
|
|
||
Loans exchanged for mortgage-backed securities | $ | 2,828 | $ | 2,179 | |||||
Real estate acquired through foreclosure | 329 | 359 | |||||||
Cash Paid During the Period for |
|
|
|
|
|
|
|
||
Interest on deposits | $ | 1,368 | $ | 1,642 | |||||
Interest on borrowings | 1,651 | 1,886 | |||||||
Income taxes | 1,962 | 2,658 |
See Notes to Consolidated Financial Statements.
6
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Accounting Policies
Basis of Presentation
The accompanying Consolidated Financial Statements are unaudited and include the accounts of Washington Mutual, Inc. and its subsidiaries ("Washington Mutual" or the "Company"). Washington Mutual's accounting and financial reporting policies are in accordance with accounting principles generally accepted in the United States of America. The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for such periods. Such adjustments are of a normal recurring nature unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. The interim financial information should be read in conjunction with Washington Mutual, Inc.'s 2003 Annual Report on Form 10-K/A. Certain prior period amounts have been reclassified to conform to current period classifications.
Recently Adopted Accounting Standards
In December 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46R ("FIN 46R"), Consolidation of Variable Interest Entities , an interpretation of Accounting Research Bulletin No. 51. FIN 46R is a revision to the original FIN 46 that addresses the consolidation of certain variable interest entities. The revision clarifies how variable interest entities should be identified and evaluated for consolidation purposes. The Company applied FIN 46 as of July 1, 2003 and FIN 46R for the quarter ended March 31, 2004. The application of FIN 46R did not have a material effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.
In March 2004, Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 105, Loan Commitments Accounted for as Derivative Instruments ("SAB 105") was issued, which provides guidance regarding loan commitments that are accounted for as derivative instruments under Statement of Financial Accounting Standards ("Statement") No. 133 (as amended), Accounting for Derivative Instruments and Hedging Activities . In this Bulletin, the SEC stated that the amount of the expected servicing rights should not be included when determining the fair value of interest rate lock commitments that are considered to be derivatives. This guidance must be applied to rate locks issued after March 31, 2004. In anticipation of this Bulletin, the Company prospectively changed its accounting policy for such rate lock commitments on January 1, 2004. Under the new policy, gains resulting from the valuation of expected servicing rights that had previously been recorded at the issuance of the rate lock are recognized when the underlying loans are sold.
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") was enacted into law. On May 19, 2004, the FASB issued Staff Position ("FSP") No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 , which supersedes FSP 106-1 which was issued on January 12, 2004. FSP 106-1 permitted employers that sponsor postretirement benefit plans that provide prescription drug benefits to retirees to make a one-time election to defer the accounting impact, if any, of the Act. The Company elected to defer recognition of the impact of the provisions of the Act as permitted by FSP 106-1. FSP 106-2 provides two transition options for companies that previously elected to defer the impact of the Act, a retroactive application to the date of enactment or a prospective application from the date of adoption. The Company adopted FSP 106-2 as of July 1, 2004 and has elected to prospectively apply the provisions of the Act. The Company has determined the passage of the Act does not significantly affect the Company's retiree drug plan benefit obligations. Consequently, as permitted by FSP 106-2, the Company will incorporate the effects of the Act in its next measurement of plan assets and benefit obligations in
7
December 2004, and as such, the net periodic benefit cost disclosed in Note 6 "Employee Benefits Programs" does not reflect any amount associated with the subsidy under the Act. The adoption of FSP 106-2 did not have a material effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.
In March of 2004, the Emerging Issues Task Force ("EITF") reached consensus on the guidance provided in EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments . Among other investments, this guidance is applicable to debt and equity securities that are within the scope of Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities . Paragraph 10 of EITF 03-1 specifies that an impairment would be considered other-than-temporary unless (a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment and (b) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. A company's liquidity and capital requirements should be considered when assessing its intent and ability to hold an investment for a reasonable period of time that would allow the fair value of the investment to recover up to or beyond its cost. Although not presumptive, a pattern of selling investments prior to the forecasted fair value recovery may call into question a company's intent. In addition, the severity and duration of the impairment should also be considered when determining whether the impairment is other-than-temporary. This guidance was effective for reporting periods beginning after June 15, 2004 with the exception of paragraphs 10 - 20 of EITF 03-1, which will be deliberated further. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. After the FASB completes their deliberations with respect to paragraphs 10 - 20, the Company will evaluate the potential impact of those paragraphs on its process for determining whether other-than-temporary declines exist within its debt and equity investment securities portfolio. The outcome of this deliberation may accelerate the recognition of losses from declines in value on debt securities due to interest rates; however, it is not anticipated to have a significant impact on stockholders' equity as changes in market value of available-for-sale securities are already included in Accumulated Other Comprehensive Income.
Recently Issued Accounting Standards
In September of 2004, the EITF reached consensus on the guidance provided in EITF Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per Share . EITF 04-8 addresses the issue of when the dilutive effect of contingently convertible debt instruments should be included in diluted earnings per share. The new guidance is effective for reporting periods ending after December 15, 2004, however at this time the Company does not expect the adoption of EITF 04-8 to have any effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition as the Company has not issued contingently convertible debt instruments.
Mortgage Servicing Rights Hedging Activities
The Company began applying fair value hedge accounting treatment, as prescribed by Statement No. 133, as of April 1, 2004 to most of its mortgage servicing rights ("MSR"). Applying fair value hedge accounting to the MSR results in the changes in fair value of the hedging derivatives being netted against the changes in fair value of the hedged MSR, to the extent the hedge relationship is determined to be highly effective. We use standard statistical methods of correlation to determine if the results of the changes in value of the hedging derivative and the hedged MSR meet the Statement No. 133 criteria for a highly effective hedge accounting relationship. Unlike the lower of cost or market value accounting methodology, the recorded value of the hedged MSR may exceed its original cost basis. The portion of the
8
MSR in which the hedging relationship is determined not to be highly effective will continue to be accounted for at the lower of aggregate cost or market value.
Hedge ineffectiveness from fair value hedges of MSR as well as any provision for impairment or reversal of such provision recognized on the MSR that are accounted for at the lower of aggregate cost or market value are reported as mortgage servicing rights valuation adjustments on the Consolidated Statements of Income.
The change in fair value of certain MSR risk management derivatives in which the Company either has not attempted to achieve, or has attempted but did not achieve, hedge accounting treatment under Statement No. 133 is included in revaluation gain (loss) from derivatives on the Consolidated Statements of Income.
Stock-Based Compensation
In accordance with the transitional guidance of Statement No. 148, Accounting for Stock-Based Compensation Transition and Disclosure , an amendment of FASB Statement No. 123 , the Company elected to prospectively apply the fair value method of accounting for stock-based awards granted subsequent to December 31, 2002. For such awards, fair value is estimated using a binomial option pricing model, with compensation expense recognized in earnings over the required service period. Stock-based awards granted prior to January 1, 2003, and not modified after December 31, 2002, will continue to be accounted for under Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees . The pro forma presentation of what the impact to the financial statements would be if these awards were accounted for on the fair value basis will continue to be disclosed in the Notes to Consolidated Financial Statements until the last of those awards vest in 2005.
Had compensation cost for the Company's stock-based compensation plans been determined using the fair value method consistent with Statement No. 123 for all periods presented, the Company's net income and net income per common share would have been reduced to the pro forma amounts indicated below:
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
2004
|
2003
|
||||||||||
|
(dollars in millions, except per share amounts)
|
|||||||||||||
Net income | $ | 674 | $ | 1,023 | $ | 2,210 | $ | 3,037 | ||||||
Add back: Stock-based employee compensation expense included in reported net income, net of related tax effects | 14 | 10 | 54 | 43 | ||||||||||
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects | (26 | ) | (28 | ) | (87 | ) | (97 | ) | ||||||
|
|
|
|
|||||||||||
Pro forma net income | $ | 662 | $ | 1,005 | $ | 2,177 | $ | 2,983 | ||||||
|
|
|
|
|||||||||||
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: | ||||||||||||||
As reported | $ | 0.78 | $ | 1.14 | $ | 2.56 | $ | 3.34 | ||||||
Pro forma | 0.77 | 1.12 | 2.52 | 3.28 | ||||||||||
Diluted: | ||||||||||||||
As reported | 0.76 | 1.11 | 2.50 | 3.27 | ||||||||||
Pro forma | 0.75 | 1.09 | 2.46 | 3.22 |
9
Note 2: Discontinued Operations
During the first quarter of 2004 the Company sold its subsidiary, Washington Mutual Finance Corporation. Accordingly, Washington Mutual Finance has been accounted for as a discontinued operation and the results of operations and cash flows have been removed from the Company's results of continuing operations for all periods presented on the Consolidated Statements of Income, Cash Flows and Notes to the Consolidated Financial Statements, unless otherwise noted. Likewise, the assets and liabilities of Washington Mutual Finance are presented under separate captions on the Consolidated Statements of Financial Condition. The results from discontinued operations amounted to $399 million, net of tax, which includes a pretax gain of $676 million ($420 million, net of tax) that was recorded upon the sale of Washington Mutual Finance.
Note 3: Earnings Per Share
Information used to calculate earnings per share was as follows:
|
Three Months
Ended September 30, |
Nine Months
Ended September 30, |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
2004
|
2003
|
||||||
Weighted average shares (in thousands) | ||||||||||
Basic weighted average number of common shares outstanding | 862,004 | 899,579 | 861,933 | 910,449 | ||||||
Dilutive effect of potential common shares from: | ||||||||||
Awards granted under equity incentive programs | 11,744 | 9,774 | 12,644 | 8,860 | ||||||
Trust Preferred Income Equity Redeemable Securities SM | 8,575 | 9,019 | 9,491 | 8,161 | ||||||
|
|
|
|
|||||||
Diluted weighted average number of common shares outstanding | 882,323 | 918,372 | 884,068 | 927,470 | ||||||
|
|
|
|
For the three and nine months ended September 30, 2004, options to purchase an additional 11,599,147 and 1,657,852 shares of common stock were outstanding, but were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect. Likewise, for the three and nine months ended September 30, 2003, options to purchase an additional 54,700 and 1,891,409 shares of common stock were outstanding, but were not included in the computation of diluted earnings per share because their inclusion also 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.), 6 million shares of common stock, with an assigned value of $18.4944 per share, are being held in escrow for the benefit of certain of the former investors in Keystone Holdings, and their transferees. During 2003, the number of escrow shares was reduced from 18 million to 6 million as a result of the return and cancellation of 12 million shares to the Company. The escrow will expire on December 20, 2008, subject to certain limited extensions. The conditions under which these shares can be released from escrow are related to the outcome of certain litigation and not based on future earnings or market prices. At September 30, 2004, the conditions for releasing the shares from escrow had not occurred, and therefore none of those shares were included in the above computations.
10
Note 4: Mortgage Banking Activities
Changes in the portfolio of loans serviced for others were as follows:
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
2004
|
2003
|
|||||||||||
|
(in millions)
|
||||||||||||||
Balance, beginning of period | $ | 558,388 | $ | 583,823 | $ | 582,669 | $ | 604,504 | |||||||
Home loans: | |||||||||||||||
Additions | 29,699 | 105,883 | 105,909 | 291,391 | |||||||||||
Sales | | | | (2,960 | ) | ||||||||||
Loan payments and other | (37,035 | ) | (111,834 | ) | (139,481 | ) | (315,257 | ) | |||||||
Net change in commercial real estate loans serviced for others | 193 | (50 | ) | 2,148 | 144 | ||||||||||
|
|
|
|
||||||||||||
Balance, end of period | $ | 551,245 | $ | 577,822 | $ | 551,245 | $ | 577,822 | |||||||
|
|
|
|
Changes in the balance of MSR, net of the valuation allowance, were as follows:
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
2004
|
2003
|
|||||||||||
|
(in millions)
|
||||||||||||||
Balance, beginning of period | $ | 7,501 | $ | 4,598 | $ | 6,354 | $ | 5,341 | |||||||
Home loans: | |||||||||||||||
Additions | 348 | 1,587 | 1,463 | 3,502 | |||||||||||
Amortization | (589 | ) | (665 | ) | (1,884 | ) | (2,665 | ) | |||||||
(Impairment) reversal | (266 | ) | 368 | (646 | ) | 96 | |||||||||
Statement No. 133 MSR accounting valuation adjustments | (885 | ) | | 822 | | ||||||||||
Sales | | (18 | ) | | (406 | ) | |||||||||
Net change in commercial real estate MSR | 3 | | 3 | 2 | |||||||||||
|
|
|
|
||||||||||||
Balance, end of period (1) | $ | 6,112 | $ | 5,870 | $ | 6,112 | $ | 5,870 | |||||||
|
|
|
|
Changes in the valuation allowance for MSR were as follows:
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
2004
|
2003
|
||||||||||
|
(in millions)
|
|||||||||||||
Balance, beginning of period | $ | 2,417 | $ | 3,444 | $ | 2,435 | $ | 4,521 | ||||||
Impairment (reversal) | 266 | (368 | ) | 646 | (96 | ) | ||||||||
Other than temporary impairment | (22 | ) | | (410 | ) | (1,115 | ) | |||||||
Sales | | (1 | ) | | (235 | ) | ||||||||
Other | (8 | ) | | (18 | ) | | ||||||||
|
|
|
|
|||||||||||
Balance, end of period | $ | 2,653 | $ | 3,075 | $ | 2,653 | $ | 3,075 | ||||||
|
|
|
|
11
At September 30, 2004, the expected weighted average life of the Company's MSR was 3.7 years. Projected amortization expense for the gross carrying value of MSR at September 30, 2004 is estimated to be as follows (in millions):
Remainder of 2004 | $ | 602 | |||
2005 | 1,936 | ||||
2006 | 1,363 | ||||
2007 | 1,007 | ||||
2008 | 772 | ||||
After 2008 | 3,085 | ||||
|
|||||
Gross carrying value of MSR | 8,765 | ||||
Less: valuation allowance | (2,653 | ) | |||
|
|||||
Net carrying value of MSR | $ | 6,112 | |||
|
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 projected MSR prepayment estimates and discount rates, as were used to determine amortization expense at the end of the third quarter of 2004. 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 5: Guarantees
The Company sells loans without recourse that may have to be subsequently repurchased if a defect that occurred during the loan's origination process results in a violation of a representation or warranty made in connection with the sale of the loan. 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 occurred and if such defects constitute a violation of a representation or warranty made to the investor in connection with the sale. If such 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 such defects, the Company has no commitment to repurchase the loan. As of September 30, 2004 and December 31, 2003, the amount of loans sold without recourse totaled $545.03 billion and $578.71 billion, which substantially represents the unpaid principal balance of the Company's loans serviced for others portfolio. The Company has accrued $122 million as of September 30, 2004 and $112 million as of December 31, 2003 to cover the estimated loss exposure related to the loan origination process defects that are inherent within this portfolio.
At September 30, 2004, the Company is the guarantor of five separate issues of trust preferred securities. The Company has issued subordinated debentures to wholly-owned special purpose trusts. Each trust has issued trust preferred securities. The sole assets of each trust are the subordinated debentures issued by the Company. The Company guarantees the accumulated and unpaid distributions of each trust, to the extent the Company provided funding to the trust per the Company's obligation under subordinated debentures, but the trust then failed to fulfill its distribution requirements to the security holders. The maximum potential amount of future payments the Company could be required to make under this guarantee is the expected principal and interest each trust is obligated to remit under the issuance of trust
12
preferred securities, which totaled $2.24 billion as of September 30, 2004. No liability has been recorded as the Company does not expect it will be required to perform under this guarantee.
Note 6: Employee Benefits Programs
Pension Plan
Washington Mutual maintains a noncontributory cash balance defined benefit pension plan (the "Pension Plan") for eligible employees. Benefits earned for each year of service are based primarily on the level of compensation in that year plus a stipulated rate of return on the benefit balance. It is the Company's policy to contribute funds to the Pension Plan on a current basis to the extent the amounts are sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws plus such additional amounts the Company determines to be appropriate.
Nonqualified Defined Benefit Plans and Other Postretirement Benefit Plans
The Company, as successor to previously acquired companies, has assumed responsibility for a number of nonqualified, noncontributory, unfunded postretirement benefit plans, including retirement restoration plans for certain employees, a number of supplemental retirement plans for certain officers and multiple outside directors' retirement plans. Benefits under the retirement restoration plans are generally determined by the Company. Benefits under the supplemental retirement plans and outside directors retirement plans are generally based on years of service.
The Company, as successor to previously acquired companies, maintains unfunded defined benefit postretirement plans that make medical and life insurance coverage available to eligible retired employees and their beneficiaries and covered dependents. The expected cost of providing these benefits to retirees, their beneficiaries and covered dependents was accrued during the years each employee provided services.
Components of net periodic benefit cost for the Pension Plan, Nonqualified Defined Benefit Plans and Other Postretirement Benefit Plans were as follows:
|
Three Months Ended September 30,
|
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
|||||||||||||||||
|
Pension
Plan |
Nonqualified
Defined Benefit Plans |
Other
Postretirement Benefit Plans |
Pension
Plan |
Nonqualified
Defined Benefit Plans |
Other
Postretirement Benefit Plans |
|||||||||||||
|
(in millions)
|
||||||||||||||||||
Interest cost | $ | 20 | $ | 2 | $ | 1 | $ | 21 | $ | 2 | $ | 1 | |||||||
Service cost | 20 | | | 16 | | 1 | |||||||||||||
Expected return on plan assets | (25 | ) | | | (24 | ) | | | |||||||||||
Amortization of prior service cost (credit) | 1 | | | (1 | ) | | | ||||||||||||
Recognized net actuarial loss | 10 | | | 8 | | | |||||||||||||
|
|
|
|
|
|
||||||||||||||
Net periodic benefit cost | $ | 26 | $ | 2 | $ | 1 | $ | 20 | $ | 2 | $ | 2 | |||||||
|
|
|
|
|
|
||||||||||||||
13
|
|
Nine Months Ended September 30, |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
|||||||||||||||||
|
Pension
Plan |
Nonqualified
Defined Benefit Plans |
Other
Postretirement Benefit Plans |
Pension Plan
|
Nonqualified
Defined Benefit Plans |
Other
Postretirement Benefit Plans |
|||||||||||||
|
(in millions)
|
||||||||||||||||||
Interest cost | $ | 61 | $ | 5 | $ | 3 | $ | 53 | $ | 6 | $ | 4 | |||||||
Service cost | 63 | | 1 | 40 | | 1 | |||||||||||||
Expected return on plan assets | (77 | ) | | | (60 | ) | | | |||||||||||
Amortization of prior service cost (credit) | 2 | | | (4 | ) | | | ||||||||||||
Recognized net actuarial loss | 28 | 1 | | 20 | | | |||||||||||||
|
|
|
|
|
|
||||||||||||||
Net periodic benefit cost | $ | 77 | $ | 6 | $ | 4 | $ | 49 | $ | 6 | $ | 5 | |||||||
|
|
|
|
|
|
Note 7: Operating Segments
The Company has grouped its products and services into two primary categories those marketed to retail consumers and those marketed to commercial customers and has established three operating segments for the purpose of management reporting: Retail Banking and Financial Services, Mortgage Banking and the Commercial Group. Unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting. The management reporting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The Company's operating segments are defined by the products and services they offer.
The Company uses various methodologies, and continues to enhance those methodologies, to assign certain balance sheet and income statement items to the responsible operating segment. When changes are made to the methodologies used to measure segment profitability, results for prior periods are restated for comparability. A significant change that occurred in the first quarter of 2004 that is reflected in the operating segment financial highlights tables is the modified calculation of the long-term, normalized net charge-off ratio that is used to measure each segment's provision for loan and lease losses. The revised methodology recalibrates this ratio more frequently to the latest available experience factors that are used to measure expected losses on the Company's loan products. In the second quarter of 2004, we applied this methodology change to prior years and reallocated the adjustments from the original straight-line basis. This change did not have a material impact on 2003's results of operations, but has materially impacted 2004's quarterly results of operations.
Methodologies that are applied to the measurement of segment profitability include: (1) a funds transfer pricing system, which allocates interest income funding credits and funding charges between the operating segments and the Treasury Division. A segment will receive a funding credit from the Treasury Division for its liabilities. Conversely, a segment is assigned a charge by the Treasury Division to fund its assets. The system is based on the interest rate sensitivities of assets and liabilities and is designed to extract net interest income volatility from the business units and concentrate it in the Treasury Division, where it is managed. Certain basis and other residual risk remains in the operating segments; (2) a calculation of the provision for loan and lease losses based on management's current assessment of the long-term, normalized net charge-off ratio for loan products within each segment, which is recalibrated periodically to the latest available loan loss experience data. This process differs from the "losses inherent in the loan portfolio" methodology that is used to measure the allowance for loan and lease losses at the Corporate level. This methodology is used to provide segment management with provision information for
14
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; (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; and (7) inter-segment activities which include a process for transferring originated mortgage loans held in portfolio from the Mortgage Banking segment to the Retail Banking and Financial Services segment and a broker fee arrangement between Mortgage Banking and Retail Banking and Financial Services. The process for transferring originated mortgage loans involves Mortgage Banking recognizing a gain on the sale of loans to Retail Banking and Financial Services based on an assumed profit factor. This assumed profit factor is included in Retail Banking and Financial Services loan premiums and amortization of loan premiums. The elimination of inter-segment gains on sale, loan premiums and amortization are included in the reconciliation adjustments column within these Note 7 tables and are described in the associated footnotes. The broker fee arrangement involves Retail Banking and Financial Services receiving revenue for the origination of home loans and Mortgage Banking receiving revenue for the origination of home equity loans and lines of credit. The net amount of the inter-segment broker fees is included in the inter-segment revenue (expense) line within these Note 7 tables.
The Consumer Group provides access to customers through a wide range of channels, which encompass a network of retail banking stores, retail and wholesale home loan centers, ATMs and online banking. The Consumer Group consists of two distinct operating segments for which separate financial reports are prepared: the Retail Banking and Financial Services segment, and the Mortgage Banking segment.
The Retail Banking and Financial Services segment offers a diversified set of deposits and consumer lending products and financial services to individual consumers and small business. Loan products include home loans, home equity loans and lines of credit and consumer loans. This segment acquires home loans originated and serviced by the Mortgage Banking segment at a premium, which are amortized over the expected life of the loans. This segment's loan portfolio also includes purchased home loans made to higher risk borrowers. Financial services offered by this segment include the Company's mutual fund management business, WM Advisors, Inc., which provides investment advisory and mutual fund distribution services, and investment advisory and securities brokerage services that are offered by WM Financial Services, Inc., a licensed broker-dealer. Fixed annuities are also offered to the public through licensed bank employees.
The Mortgage Banking segment originates and services home loans that are sold to secondary market participants and loans that are held in portfolio by the Retail Banking and Financial Services segment. The Mortgage Banking segment charges a servicing fee to the Retail Banking and Financial Services segment for servicing the Company's home loan portfolio. This fee is based on a monthly charge determined by the types of loans serviced. Insurance products that complement the mortgage process, such as private mortgage insurance and property and casualty insurance policies, are also made available through insurance agencies that are part of this segment. This segment also manages the Company's captive reinsurance activities and makes available a variety of life insurance policies.
The Commercial Group's multiple business activities are managed as one operating segment. This group's products and services include loans made to developers of and investors in multi-family and real estate properties, commercial real estate loan servicing, selling commercial real estate loans to secondary market participants and mortgage banker financing. Through Long Beach Mortgage Company, a
15
wholly-owned subsidiary of the Company and a component of the Company's specialty mortgage finance program, the Commercial Group originates and services home loans made to higher-risk borrowers that are sold to secondary market participants.
In July 2004 the Company announced that the Commercial Group is exiting certain activities that are no longer aligned with the Company's strategic objectives. These activities include home construction loans made to builders and commercial loans made to companies whose annual revenues typically exceed $5 million.
The Corporate Support/Treasury and Other category includes management of the Company's interest rate risk, liquidity, capital, and borrowings and the investment securities and the mortgage-backed securities portfolios. This category also includes the costs of the Company's technology services, facilities, legal, accounting and finance, and human resources to the extent not allocated to the business segments and restructuring charges incurred from the Company's cost containment initiative. Also reported in this category is the net impact of funds transfer pricing for loan and deposit balances including the effects of changes in interest rates on the Company's net interest margin and the effects of inter-segment allocations of gains and losses related to interest rate risk management instruments.
16
Financial highlights by operating segment were as follows:
|
Three Months Ended September 30, 2004
|
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Consumer Group
|
|
|
|
|
|||||||||||||||
|
Retail
Banking and Financial Services |
Mortgage
Banking |
Commercial
Group |
Corporate
Support/ Treasury and Other |
Reconciling
Adjustments |
Total
|
||||||||||||||
|
(dollars in millions)
|
|||||||||||||||||||
Condensed income statement: | ||||||||||||||||||||
Net interest income (expense) | $ | 1,295 | $ | 274 | $ | 324 | $ | (263 | ) | $ | 110 | (1) | $ | 1,740 | ||||||
Provision for loan and lease losses | 43 | 2 | 10 | | 1 | (2) | 56 | |||||||||||||
Noninterest income (expense) | 713 | 769 | 66 | (122 | ) | (162 | ) (3) | 1,264 | ||||||||||||
Inter-segment revenue (expense) | 3 | (3 | ) | | | | | |||||||||||||
Noninterest expense | 1,116 | 602 | 160 | 203 | (212 | ) (4) | 1,869 | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Income (loss) before income taxes | 852 | 436 | 220 | (588 | ) | 159 | 1,079 | |||||||||||||
Income taxes (benefit) | 323 | 165 | 75 | (221 | ) | 63 | (5) | 405 | ||||||||||||
|
|
|
|
|
|
|||||||||||||||
Net income (loss) | $ | 529 | $ | 271 | $ | 145 | $ | (367 | ) | $ | 96 | $ | 674 | |||||||
|
|
|
|
|
|
|||||||||||||||
Performance and other data: | ||||||||||||||||||||
Efficiency ratio | 49.02 | % (6) | 52.89 | % (6) | 33.45 | % (6) | n/a | n/a | 62.19 | (7) | ||||||||||
Average loans | $ | 167,539 | $ | 22,611 | $ | 38,829 | $ | | $ | (1,600 | ) (8) | $ | 227,379 | |||||||
Average assets | 179,950 | 36,343 | 43,745 | 25,452 | (1,821 | ) (8)(9) | 283,669 | |||||||||||||
Average deposits | 131,850 | 15,385 | 7,811 | 13,820 | n/a | 168,866 | ||||||||||||||
Employees at end of period | 29,963 | 16,786 | 3,270 | 5,469 | n/a | 55,488 |
17
|
Three Months Ended September 30, 2003
|
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Consumer Group
|
|
|
|
|
|||||||||||||||
|
Retail
Banking and Financial Services |
Mortgage
Banking |
Commercial
Group |
Corporate
Support/ Treasury and Other |
Reconciling
Adjustments |
Total
|
||||||||||||||
|
(dollars in millions)
|
|||||||||||||||||||
Condensed income statement: | ||||||||||||||||||||
Net interest income (expense) | $ | 994 | $ | 683 | $ | 324 | $ | (183 | ) | $ | 91 | (1) | $ | 1,909 | ||||||
Provision for loan and lease losses | 40 | 1 | 24 | | 11 | (2) | 76 | |||||||||||||
Noninterest income | 653 | 288 | 204 | 611 | (192 | ) (3) | 1,564 | |||||||||||||
Inter-segment revenue (expense) | 63 | (63 | ) | | | | | |||||||||||||
Noninterest expense | 980 | 729 | 142 | 171 | (212 | ) (4) | 1,810 | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Income from continuing operations before income taxes | 690 | 178 | 362 | 257 | 100 | 1,587 | ||||||||||||||
Income taxes | 274 | 61 | 130 | 95 | 28 | (5) | 588 | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Income from continuing operations, net of taxes | 416 | 117 | 232 | 162 | 72 | 999 | ||||||||||||||
Income from discontinued operations, net of taxes | | | 24 | | | 24 | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Net income | $ | 416 | $ | 117 | $ | 256 | $ | 162 | $ | 72 | $ | 1,023 | ||||||||
|
|
|
|
|
|
|||||||||||||||
Performance and other data: | ||||||||||||||||||||
Efficiency ratio | 49.65 | % (6) | 74.66 | % (6) | 21.39 | % (6) | n/a | n/a | 52.13 | % (7) | ||||||||||
Average loans | $ | 118,295 | $ | 51,648 | $ | 35,318 | $ | | $ | (1,293 | ) (8) | $ | 203,968 | |||||||
Average assets | 130,046 | 78,806 | 44,017 | 39,108 | (1,762 | ) (8)(9) | 290,215 | |||||||||||||
Average deposits | 126,040 | 35,120 | 6,131 | 6,654 | n/a | 173,945 | ||||||||||||||
Employees at end of period | 28,802 | 22,527 | 5,594 | (10) | 5,978 | n/a | 62,901 | (10) |
18
|
Nine Months Ended September 30, 2004
|
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Consumer Group
|
|
|
|
|
|||||||||||||||
|
Retail
Banking and Financial Services |
Mortgage
Banking |
Commercial
Group |
Corporate
Support/ Treasury and Other |
Reconciling
Adjustments |
Total
|
||||||||||||||
|
(dollars in millions)
|
|||||||||||||||||||
Condensed income statement: | ||||||||||||||||||||
Net interest income (expense) | $ | 3,802 | $ | 908 | $ | 1,004 | $ | (767 | ) | $ | 319 | (1) | $ | 5,266 | ||||||
Provision for loan and lease losses | 123 | 7 | 34 | | 8 | (2) | 172 | |||||||||||||
Noninterest income (expense) | 2,038 | 1,728 | 256 | (158 | ) | (469 | ) (3) | 3,395 | ||||||||||||
Inter-segment revenue (expense) | 15 | (15 | ) | | | | | |||||||||||||
Noninterest expense | 3,303 | 1,921 | 458 | 548 | (633 | ) (4) | 5,597 | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Income (loss) from continuing operations before income taxes | 2,429 | 693 | 768 | (1,473 | ) | 475 | 2,892 | |||||||||||||
Income taxes (benefit) | 920 | 262 | 268 | (551 | ) | 182 | (5) | 1,081 | ||||||||||||
|
|
|
|
|
|
|||||||||||||||
Income (loss) from continuing operations, net of taxes | 1,509 | 431 | 500 | (922 | ) | 293 | 1,811 | |||||||||||||
Income from discontinued operations, net of taxes | | | | 399 | | 399 | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Net income (loss) | $ | 1,509 | $ | 431 | $ | 500 | $ | (523 | ) | $ | 293 | $ | 2,210 | |||||||
|
|
|
|
|
|
|||||||||||||||
Performance and other data: | ||||||||||||||||||||
Efficiency ratio | 49.81 | % (6) | 67.33 | % (6) | 29.25 | % (6) | n/a | n/a | 64.63 | % (7) | ||||||||||
Average loans | $ | 158,646 | $ | 23,158 | $ | 38,120 | $ | | $ | (1,553 | ) (8) | $ | 218,371 | |||||||
Average assets | 170,881 | 37,243 | 43,460 | 29,845 | (1,743 | ) (8)(9) | 279,686 | |||||||||||||
Average deposits | 129,518 | 16,695 | 6,922 | 9,429 | n/a | 162,564 | ||||||||||||||
Employees at end of period | 29,963 | 16,786 | 3,270 | 5,469 | n/a | 55,488 |
19
|
Nine Months Ended September 30, 2003
|
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Consumer Group
|
|
|
|
|
|||||||||||||||
|
Retail
Banking and Financial Services |
Mortgage
Banking |
Commercial
Group |
Corporate
Support/ Treasury and Other |
Reconciling
Adjustments |
Total
|
||||||||||||||
|
(dollars in millions)
|
|||||||||||||||||||
Condensed income statement: | ||||||||||||||||||||
Net interest income (expense) | $ | 2,902 | $ | 2,028 | $ | 959 | $ | (261 | ) | $ | 259 | (1) | $ | 5,887 | ||||||
Provision for loan and lease losses | 113 | 1 | 86 | | 44 | (2) | 244 | |||||||||||||
Noninterest income | 1,851 | 2,076 | 421 | 548 | (512 | ) (3) | 4,384 | |||||||||||||
Inter-segment revenue (expense) | 159 | (159 | ) | | | | | |||||||||||||
Noninterest expense | 2,860 | 2,180 | 406 | 490 | (630 | ) (4) | 5,306 | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Income (loss) from continuing operations before income taxes | 1,939 | 1,764 | 888 | (203 | ) | 333 | 4,721 | |||||||||||||
Income taxes (benefit) | 744 | 664 | 317 | (75 | ) | 99 | (5) | 1,749 | ||||||||||||
|
|
|
|
|
|
|||||||||||||||
Income (loss) from continuing operations, net of taxes | 1,195 | 1,100 | 571 | (128 | ) | 234 | 2,972 | |||||||||||||
Income from discontinued operations, net of taxes | | | 65 | | | 65 | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Net income (loss) | $ | 1,195 | $ | 1,100 | $ | 636 | $ | (128 | ) | $ | 234 | $ | 3,037 | |||||||
|
|
|
|
|
|
|||||||||||||||
Performance and other data: | ||||||||||||||||||||
Efficiency ratio | 50.35 | % (6) | 51.31 | % (6) | 23.13 | % (6) | n/a | n/a | 51.66 | % (7) | ||||||||||
Average loans | $ | 116,307 | $ | 48,610 | $ | 34,728 | $ | | $ | (1,206 | ) (8) | $ | 198,439 | |||||||
Average assets | 127,934 | 73,130 | 43,231 | 42,403 | (1,666 | ) (8)(9) | 285,032 | |||||||||||||
Average deposits | 124,358 | 30,066 | 5,163 | 5,649 | n/a | 165,236 | ||||||||||||||
Employees at end of period | 28,802 | 22,527 | 5,594 | (10) | 5,978 | n/a | 62,901 | (10) |
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Discontinued Operations
On November 24, 2003 the Company announced a definitive agreement to sell its subsidiary, Washington Mutual Finance Corporation, for approximately $1.30 billion in cash. This sale was completed during the first quarter of 2004. Accordingly, Washington Mutual Finance is presented in this report as a discontinued operation with the results of operations and cash flows segregated from the Company's results of continuing operations for all periods presented on the Consolidated Statements of Income, Cash Flows and Notes to the Consolidated Financial Statements as well as the tables presented herein, unless otherwise noted. Likewise, the assets and liabilities of Washington Mutual Finance are presented as separate captions on the Consolidated Statements of Financial Condition.
Cautionary Statements
Our Form 10-Q and other documents that we file with the Securities and Exchange Commission ("SEC") 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:
21
Overview
Net income for the third quarter of 2004 was $674 million, or $0.76 per diluted share, a decrease from $999 million, or $1.09 per diluted share from continuing operations for the third quarter of 2003.
Net interest income was $1.74 billion in the third quarter of 2004, compared with $1.91 billion in the third quarter of 2003 and $1.79 billion in the second quarter of 2004. The decrease was primarily due to contraction in the net interest margin, which declined from 3.07% in the third quarter of 2003 to 2.86% in the second quarter of 2004 and 2.77% in the current period. Declining asset yields and lower custodial and escrow balances were the primary factors that led to the 30 basis point decline in the margin from the third quarter of 2003. An increase in higher costing savings and time deposits and the recent steps taken by the Federal Reserve to increase the targeted federal funds rate contributed to an increase during the third quarter of 2004 in the cost of the Company's interest-bearing liabilities, which accounted for the majority of the nine basis point contraction from the second quarter of 2004. We expect the margin to contract further as the Company's adjustable rate loan portfolio reprices to current market levels more slowly than our wholesale borrowing sources. This contraction is likely to be more significant if the Federal Reserve initiates further interest rate increases or if the yield curve flattens further.
Near the end of the quarter, the Company terminated $1.75 billion of repurchase agreements, along with certain pay-fixed interest rate swaps that were embedded in those borrowings, prior to their maturity. Although this resulted in a loss on their extinguishment of $155 million, the termination of these higher-cost borrowings will partially mitigate the anticipated margin compression in future periods.
Home loan mortgage banking income increased from zero in the second quarter of 2004 to $504 million in the third quarter of 2004 primarily as a result of improved MSR risk management performance. The total change in MSR valuation, net of hedging and risk management instruments, was a gain of $466 million, an increase of $644 million from a loss of $178 million that was sustained in the second quarter of 2004. The improved performance of the Company's MSR asset, net of hedging and risk management instruments, is largely attributable to a widening of basis spreads, as the interest rate decline on LIBOR-based interest rate swap contracts exceeded the decline in mortgage interest rates. During the latter part of the quarter, the Company took steps to reduce its exposure to this element of risk by purchasing additional forward commitments to purchase and sell mortgage-backed securities and adding principal-only mortgage-backed securities to its MSR risk management program, while reducing its reliance on interest rate swaps. The change in value of the mortgage-based instruments should correlate more closely with the change in value of the MSR asset since the sensitivity of these instruments are more aligned with movements in mortgage rates. At September 30, 2004, mortgage-based products composed approximately 86% of the Company's MSR risk management instruments, as compared with 51% at June 30, 2004. While this change in the mix of risk management instruments is expected to moderate the volatility of the Company's MSR performance, it will not eliminate the variability in our earnings from period to period that results from the substantial size of our MSR asset.
22
The following table presents the aggregate valuation adjustments for the MSR and the corresponding hedging and risk management instruments during the first three quarters of 2004 as well as the nine months ended September 30, 2004:
|
Quarter Ended
|
Nine Months
Ended |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30,
2004 |
June 30,
2004 |
March 31,
2004 |
September 30,
2004 |
||||||||||||
|
(in millions)
|
|||||||||||||||
Statement No. 133 MSR accounting valuation adjustments | $ | (885 | ) | $ | 1,707 | $ | | $ | 822 | |||||||
Change in value of MSR accounted for under lower of aggregate cost or market value methodology | (266 | ) | 227 | (606 | ) | (646 | ) | |||||||||
|
|
|
|
|||||||||||||
Total MSR valuation changes | (1,151 | ) | 1,934 | (606 | ) | 176 | ||||||||||
Statement No. 133 fair value hedging adjustments | 1,316 | (1,985 | ) | | (669 | ) | ||||||||||
Revaluation gain (loss) from derivatives MSR risk management | 130 | (322 | ) | 1,108 | 917 | |||||||||||
Net settlement income from certain interest-rate swaps | 126 | 195 | 160 | 481 | ||||||||||||
Gain from securities | 45 | | 5 | 50 | ||||||||||||
|
|
|
|
|||||||||||||
Net valuation change in hedging and risk management instruments | 1,617 | (2,112 | ) | 1,273 | 779 | |||||||||||
|
|
|
|
|||||||||||||
Total change in MSR valuation, net of hedging and risk management instruments | $ | 466 | $ | (178 | ) | $ | 667 | $ | 955 | |||||||
|
|
|
|
Loans held in portfolio totaled $206.16 billion at September 30, 2004, compared with $194.54 billion at June 30, 2004 and $160.23 billion at September 30, 2003. Continued strong levels of home sales, coupled with stable or rising home prices in most of the Company's markets and a modest upward-sloping yield curve fueled strong demand for adjustable-rate home mortgages. The Company's short-term adjustable rate home loan volume was $19.07 billion in the third quarter of 2004, compared with $17.45 billion in the preceding quarter and $7.54 billion in the third quarter of 2003. The Company retained approximately 52% of the third quarter 2004 volume, or $9.96 billion, for its home loan portfolio and designated the remainder to be sold through secondary market channels. Strong volume on home equity loan and line of credit products that was generated primarily through the Company's retail banking network also resulted in a $4.43 billion increase in the loan portfolio during the third quarter of 2004. Outstanding balances of home equity loans and lines of credit have increased by $16.45 billion, or 68%, since September 30, 2003.
The Company continues to grow its retail banking business by opening new stores and enhancing its product suite. During the third quarter, the Company opened a net total of 56 retail banking stores and added over 142,000 net new retail checking accounts. Growth was particularly strong in small business checking accounts, as approximately 32,000 of these accounts were opened during the quarter, bringing the total of net new small business checking account openings to over 85,000 during the first nine months of 2004. Since the beginning of the year, the Company has opened over 180 new stores and expects to achieve its 2004 target of opening 250 stores by the end of this year.
A prominent management priority continues to be the Company's cost containment initiative, which was originally announced in the fourth quarter of 2003. As of September 30, 2004, this initiative has resulted in cumulative headcount reductions of approximately 8,000 with an additional 1,900 employees who received termination notices as of that date. This initiative, which is not expected to be completed until the middle of 2005, is primarily directed at reducing the fixed cost structure of the mortgage banking business through employee headcount reductions and facilities closures.
23
Until the cost structure of the Company's mortgage banking business approaches a level that is commensurate with the cost structures of other mortgage banking industry leaders, the profitability of our mortgage banking business will be adversely affected. The primary components of noninterest expense that are impacted by this initiative are compensation and benefits due to headcount reductions and severance charges associated with those reductions, and occupancy and equipment expense due to facilities closures. Two significant milestones within this initiative occurred during the third quarter, when the Company completed its conversion of all home loan customer records onto a single servicing system and consolidated 12 mortgage banking loan fulfillment centers into the 34 remaining centers and reduced staffing levels at those remaining locations. The Company also announced in July 2004 that its mortgage banking business will concentrate its activities in markets in which the Company believes it can optimize its retail banking cross-selling opportunities. This initiative resulted in the sale or closure of approximately 100 retail mortgage lending offices during the third quarter.
Ultimately, the reduced expenses to be realized in 2004 from the cost containment initiative are expected to offset this year's incremental costs from the continuing expansion of the retail banking franchise, thus producing a noninterest expense run rate in 2004 that is essentially flat when compared to the total noninterest expense incurred in 2003.
In July 2004, the Company announced that the Commercial Group is exiting certain activities that are no longer aligned with the Company's strategic objectives. These activities include home construction loans made to builders and commercial loans made to companies whose annual revenues typically exceed $5 million. Over time, this initiative will result in the closure of 53 commercial banking locations and the elimination of approximately 850 positions.
Controls and Procedures
Disclosure Controls and Procedures
The Company's management, under the direction of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or furnishes under the Securities Exchange Act of 1934.
We review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and improve our controls and procedures over time and correct any deficiencies that we may discover. While we believe the present design of our disclosure controls and procedures is effective, future events affecting our business may cause us to modify our disclosure controls and procedures.
Internal Control Over Financial Reporting
There have not been any changes in the Company's internal control environment over financial reporting during the third quarter of 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
The Company is currently undergoing a comprehensive effort to ensure compliance with the new regulations under Section 404 of the Sarbanes-Oxley Act that take effect for the Company's fiscal year ending December 31, 2004. This effort includes internal control documentation and review under the direction of senior management. In the course of its ongoing evaluation, management has identified certain areas requiring improvement, which the Company is addressing. Management routinely reviews potential internal control issues with the Company's Audit Committee.
24
Critical Accounting Policies
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in our Consolidated Financial Statements and accompanying notes. We believe that the judgments, estimates and assumptions used in the preparation of our Consolidated Financial Statements are appropriate given the factual circumstances as of September 30, 2004.
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 three 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 MSR, the methodology that determines our allowance for loan and lease losses and the assumptions used in the calculation of our net periodic benefit cost. Management has discussed the development and selection of these critical accounting policies with the Company's Audit Committee. The Company no longer considers its accounting policy for interest rate lock commitments on loans to be held for sale to be critical as the valuation of the expected servicing rights that the Company retains when the underlying loans are sold is no longer recognized at the issuance of the rate lock as a result of the guidance issued in SEC Staff Accounting Bulletin No. 105.
These policies and the judgments, estimates and assumptions are described in greater detail in the Company's 2003 Annual Report on Form 10-K/A in the "Critical Accounting Policies" section of Management's Discussion and Analysis and in Note 1 to the Consolidated Financial Statements "Summary of Significant Accounting Policies."
Recently Issued Accounting Standards
In September of 2004, the Emerging Issues Task Force ("EITF") reached consensus on the guidance provided in EITF Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per Share . EITF 04-8 addresses the issue of when the dilutive effect of contingently convertible debt instruments should be included in diluted earnings per share. The new guidance is effective for reporting periods ending after December 15, 2004, however at this time the Company does not expect the adoption of EITF 04-8 to have any effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition as the Company has not issued contingently convertible debt instruments.
25
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
2004
|
2003
|
||||||||||||
|
(dollars in millions, except per share amounts)
|
|||||||||||||||
Profitability | ||||||||||||||||
Net interest income | $ | 1,740 | $ | 1,909 | $ | 5,266 | $ | 5,887 | ||||||||
Net interest margin | 2.77 | % | 3.07 | % | 2.84 | % | 3.19 | % | ||||||||
Noninterest income | $ | 1,264 | $ | 1,564 | $ | 3,395 | $ | 4,384 | ||||||||
Noninterest expense | 1,869 | 1,810 | 5,597 | 5,306 | ||||||||||||
Net income | 674 | 1,023 | 2,210 | 3,037 | ||||||||||||
Basic earnings per common share: | ||||||||||||||||
Income from continuing operations | $ | 0.78 | $ | 1.11 | $ | 2.10 | $ | 3.27 | ||||||||
Income from discontinued operations, net | | 0.03 | 0.46 | 0.07 | ||||||||||||
|
|
|
|
|||||||||||||
Net income | 0.78 | 1.14 | 2.56 | 3.34 | ||||||||||||
Diluted earnings per common share: | ||||||||||||||||
Income from continuing operations | $ | 0.76 | $ | 1.09 | $ | 2.05 | $ | 3.20 | ||||||||
Income from discontinued operations, net | | 0.02 | 0.45 | 0.07 | ||||||||||||
|
|
|
|
|||||||||||||
Net income | 0.76 | 1.11 | 2.50 | 3.27 | ||||||||||||
Basic weighted average number of common shares outstanding (in thousands) | 862,004 | 899,579 | 861,933 | 910,449 | ||||||||||||
Diluted weighted average number of common shares outstanding (in thousands) | 882,323 | 918,372 | 884,068 | 927,470 | ||||||||||||
Dividends declared per common share | $ | 0.44 | $ | 0.40 | $ | 1.29 | $ | 0.99 | ||||||||
Return on average assets (1) | 0.95 | % | 1.41 | % | 1.05 | % | 1.42 | % | ||||||||
Return on average common equity (1) | 13.03 | 19.82 | 14.47 | 19.50 | ||||||||||||
Efficiency ratio (2)(3) | 62.19 | 52.13 | 64.63 | 51.66 | ||||||||||||
Asset Quality | ||||||||||||||||
Nonaccrual loans (4)(5) | $ | 1,471 | $ | 1,813 | $ | 1,471 | $ | 1,813 | ||||||||
Foreclosed assets (5) | 281 | 293 | 281 | 293 | ||||||||||||
|
|
|
|
|||||||||||||
Total nonperforming assets (5) | $ | 1,752 | $ | 2,106 | $ | 1,752 | $ | 2,106 | ||||||||
Nonperforming assets/total assets (5) | 0.61 | % | 0.73 | % | 0.61 | % | 0.73 | % | ||||||||
Restructured loans (5) | $ | 38 | $ | 118 | $ | 38 | $ | 118 | ||||||||
|
|
|
|
|||||||||||||
Total nonperforming assets and restructured loans (5) | 1,790 | 2,224 | 1,790 | 2,224 | ||||||||||||
Allowance for loan and lease losses (5) | 1,322 | 1,549 | 1,322 | 1,549 | ||||||||||||
Allowance as a percentage of total loans held in portfolio (5) | 0.64 | % | 0.97 | % | 0.64 | % | 0.97 | % | ||||||||
Provision for loan and lease losses | $ | 56 | $ | 76 | $ | 172 | $ | 244 | ||||||||
Net charge-offs | 27 | 74 | 97 | 213 | ||||||||||||
Capital Adequacy (5) | ||||||||||||||||
Stockholders' equity/total assets | 7.21 | % | 7.13 | % | 7.21 | % | 7.13 | % | ||||||||
Tangible common equity (6) /total tangible assets (6) | 5.26 | 5.26 | 5.26 | 5.26 | ||||||||||||
Estimated total risk-based capital/risk-weighted assets (7) | 10.64 | 11.54 | 10.64 | 11.54 | ||||||||||||
Per Common Share Data | ||||||||||||||||
Book value per common share (5)(8) | $ | 24.01 | $ | 22.77 | $ | 24.01 | $ | 22.77 | ||||||||
Market prices: | ||||||||||||||||
High | 40.19 | 42.75 | 45.28 | 43.90 | ||||||||||||
Low | 37.63 | 36.92 | 37.63 | 32.98 | ||||||||||||
Period end | 39.08 | 39.37 | 39.08 | 39.37 |
26
Summary Financial Data (Continued)
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
2004
|
2003
|
||||||||||||
|
(in millions)
|
|||||||||||||||
Supplemental Data | ||||||||||||||||
Average balance sheet: | ||||||||||||||||
Total loans held for sale | $ | 28,220 | $ | 51,950 | $ | 28,592 | $ | 50,773 | ||||||||
Total loans held in portfolio | 199,159 | 152,018 | 189,779 | 147,666 | ||||||||||||
Total interest-earning assets | 252,235 | 249,892 | 247,842 | 246,537 | ||||||||||||
Total assets | 283,669 | 290,215 | 279,686 | 285,032 | ||||||||||||
Total interest-bearing deposits | 135,600 | 124,488 | 128,893 | 121,221 | ||||||||||||
Total noninterest-bearing deposits | 33,266 | 49,457 | 33,671 | 44,015 | ||||||||||||
Total stockholders' equity | 20,703 | 20,657 | 20,361 | 20,764 | ||||||||||||
Period-end balance sheet: | ||||||||||||||||
Loans held for sale | 29,184 | 35,820 | 29,184 | 35,820 | ||||||||||||
Loans held in portfolio, net of allowance for loan and lease losses | 204,836 | 158,680 | 204,836 | 158,680 | ||||||||||||
Total assets | 288,828 | 286,631 | 288,828 | 286,631 | ||||||||||||
Total deposits | 168,695 | 164,141 | 168,695 | 164,141 | ||||||||||||
Total stockholders' equity | 20,820 | 20,441 | 20,820 | 20,441 | ||||||||||||
Loan volume: | ||||||||||||||||
Home loans: | ||||||||||||||||
Adjustable rate | 25,589 | 28,225 | 77,164 | 76,503 | ||||||||||||
Fixed rate | 14,635 | 83,360 | 62,275 | 235,499 | ||||||||||||
Specialty mortgage finance (1) | 7,536 | 5,460 | 21,972 | 14,647 | ||||||||||||
|
|
|
|
|||||||||||||
Total home loan volume | 47,760 | 117,045 | 161,411 | 326,649 | ||||||||||||
Total loan volume | 61,825 | 131,938 | 203,511 | 362,342 | ||||||||||||
Home loan refinancing (2) | 23,834 | 90,762 | 97,268 | 261,166 | ||||||||||||
Total refinancing (2) | 24,824 | 93,972 | 101,995 | 267,897 |
Earnings Performance from Continuing Operations
Net Interest Income
Net interest income decreased largely from contraction of the net interest margin, which declined by 30 and 35 basis points to 2.77% and 2.84% for the three and nine months ended September 30, 2004 from 3.07% and 3.19% for the same periods in 2003, as yields on interest-earning assets continued to decline through the first half of 2004, primarily as a result of the sales and runoff of higher yielding loans and debt securities. Reduced levels of refinancing activity during the third quarter of 2004 also contributed to margin compression, as average noninterest-bearing custodial and escrow deposits declined by approximately $20 billion as compared with the third quarter of 2003.
Interest rate contracts, including embedded derivatives, held for asset/liability interest rate risk management purposes decreased net interest income by $39 million and $240 million for the three and nine months ended September 30, 2004, compared with $158 million and $462 million for the same periods in 2003.
27
Detailed average balances of interest and noninterest-earning assets as well as interest income and expense and the weighted average interest rates, were as follows:
|
Three Months Ended September 30,
|
||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
|||||||||||||||||||
|
Average
Balance |
Rate
|
Interest
Income |
Average
Balance |
Rate
|
Interest
Income |
|||||||||||||||
|
(dollars in millions)
|
||||||||||||||||||||
Assets | |||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | $ | 922 | 1.44 | % | $ | 3 | $ | 1,350 | 2.16 | % | $ | 7 | |||||||||
Available-for-sale securities (1) : | |||||||||||||||||||||
Mortgage-backed securities | 9,726 | 3.85 | 94 | 21,174 | 4.51 | 239 | |||||||||||||||
Investment securities | 7,597 | 3.62 | 69 | 17,652 | 3.66 | 162 | |||||||||||||||
Loans held for sale (2) | 28,220 | 4.83 | 341 | 51,950 | 5.31 | 689 | |||||||||||||||
Loans held in portfolio (2)(3) : | |||||||||||||||||||||
Loans secured by real estate: | |||||||||||||||||||||
Home | 108,594 | 4.19 | 1,137 | 84,456 | 4.56 | 963 | |||||||||||||||
Purchased specialty mortgage finance | 16,279 | 4.57 | 186 | 10,777 | 5.30 | 143 | |||||||||||||||
|
|
|
|
||||||||||||||||||
Total home loans | 124,873 | 4.24 | 1,323 | 95,233 | 4.64 | 1,106 | |||||||||||||||
Home equity loans and lines of credit | 38,329 | 4.55 | 438 | 22,209 | 4.79 | 266 | |||||||||||||||
Home construction: | |||||||||||||||||||||
Builder (4) | 1,288 | 4.68 | 15 | 1,105 | 4.47 | 13 | |||||||||||||||
Custom (5) | 1,405 | 6.07 | 21 | 977 | 6.90 | 17 | |||||||||||||||
Multi-family | 21,240 | 4.90 | 260 | 19,920 | 5.16 | 258 | |||||||||||||||
Other real estate | 6,364 | 5.78 | 93 | 6,989 | 6.31 | 111 | |||||||||||||||
|
|
|
|
||||||||||||||||||
Total loans secured by real estate | 193,499 | 4.44 | 2,150 | 146,433 | 4.83 | 1,771 | |||||||||||||||
Consumer | 860 | 10.17 | 22 | 1,178 | 8.55 | 25 | |||||||||||||||
Commercial business | 4,800 | 4.43 | 54 | 4,407 | 4.18 | 47 | |||||||||||||||
|
|
|
|
||||||||||||||||||
Total loans held in portfolio | 199,159 | 4.46 | 2,226 | 152,018 | 4.84 | 1,843 | |||||||||||||||
Other | 6,611 | 4.70 | 78 | 5,748 | 3.99 | 58 | |||||||||||||||
|
|
|
|
||||||||||||||||||
Total interest-earning assets | 252,235 | 4.45 | 2,811 | 249,892 | 4.79 | 2,998 | |||||||||||||||
Noninterest-earning assets: | |||||||||||||||||||||
Mortgage servicing rights | 6,698 | 6,250 | |||||||||||||||||||
Goodwill | 6,196 | 6,196 | |||||||||||||||||||
Other (6) | 18,540 | 27,877 | |||||||||||||||||||
|
|
||||||||||||||||||||
Total assets | $ | 283,669 | $ | 290,215 | |||||||||||||||||
|
|
(This table is continued on the next page.)
28
(Continued from the previous page.)
|
Three Months Ended September 30,
|
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
|||||||||||||||||
|
Average
Balance |
Rate
|
Interest
Expense |
Average
Balance |
Rate
|
Interest
Expense |
|||||||||||||
|
(dollars in millions)
|
||||||||||||||||||
Liabilities | |||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||
Deposits: | |||||||||||||||||||
Interest-bearing checking deposits | $ | 54,377 | 1.25 | % | $ | 172 | $ | 64,057 | 1.68 | % | $ | 272 | |||||||
Savings and money market deposits | 43,278 | 1.27 | 138 | 28,674 | 0.88 | 63 | |||||||||||||
Time deposits | 37,945 | 2.40 | 229 | 31,757 | 2.53 | 203 | |||||||||||||
|
|
|
|
||||||||||||||||
Total interest-bearing deposits | 135,600 | 1.58 | 539 | 124,488 | 1.72 | 538 | |||||||||||||
Federal funds purchased and commercial paper | 2,733 | 1.54 | 10 | 4,057 | 1.12 | 12 | |||||||||||||
Securities sold under agreements to repurchase | 14,213 | 2.75 | 100 | 21,399 | 2.19 | 120 | |||||||||||||
Advances from Federal Home Loan Banks | 59,227 | 2.02 | 306 | 45,334 | 2.59 | 300 | |||||||||||||
Other | 12,922 | 3.62 | 116 | 12,203 | 3.94 | 119 | |||||||||||||
|
|
|
|
||||||||||||||||
Total interest-bearing liabilities | 224,695 | 1.89 | 1,071 | 207,481 | 2.07 | 1,089 | |||||||||||||
|
|
||||||||||||||||||
Noninterest-bearing sources: | |||||||||||||||||||
Noninterest-bearing deposits | 33,266 | 49,457 | |||||||||||||||||
Other liabilities (7) | 5,005 | 12,620 | |||||||||||||||||
Stockholders' equity | 20,703 | 20,657 | |||||||||||||||||
|
|
||||||||||||||||||
Total liabilities and stockholders' equity | $ | 283,669 | $ | 290,215 | |||||||||||||||
|
|
||||||||||||||||||
Net interest spread and net interest income | 2.56 | $ | 1,740 | 2.72 | $ | 1,909 | |||||||||||||
|
|
||||||||||||||||||
Impact of noninterest-bearing sources | 0.21 | 0.35 | |||||||||||||||||
Net interest margin | 2.77 | 3.07 |
29
|
Nine Months Ended September 30,
|
||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
|||||||||||||||||||
|
Average
Balance |
Rate
|
Interest
Income |
Average
Balance |
Rate
|
Interest
Income |
|||||||||||||||
|
(dollars in millions)
|
||||||||||||||||||||
Assets | |||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | $ | 993 | 1.30 | % | $ | 10 | $ | 3,297 | 1.39 | % | $ | 35 | |||||||||
Available-for-sale securities (1) : | |||||||||||||||||||||
Mortgage-backed securities | 9,870 | 4.04 | 299 | 23,805 | 5.04 | 900 | |||||||||||||||
Investment securities | 12,862 | 3.19 | 308 | 15,829 | 4.08 | 484 | |||||||||||||||
Loans held for sale (2) | 28,592 | 5.03 | 1,079 | 50,773 | 5.41 | 2,061 | |||||||||||||||
Loans held in portfolio (2)(3) : | |||||||||||||||||||||
Loans secured by real estate: | |||||||||||||||||||||
Home | 105,559 | 4.18 | 3,311 | 83,656 | 4.91 | 3,079 | |||||||||||||||
Purchased specialty mortgage finance | 15,223 | 4.83 | 552 | 10,456 | 5.57 | 437 | |||||||||||||||
|
|
|
|
||||||||||||||||||
Total home loans | 120,782 | 4.26 | 3,863 | 94,112 | 4.98 | 3,516 | |||||||||||||||
Home equity loans and lines of credit | 33,786 | 4.59 | 1,162 | 19,583 | 5.09 | 747 | |||||||||||||||
Home construction: | |||||||||||||||||||||
Builder (4) | 1,205 | 4.49 | 41 | 1,088 | 4.75 | 39 | |||||||||||||||
Custom (5) | 1,302 | 6.13 | 60 | 942 | 7.36 | 52 | |||||||||||||||
Multi-family | 20,810 | 4.98 | 777 | 19,149 | 5.38 | 773 | |||||||||||||||
Other real estate | 6,484 | 5.87 | 287 | 7,344 | 6.30 | 348 | |||||||||||||||
|
|
|
|
||||||||||||||||||
Total loans secured by real estate | 184,369 | 4.48 | 6,190 | 142,218 | 5.13 | 5,475 | |||||||||||||||
Consumer | 928 | 10.08 | 70 | 1,255 | 8.82 | 83 | |||||||||||||||
Commercial business | 4,482 | 4.24 | 144 | 4,193 | 4.49 | 143 | |||||||||||||||
|
|
|
|
||||||||||||||||||
Total loans held in portfolio | 189,779 | 4.50 | 6,404 | 147,666 | 5.15 | 5,701 | |||||||||||||||
Other | 5,746 | 4.27 | 184 | 5,167 | 4.72 | 183 | |||||||||||||||
|
|
|
|
||||||||||||||||||
Total interest-earning assets | 247,842 | 4.46 | 8,284 | 246,537 | 5.06 | 9,364 | |||||||||||||||
Noninterest-earning assets: | |||||||||||||||||||||
Mortgage servicing rights | 6,566 | 5,490 | |||||||||||||||||||
Goodwill | 6,196 | 6,199 | |||||||||||||||||||
Other (6) | 19,082 | 26,806 | |||||||||||||||||||
|
|
||||||||||||||||||||
Total assets | $ | 279,686 | $ | 285,032 | |||||||||||||||||
|
|
(This table is continued on the next page.)
30
(Continued from the previous page.)
|
Nine Months Ended September 30,
|
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
|||||||||||||||||
|
Average
Balance |
Rate
|
Interest
Expense |
Average
Balance |
Rate
|
Interest
Expense |
|||||||||||||
|
(dollars in millions)
|
||||||||||||||||||
Liabilities | |||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||
Deposits: | |||||||||||||||||||
Interest-bearing checking deposits | $ | 62,396 | 1.27 | % | $ | 593 | $ | 60,980 | 1.78 | % | $ | 810 | |||||||
Savings and money market deposits | 33,211 | 1.00 | 249 | 28,265 | 0.98 | 207 | |||||||||||||
Time deposits | 33,286 | 2.39 | 598 | 31,976 | 2.74 | 657 | |||||||||||||
|
|
|
|
||||||||||||||||
Total interest-bearing deposits | 128,893 | 1.49 | 1,440 | 121,221 | 1.85 | 1,674 | |||||||||||||
Federal funds purchased and commercial paper | 3,084 | 1.21 | 28 | 2,917 | 1.21 | 26 | |||||||||||||
Securities sold under agreements to repurchase | 17,711 | 2.26 | 304 | 20,607 | 2.52 | 394 | |||||||||||||
Advances from Federal Home Loan Banks | 57,135 | 2.05 | 892 | 50,993 | 2.62 | 1,012 | |||||||||||||
Other | 13,241 | 3.58 | 354 | 13,192 | 3.76 | 371 | |||||||||||||
|
|
|
|
||||||||||||||||
Total interest-bearing liabilities | 220,064 | 1.82 | 3,018 | 208,930 | 2.21 | 3,477 | |||||||||||||
|
|
||||||||||||||||||
Noninterest-bearing sources: | |||||||||||||||||||
Noninterest-bearing deposits | 33,671 | 44,015 | |||||||||||||||||
Other liabilities (7) | 5,590 | 11,323 | |||||||||||||||||
Stockholders' equity | 20,361 | 20,764 | |||||||||||||||||
|
|
||||||||||||||||||
Total liabilities and stockholders' equity | $ | 279,686 | $ | 285,032 | |||||||||||||||
|
|
||||||||||||||||||
Net interest spread and net interest income | 2.64 | $ | 5,266 | 2.85 | $ | 5,887 | |||||||||||||
|
|
||||||||||||||||||
Impact of noninterest-bearing sources | 0.20 | 0.34 | |||||||||||||||||
Net interest margin | 2.84 | 3.19 |
31
Noninterest Income
Noninterest income from continuing operations consisted of the following:
|
Three Months Ended
September 30, |
|
Nine Months Ended
September 30, |
|
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Percentage
Change |
Percentage
Change |
||||||||||||||||||||
|
2004
|
2003
|
2004
|
2003
|
||||||||||||||||||
|
(dollars in millions)
|
|||||||||||||||||||||
Home loan mortgage banking income (expense): | ||||||||||||||||||||||
Loan servicing income (expense): | ||||||||||||||||||||||
Loan servicing fees | $ | 482 | $ | 542 | (11 | )% | $ | 1,469 | $ | 1,748 | (16 | )% | ||||||||||
Amortization of mortgage servicing rights | (589 | ) | (665 | ) | (11 | ) | (1,884 | ) | (2,665 | ) | (29 | ) | ||||||||||
MSR valuation adjustments: | ||||||||||||||||||||||
MSR net ineffectiveness under Statement No. 133 | 431 | | | 153 | | | ||||||||||||||||
MSR lower of cost or market adjustment | (266 | ) | 368 | | (646 | ) | 96 | | ||||||||||||||
|
|
|
|
|||||||||||||||||||
Net MSR valuation adjustments | 165 | 368 | (55 | ) | (493 | ) | 96 | | ||||||||||||||
Other, net | (62 | ) | (220 | ) | (72 | ) | (217 | ) | (515 | ) | (58 | ) | ||||||||||
|
|
|
|
|||||||||||||||||||
Net home loan servicing income (expense) | (4 | ) | 25 | | (1,125 | ) | (1,336 | ) | (16 | ) | ||||||||||||
Revaluation gain (loss) from derivatives | 107 | (172 | ) | | 969 | 643 | 51 | |||||||||||||||
Net settlement income from certain interest-rate swaps | 126 | 130 | (3 | ) | 485 | 354 | 37 | |||||||||||||||
Gain (loss) from mortgage loans | 210 | (204 | ) | | 494 | 1,186 | (58 | ) | ||||||||||||||
Loan related income | 65 | 108 | (40 | ) | 212 | 274 | (23 | ) | ||||||||||||||
Gain from sale of originated mortgage-backed securities | | 258 | (100 | ) | | 260 | (100 | ) | ||||||||||||||
|
|
|
|
|||||||||||||||||||
Total home loan mortgage banking income | 504 | 145 | 248 | 1,035 | 1,381 | (25 | ) | |||||||||||||||
Depositor and other retail banking fees | 514 | 471 | 9 | 1,484 | 1,346 | 10 | ||||||||||||||||
Securities fees and commissions | 104 | 103 | 1 | 315 | 291 | 8 | ||||||||||||||||
Insurance income | 61 | 45 | 36 | 179 | 139 | 29 | ||||||||||||||||
Portfolio loan related income | 109 | 116 | (7 | ) | 299 | 344 | (13 | ) | ||||||||||||||
Gain from other available-for-sale securities | 11 | 557 | (98 | ) | 73 | 689 | (89 | ) | ||||||||||||||
Gain (loss) on extinguishment of borrowings | (147 | ) | 7 | | (237 | ) | (129 | ) | 84 | |||||||||||||
Other income | 108 | 120 | (10 | ) | 247 | 323 | (24 | ) | ||||||||||||||
|
|
|
|
|||||||||||||||||||
Total noninterest income | $ | 1,264 | $ | 1,564 | (19 | ) | $ | 3,395 | $ | 4,384 | (23 | ) | ||||||||||
|
|
|
|
Home Loan Mortgage Banking Income
The decrease in home loan servicing fees for the three and nine months ended September 30, 2004 was the result of the decrease in our loans serviced for others portfolio and a decline in the weighted average servicing fee. Our loans serviced for others portfolio decreased as the Company's loan volume mix began to shift from salable production to balance sheet portfolio lending during the second half of 2003. The volume of new, salable loan production was lower than the paydown rate of the servicing portfolio.
The weighted average servicing fee decreased from 35 basis points at September 30, 2003 to 33 basis points at September 30, 2004 primarily due to transactions entered into, from time to time, in which a portion of the future contractual servicing cash flows are securitized and sold to third parties. These transactions decreased the net MSR balance by $230 million during the twelve months ending
32
September 30, 2004, but had no impact on the unpaid principal balance of the loans serviced for others portfolio. Additionally, the Company has entered into loan sales and securitizations with certain government-sponsored and private enterprises in which it has retained a smaller servicing fee than is common in the industry. The smaller servicing fee leads to a lower value for the resulting MSR and greater cash proceeds when the loans or securities are sold.
The following table presents the aggregate valuation adjustments for the MSR and the corresponding hedging and risk management derivative instruments and securities during the three and nine months ended September 30, 2004 and 2003:
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
2004
|
2003
|
||||||||||
|
(in millions)
|
|||||||||||||
Statement No. 133 MSR accounting valuation adjustments | $ | (885 | ) | $ | | $ | 822 | $ | | |||||
Change in value of MSR accounted for under lower of aggregate cost or market value methodology | (266 | ) | 368 | (646 | ) | 96 | ||||||||
|
|
|
|
|||||||||||
Total MSR valuation changes | (1,151 | ) | 368 | 176 | 96 | |||||||||
Statement No. 133 fair value hedging adjustments | 1,316 | | (669 | ) | | |||||||||
Revaluation gain (loss) from derivatives MSR risk management | 130 | (317 | ) | 917 | 840 | |||||||||
Net settlement income from certain interest-rate swaps | 126 | 120 | 481 | 344 | ||||||||||
Gain from securities | 45 | 176 | 50 | 316 | ||||||||||
|
|
|
|
|||||||||||
Net valuation change in hedging and risk management instruments | 1,617 | (21 | ) | 779 | 1,500 | |||||||||
|
|
|
|
|||||||||||
Total change in MSR valuation, net of hedging and risk management instruments | $ | 466 | $ | 347 | $ | 955 | $ | 1,596 | ||||||
|
|
|
|
The following tables separately present the risk management results associated with the economic hedges of MSR, loans held for sale and other risk management activities included within noninterest income for the three and nine months ended September 30, 2004 and 2003:
|
Three Months Ended
September 30, 2004 |
Nine Months Ended
September 30, 2004 |
||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
MSR
|
Loans
Held for Sale |
Other
|
Total
|
MSR
|
Loans
Held for Sale |
Other
|
Total
|
||||||||||||||||||
|
(in millions)
|
|||||||||||||||||||||||||
Revaluation gain (loss) from derivatives | $ | 130 | $ | (23 | ) | $ | | $ | 107 | $ | 917 | $ | 52 | $ | | $ | 969 | |||||||||
Net settlement income from certain interest-rate swaps | 126 | | | 126 | 481 | 4 | | 485 | ||||||||||||||||||
Gain from securities: | ||||||||||||||||||||||||||
Gain from other available-for-sale securities | | | 11 | 11 | 5 | | 68 | 73 | ||||||||||||||||||
Revaluation gain from principal-only mortgage-backed trading securities (1) | 45 | | | 45 | 45 | | | 45 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total | $ | 301 | $ | (23 | ) | $ | 11 | $ | 289 | $ | 1,448 | $ | 56 | $ | 68 | $ | 1,572 | |||||||||
|
|
|
|
|
|
|
|
33
|
Three Months Ended September 30, 2003
|
Nine Months Ended
September 30, 2003 |
|||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
MSR
|
Loans
Held for Sale |
Other
|
Total
|
MSR
|
Loans
Held for Sale |
Other
|
Total
|
|||||||||||||||||
|
(in millions)
|
||||||||||||||||||||||||
Revaluation gain (loss) from derivatives | $ | (317 | ) | $ | 145 | $ | | $ | (172 | ) | $ | 840 | $ | (197 | ) | $ | | $ | 643 | ||||||
Net settlement income from certain interest-rate swaps | 120 | 10 | | 130 | 344 | 10 | | 354 | |||||||||||||||||
Gain from other available-for-sale securities | 176 | | 381 | 557 | 316 | | 373 | 689 | |||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
Total | $ | (21 | ) | $ | 155 | $ | 381 | $ | 515 | $ | 1,500 | $ | (187 | ) | $ | 373 | $ | 1,686 | |||||||
|
|
|
|
|
|
|
|
Revaluation gain (loss) 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 of Financial Accounting Standards ("Statement") No. 133.
The Company began applying fair value hedge accounting treatment, as prescribed by Statement No. 133, as of April 1, 2004 to most of its MSR. Applying fair value hedge accounting to the MSR results in the changes in fair value of the hedging derivatives to be netted against the changes in fair value of the hedged MSR, to the extent the hedge relationship is determined to be highly effective. We use standard statistical methods of correlation to determine if the results of the changes in value of the hedging derivative and the hedged MSR meet the Statement No. 133 criteria for a highly effective hedge accounting relationship. Unlike the lower of cost or market value accounting methodology, the recorded value of the hedged MSR may exceed its original cost basis. The portion of the MSR in which the hedging relationship is determined not to be highly effective will continue to be accounted for at the lower of aggregate cost or market value.
The total change in MSR valuation, net of hedging and risk management instruments was a gain of $466 million in the third quarter of 2004, compared with a gain of $347 million in the third quarter of 2003. The hedging performance of the MSR asset was affected by the significant decrease in mortgage interest rates during the quarter. At September 30, 2004, the Federal National Mortgage Association ("FNMA") 30-year current coupon fixed mortgage rate was 5.24%, a decrease of 38 basis points from 5.62% at June 30, 2004. As interest rates decreased, basis spreads between mortgage rates and interest rate swap indices widened, resulting in gains on MSR hedging and risk management instruments that exceeded the decrease in value of the MSR.
During the nine months ended September 30, 2004, we recorded other than temporary MSR impairment of $410 million on the MSR asset. This amount was determined by applying an appropriate interest rate shock to the MSR in order to estimate the amount of the valuation allowance we may expect to recover in the foreseeable future. To the extent that the gross carrying value of the MSR, including the Statement No. 133 valuation adjustments, exceeded the estimated recoverable amount, that portion of the gross carrying value was written off as other than temporary impairment. The initial application of fair value hedge accounting treatment to most of the Company's MSR during the second quarter of 2004 effectively resulted in the Company recording much of the recovery in the value as a Statement No. 133 valuation adjustment. Absent the application of Statement 133 to the Company's MSR asset, most of the MSR recovery recognized during the second quarter would have been recorded as a reversal of the valuation allowance. The Company recorded other than temporary MSR impairment of $1.11 billion for the nine months ended September 30, 2003.
34
MSR amortization expense was lower in the first nine months of 2004, compared with the same period in 2003, due to a decline in the high prepayment rates experienced in the first half of 2003 and the large other than temporary MSR impairment recorded in that year.
The decrease in "Other, net" home loan servicing income (expense) for the three and nine months ended September 30, 2004 resulted from lower loan pool expenses due to the reduction in refinancing activity. Loan pool expenses represent the amount of expense that the Company incurs for the elapsed time between the borrower payoff date and the next monthly investor pool cutoff date.
In measuring the fair value of MSR, we stratify the loans in our servicing portfolio based on loan type and coupon rate. An impairment valuation allowance for a stratum is recorded when, and in the amount by which, its fair value is less than its gross carrying value. A reversal of the impairment allowance for a stratum is recorded when its fair value exceeds its net carrying value. However, a reversal in any particular stratum cannot exceed its valuation allowance. At September 30, 2004, we stratified the loans in our servicing portfolio as follows:
|
|
September 30, 2004
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Rate Band
|
Gross
Carrying Value |
Valuation
Allowance |
Net
Carrying Value |
Fair
Value |
|||||||||||
|
|
(in millions)
|
||||||||||||||
Primary Servicing: | ||||||||||||||||
Adjustable | All loans | $ | 1,653 | $ | 647 | $ | 1,006 | $ | 1,006 | |||||||
Government-sponsored enterprises | 6.00% and below | 2,888 | 510 | 2,378 | 2,378 | |||||||||||
Government-sponsored enterprises | 6.01% to 7.49% | 1,563 | 706 | 857 | 857 | |||||||||||
Government-sponsored enterprises | 7.50% and above | 203 | 81 | 122 | 122 | |||||||||||
Government | 6.00% and below | 495 | 85 | 410 | 410 | |||||||||||
Government | 6.01% to 7.49% | 551 | 237 | 314 | 314 | |||||||||||
Government | 7.50% and above | 262 | 115 | 147 | 147 | |||||||||||
Private | 6.00% and below | 476 | 83 | 393 | 393 | |||||||||||
Private | 6.01% to 7.49% | 275 | 121 | 154 | 154 | |||||||||||
Private | 7.50% and above | 97 | 32 | 65 | 65 | |||||||||||
|
|
|
|
|||||||||||||
Total primary servicing | 8,463 | 2,617 | 5,846 | 5,846 | ||||||||||||
Master servicing | All loans | 111 | 30 | 81 | 81 | |||||||||||
Specialty home loans | All loans | 159 | 4 | 155 | 155 | |||||||||||
Multi-family | All loans | 32 | 2 | 30 | 30 | |||||||||||
|
|
|
|
|||||||||||||
Total | $ | 8,765 | $ | 2,653 | $ | 6,112 | $ | 6,112 | ||||||||
|
|
|
|
35
At September 30, 2004, key economic assumptions and the sensitivity of the current fair value of home loan MSR to immediate changes in those assumptions were as follows:
|
September 30, 2004
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Mortgage Servicing Rights
|
|||||||||||||
|
Fixed-Rate
Mortgage Loans |
Adjustable-Rate
Mortgage Loans |
|
|||||||||||
|
Government and
Government- Sponsored Enterprises |
Privately
Issued |
All
Types |
Specialty
Home Loans |
||||||||||
|
(dollars in millions)
|
|||||||||||||
Fair value of home loan MSR | $ | 4,228 | $ | 612 | $ | 1,006 | $ | 155 | ||||||
Expected weighted-average life (in years) | 3.8 | 3.8 | 3.2 | 2.5 | ||||||||||
Constant prepayment rate ("CPR") (1) | 18.55 | % | 19.94 | % | 28.12 | % | 32.37 | % | ||||||
Impact on fair value of 25% decrease in CPR | $ | 789 | $ | 136 | $ | 217 | $ | 33 | ||||||
Impact on fair value of 50% decrease in CPR | 1,885 | 328 | 538 | 81 | ||||||||||
Impact on fair value of 25% increase in CPR | (592 | ) | (101 | ) | (158 | ) | (25 | ) | ||||||
Impact on fair value of 50% increase in CPR | (1,051 | ) | (179 | ) | (282 | ) | (44 | ) | ||||||
Discounted cash flow rate ("DCF") | 8.31 | % | 9.81 | % | 9.58 | % | 19.75 | % | ||||||
Impact on fair value of 10% decrease in DCF | n/a | n/a | n/a | $ | 5 | |||||||||
Impact on fair value of 25% decrease in DCF | $ | 300 | $ | 48 | $ | 57 | 13 | |||||||
Impact on fair value of 50% decrease in DCF | 654 | 106 | 122 | n/a | ||||||||||
Impact on fair value of 25% increase in DCF | (258 | ) | (41 | ) | (50 | ) | (11 | ) | ||||||
Impact on fair value of 50% increase in DCF | (482 | ) | (75 | ) | (94 | ) | (20 | ) |
These sensitivities are hypothetical and should be used with caution. As the table above demonstrates, our methodology for estimating the fair value of MSR is highly sensitive to changes in assumptions. For example, our determination of fair value uses anticipated prepayment speeds. Actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value based on a variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the MSR is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, increases in market interest rates may result in lower prepayments, but credit losses may increase), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made as of a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time. Refer to "Market Risk Management" for discussion of how MSR prepayment risk is managed and to Note 1 to the Consolidated Financial Statements "Summary of Significant Accounting Policies" in the Company's 2003 Annual Report on Form 10-K/A for further discussion of how MSR impairment is measured.
The Company recorded gain from mortgage loans, net of risk management instruments, of $187 million and $550 million for the three and nine months ended September 30, 2004, compared with a net loss of $49 million and a net gain of $999 million for the same periods in 2003. The increase of $236 million from the three months ended September 30, 2003 to the same period in 2004 was primarily the result of losses incurred from various market volatility and operational issues experienced during the third quarter of 2003, including unhedged rate lock extensions granted to customers, a diminished level of market liquidity for certain instruments used to manage interest rate risk on rate locks and loans held for sale, and systems issues that caused data interruptions during the period. The decrease of $449 million from the nine months ended September 30, 2003 to the same period in 2004 was primarily the result of
36
historically low mortgage interest rates during the first part of 2003 which generated extremely high levels of salable fixed-rate home loan volume, most of which was the result of refinancing activity. When the industry-wide refinancing boom ended later that year, customer preferences began to shift away from fixed-rate loans to adjustable-rate products. Accordingly, the Company's fixed-rate home loan volume declined from $240.44 billion in the first nine months of 2003 to $67.91 billion in the same period of 2004. Conversely, short-term adjustable-rate loan volume, which the Company generally retains in its loan portfolio, increased from $18.47 billion in the first nine months of 2003 to $50.29 billion in the same period of 2004.
As part of its normal servicing activities, the Company repurchases delinquent mortgages contained within Government National Mortgage Association ("GNMA") loan servicing pools and, in general, resells them to secondary market participants. Accordingly, gains from the resale of these mortgages are reported as gain from mortgage loans. In one part of the Company's program, certain loans that have been 30 days or more past due for four consecutive months with at least one payment that remains uncured (referred to as "rolling 30 loans") are repurchased from GNMA and then resold in the secondary market. In the other, certain loans that have missed three consecutive payments are likewise purchased and resold. Gain from the sale of these loans was $30 million and $130 million for the three and nine months ended September 30, 2004 and $81 million and $309 million for the same periods in 2003. 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. Over time, we expect gains from the repurchase of "rolling 30 loans" to diminish as the pools that are eligible for repurchase are depleted.
The fair value changes in loans held for sale and the offsetting changes in the derivative instruments used as fair value hedges are 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 changes in the fair value of derivatives acquired to mitigate the risk of fair value changes to these nonqualifying loans, a net loss of $23 million and a net gain of $52 million were recognized as revaluation gain/loss from derivatives during the three and nine months ended September 30, 2004, compared with a revaluation gain of $145 million and a net loss of $197 million for the same periods in 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 September 30, 2004, the fair value of loans held for sale was $29.32 billion with a carrying amount of $29.18 billion, and as of December 31, 2003, the fair value and carrying amount were $20.84 billion.
Net settlement income from certain interest-rate swaps primarily represents income from our interest-rate swaps that are designated as MSR risk management instruments. At September 30, 2004, the total notional amount of such swaps was $41.99 billion, compared with $24.73 billion at September 30, 2003.
Loan related income decreased for the three and nine months ended September 30, 2004 primarily due to decreased loan transfer fees charged to our correspondent lenders resulting from decreased loan volume.
All Other Noninterest Income Analysis
The increase in depositor and other retail banking fees for the three and nine months ended September 30, 2004, compared with the same periods in 2003, was largely due to higher levels of checking fees that resulted from an increase in the number of noninterest-bearing checking accounts and an increase in ATM and debit card related income. The number of noninterest-bearing checking accounts at September 30, 2004 totaled approximately 7.0 million, compared with approximately 6.3 million at September 30, 2003.
Insurance income increased during the three and nine months ended September 30, 2004 substantially due to the continued growth in our captive reinsurance programs.
37
Gain from other available-for-sale securities decreased to $11 million for the third quarter of 2004 from $557 million for the same period in 2003. During the third quarter of 2003, sales of $28.10 billion in mortgage-backed securities and investment securities resulted in total gains of approximately $815 million and included $176 million designated as MSR risk management instruments and $381 million related to securities acquired for asset-liability risk management. The remaining gains of $258 million are reflected as gain from sale of originated mortgage-backed securities within home loan mortgage banking income. There were no similar sales for the same period in 2004.
Several securities sold under agreements to repurchase ("repurchase agreements") with associated pay-fixed swaps were terminated during the third quarter of 2004, resulting in a net loss on extinguishment of borrowings of $147 million. During the first half of 2004, the Company terminated certain pay-fixed swaps hedging variable rate Federal Home Loan Bank ("FHLB") advances, resulting in a loss of $90 million. During the nine months ended September 30, 2003, the Company restructured certain repurchase agreements containing embedded pay-fixed swaps resulting in a loss of $129 million. Each of these transactions had the immediate effect of reducing the Company's wholesale borrowing costs.
Other income included $45 million of income recognized from revaluation gains on principal-only mortgage-backed trading securities in the third quarter of 2004, which were acquired as MSR risk management instruments. In the third quarter of 2003, other income included a $55 million fee received from the Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac") for swapping certain multi-family loans for 100% of the beneficial interest in those loans in the form of mortgage-backed securities. The decrease for the nine months ended September 30, 2004 as compared with the same period in 2003 was primarily due to a decline in the income recorded on residual interests in collateralized mortgage obligations and other trading securities.
Noninterest Expense
Noninterest expense from continuing operations consisted of the following:
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Percentage
Change |
Percentage
Change |
||||||||||||||||
|
2004
|
2003
|
2004
|
2003
|
||||||||||||||
|
(dollars in millions)
|
|||||||||||||||||
Compensation and benefits | $ | 841 | $ | 837 | | % | $ | 2,589 | $ | 2,427 | 7 | % | ||||||
Occupancy and equipment | 404 | 352 | 15 | 1,197 | 1,024 | 17 | ||||||||||||
Telecommunications and outsourced information services | 118 | 150 | (21 | ) | 364 | 429 | (15 | ) | ||||||||||
Depositor and other retail banking losses | 54 | 35 | 54 | 134 | 113 | 18 | ||||||||||||
Amortization of other intangible assets | 14 | 15 | (8 | ) | 42 | 46 | (8 | ) | ||||||||||
Advertising and promotion | 76 | 51 | 49 | 219 | 190 | 15 | ||||||||||||
Professional fees | 34 | 69 | (51 | ) | 105 | 189 | (44 | ) | ||||||||||
Postage | 58 | 51 | 14 | 174 | 164 | 6 | ||||||||||||
Loan expense | 57 | 71 | (19 | ) | 166 | 192 | (13 | ) | ||||||||||
Travel and training | 26 | 38 | (31 | ) | 89 | 111 | (20 | ) | ||||||||||
Reinsurance expense | 21 | 12 | 73 | 59 | 44 | 35 | ||||||||||||
Other expense | 166 | 129 | 27 | 459 | 377 | 22 | ||||||||||||
|
|
|
|
|||||||||||||||
Total noninterest expense | $ | 1,869 | $ | 1,810 | 3 | $ | 5,597 | $ | 5,306 | 5 | ||||||||
|
|
|
|
The increase in employee compensation and benefits for the nine months ended September 30, 2004, compared with the same period in 2003 was primarily due to lower levels of compensation expense that are deferrable as direct loan origination costs and an $84 million charge for severance expense related to staffing reductions that occurred as part of the Company's ongoing cost containment initiative. The
38
number of employees was 55,488 at September 30, 2004, compared with 61,374 at December 31, 2003 and 60,549 at September 30, 2003.
The increase in occupancy and equipment expense for the three months ended September 30, 2004, compared with the same period in 2003 resulted primarily from restructuring activities and increased rent expense. Restructuring activities included a $14 million charge for the discontinued use of facilities and a $14 million loss on the disposal of furniture and equipment. The increase in rent expense was due to the continued expansion of new retail banking stores throughout the twelve month period ending September 30, 2004. The majority of the increase for the nine months ended September 30, 2004 was from higher equipment depreciation expense, building rent expense and the costs related to the discontinued use of facilities and losses on the disposal of equipment. Depreciation expense increased due to the completion of technology projects that were placed in service during the second quarter of 2003.
The increase in depositor and other retail banking losses was primarily due to higher levels of overdraft charge-offs, losses from returned deposited checks and a general increase in check fraud.
The increase in advertising and promotion expense for the three months ended September 30, 2004 was primarily due to additional direct mailing costs for the Free Checking campaign and other local marketing and community relations expense.
The decrease in professional fees for the three and nine months ended September 30, 2004 was mostly due to decreases in fees associated with technology-related projects.
The increase in other expense for the three and nine months ended September 30, 2004 was partly due to an increase in the accrual for estimated losses related to certain outstanding litigation settlements, judgments and potential environmental claims.
Review of Financial Condition
Securities
Securities consisted of the following:
|
September 30, 2004
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized
Cost |
Unrealized
Gains |
Unrealized
Losses |
Fair
Value |
|||||||||||
|
(in millions)
|
||||||||||||||
Available-for-sale securities | |||||||||||||||
Mortgage-backed securities: | |||||||||||||||
U.S. Government and agency | $ | 8,801 | $ | 138 | $ | (21 | ) | $ | 8,918 | ||||||
Private issue | 1,220 | 30 | | 1,250 | |||||||||||
|
|
|
|
||||||||||||
Total mortgage-backed securities | 10,021 | 168 | (21 | ) | 10,168 | ||||||||||
Investment securities: | |||||||||||||||
U.S. Government and agency | 5,842 | 38 | (36 | ) | 5,844 | ||||||||||
Other debt securities | 326 | 19 | | 345 | |||||||||||
Equity securities | 123 | 8 | (1 | ) | 130 | ||||||||||
|
|
|
|
||||||||||||
Total investment securities | 6,291 | 65 | (37 | ) | 6,319 | ||||||||||
|
|
|
|
||||||||||||
Total available-for-sale securities | $ | 16,312 | $ | 233 | $ | (58 | ) | $ | 16,487 | ||||||
|
|
|
|
39
|
December 31, 2003
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized
Cost |
Unrealized
Gains |
Unrealized
Losses |
Fair
Value |
|||||||||||
|
(in millions)
|
||||||||||||||
Available-for-sale securities | |||||||||||||||
Mortgage-backed securities: | |||||||||||||||
U.S. Government and agency | $ | 8,687 | $ | 140 | $ | (26 | ) | $ | 8,801 | ||||||
Private issue | 1,849 | 46 | (1 | ) | 1,894 | ||||||||||
|
|
|
|
||||||||||||
Total mortgage-backed securities | 10,536 | 186 | (27 | ) | 10,695 | ||||||||||
Investment securities: | |||||||||||||||
U.S. Government and agency | 25,950 | 5 | (340 | ) | 25,615 | ||||||||||
Other debt securities | 247 | 17 | (2 | ) | 262 | ||||||||||
Equity securities | 125 | 11 | (1 | ) | 135 | ||||||||||
|
|
|
|
||||||||||||
Total investment securities | 26,322 | 33 | (343 | ) | 26,012 | ||||||||||
|
|
|
|
||||||||||||
Total available-for-sale securities | $ | 36,858 | $ | 219 | $ | (370 | ) | $ | 36,707 | ||||||
|
|
|
|
The realized gross gains and losses of securities for the periods indicated were as follows:
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
2004
|
2003
|
||||||||||
|
(in millions)
|
|||||||||||||
Available-for-sale securities | ||||||||||||||
Realized gross gains | $ | 41 | $ | 905 | $ | 238 | $ | 1,083 | ||||||
Realized gross losses | (30 | ) | (90 | ) | (165 | ) | (134 | ) | ||||||
|
|
|
|
|||||||||||
Realized net gain | $ | 11 | $ | 815 | $ | 73 | $ | 949 | ||||||
|
|
|
|
Our investment securities decreased predominantly due to the sale of U.S. Government and agency bonds. The proceeds from the sales of these securities were used, in part, to allow for the growth in the loan portfolio.
40
Loans
Loans held in portfolio consisted of the following:
|
September 30,
2004 |
December 31,
2003 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(in millions)
|
|||||||||
Loans secured by real estate: | ||||||||||
Home | $ | 112,230 | $ | 100,043 | ||||||
Purchased specialty mortgage finance | 17,305 | 12,973 | ||||||||
|
|
|||||||||
Total home loans | 129,535 | 113,016 | ||||||||
Home equity loans and lines of credit | 40,505 | 27,647 | ||||||||
Home construction: | ||||||||||
Builder (1) | 1,248 | 1,052 | ||||||||
Custom (2) | 1,484 | 1,168 | ||||||||
Multi-family | 21,640 | 20,324 | ||||||||
Other real estate | 6,268 | 6,649 | ||||||||
|
|
|||||||||
Total loans secured by real estate | 200,680 | 169,856 | ||||||||
Consumer | 831 | 1,028 | ||||||||
Commercial business | 4,647 | 4,266 | ||||||||
|
|
|||||||||
Total loans held in portfolio | $ | 206,158 | $ | 175,150 | ||||||
|
|
Our loans held in portfolio increased predominantly due to an increase in home loans and home equity loans and lines of credit. Substantially all of the growth in the home loan and home equity loans and lines of credit portfolios resulted from the origination of short-term adjustable-rate products.
Other Assets
Other assets consisted of the following:
|
September 30,
2004 |
December 31,
2003 |
|||||
---|---|---|---|---|---|---|---|
|
(in millions)
|
||||||
Premises and equipment | $ | 3,279 | $ | 3,286 | |||
Investment in bank-owned life insurance | 2,655 | 2,582 | |||||
Accrued interest receivable | 1,453 | 1,558 | |||||
Foreclosed assets | 281 | 311 | |||||
Other intangible assets | 208 | 251 | |||||
Derivatives | 1,488 | 1,457 | |||||
Trading securities | 3,113 | 1,381 | |||||
Accounts receivable | 3,653 | 4,309 | |||||
Other | 1,281 | 1,366 | |||||
|
|
||||||
Total other assets | $ | 17,411 | $ | 16,501 | |||
|
|
A majority of the increase in trading securities was due to the purchase of principal-only mortgage backed securities that are being used for MSR risk management purposes.
41
Deposits
Deposits consisted of the following:
|
September 30,
2004 |
December 31,
2003 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(in millions)
|
|||||||||
Retail deposits: | ||||||||||
Checking deposits: | ||||||||||
Noninterest bearing | $ | 16,178 | $ | 13,724 | ||||||
Interest bearing | 52,378 | 67,990 | ||||||||
|
|
|||||||||
Total checking deposits | 68,556 | 81,714 | ||||||||
Savings and money market deposits | 38,620 | 22,131 | ||||||||
Time deposits | 24,825 | 24,605 | ||||||||
|
|
|||||||||
Total retail deposits | 132,001 | 128,450 | ||||||||
Commercial business deposits | 8,117 | 7,159 | ||||||||
Wholesale deposits | 14,052 | 2,579 | ||||||||
Custodial and escrow deposits (1) | 14,525 | 14,993 | ||||||||
|
|
|||||||||
Total deposits | $ | 168,695 | $ | 153,181 | ||||||
|
|
The increase in retail deposits was primarily the result of the $16.49 billion increase in savings and money market deposits from year-end 2003, which was predominantly due to the introduction of the Platinum Savings account, substantially offset by a decline in Platinum Checking account balances. The $11.47 billion increase in wholesale deposits from year-end 2003 was predominantly due to an increase in our investor base resulting from an upgrade in our credit rating from a major agency in the early part of 2004, making the Company more attractive to institutional investors.
Checking, savings and money market deposits composed 81% of retail deposits at September 30, 2004, unchanged from year-end 2003. These products generally have the benefit of lower interest costs, compared with time deposits. Even though checking, savings and money market deposits are more liquid, we consider them to be the core relationship with our customers. At September 30, 2004, deposits funded 58% of total assets, compared with 56% at December 31, 2003.
Borrowings
At September 30, 2004, our borrowings were largely in the form of advances from the Federal Home Loan Banks ("FHLBs") of Seattle, San Francisco, Dallas and New York and repurchase agreements. Although the Company acquired advances from the FHLBs of Dallas and New York during its acquisitions of Bank United in 2001 and Dime Bancorp, Inc. in 2002, the Company does not have continuing borrowing privileges at these FHLBs. The mix of our borrowing sources at any given time is dependent on market conditions.
Operating Segments
We manage and report information concerning the Company's activities, operations, products and services around two primary categories: consumers and commercial customers and have established three operating segments for the purpose of management reporting: Retail Banking and Financial Services, Mortgage Banking and the Commercial Group. Results for Corporate Support/Treasury and Other are also presented. Refer to Note 7 to the Consolidated Financial Statements "Operating Segments" for information regarding the key elements of our management reporting methodologies used to measure segment performance.
42
Consumer Group
Retail Banking and Financial Services
|
Three Months Ended
September 30, |
|
Nine Months Ended
September 30, |
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Percentage
Change |
Percentage
Change |
|||||||||||||||||
|
2004
|
2003
|
2004
|
2003
|
|||||||||||||||
|
(dollars in millions)
|
|
(dollars in millions)
|
|
|||||||||||||||
Condensed income statement: | |||||||||||||||||||
Net interest income | $ | 1,295 | $ | 994 | 30 | % | $ | 3,802 | $ | 2,902 | 31 | % | |||||||
Provision for loan and lease losses | 43 | 40 | 9 | 123 | 113 | 10 | |||||||||||||
Noninterest income | 713 | 653 | 9 | 2,038 | 1,851 | 10 | |||||||||||||
Inter-segment revenue | 3 | 63 | (96 | ) | 15 | 159 | (90 | ) | |||||||||||
Noninterest expense | 1,116 | 980 | 14 | 3,303 | 2,860 | 15 | |||||||||||||
|
|
|
|
||||||||||||||||
Income before income taxes | 852 | 690 | 23 | 2,429 | 1,939 | 25 | |||||||||||||
Income taxes | 323 | 274 | 18 | 920 | 744 | 24 | |||||||||||||
|
|
|
|
||||||||||||||||
Net income | $ | 529 | $ | 416 | 27 | $ | 1,509 | $ | 1,195 | 26 | |||||||||
|
|
|
|
||||||||||||||||
Performance and other data: | |||||||||||||||||||
Efficiency ratio (1) | 49.02 | % | 49.65 | % | (1 | ) | 49.81 | % | 50.35 | % | (1 | ) | |||||||
Average loans | $ | 167,539 | $ | 118,295 | 42 | $ | 158,646 | $ | 116,307 | 36 | |||||||||
Average assets | 179,950 | 130,046 | 38 | 170,881 | 127,934 | 34 | |||||||||||||
Average deposits | 131,850 | 126,040 | 5 | 129,518 | 124,358 | 4 | |||||||||||||
Employees at end of period | 29,963 | 28,802 | 4 | 29,963 | 28,802 | 4 |
The increase in net interest income was mostly due to higher average balances of home loans and home equity loans and lines of credit. Average home loans have increased $27.93 billion and $24.28 billion, or 34% and 30%, for the three and nine months ended September 30, 2004, compared with the same periods in 2003 resulting from increased growth in short-term adjustable-rate mortgages typically held in portfolio. Average home equity loans and lines of credit increased $16.12 billion and $14.27 billion, or 73%, for the three and nine months ended September 30, 2004, compared with the same periods in 2003.
The increase in noninterest income was primarily due to depositor and other retail banking fees resulting from higher numbers of net new retail checking accounts, which increased by approximately 142,000 in the third quarter of 2004 and 755,000 in the preceding twelve months.
Inter-segment revenue decreased due to lower broker fees received from the Mortgage Banking segment for the origination of mortgage loans, which resulted from the overall decline in refinancing activity.
The increase in noninterest expense was primarily driven by employee compensation and benefits and occupancy and equipment expense resulting from expansion of the Company's distribution network, which included the opening of 56 net new stores in the third quarter of 2004 and 195 net new stores in the preceding twelve months.
The increase in average deposits was primarily due to higher levels of interest-bearing Platinum Savings accounts.
43
Mortgage Banking
|
Three Months Ended
September 30, |
|
Nine Months Ended
September 30, |
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Percentage
Change |
Percentage
Change |
|||||||||||||||||
|
2004
|
2003
|
2004
|
2003
|
|||||||||||||||
|
(dollars in millions)
|
|
(dollars in millions)
|
|
|||||||||||||||
Condensed income statement: | |||||||||||||||||||
Net interest income | $ | 274 | $ | 683 | (60 | )% | $ | 908 | $ | 2,028 | (55 | )% | |||||||
Provision for loan and lease losses | 2 | 1 | 143 | 7 | 1 | 433 | |||||||||||||
Noninterest income | 769 | 288 | 167 | 1,728 | 2,076 | (17 | ) | ||||||||||||
Inter-segment expense | 3 | 63 | (96 | ) | 15 | 159 | (90 | ) | |||||||||||
Noninterest expense | 602 | 729 | (17 | ) | 1,921 | 2,180 | (12 | ) | |||||||||||
|
|
|
|
||||||||||||||||
Income before income taxes | 436 | 178 | 146 | 693 | 1,764 | (61 | ) | ||||||||||||
Income taxes | 165 | 61 | 171 | 262 | 664 | (61 | ) | ||||||||||||
|
|
|
|
||||||||||||||||
Net income | $ | 271 | $ | 117 | 133 | $ | 431 | $ | 1,100 | (61 | ) | ||||||||
|
|
|
|
||||||||||||||||
Performance and other data: | |||||||||||||||||||
Efficiency ratio (1) | 52.89 | % | 74.66 | % | (29 | ) | 67.33 | % | 51.31 | % | 31 | ||||||||
Average loans | $ | 22,611 | $ | 51,648 | (56 | ) | $ | 23,158 | $ | 48,160 | (52 | ) | |||||||
Average assets | 36,343 | 78,806 | (54 | ) | 37,243 | 73,130 | (49 | ) | |||||||||||
Average deposits | 15,385 | 35,120 | (56 | ) | 16,695 | 30,066 | (44 | ) | |||||||||||
Employees at end of period | 16,786 | 22,527 | (25 | ) | 16,786 | 22,527 | (25 | ) |
The decrease in net interest income was mostly due to a decline in the average balances of loans held for sale. This occurred due to a reduction in refinancing activity, compared with 2003 when interest rates were at record low levels and a shift in loan volume mix from fixed-rate loans to adjustable-rate loans that are generally held in portfolio. Total loan volume for the three months ended September 30, 2004 was $40.49 billion, compared with $111.95 billion for the same period in 2003. Adjustable-rate loan mortgage volume increased for the three months ended September 30, 2004 to 63% of total loan volume from 25% in 2003.
The increase in noninterest income for the three months ended September 30, 2004 was primarily due to losses from mortgage loans incurred during the third quarter of 2003, resulting from various market volatility and operational issues, including unhedged rate lock extensions granted to customers, a diminished level of market liquidity for certain instruments used to manage interest rate risk on rate locks and loans held for sale, and systems issues that caused data interruptions during the period. The decrease in noninterest income for the nine months ended September 30, 2004 was mostly due to gains from other available-for-sale securities resulting from sales of investment securities designated as MSR risk management instruments during the second and third quarters of 2003. There was no comparable activity for the same periods in 2004.
Inter-segment expense has decreased due to lower broker fees paid to the Retail Banking and Financial Services segment for the origination of mortgage loans resulting from the overall decline in refinancing activity, compared with 2003.
The decrease in noninterest expense for the three and nine months ended September 30, 2004 was primarily due to lower technology and compensation and benefits expense. This reflects the consolidation of various locations and functions, the conversion to a single loan servicing platform, headcount reductions, which decreased to 16,786 at September 30, 2004 from 22,527 at September 30, 2003, and the sale or closure of approximately 100 home loan offices in non-strategic markets.
44
The decrease in average deposits was predominantly due to lower custodial and escrow balances resulting from the overall decline in refinancing activity, compared with 2003.
Commercial Group
|
Three Months Ended
September 30, |
|
Nine Months Ended
September 30, |
|
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Percentage
Change |
Percentage
Change |
||||||||||||||||||
|
2004
|
2003
|
2004
|
2003
|
||||||||||||||||
|
(dollars in millions)
|
|
(dollars in millions)
|
|
||||||||||||||||
Condensed income statement: | ||||||||||||||||||||
Net interest income | $ | 324 | $ | 324 | | % | $ | 1,004 | $ | 959 | 5 | % | ||||||||
Provision for loan and lease losses | 10 | 24 | (59 | ) | 34 | 86 | (60 | ) | ||||||||||||
Noninterest income | 66 | 204 | (67 | ) | 256 | 421 | (39 | ) | ||||||||||||
Noninterest expense | 160 | 142 | 13 | 458 | 406 | 12 | ||||||||||||||
|
|
|
|
|||||||||||||||||
Income from continuing operations before income taxes | 220 | 362 | (39 | ) | 768 | 888 | (14 | ) | ||||||||||||
Income taxes | 75 | 130 | (42 | ) | 268 | 317 | (16 | ) | ||||||||||||
|
|
|
|
|||||||||||||||||
Income from continuing operations | 145 | 232 | (38 | ) | 500 | 571 | (12 | ) | ||||||||||||
Income from discontinued operations, net of taxes | | 24 | (100 | ) | | 65 | (100 | ) | ||||||||||||
|
|
|
|
|||||||||||||||||
Net income | $ | 145 | $ | 256 | (44 | ) | $ | 500 | $ | 636 | (21 | ) | ||||||||
|
|
|
|
|||||||||||||||||
Performance and other data: | ||||||||||||||||||||
Efficiency ratio (1) | 33.45 | % | 21.39 | % | 56 | 29.25 | % | 23.13 | % | 26 | ||||||||||
Average loans | $ | 38,829 | $ | 35,318 | 10 | $ | 38,120 | $ | 34,728 | 10 | ||||||||||
Average assets | 43,745 | 44,017 | (1 | ) | 43,460 | 43,231 | 3 | |||||||||||||
Average deposits | 7,811 | 6,131 | 27 | 6,922 | 5,163 | 34 | ||||||||||||||
Employees at end of period (2) | 3,270 | 5,594 | (42 | ) | 3,270 | 5,594 | (42 | ) |
The decrease in the provision for loan and lease losses resulted from lower actual charge-offs and lower expected charge-off rates of commercial and multi-family loans, compared with 2003.
The decrease in noninterest income for the three and nine months ended September 30, 2004 was primarily due to transactions during the third quarter of 2003 that resulted in a gain of $70 million recognized from the sale of mortgage-backed securities and a nonrefundable fee of $55 million received as consideration for swapping approximately $3.3 billion of multi-family loans with Freddie Mac.
The increase in noninterest expense was mostly due to increased compensation and benefits, technology and occupancy and equipment expense and other expenses due to growth in Long Beach Mortgage, part of the Company's specialty mortgage finance program.
45
Corporate Support/Treasury and Other
|
Three Months Ended
September 30, |
|
Nine Months Ended
September 30, |
|
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Percentage
Change |
Percentage
Change |
||||||||||||||||||
|
2004
|
2003
|
2004
|
2003
|
||||||||||||||||
|
(dollars in millions)
|
|
(dollars in millions)
|
|
||||||||||||||||
Condensed income statement: | ||||||||||||||||||||
Net interest income (expense) | $ | (263 | ) | $ | (183 | ) | 43 | % | $ | (767 | ) | $ | (261 | ) | 194 | % | ||||
Noninterest income (expense) | (122 | ) | 611 | | (158 | ) | 548 | | ||||||||||||
Noninterest expense | 203 | 171 | 18 | 548 | 490 | 12 | ||||||||||||||
|
|
|
|
|||||||||||||||||
Income (loss) from continuing operations before income taxes | (588 | ) | 257 | | (1,473 | ) | (203 | ) | 627 | |||||||||||
Income taxes (benefit) | (221 | ) | 95 | | (551 | ) | (75 | ) | 634 | |||||||||||
|
|
|
|
|||||||||||||||||
Income (loss) from continuing operations | (367 | ) | 162 | | (922 | ) | (128 | ) | 624 | |||||||||||
Income from discontinued operations, net of taxes | | | | 399 | | | ||||||||||||||
|
|
|
|
|||||||||||||||||
Net income (loss) | $ | (367 | ) | $ | 162 | | $ | (523 | ) | $ | (128 | ) | 310 | |||||||
|
|
|
|
|||||||||||||||||
Performance and other data: | ||||||||||||||||||||
Average assets | $ | 25,452 | $ | 39,108 | (35 | ) | $ | 29,845 | $ | 42,403 | (30 | ) | ||||||||
Average deposits | 13,820 | 6,654 | 108 | 9,429 | 5,649 | 67 | ||||||||||||||
Employees at end of period | 5,469 | 5,978 | (9 | ) | 5,469 | 5,978 | (9 | ) |
The increase in net interest expense was primarily due to lower interest income from declining balances of available-for-sale securities.
The decrease in noninterest income was substantially due to gains realized on the sale of available-for-sale securities during the third quarter of 2003 and losses of $237 million that resulted from the termination of certain wholesale borrowings with associated pay-fixed interest rate swaps during the nine months ended September 30, 2004.
A significant portion of the increase in noninterest expense was due to severance and facility closures related to the Company's cost containment initiative. All such restructuring charges incurred from this initiative are charged to this unit.
The decrease in average assets was mostly due to the sales and paydowns of available-for-sale securities during the preceding twelve months.
Income from discontinued operations resulted from the sale of the Company's subsidiary, Washington Mutual Finance, in the first quarter of 2004.
46
Asset Securitization
We transform loans into securities, which are sold to investors a process known as securitization. Securitization involves the sale of loans to a qualifying special-purpose entity ("QSPE"), typically a trust. The QSPE, in turn, issues securities, commonly called asset-backed securities, which 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 QSPEs 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 sold or securitized assets. Retained interests may provide credit enhancement to the investors and, absent the violation of representations and warranties, generally represent the Company's maximum risk exposure associated with these transactions. Retained interests in securitizations were $1.79 billion at September 30, 2004, of which $1.74 billion have either a AAA credit rating or are agency insured. Additional information concerning securitization transactions is included in Note 7 to the Consolidated Financial Statements "Mortgage Banking Activities" of the Company's 2003 Annual Report on Form 10-K/A.
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 5 to the Consolidated Financial Statements "Guarantees."
Asset Quality
Nonaccrual Loans, Foreclosed Assets and Restructured Loans
Loans are generally placed on nonaccrual status when they are 90 days or more past due. Additionally, loans in non-homogeneous portfolios are placed on nonaccrual status prior to becoming 90 days past due when payment in full of principal and interest is not expected. Management's classification of a loan as nonaccrual or restructured does not necessarily indicate that the principal or interest of the loan is uncollectible in whole or in part.
47
Nonaccrual loans and foreclosed assets ("nonperforming assets") and restructured loans from continuing operations consisted of the following:
|
September 30,
2004 |
June 30,
2004 |
December 31,
2003 |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(dollars in millions)
|
|||||||||||||||
Nonperforming assets and restructured loans: | ||||||||||||||||
Nonaccrual loans: | ||||||||||||||||
Loans secured by real estate: | ||||||||||||||||
Home | $ | 538 | $ | 535 | $ | 736 | ||||||||||
Purchased specialty mortgage finance | 608 | 585 | 597 | |||||||||||||
|
|
|
||||||||||||||
Total home nonaccrual loans | 1,146 | 1,120 | 1,333 | |||||||||||||
Home equity loans and lines of credit | 50 | 48 | 47 | |||||||||||||
Home construction: | ||||||||||||||||
Builder (1) | 23 | 18 | 25 | |||||||||||||
Custom (2) | 8 | 6 | 10 | |||||||||||||
Multi-family | 23 | 20 | 19 | |||||||||||||
Other real estate | 173 | 133 | 153 | |||||||||||||
|
|
|
||||||||||||||
Total nonaccrual loans secured by real estate | 1,423 | 1,345 | 1,587 | |||||||||||||
Consumer | 11 | 9 | 8 | |||||||||||||
Commercial business | 37 | 42 | 31 | |||||||||||||
|
|
|
||||||||||||||
Total nonaccrual loans held in portfolio | 1,471 | 1,396 | 1,626 | |||||||||||||
Foreclosed assets | 281 | 286 | 311 | |||||||||||||
|
|
|
||||||||||||||
Total nonperforming assets | $ | 1,752 | $ | 1,682 | $ | 1,937 | ||||||||||
As a percentage of total assets | 0.61 | % | 0.60 | % | 0.70 | % | ||||||||||
Restructured loans | $ | 38 | $ | 79 | $ | 111 | ||||||||||
|
|
|
||||||||||||||
Total nonperforming assets and restructured loans | $ | 1,790 | $ | 1,761 | $ | 2,048 | ||||||||||
|
|
|
The reduction in nonaccrual loans during the first nine months of 2004 was predominantly driven by declines in nonaccrual home loans. The Company continued its program of selling packages of nonperforming loans that it holds in portfolio, including $95 million of such nonperforming loans sold during the third quarter. Year-to-date, $341 million of nonperforming loans held in portfolio were sold which resulted in $17 million in related charge-offs. We will continue to periodically evaluate nonperforming loan sales as part of our ongoing portfolio management strategy.
Nonaccrual home equity loans and lines of credit increased $3 million during the first nine months of 2004, but as a percentage to total loans in this portfolio declined to 0.12% at September 30, 2004 from 0.17% at December 31, 2003. Other real estate nonaccrual loans increased $40 million during the quarter, primarily due to the addition of two large credits, and are up $20 million since year-end 2003.
Foreclosed assets totaled $281 million at September 30, 2004, compared with $286 million at June 30, 2004 and $311 million at December 31, 2003. The Company's foreclosed assets include residential and commercial real estate as well as a small amount of personal property. Driving the decline during the nine months just ended were the sales of several commercial foreclosed assets.
Nonaccrual loans held for sale, which are excluded from the nonaccrual balances presented above, were $84 million, $99 million and $66 million at September 30, 2004, June 30, 2004, and December 31, 2003.
48
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 $68 million at September 30, 2004, compared with $53 million at June 30, 2004, and $46 million at December 31, 2003. The majority of these loans are either VA- or FHA-insured with little or no risk of loss of principal or interest.
Provision and Allowance for Loan and Lease Losses
Changes in the allowance for loan and lease losses from continuing operations were as follows:
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
2004
|
2003
|
||||||||||||||
|
(dollars in millions)
|
|||||||||||||||||
Balance, beginning of period | $ | 1,293 | $ | 1,530 | $ | 1,250 | $ | 1,503 | ||||||||||
Allowance for certain loan commitments/other | | 17 | (3 | ) | 15 | |||||||||||||
Provision for loan and lease losses | 56 | 76 | 172 | 244 | ||||||||||||||
|
|
|
|
|||||||||||||||
1,349 | 1,623 | 1,419 | 1,762 | |||||||||||||||
Loans charged off: | ||||||||||||||||||
Loans secured by real estate: | ||||||||||||||||||
Home | (6 | ) | (22 | ) | (30 | ) | (46 | ) | ||||||||||
Purchased specialty mortgage finance | (11 | ) | (9 | ) | (29 | ) | (29 | ) | ||||||||||
|
|
|
|
|||||||||||||||
Total home loan charge-offs | (17 | ) | (31 | ) | (59 | ) | (75 | ) | ||||||||||
Home equity loans and lines of credit | (6 | ) | (4 | ) | (18 | ) | (11 | ) | ||||||||||
Home construction builder (1) | | (1 | ) | | (1 | ) | ||||||||||||
Multi-family | | (4 | ) | | (5 | ) | ||||||||||||
Other real estate | (1 | ) | (16 | ) | (10 | ) | (46 | ) | ||||||||||
|
|
|
|
|||||||||||||||
Total loans secured by real estate | (24 | ) | (56 | ) | (87 | ) | (138 | ) | ||||||||||
Consumer | (11 | ) | (20 | ) | (36 | ) | (55 | ) | ||||||||||
Commercial business | (4 | ) | (19 | ) | (14 | ) | (64 | ) | ||||||||||
|
|
|
|
|||||||||||||||
Total loans charged off | (39 | ) | (95 | ) | (137 | ) | (257 | ) | ||||||||||
Recoveries of loans previously charged off: | ||||||||||||||||||
Loans secured by real estate: | ||||||||||||||||||
Home | | 7 | | 9 | ||||||||||||||
Purchased specialty mortgage finance | 1 | 1 | 3 | 2 | ||||||||||||||
|
|
|
|
|||||||||||||||
Total home loan recoveries | 1 | 8 | 3 | 11 | ||||||||||||||
Home equity loans and lines of credit | | | 1 | | ||||||||||||||
Multi-family | 1 | | 3 | | ||||||||||||||
Other real estate | 2 | 6 | 8 | 13 | ||||||||||||||
|
|
|
|
|||||||||||||||
Total loans secured by real estate | 4 | 14 | 15 | 24 | ||||||||||||||
Consumer | 5 | 5 | 15 | 11 | ||||||||||||||
Commercial business | 3 | 2 | 10 | 9 | ||||||||||||||
|
|
|
|
|||||||||||||||
Total recoveries of loans previously charged off | 12 | 21 | 40 | 44 | ||||||||||||||
|
|
|
|
|||||||||||||||
Net charge-offs | (27 | ) | (74 | ) | (97 | ) | (213 | ) | ||||||||||
|
|
|
|
|||||||||||||||
Balance, end of period | $ | 1,322 | $ | 1,549 | $ | 1,322 | $ | 1,549 | ||||||||||
|
|
|
|
|||||||||||||||
Net charge-offs (annualized) as a percentage of average loans held in portfolio |
|
|
0.05 |
% |
|
0.19 |
% |
|
0.07 |
% |
|
0.19 |
% |
|||||
Allowance as a percentage of total loans held in portfolio | 0.64 | 0.97 | 0.64 | 0.97 |
49
Net charge-offs for the three and nine months ended September 30, 2004 decreased $47 million and $116 million, compared with the same periods during 2003. As an annualized percentage of average loans held in portfolio, net charge-offs were 0.05% and 0.07% for the three and nine months ended September 30, 2004, compared with 0.19% for both of the same periods in 2003.
With economic statistics in the fourth quarter of 2003 affirming the trend of a strengthening national economy accompanied by a significant reduction in the Company's nonperforming loan balances and the disposition of a higher risk loan portfolio, management determined that a reduction in the overall size of the allowance was appropriate. Accordingly, a $202 million reversal of the allowance for loan and lease losses was recorded during the fourth quarter, which had the effect of reducing the allowance as a percentage of total loans held in portfolio to 0.71% at year-end 2003.
During the first nine months of 2004, the Company recorded a provision of $172 million which exceeded net charge-offs by $75 million in support of this year's loan portfolio growth. The resulting allowance as a percentage of total loans held in portfolio at September 30, 2004 was 0.64%, compared with 0.66% at June 30, 2004 and 0.71% at December 31, 2003.
The allowance for loan and lease losses represents management's estimate of credit losses inherent in the Company's loan and lease portfolios as of the balance sheet date. The estimation of the allowance is based on a variety of factors, including past loan loss experience, adverse situations that have occurred but are not yet known that may affect the borrower's ability to repay, the estimated value of underlying collateral and general economic conditions. The Company's methodology for assessing the adequacy of the allowance includes the evaluation of three distinct elements: the formula allowance, the specific allowance (which includes the allowance for loans deemed to be impaired by Statement No. 114, Accounting by Creditors for Impairment of a Loan ) and the unallocated allowance. The formula allowance and the specific allowance collectively represent the portion of the allowance for loan and lease losses that are allocated to the various loan portfolios.
Refer to Note 1 to the Consolidated Financial Statements "Summary of Significant Accounting Policies" in our 2003 Annual Report on Form 10-K/A for further discussion of the Allowance for Loan and Lease Losses.
Liquidity
The objective of liquidity management is to ensure the Company has the continuing ability to maintain cash flows that are adequate to fund operations and meet obligations and other commitments on a timely and cost-effective basis. The Company establishes liquidity guidelines for the parent holding company, Washington Mutual, Inc., as well as for its principal operating subsidiaries.
Washington Mutual, Inc.
Liquidity for Washington Mutual, Inc. is generated through its ability to raise funds through dividends from subsidiaries and in various capital markets such as unsecured debt, commercial paper and lines of credit.
Washington Mutual, Inc.'s primary funding source during 2003 was from dividends paid by our banking subsidiaries. Washington Mutual, Inc. also received dividends from subsidiaries during the third quarter of 2004 and expects to continue to receive dividends in the future. Banking subsidiaries dividends may be reduced from time to time to ensure that internal capital targets are met. Various regulatory requirements related to capital adequacy and retained earnings also limit the amount of dividends that can be paid by our banking subsidiaries. For more information on dividend restrictions applicable to our banking subsidiaries, refer to the Company's 2003 Annual Report on Form 10-K/A, "Business Regulation and Supervision" and Note 19 to the Consolidated Financial Statements "Regulatory Capital Requirements and Dividend Restrictions."
50
During 2003, Washington Mutual, Inc. filed two shelf registration statements with the Securities and Exchange Commission, registering a total of $7 billion of debt securities, preferred stock and depositary shares in the United States and in international capital markets. In 2003, the Company issued $1.65 billion of fixed- and adjustable-rate senior debt securities. In March 2004, the Company issued $750 million of fixed-rate subordinated debt securities. At September 30, 2004, the Company had $4.60 billion available for issuance.
Washington Mutual, Inc. also has a commercial paper program and a revolving credit facility that are sources of liquidity. The commercial paper program provides for up to $500 million in funds. The revolving credit facility totaling $800 million provides credit support for Washington Mutual, Inc.'s commercial paper program as well as funds for general corporate purposes. At September 30, 2004, Washington Mutual, Inc. had no commercial paper outstanding and the entire amount of the revolving credit facility was available.
Banking Subsidiaries
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 nine months ended September 30, 2004, those sources funded 73% of average total assets. Our continuing ability to retain our transaction deposit 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. We expect to continue to have the necessary assets available to pledge as collateral to obtain FHLB advances and repurchase agreements to offset any potential declines in deposit balances.
In the nine months ended September 30, 2004, the Company's proceeds from the sales of loans held for sale were approximately $101 billion. These proceeds were, in turn, used as the primary funding source for the origination and purchases, net of principal payments, of approximately $112 billion of loans held for sale during the same period. Typically, a cyclical pattern of sales and originations/purchases repeats itself during the course of a period and the amount of funding necessary to sustain our mortgage banking operations does not significantly affect the Company's overall level of liquidity resources. In the nine months ended September 30, 2004, originations/purchases of loans held for sale, net of principal payments, exceeded the proceeds from the sale of loans held for sale by approximately $11 billion.
To supplement our funding sources, our banking subsidiaries also raise funds in domestic and international capital markets. In August 2003, the Company established a $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 structures. Under this program, WMBFA is allowed to issue up to $15 billion in notes, of which $5 billion can be issued as subordinated notes subject to regulatory approval. WMB is 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. As part of this program, WMBFA issued $750 million of 10 year fixed-rate subordinated notes in August of 2004 and an additional $250 million with identical terms in September 2004. On November 4, 2004, WMBFA sold an additional $1 billion of 10 year fixed-rate subordinated notes and $500 million of 10 year floating rate subordinated notes. The terms of these sales are expected to close on November 12, 2004. After these issuances, these two banking subsidiaries had a combined total of $17.50 billion available under this program.
Non-banking Subsidiaries
Long Beach Mortgage has revolving credit facilities with non-affiliated lenders totaling $2.5 billion that are used to fund loans held for sale. At September 30, 2004, Long Beach Mortgage had borrowings outstanding of $500 million under these credit facilities.
51
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:
|
September 30, 2004
|
|
|||||||
---|---|---|---|---|---|---|---|---|---|
|
Well-Capitalized
Minimum |
||||||||
|
WMBFA
|
WMB
|
WMBfsb
|
||||||
Tier 1 capital to adjusted total assets (leverage) | 5.85 | % | 6.58 | % | 96.51 | % | 5.00 | % | |
Adjusted tier 1 capital to total risk-weighted assets | 8.24 | 9.61 | 487.33 | 6.00 | |||||
Total risk-based capital to total risk-weighted assets | 10.94 | 11.79 | 487.42 | 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 September 30, 2004.
Our broker-dealer subsidiaries are also subject to capital requirements. At September 30, 2004, both of our broker-dealer subsidiaries were in compliance with their applicable capital requirements.
On February 1, 2004, WMBfsb became a subsidiary of WMBFA. This reorganization was followed by the contribution of $23.27 billion of mortgage-backed and investment securities by WMBFA to WMBfsb on March 1, 2004. Due to the low risk weights assigned to these securities under the federal banking agency regulatory capital guidelines, their contribution to WMBfsb's capital base substantially increased that entity's risk-based capital ratios.
Market Risk Management
Market risk is defined as the sensitivity of income, fair market values and capital to changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates or prices. The primary market risk to which we are exposed is interest rate risk. Substantially all of our interest rate risk arises from instruments, positions and transactions entered into for purposes other than trading. These include loans, MSR, securities, deposits, borrowings, long-term debt and derivative financial instruments.
We manage interest rate risk within a consolidated enterprise risk management framework that includes the measurement and management of specific portfolios (MSR and Other Mortgage Banking) discussed below. The principal objective of asset/liability management is to manage the sensitivity of net income to changing interest rates. Asset/liability management is governed by 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.
MSR Risk Management
We manage potential impairment in the fair value of MSR and increased amortization levels of MSR through a comprehensive risk management program. Our intent is to offset the changes in fair value and amortization levels of MSR with changes in the fair value of risk management instruments. The risk management instruments include interest rate contracts, forward purchase commitments and available-for-sale securities. The available-for-sale securities generally consist of fixed-rate debt securities, such as U.S. Government and agency obligations and mortgage-backed securities, including principal-only strips. The interest rate contracts typically consist of interest rate swaps, interest rate swaptions and interest rate floors. We also enter into forward commitments to purchase mortgage-backed securities which generally are agreements to purchase 15- and 30-year fixed-rate mortgage-backed securities. From time to time, we may choose to embed interest rate contracts into our borrowing instruments, such as repurchase agreements.
The fair value of MSR is primarily affected by changes in prepayments that result from shifts in mortgage rates. Changes in the value of MSR risk management instruments due to changes in interest
52
rates vary based on the specific instrument. For example, changes in the fair value of interest rate swaps are driven by shifts in interest rate swap rates and the fair value of U.S. Treasury securities is based on changes in U.S. Treasury rates. Mortgage rates may move more or less than the rates on Treasury bonds or interest rate swaps. This could result in a change in the fair value of the MSR that differs from the change in fair value of the MSR risk management instruments. This difference in market indices between the MSR and the risk management instruments results in what is referred to as basis risk.
During the third quarter, the Company adopted an MSR risk management approach that reduces its exposure to basis risk. As a result, the amount of mortgage based risk management products, such as forward commitments to purchase and sell mortgage-backed securities, was increased, while the amount of LIBOR based products, such as interest rate swap contracts, was diminished. Due to the inherent optionality in mortgage-based products, additional derivatives were also purchased to mitigate the optionality risk created by these products. This change in approach resulted in a significant increase in the total notional balance of derivative contracts that are designated as MSR risk management instruments.
The fair value of MSR decreases and the amortization rate increases in a declining interest rate environment due to the higher prepayment activity, resulting in the potential for loss of value and a reduction in net loan servicing income. During periods of rising interest rates, the amortization rate of MSR decreases and the fair value of MSR increases. The timing and amount of any potential MSR valuation adjustment cannot be predicted with precision because of its dependency on the timing and magnitude of future interest rate changes.
We manage the MSR daily and adjust the mix of instruments used to manage MSR fair value changes as interest rates and market conditions warrant. The objective is to maintain an efficient and fairly liquid mix as well as a diverse portfolio of risk management instruments with maturity ranges that correspond well to the anticipated behavior of the MSR. For that portion of the MSR which qualifies for hedge accounting treatment, all changes in fair value of the MSR, even when the fair value is higher than amortized cost, will be recorded through earnings. MSR which do not qualify for hedge accounting treatment must be accounted for at the lower of aggregate cost or market value. We also manage the size of the MSR asset. Depending on market conditions and our desire to expand customer relationships, we may periodically sell or purchase additional servicing. We also may structure loan sales to control the size of the MSR asset created by any particular transaction.
We believe this overall risk management strategy is the most efficient approach to managing MSR fair value risk. The success of this strategy, however, is dependent on management's judgments regarding the amount, type and mix of MSR risk management instruments that we select to manage the changes in fair value of our mortgage servicing asset. If this strategy is not successful, our net income could be adversely affected.
Other Mortgage Banking Risk Management
We also manage the risks associated with our home loan mortgage warehouse and pipeline. The mortgage warehouse consists of funded loans, which are primarily fixed-rate home mortgages intended for sale in the secondary market. The pipeline consists of commitments to originate or purchase fixed-rate and, to a lesser degree, adjustable-rate home loans to be sold in the secondary market. The risk associated with the mortgage pipeline and warehouse is the potential for change in interest rates between the time the customer locks in the rate on the loan and the time the loan is sold.
We measure the risk profile of the mortgage warehouse and pipeline daily. As needed, to manage the warehouse and pipeline risk, we execute forward sales commitments, interest rate contracts, 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 estimate the fallout factor, which represents the percentage of
53
loans that are not expected to be funded, when determining the appropriate amount of our pipeline and warehouse risk management instruments.
Asset/Liability Risk Management
The purpose of asset/liability risk management is to assess the aggregate risk profile of the consolidated Company. Asset/liability risk analysis combines the MSR and Other Mortgage Banking activities with substantially all of the other remaining interest rate risk positions inherent in the Company's operations.
To analyze net income sensitivity, management projects net income in a variety of interest rate scenarios, assuming both parallel and non-parallel shifts in the yield curve. These scenarios also capture the net interest income sensitivity due to changes in the slope of the yield curve and changes in the spread between Treasury and LIBOR rates. Additionally, management measures the sensitivity of asset and liability fair value changes to changes in interest rates to analyze risk exposure over longer periods of time.
The projection of the sensitivity of net income requires numerous assumptions. Prepayment speeds, decay rates (the estimated runoff of deposit accounts that do not have a stated maturity) and loan and deposit volume and mix projections are the most significant assumptions. Prepayments affect the size of the balance sheet, which impacts net interest income, and is also a major factor in the valuation of MSR. The decay rate assumptions also impact net interest income by altering the expected deposit mix and rates in various interest rate environments. The prepayment and decay rate assumptions reflect management's best estimate of future behavior. These assumptions are derived from internal and external analysis of customer behavior.
The slope of the yield curve, current interest rate conditions and the speed of changes in interest rates all affect our sensitivity to changes in interest rates. Our interest-bearing deposits and borrowings typically reprice faster than our adjustable-rate assets. An additional lag effect is inherent in our adjustable-rate loans and mortgage-backed securities indexed to the 12-month average of the annual yields on actively traded U.S. Treasury securities adjusted to a constant maturity of one year and those indexed to the 11th District FHLB monthly weighted average cost of funds index.
The sensitivity of new loan volume and mix to changes in market interest rate levels is also projected. We generally assume a reduction in total loan production in rising interest rate scenarios with a shift towards a greater proportion of adjustable-rate production, which we generally hold in our loan portfolio. The gain from mortgage loans also varies under different interest rate scenarios. Normally, the gain from mortgage loans increases in falling interest rate environments primarily from high fixed-rate mortgage refinancing activity. Conversely, the gain from mortgage loans may decline when interest rates increase if we choose to retain more loans in the portfolio.
In periods of rising interest rates, the net interest margin normally contracts since the repricing period of liabilities is shorter than the repricing period of assets. The net interest margin generally expands in periods of falling interest rates as borrowing costs reprice downward faster than asset yields.
To manage interest rate sensitivity, management first utilizes the interest rate risk characteristics of our balance sheet assets and liabilities to offset each other as much as possible. Balance sheet products have a variety of risk profiles and sensitivities. Some of the components of our interest rate risk are countercyclical. We may adjust the amount or mix of risk management instruments based on the countercyclical behavior of our balance sheet products.
When the countercyclical behavior inherent in portions of our balance sheet does not result in an acceptable risk profile, management utilizes investment securities and interest rate contracts to mitigate this situation. The interest rate contracts used for this purpose are classified as asset/liability risk management instruments. These contracts are often used to modify the repricing period of our interest-bearing funding sources with the intention of reducing the volatility of net interest income. The types of
54
contracts used for this purpose consist of interest rate swaps, interest rate corridors, interest rate swaptions and certain derivatives that are embedded in borrowings. 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.
October 1, 2004 and January 1, 2004 Sensitivity Comparison
The table below indicates the sensitivity of net interest income and net income to interest rate movements in market risk sensitive instruments. The base case used for this sensitivity analysis is derived from our most recent earnings plan for the respective twelve month periods as of the date the analysis was performed. The comparative results assume parallel shifts in the yield curve with interest rates rising 200 basis points in even quarterly increments over the twelve-month periods ending September 30, 2005 and December 31, 2004 and interest rates decreasing by 50 basis points in even quarterly increments over the first six months of the twelve-month periods. The projected interest rate sensitivities of net interest income and net income shown below may differ significantly from actual results, particularly with respect to non-parallel shifts in the yield curve or changes in the spreads between mortgage, Treasury and LIBOR rates.
|
Gradual Change in Rates
|
|||||
---|---|---|---|---|---|---|
|
-50 basis points
|
+200 basis points
|
||||
Net interest income change for the one-year period beginning: | ||||||
October 1, 2004 | 1.56 | % | (0.96 | )% | ||
January 1, 2004 | 3.01 | (2.57 | ) | |||
Net income change for the one-year period beginning: | ||||||
October 1, 2004 | (0.95 | ) | (0.53 | ) | ||
January 1, 2004 | (0.34 | ) | (1.23 | ) |
The change in net income sensitivity was mainly due to the decreased sensitivity of net interest income. The reduced volatility of net interest income was due to the sale of fixed-rate bonds during the first nine months of the year combined with increases in adjustable-rate loans held in portfolio and fixed-rate FHLB advances.
These sensitivity analyses are limited in that they were performed at a particular point in time; are subject to the accuracy of various assumptions used, including prepayment forecasts and discount rates; and do not incorporate other factors that would impact the Company's overall financial performance in such scenarios, most significantly the impact of changes in gain from mortgage loans, that result from changes in interest rates. Before the second quarter of 2004, the gain from mortgage loans varied based on an assumed level of salable loan volume. Accordingly, the results of the January 1, 2004 net income simulation have been restated to conform to this change in methodology. In addition, not all of the changes in fair value may impact current period earnings. For example, the portion of the MSR that does not qualify for fair value hedge accounting treatment may increase in value, but the amount of the increase that is recorded in current period earnings may be limited to the recovery of the impairment reserve within each stratum. These analyses also assume that the general composition of MSR hedging and risk management instruments remain fairly constant and that mortgage and interest rate swap spreads remain constant in all interest rate environments. These assumptions may not be realized. For example, changes in spreads between interest rate indices could result in significant changes in projected net income sensitivity. Projected net income may increase if market rates on interest rate swaps decrease by more than the decrease in mortgage rates, while the projected net income may decline if the rates on swaps increase by more than mortgage rates. For all of these reasons, the preceding sensitivity estimates should not be viewed as an earnings forecast.
55
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 interest rate swaps, interest rate swaptions and embedded derivatives at September 30, 2004 are indexed to three-month LIBOR.
The following estimated net fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies:
|
September 30, 2004
|
||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Maturity Range
|
||||||||||||||||||||||||||||
|
Net
Fair Value |
Total
Notional Amount |
2004
|
2005
|
2006
|
2007
|
2008
|
After
2008 |
|||||||||||||||||||||
|
(dollars in millions)
|
||||||||||||||||||||||||||||
Interest Rate Risk Management Contracts: | |||||||||||||||||||||||||||||
Asset/Liability Risk Management | |||||||||||||||||||||||||||||
Pay-fixed swaps: | $ | (191 | ) | ||||||||||||||||||||||||||
Contractual maturity | $ | 9,892 | $ | 1,270 | $ | 2,717 | $ | 2,267 | $ | 2,980 | | $ | 658 | ||||||||||||||||
Weighted average pay rate | 4.04 | % | 3.50 | % | 3.50 | % | 3.69 | % | 4.90 | % | | 4.62 | % | ||||||||||||||||
Weighted average receive rate | 1.76 | % | 1.79 | % | 1.81 | % | 1.74 | % | 1.72 | % | | 1.80 | % | ||||||||||||||||
Receive-fixed swaps: | 324 | ||||||||||||||||||||||||||||
Contractual maturity | $ | 8,330 | | $ | 80 | $ | 1,000 | $ | 950 | $ | 850 | $ | 5,450 | ||||||||||||||||
Weighted average pay rate | 2.28 | % | | 0.01 | % | 1.71 | % | 4.77 | % | 1.98 | % | 2.03 | % | ||||||||||||||||
Weighted average receive rate | 5.50 | % | | 5.41 | % | 6.81 | % | 5.74 | % | 3.99 | % | 5.45 | % | ||||||||||||||||
Interest rate corridors: | | ||||||||||||||||||||||||||||
Contractual maturity | $ | 66 | $ | 13 | $ | 53 | | | | | |||||||||||||||||||
Weighted average strike rate long cap | 6.37 | % | 8.15 | % | 5.94 | % | | | | | |||||||||||||||||||
Weighted average strike rate short cap | 7.84 | % | 9.50 | % | 7.44 | % | | | | | |||||||||||||||||||
Embedded caps: | | ||||||||||||||||||||||||||||
Contractual maturity | $ | 500 | $ | 500 | | | | | | ||||||||||||||||||||
Weighted average strike rate | 7.75 | % | 7.75 | % | | | | | | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
Total asset/liability risk management | $ | 133 | $ | 18,788 | |||||||||||||||||||||||||
|
|
(This table is continued on the next page.)
56
(Continued from the previous page.)
|
September 30, 2004
|
||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Maturity Range
|
||||||||||||||||||||||||||||
|
Net
Fair Value |
Total
Notional Amount |
2004
|
2005
|
2006
|
2007
|
2008
|
After
2008 |
|||||||||||||||||||||
|
(dollars in millions)
|
||||||||||||||||||||||||||||
Interest Rate Risk Management Contracts: | |||||||||||||||||||||||||||||
Other Mortgage Banking Risk Management | |||||||||||||||||||||||||||||
Forward purchase commitments: | $ | 4 | |||||||||||||||||||||||||||
Contractual maturity | $ | 4,072 | $ | 4,072 | | | | | | ||||||||||||||||||||
Weighted average price | 101.60 | 101.60 | | | | | | ||||||||||||||||||||||
Forward sales commitments: | (77 | ) | |||||||||||||||||||||||||||
Contractual maturity | $ | 13,176 | $ | 13,176 | | | | | | ||||||||||||||||||||
Weighted average price | 101.52 | 101.52 | | | | | | ||||||||||||||||||||||
Mortgage put options: | 3 | ||||||||||||||||||||||||||||
Contractual maturity | $ | 800 | $ | 800 | | | | | | ||||||||||||||||||||
Weighted average strike price | 100.17 | 100.17 | | | | | | ||||||||||||||||||||||
Interest rate futures: | | ||||||||||||||||||||||||||||
Contractual maturity | $ | 11,471 | $ | 426 | $ | 2,607 | $ | 3,111 | $ | 4,652 | $ | 363 | $ | 312 | |||||||||||||||
Weighted average price | 96.20 | 97.84 | 97.09 | 96.28 | 95.79 | 95.33 | 95.04 | ||||||||||||||||||||||
Pay-fixed swaps: | (6 | ) | |||||||||||||||||||||||||||
Contractual maturity | $ | 250 | | | | | | $ | 250 | ||||||||||||||||||||
Weighted average pay rate | 4.85 | % | | | | | | 4.85 | % | ||||||||||||||||||||
Weighted average receive rate | 1.81 | % | | | | | | 1.81 | % | ||||||||||||||||||||
Receive-fixed swaps: | 16 | ||||||||||||||||||||||||||||
Contractual maturity | $ | 1,235 | | | $ | 300 | $ | 400 | | $ | 535 | ||||||||||||||||||
Weighted average pay rate | 1.77 | % | | | 1.58 | % | 1.91 | % | | 1.78 | % | ||||||||||||||||||
Weighted average receive rate | 3.78 | % | | | 2.19 | % | 3.37 | % | | 4.97 | % | ||||||||||||||||||
Payor swaptions: | 5 | ||||||||||||||||||||||||||||
Contractual maturity (option) | $ | 6,280 | | $ | 6,280 | | | | | ||||||||||||||||||||
Weighted average strike rate | 6.37 | % | | 6.37 | % | | | | | ||||||||||||||||||||
Contractual maturity (swap) | | | | | | | $ | 6,280 | |||||||||||||||||||||
Weighted average pay rate | | | | | | | 6.37 | % | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
Total other mortgage banking risk management | $ | (55 | ) | $ | 37,284 | ||||||||||||||||||||||||
|
|
(This table is continued on the next page.)
57
(Continued from the previous page.)
|
September 30, 2004
|
|||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Maturity Range
|
|||||||||||||||||||||||||||||
|
Net
Fair Value |
Total
Notional Amount |
2004
|
2005
|
2006
|
2007
|
2008
|
After
2008 |
||||||||||||||||||||||
|
(dollars in millions)
|
|||||||||||||||||||||||||||||
Interest Rate Risk Management Contracts: | ||||||||||||||||||||||||||||||
MSR Risk Management | ||||||||||||||||||||||||||||||
Pay-fixed swaps: | 21 | |||||||||||||||||||||||||||||
Contractual maturity | $ | 23,135 | | $ | 7,250 | $ | 9,000 | $ | 4,600 | | $ | 2,285 | ||||||||||||||||||
Weighted average pay rate | 2.88 | % | | 2.37 | % | 2.84 | % | 3.22 | % | | 4.00 | % | ||||||||||||||||||
Weighted average receive rate | 1.90 | % | | 1.93 | % | 1.90 | % | 1.90 | % | | 1.82 | % | ||||||||||||||||||
Receive-fixed swaps: | 341 | |||||||||||||||||||||||||||||
Contractual maturity | $ | 18,755 | | $ | 950 | $ | 2,500 | $ | 1,550 | $ | 1,010 | $ | 12,745 | |||||||||||||||||
Weighted average pay rate | 1.83 | % | | 1.77 | % | 2.03 | % | 1.98 | % | 1.69 | % | 1.79 | % | |||||||||||||||||
Weighted average receive rate | 4.30 | % | | 2.27 | % | 3.21 | % | 3.35 | % | 3.76 | % | 4.82 | % | |||||||||||||||||
Constant maturity mortgage swaps: | 1 | |||||||||||||||||||||||||||||
Contractual maturity | $ | 100 | | | | | $ | 100 | | |||||||||||||||||||||
Weighted average pay rate | 5.21 | % | | | | | 5.21 | % | | |||||||||||||||||||||
Weighted average receive rate | 5.30 | % | | | | | 5.30 | % | | |||||||||||||||||||||
Payor swaptions: | 209 | |||||||||||||||||||||||||||||
Contractual maturity (option) | $ | 56,050 | $ | 10,300 | $ | 38,550 | $ | 7,200 | | | | |||||||||||||||||||
Weighted average strike rate | 5.85 | % | 5.93 | % | 5.67 | % | 6.71 | % | | | | |||||||||||||||||||
Contractual maturity (swap) | | | | | $ | 2,950 | $ | 1,550 | $ | 51,550 | ||||||||||||||||||||
Weighted average pay rate | | | | | 4.10 | 4.54 | 5.99 | % | ||||||||||||||||||||||
Receive-fixed swaptions: | 31 | |||||||||||||||||||||||||||||
Contractual maturity (option) | $ | 1,775 | | $ | 1,775 | | | | | |||||||||||||||||||||
Weighted average strike rate | 4.43 | % | | 4.43 | % | | | | | |||||||||||||||||||||
Contractual maturity (swap) | | | | | | | $ | 1,775 | ||||||||||||||||||||||
Weighted average strike rate | | | | | | | 4.43 | % | ||||||||||||||||||||||
Written receive-fixed swaptions: | (11 | ) | ||||||||||||||||||||||||||||
Contractual maturity (option) | $ | 4,000 | | $ | 4,000 | | | | | |||||||||||||||||||||
Weighted average strike rate | 3.22 | % | | 3.22 | % | | | | | |||||||||||||||||||||
Contractual maturity (swap) | | | | | $ | 1,000 | | $ | 3,000 | |||||||||||||||||||||
Weighted average strike rate | | | | | 2.77 | % | | 3.37 | % | |||||||||||||||||||||
Forward purchase commitments: | 214 | |||||||||||||||||||||||||||||
Contractual maturity | $ | 48,406 | $ | 45,406 | $ | 3,000 | | | | | ||||||||||||||||||||
Weighted average price | 98.68 | 98.71 | 98.23 | | | | | |||||||||||||||||||||||
Forward sales commitments: | 22 | |||||||||||||||||||||||||||||
Contractual maturity | $ | 8,576 | $ | 8,576 | | | | | | |||||||||||||||||||||
Weighted average price | 100.26 | 100.26 | | | | | | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
Total MSR risk management | $ | 828 | $ | 160,797 | ||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
Total interest rate risk management contracts | $ | 906 | $ | 216,869 | ||||||||||||||||||||||||||
|
|
|
September 30, 2004
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized
Cost |
Net Unrealized
Gain (Loss) |
Fair Value
|
|||||||||
|
(in millions)
|
|||||||||||
MSR Risk Management: | ||||||||||||
Available-For-Sale Securities: | ||||||||||||
Mortgage-backed securities U.S. Government and agency (1) | $ | 614 | $ | 5 | $ | 619 | ||||||
Trading Securities: | ||||||||||||
Principal-only mortgage-backed securities | | | 1,459 | |||||||||
|
||||||||||||
Total MSR risk management securities | $ | 2,078 | ||||||||||
|
58
|
December 31, 2003
|
||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Maturity Range
|
||||||||||||||||||||||||||||
|
Net
Fair Value |
Total
Notional Amount |
2004
|
2005
|
2006
|
2007
|
2008
|
After
2008 |
|||||||||||||||||||||
|
(dollars in millions)
|
||||||||||||||||||||||||||||
Interest Rate Risk Management Contracts: | |||||||||||||||||||||||||||||
Asset/Liability Risk Management | |||||||||||||||||||||||||||||
Pay-fixed swaps: | $ | (748 | ) | ||||||||||||||||||||||||||
Contractual maturity | $ | 21,894 | $ | 9,083 | $ | 3,288 | $ | 4,745 | $ | 3,700 | $ | 553 | $ | 525 | |||||||||||||||
Weighted average pay rate | 4.30 | % | 3.97 | % | 4.13 | % | 4.38 | % | 5.02 | % | 5.00 | % | 4.66 | % | |||||||||||||||
Weighted average receive rate | 1.18 | % | 1.17 | % | 1.16 | % | 1.22 | % | 1.17 | % | 1.15 | % | 1.17 | % | |||||||||||||||
Receive-fixed swaps: | 401 | ||||||||||||||||||||||||||||
Contractual maturity | $ | 6,440 | $ | 200 | $ | 180 | $ | 1,000 | $ | 750 | $ | 750 | $ | 3,560 | |||||||||||||||
Weighted average pay rate | 1.41 | % | 1.38 | % | 0.29 | % | 1.18 | % | 3.43 | % | 1.15 | % | 1.16 | % | |||||||||||||||
Weighted average receive rate | 5.44 | % | 6.75 | % | 5.35 | % | 6.81 | % | 4.91 | % | 3.71 | % | 5.47 | % | |||||||||||||||
Interest rate corridors: | | ||||||||||||||||||||||||||||
Contractual maturity | $ | 254 | $ | 191 | $ | 63 | | | | | |||||||||||||||||||
Weighted average strike rate long cap | 7.60 | % | 8.14 | % | 5.94 | % | | | | | |||||||||||||||||||
Weighted average strike rate short cap | 8.98 | % | 9.48 | % | 7.44 | % | | | | | |||||||||||||||||||
Payor swaptions (1) : | 1 | ||||||||||||||||||||||||||||
Contractual maturity (option) | $ | 41 | | $ | 41 | | | | | ||||||||||||||||||||
Weighted average strike rate | 5.89 | % | | 5.89 | % | | | | | ||||||||||||||||||||
Contractual maturity (swap) | | | | | | | $ | 41 | |||||||||||||||||||||
Weighted average pay rate | | | | | | | 5.89 | % | |||||||||||||||||||||
Embedded pay-fixed swaps: | (99 | ) | |||||||||||||||||||||||||||
Contractual maturity | $ | 2,500 | | | | $ | 2,500 | | | ||||||||||||||||||||
Weighted average pay rate | 4.09 | % | | | | 4.09 | % | | | ||||||||||||||||||||
Weighted average receive rate | 1.16 | % | | | | 1.16 | % | | | ||||||||||||||||||||
Embedded caps: | | ||||||||||||||||||||||||||||
Contractual maturity | $ | 500 | $ | 500 | | | | | | ||||||||||||||||||||
Weighted average strike rate | 7.75 | % | 7.75 | % | | | | | | ||||||||||||||||||||
Embedded payor swaptions (1) : | | ||||||||||||||||||||||||||||
Contractual maturity (option) | $ | 500 | $ | 500 | | | | | | ||||||||||||||||||||
Weighted average strike rate | 6.21 | % | 6.21 | % | | | | | | ||||||||||||||||||||
Contractual maturity (swap) | | | | | | | $ | 500 | |||||||||||||||||||||
Weighted average pay rate | | | | | | | 6.21 | % | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
Total asset/liability risk management | $ | (445 | ) | $ | 32,129 | ||||||||||||||||||||||||
|
|
(This table is continued on the next page.)
59
(Continued from the previous page.)
|
December 31, 2003
|
||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Maturity Range
|
||||||||||||||||||||||||||||
|
Net
Fair Value |
Total
Notional Amount |
2004
|
2005
|
2006
|
2007
|
2008
|
After
2008 |
|||||||||||||||||||||
|
(dollars in millions)
|
||||||||||||||||||||||||||||
Interest Rate Risk Management Contracts: | |||||||||||||||||||||||||||||
Other Mortgage Banking Risk Management | |||||||||||||||||||||||||||||
Forward purchase commitments: | $ | 15 | |||||||||||||||||||||||||||
Contractual maturity | $ | 5,556 | $ | 5,556 | | | | | | ||||||||||||||||||||
Weighted average price | 100.88 | 100.88 | | | | | | ||||||||||||||||||||||
Forward sales commitments: | (122 | ) | |||||||||||||||||||||||||||
Contractual maturity | $ | 16,795 | $ | 16,795 | | | | | | ||||||||||||||||||||
Weighted average price | 101.08 | 101.08 | | | | | | ||||||||||||||||||||||
Interest rate futures: | | ||||||||||||||||||||||||||||
Contractual maturity | $ | 12,874 | $ | 1,851 | $ | 1,542 | $ | 2,255 | $ | 2,002 | $ | 5,224 | | ||||||||||||||||
Weighted average price | 96.17 | 98.34 | 96.79 | 95.64 | 94.81 | 94.40 | | ||||||||||||||||||||||
Mortgage put options: | | ||||||||||||||||||||||||||||
Contractual maturity | $ | 100 | $ | 100 | | | | | | ||||||||||||||||||||
Weighted average strike price | 99.07 | 99.07 | | | | | | ||||||||||||||||||||||
Receive-fixed swaps: | 44 | ||||||||||||||||||||||||||||
Contractual maturity | $ | 1,950 | | | | | $ | 250 | $ | 1,700 | |||||||||||||||||||
Weighted average pay rate | 1.17 | % | | | | | 1.17 | % | 1.17 | % | |||||||||||||||||||
Weighted average receive rate | 4.79 | % | | | | | 3.90 | % | 4.92 | % | |||||||||||||||||||
Floors (2) : | 1 | ||||||||||||||||||||||||||||
Contractual maturity | $ | 250 | | $ | 250 | | | | | ||||||||||||||||||||
Weighted average strike price | 1.56 | % | | 1.56 | % | | | | | ||||||||||||||||||||
Payor swaptions: | 52 | ||||||||||||||||||||||||||||
Contractual maturity (option) | $ | 3,195 | $ | 1,050 | $ | 2,145 | | | | | |||||||||||||||||||
Weighted average strike rate | 6.48 | % | 5.94 | % | 6.74 | % | | | | | |||||||||||||||||||
Contractual maturity (swap) | | | | | | | $ | 3,195 | |||||||||||||||||||||
Weighted average pay rate | | | | | | | 6.48 | % | |||||||||||||||||||||
Receiver swaptions: | 8 | ||||||||||||||||||||||||||||
Contractual maturity (option) | $ | 300 | $ | 300 | | | | | | ||||||||||||||||||||
Weighted average strike rate | 4.84 | % | 4.84 | % | | | | | | ||||||||||||||||||||
Contractual maturity (swap) | | | | | | | $ | 300 | |||||||||||||||||||||
Weighted average receive rate | | | | | | | 4.84 | % | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
Total other mortgage banking risk management | $ | (2 | ) | $ | 41,020 | ||||||||||||||||||||||||
|
|
(This table is continued on the next page.)
60
(Continued from the previous page.)
|
December 31, 2003
|
|||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Maturity Range
|
|||||||||||||||||||||||||||||
|
Net
Fair Value |
Total
Notional Amount |
2004
|
2005
|
2006
|
2007
|
2008
|
After
2008 |
||||||||||||||||||||||
|
(dollars in millions)
|
|||||||||||||||||||||||||||||
Interest Rate Risk Management Contracts: | ||||||||||||||||||||||||||||||
MSR Risk Management | ||||||||||||||||||||||||||||||
Receive-fixed swaps: | $ | 201 | ||||||||||||||||||||||||||||
Contractual maturity | $ | 30,588 | $ | 243 | $ | 10,500 | $ | 500 | $ | 1,800 | $ | 4,135 | $ | 13,410 | ||||||||||||||||
Weighted average pay rate | 1.33 | % | 1.16 | % | 1.35 | % | 1.66 | % | 2.77 | % | 1.17 | % | 1.17 | % | ||||||||||||||||
Weighted average receive rate | 3.78 | % | 5.34 | % | 2.19 | % | 4.18 | % | 4.27 | % | 3.76 | % | 4.93 | % | ||||||||||||||||
Constant maturity mortgage swaps: | 1 | |||||||||||||||||||||||||||||
Contractual maturity | $ | 100 | | | | | $ | 100 | | |||||||||||||||||||||
Weighted average pay rate | 5.24 | % | | | | | 5.24 | % | | |||||||||||||||||||||
Weighted average receive rate | 5.41 | % | | | | | 5.41 | % | | |||||||||||||||||||||
Payor swaptions: | 226 | |||||||||||||||||||||||||||||
Contractual maturity (option) | $ | 13,800 | $ | 2,800 | $ | 6,000 | $ | 5,000 | | | | |||||||||||||||||||
Weighted average strike rate | 7.12 | % | 6.66 | % | 7.32 | % | 7.14 | % | | | | |||||||||||||||||||
Contractual maturity (swap) | | | | | | | $ | 13,800 | ||||||||||||||||||||||
Weighted average pay rate | | | | | | | 7.12 | % | ||||||||||||||||||||||
Forward purchase commitments: | 241 | |||||||||||||||||||||||||||||
Contractual maturity | $ | 22,435 | $ | 22,435 | | | | | | |||||||||||||||||||||
Weighted average price | 98.47 | 98.47 | | | | | | |||||||||||||||||||||||
Forward sales commitments: | | |||||||||||||||||||||||||||||
Contractual maturity | $ | 1,500 | $ | 1,500 | | | | | | |||||||||||||||||||||
Weighted average price | 98.96 | 98.96 | | | | | | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
Total MSR risk management | $ | 669 | $ | 68,423 | ||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
Total interest rate risk management contracts | $ | 222 | $ | 141,572 | ||||||||||||||||||||||||||
|
|
|
December 31, 2003
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized
Cost |
Net
Unrealized Gain (Loss) |
Fair Value
|
||||||||||
|
(in millions)
|
||||||||||||
MSR Risk Management: | |||||||||||||
Available-For-Sale Securities: | |||||||||||||
Mortgage-backed securities (1) : | |||||||||||||
U.S. Government and agency | $ | 486 | $ | (14 | ) | $ | 472 | ||||||
Investment securities (1) : | |||||||||||||
U.S. Government and agency | 6,275 | (156 | ) | 6,119 | |||||||||
|
|||||||||||||
Total MSR risk management securities | $ | 6,591 | |||||||||||
|
61
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. With the exception of forward purchase and sales commitments, 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 received from a counterparty is continually monitored and the Company may request additional collateral from counterparties or return collateral pledged as deemed appropriate. The Company's agreements generally include master netting agreements whereby the counterparties are entitled to settle their positions "net." At September 30, 2004 and December 31, 2003, the gross positive fair value of the Company's derivative financial instruments was $1.33 billion and $1.34 billion. The Company's master netting agreements at September 30, 2004 and December 31, 2003 reduced the Company's derivative counterparty credit risk by $360 million and $646 million. The Company's collateral against derivative financial instruments was $635 million and $323 million at September 30, 2004 and December 31, 2003. Accordingly, the Company's credit risk related to derivative financial instruments at September 30, 2004 and December 31, 2003 was $338 million and $375 million.
62
Item 1. Legal Proceedings
During the second quarter of 2004, three plaintiffs filed lawsuits alleging violations of Section 19(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), Rule 10b-5 thereunder and Section 20(a) of the Exchange Act. Each plaintiff purported to represent a class of purchasers of Washington Mutual, Inc., securities from April 15, 2003 through June 28, 2004. The complaints alleged that in various public statements the defendants made misrepresentations, and failed to disclose material facts, concerning the Company's business, business model and future revenue potential. Each complaint sought compensatory damages, fees, costs, expenses and other equitable and/or injunctive relief.
During the third quarter of 2004, three more lawsuits were filed on behalf of the same class of purchasers as alleged in the original complaints. The new complaints contained allegations that were substantially similar to those pleaded in the original cases. Subsequently, the parties submitted a stipulated Order to the Court through which all six cases will be consolidated into a single action; lead plaintiffs and lead plaintiffs' counsel will be appointed; and a schedule will be set for the filing of an amended consolidated complaint and the Company's response. The Court has not yet taken action on that stipulation.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below represents share repurchases made by the Company for the quarter ended September 30, 2004. Management may engage in future share repurchases as liquidity conditions permit and market conditions warrant.
Issuer Purchases of Equity Securities
|
(a) Total
Number of Shares (or Units) Purchased (1) |
(b) Average
Price Paid per Share (or Unit) |
(c) Total
Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2) |
(d) Maximum
Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
||||
---|---|---|---|---|---|---|---|---|
July 1, 2004 to July 31, 2004 | | | | 43,465,506 | ||||
August 1, 2004 to August 31, 2004 | | | | 43,465,506 | ||||
September 1, 2004 to September 30, 2004 | | | | 43,465,506 | ||||
Total | | | | 43,465,506 |
For a discussion regarding working capital requirements and dividend restrictions applicable to our banking subsidiaries, refer to the Company's 2003 Annual Report on Form 10-K/A, "Business Regulation and Supervision" and Note 19 to the Consolidated Financial Statements "Regulatory Capital Requirements and Dividend Restrictions."
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits
See Index of Exhibits on page 65.
63
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 November 9, 2004.
WASHINGTON MUTUAL, INC. | ||||
|
|
By: |
|
/s/ THOMAS W. CASEY Thomas W. Casey Executive Vice President and Chief Financial Officer |
|
|
By: |
|
/s/ ROBERT H. MILES Robert H. Miles Senior Vice President and Controller (Principal Accounting Officer) |
64
WASHINGTON MUTUAL, INC.
INDEX OF EXHIBITS
Exhibit No.
3.1 | Restated Articles of Incorporation of Washington Mutual, Inc., as amended. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. File No. 0-25188). | |
3.2 |
|
Articles of Amendment to the Amended and Restated Articles of Incorporation of Washington Mutual, Inc. creating a class of preferred stock, Series RP. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. File No. 001-14667). |
3.3 |
|
Restated Bylaws of Washington Mutual, Inc., as amended. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. File No. 001-14667). |
4.1 |
|
Rights Agreement dated December 20, 2000 between Washington Mutual, Inc. and Mellon Investor Services, LLC. (Incorporated by reference to the Company's Current Report on Form 8-K filed January 8, 2001. File No. 0-25188). |
4.2 |
|
Washington Mutual, Inc. will furnish upon request copies of all instruments defining the rights of holders of long-term debt instruments of Washington Mutual, Inc. and its consolidated subsidiaries. |
4.3 |
|
Warrant Agreement dated as of April 30, 2001. (Incorporated by reference to the Company's Registration Statement on Form S-3. File No. 333-63976). |
4.4 |
|
2003 Amended and Restated Warrant Agreement, dated March 11, 2003 by and between Washington Mutual, Inc. and Mellon Investor Services LLC. (Incorporated by reference to the Company's Current Report on Form 8-K, dated March 12, 2003. File No. 001-14667). |
10.1 |
|
Form of 2003 Equity Incentive Plan Stock Option Agreement (1-Year Cliff Vesting) (filed herewith). |
10.2 |
|
Form of 2003 Equity Incentive Plan Stock Option Agreement (3-Year Graded Vesting) (filed herewith). |
10.3 |
|
Form of 2003 Equity Incentive Plan Notice of Stock Option Grant (filed herewith). |
10.4 |
|
Form of 2003 Equity Incentive Plan Restricted Stock Award Agreement (3-Year Cliff Vesting) (filed herewith). |
10.5 |
|
Form of 2003 Equity Incentive Plan Restricted Stock Award Agreement (3-Year Graduated Vesting) (filed herewith). |
10.6 |
|
Form of 2003 Equity Incentive Plan Performance Share Award Agreement (filed herewith). |
31.1 |
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
65
Exhibit No.
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). |
66
WASHINGTON MUTUAL, INC. STOCK OPTION AGREEMENT
(1-Year Cliff Vesting)
Washington Mutual, Inc. (the " Company "), by action of the Board and approval of its shareholders, established the Washington Mutual, Inc. 2003 Equity Incentive Plan (the " Plan "). The Participant is employed by the Company or a Related Company (or in the case of a Nonqualified Stock Option, the Participant is an employee, director, consultant, agent, advisor or independent contractor of the Company or a Related Company) and the Company desires to encourage the Participant to own Common Stock for the purposes stated in Section 1 of the Plan. In consideration of the foregoing, the parties have entered into this Stock Option Agreement (this " Agreement ") to govern the terms of the Option (as defined below) granted by the Company. Defined terms in the Plan shall have the same meaning in this Agreement, except where the context otherwise requires.
1. Grant of Option
On the grant date (the " Grant Date ") set forth in the electronic Notice of Grant (" Notice of Grant ") provided to the Participant named therein, the Company has granted to the Participant a right to purchase up to the number of shares of the Company's Common Stock at the purchase price per share (the " Exercise Price "), each as adjusted from time to time pursuant to Section 15 of the Plan, set forth in the Notice of Grant, which right shall be subject to the terms and conditions set forth in the Notice of Grant, this Agreement, and the Plan (as amended from time to time) (the " Option "). By accepting the Option grant, the Participant irrevocably agrees on behalf of the Participant and the Participant's successors and permitted assigns to all of the terms and conditions of the Option as set forth in or pursuant to the Notice of Grant, this Agreement, and the Plan (as such may be amended from time to time).
2. Exercisability; Notice of Exercise
(a) The Option shall not be exercisable as of the Grant Date. After the Grant Date, to the extent not previously exercised and provided that the Participant has not experienced a Termination of Service and remains continuously employed, the Option shall become vested and exercisable on the anniversary of the Grant Date specified below with respect to a number of shares of Common Stock (rounded to the nearest whole share) equal to the percentage of the total number of shares subject to the Option in accordance with the following schedule:
Anniversary of Grant Date
|
Percent (%) of Option
Shares Vested & Exercisable |
|
---|---|---|
1st Anniversary | 100% |
(b) The vesting period and/or exercisability of the Option set forth in Paragraph 2(a) may be adjusted by the Committee to reflect the decreased level of employment during any period in which the Participant is on an approved leave of absence or is employed on a less than full time basis. Notwithstanding anything to the contrary in this Paragraph 2, the Option shall be subject to earlier acceleration of exercisability and/or expiration of the Option as provided in this Agreement and the Plan
(c) To the extent then exercisable, the Option may be exercised, from time to time, in whole or in part by notifying the Company or its designee of such exercise in such manner as the Company may from time to time require, which notice shall specify the number of shares of Common Stock for which the Option is to be exercised and be accompanied by evidence satisfactory to the Committee of such person's right to exercise the Option if the person exercising the Option is not the Participant, and which notice shall provide for payment of the Option Exercise Price in accordance with Section 7.5 of the Plan.
3. Non-Transferability of Option
Except as provided in Section 14 of the Plan, the Option is not transferable and the Participant may not make any disposition of the Option or any interest therein. (Section 14 of the Plan permits transfers by will and by the laws of descent and distribution and permits the Participant to designate one or more beneficiaries on a Company-approved form who can exercise an Option following the Participant's death. The Committee, in its sole discretion, may also permit the Participant to assign or transfer an Option, to the extent permitted under the Plan.) As used herein, "disposition" means any sale, transfer, encumbrance, gift, donation, assignment, pledge, hypothecation, or other disposition, whether similar or dissimilar to those previously enumerated, whether voluntary or involuntary, and whether during the Participant's lifetime or upon or after the Participant's death, including, but not limited to, any disposition by operation of law, by court order, by judicial process, or by foreclosure, levy, or attachment. Any attempted disposition in violation of this Paragraph 3 and Section 14 of the Plan shall be void.
4. Status of Participant
The Participant shall not be deemed a shareholder of the Company with respect to any of the shares of Common Stock subject to the Option, except to the extent that such shares shall have been purchased and transferred to him or her. The Company shall not be required to issue or transfer any certificates for shares of Common Stock purchased upon exercise of the Option until all applicable requirements of law have been complied with and such shares shall have been duly listed on any securities exchange on which the Common Stock may then be listed.
5. No Effect on Capital Structure
The Option shall not affect the right of the Company or any Related Company to reclassify, recapitalize or otherwise change its capital or debt structure or to merge, consolidate, convey any or all of its assets, dissolve, liquidate, windup, or otherwise reorganize.
6. Expiration of Option
The right to purchase Common Stock under the Option shall expire on the date specified in the Notice of Grant, which is ten (10) years from the Grant Date, provided however, that the Option shall expire sooner in the circumstances described below in this Paragraph 6 and as otherwise provided under the Plan (for example, in connection with a Company Transaction under Section 15.3 of the Plan).
(a) Termination of Service without Cause. Upon a Termination of Service without Cause, (i) any part of the Option that is unexercisable as of such termination date shall remain unexercisable and shall terminate as of such date, and (ii) the Participant shall have the right for 12 months after the date of such Termination of Service to exercise only that portion of the Option that has become exercisable as of the date of such Termination of Service, and thereafter the Option shall terminate and cease to be exercisable.
(b) Termination of Service for Cause. Upon a Termination of Service for Cause, the portion, if any, of the Option that remains unexercised at the time the Participant is notified of such Termination of Service shall terminate and cease to be exercisable as of such time.
(c) Retirement as Employee or Director. Upon a Termination of Service by reason of Retirement, the Participant shall have the right, until one (1) year after the date of such Termination of Service, to exercise only the portion of the Participant's Option that has become exercisable as of the date of such Termination of Service, and thereafter the Option shall terminate and cease to be exercisable, except that if such Retirement occurs after the
2
Participant has attained age 60 (age 72 for Board directors), then (i) the Option shall become exercisable in full as of the date of such Termination of Service and (ii) the Participant shall have the right to exercise the Option through the date that is five (5) years after the date of such Termination of Service. Thereafter, the Option shall terminate and cease to be exercisable.
(d) Disability. Upon a Termination of Service by reason of Disability, (i) the Option shall become exercisable in full as of the date of such Termination of Service and (ii) the Participant shall have the right for 12 months after the date of such Termination of Service to exercise the Option. Thereafter, the Option shall terminate and cease to be exercisable.
(e) Death. Upon a Termination of Service by reason of death, (i) the Option shall become exercisable in full as of the date of such Termination of Service and (ii) the Option shall be exercisable by the Participant's legal representatives, heirs, legatees, or distributees for 12 months after the date of such Termination of Service. Thereafter, the Option shall terminate and cease to be exercisable. Notwithstanding the foregoing, if a Participant dies after a Termination of Service but while an Option is otherwise exercisable, the portion of the Option that is exercisable as of the date of such Termination of Service shall expire 12 months after the date of death, unless the Committee determines otherwise.
It is the Participant's responsibility to be aware of the date the Option terminates.
7. Committee Authority
Any question concerning the interpretation of this Agreement or the Plan, any adjustments required to be made under the Plan, and any controversy that may arise under the Plan or this Agreement shall be determined by the Committee (including any person(s) to whom the Committee has delegated its authority) in its sole and absolute discretion. Such decision by the Committee shall be final and binding.
8. Stock Option Tax Treatment
The Option is intended to be treated for tax purposes as a Nonqualified Stock Option and not to be subject to tax treatment as an Incentive Stock Option.
9. Plan Controls
The terms of the Notice of Grant and this Agreement are governed by the terms of the Plan, as it exists on the date of the grant and as the Plan is amended from time to time. In the event of any conflict between the provisions of the Notice of Grant or this Agreement and the provisions of the Plan, the terms of the Plan shall control, except as expressly stated otherwise. The term "Section" generally refers to provisions within the Plan; provided, however, the term "Paragraph" shall refer to a provision of this Agreement.
10. Limitation on Rights; No Right to Future Grants; Extraordinary Item.
By entering into this Agreement and accepting the Option, Participant acknowledges that: (i) Participant's participation in the Plan is voluntary; (ii) the value of the Option is an extraordinary item which is outside the scope of any employment contract with Participant; (iii) the Option is not part of normal or expected compensation for any purpose, including without limitation for calculating any benefits, severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments, and Participant will not be entitled to compensation or damages as a consequence of Participant's forfeiture or expiration of any unvested portion of the Option as a result of Participant's Termination of Service with the Company or
3
any Related Company for any reason; and (iv) in the event that Participant is not a direct employee of Company, the grant of the Option will not be interpreted to form an employment relationship with the Company or any Related Company and the grant of the Option will not be interpreted to form an employment contract with the Participant's employer, the Company or any Related Company. The Company shall be under no obligation whatsoever to advise the Participant of the existence, maturity or termination of any of Participant's rights hereunder and Participant shall be responsible for familiarizing himself or herself with all matters contained herein and in the Plan which may affect any of Participant's rights or privileges hereunder.
11. General Provisions
11.1 Notice
Whenever any notice is required or permitted hereunder, such notice must be in writing and delivered in person or by mail (to the address set forth below if notice is being delivered to the Company) or electronically. Any notice delivered in person or by mail shall be deemed to be delivered on the date on which it is personally delivered, or, whether actually received or not, on the third business day after it is deposited in the United States mail, certified or registered, postage prepaid, addressed to the person who is to receive it at the address that such person has theretofore specified by written notice delivered in accordance herewith. Any notice given by the Company to the Participant directed to Participant at Participant's address on file with the Company shall be effective to bind the Participant and any other person who shall have acquired rights under this Agreement. The Company or the Participant may change, by written notice to the other, the address previously specified for receiving notices. Notices delivered to the Company in person or by mail shall be addressed as follows:
Company: |
Washington Mutual, Inc.
Attn: Leadership Rewards, Stock Administrator Mail Stop SAS-1610 1191 Second Avenue Seattle, WA 98101 |
11.2 No Waiver
No waiver of any provision of this Agreement will be valid unless in writing and signed by the person against whom such waiver is sought to be enforced, nor will failure to enforce any right hereunder constitute a continuing waiver of the same or a waiver of any other right hereunder.
11.3 Undertaking
Participant hereby agrees to take whatever additional action and execute whatever additional documents the Company may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either the Participant or the Option pursuant to the express provisions of this Agreement.
11.4 Entire Contract
This Agreement, the Notice of Grant and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof. This Agreement is made pursuant to the provisions of the Plan and will in all respects be construed in conformity with the express terms and provisions of the Plan.
4
11.5 Successors and Assigns
The provisions of this Agreement will inure to the benefit of, and be binding on, the Company and its successors and assigns and Participant and Participant's legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person will have become a party to this Agreement and agreed in writing to join herein and be bound by the terms and conditions hereof.
11.6 Securities Law Compliance; Restrictions on Resales of Option Shares
The Company may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any exercise of the Option and/or any resales by the Participant or other subsequent transfers by the Participant of any shares of Common Stock issued as a result of the exercise of the Option, including without limitation (a) restrictions under an insider trading policy, (b) restrictions that may be necessary in the absence of an effective registration statement under the Securities Act of 1933, as amended, covering the Option and/or the Common Stock underlying the Option and (c) restrictions as to the use of a specified brokerage firm or other agent for exercising the Option and/or for such resales or other transfers. The sale of the shares underlying the Option must also comply with other applicable laws and regulations governing the sale of such shares.
11.7 Information Confidential
As partial consideration for the granting of the Option, the Participant agrees that he or she will keep confidential all information and knowledge that the Participant has relating to the manner and amount of his or her participation in the Plan; provided, however, that such information may be disclosed as required by law and may be given in confidence to the Participant's spouse, tax and financial advisors, or to a financial institution to the extent that such information is necessary to secure a loan.
11.8 Governing Law
Except as may otherwise be provided in the Plan, the provisions of the Notice of Grant and this Agreement shall be governed by the laws of the state of Washington, without giving effect to principles of conflicts of law.
5
WASHINGTON MUTUAL, INC. STOCK OPTION AGREEMENT
(3-Year Graded Vesting)
Washington Mutual, Inc. (the " Company "), by action of the Board and approval of its shareholders, established the Washington Mutual, Inc. 2003 Equity Incentive Plan (the " Plan "). The Participant is employed by the Company or a Related Company (or in the case of a Nonqualified Stock Option, the Participant is an employee, director, consultant, agent, advisor or independent contractor of the Company or a Related Company) and the Company desires to encourage the Participant to own Common Stock for the purposes stated in Section 1 of the Plan. In consideration of the foregoing, the parties have entered into this Stock Option Agreement (this " Agreement ") to govern the terms of the Option (as defined below) granted by the Company. Defined terms in the Plan shall have the same meaning in this Agreement, except where the context otherwise requires.
1. Grant of Option
On the grant date (the " Grant Date ") set forth in the electronic Notice of Grant (" Notice of Grant ") provided to the Participant named therein, the Company has granted to the Participant a right to purchase up to the number of shares of the Company's Common Stock at the purchase price per share (the " Exercise Price "), each as adjusted from time to time pursuant to Section 15 of the Plan, set forth in the Notice of Grant, which right shall be subject to the terms and conditions set forth in the Notice of Grant, this Agreement, and the Plan (as amended from time to time) (the " Option "). The Participant shall not be entitled to any of the benefits under this Option unless and until the Participant accepts the Option grant through the electronic grant notification system maintained by or on behalf of the Company. By accepting the Option grant, the Participant irrevocably agrees on behalf of the Participant and the Participant's successors and permitted assigns to all of the terms and conditions of the Option as set forth in or pursuant to the Notice of Grant, this Agreement, and the Plan (as such may be amended from time to time).
2. Exercisability; Notice of Exercise
(a) The Option shall not be exercisable as of the Grant Date. After the Grant Date, to the extent not previously exercised and provided that the Participant has not experienced a Termination of Service and remains continuously employed, the Option shall become vested and exercisable on the anniversary of the Grant Date specified below with respect to a number of shares of Common Stock (rounded to the nearest whole share) equal to the percentage of the total number of shares subject to the Option in accordance with the following schedule:
Anniversary of
Grant Date |
Percent (%) of Option Shares Vested & Exercisable
|
|
---|---|---|
1st Anniversary | 33 1 / 3 % | |
2nd Anniversary | 66 2 / 3 % | |
3rd Anniversary | 100% |
(b) The vesting period and/or exercisability of the Option set forth in Paragraph 2(a) may be adjusted by the Committee to reflect the decreased level of employment during any period in which the Participant is on an approved leave of absence or is employed on a less than full time basis. Notwithstanding anything to the contrary in this Paragraph 2, the Option shall be subject to earlier acceleration of exercisability and/or expiration of the Option as provided in this Agreement and the Plan.
(c) To the extent then exercisable, the Option may be exercised, from time to time, in whole or in part by notifying the Company or its designee of such exercise in such manner as the Company may from time to time require, which notice shall specify the number of shares of
Common Stock for which the Option is to be exercised and be accompanied by evidence satisfactory to the Committee of such person's right to exercise the Option if the person exercising the Option is not the Participant, and which notice shall provide for payment of the Option Exercise Price in accordance with Section 7.5 of the Plan.
3. Non-Transferability of Option
Except as provided in Section 14 of the Plan, the Option is not transferable and the Participant may not make any disposition of the Option or any interest therein. (Section 14 of the Plan permits transfers by will and by the laws of descent and distribution and permits the Participant to designate one or more beneficiaries on a Company-approved form who can exercise an Option following the Participant's death. The Committee, in its sole discretion, may also permit the Participant to assign or transfer an Option, to the extent permitted under the Plan.) As used herein, "disposition" means any sale, transfer, encumbrance, gift, donation, assignment, pledge, hypothecation, or other disposition, whether similar or dissimilar to those previously enumerated, whether voluntary or involuntary, and whether during the Participant's lifetime or upon or after the Participant's death, including, but not limited to, any disposition by operation of law, by court order, by judicial process, or by foreclosure, levy, or attachment. Any attempted disposition in violation of this Paragraph 3 and Section 14 of the Plan shall be void.
4. Status of Participant
The Participant shall not be deemed a shareholder of the Company with respect to any of the shares of Common Stock subject to the Option, except to the extent that such shares shall have been purchased and transferred to him or her. The Company shall not be required to issue or transfer any certificates for shares of Common Stock purchased upon exercise of the Option until all applicable requirements of law have been complied with and such shares shall have been duly listed on any securities exchange on which the Common Stock may then be listed.
5. No Effect on Capital Structure
The Option shall not affect the right of the Company or any Related Company to reclassify, recapitalize or otherwise change its capital or debt structure or to merge, consolidate, convey any or all of its assets, dissolve, liquidate, windup, or otherwise reorganize.
6. Expiration of Option
The right to purchase Common Stock under the Option shall expire on the date specified in the Notice of Grant, which is ten (10) years from the Grant Date, provided however, that the Option shall expire sooner in the circumstances described below in this Paragraph 6 and as otherwise provided under the Plan (for example, in connection with a Company Transaction under Section 15.3 of the Plan).
(a) Termination of Service without Cause. Upon a Termination of Service without Cause, (i) any part of the Option that is unexercisable as of such termination date shall remain unexercisable and shall terminate as of such date, and (ii) the Participant shall have the right for 12 months after the date of such Termination of Service to exercise only that portion of the Option that has become exercisable as of the date of such Termination of Service, and thereafter the Option shall terminate and cease to be exercisable.
(b) Termination of Service for Cause. Upon a Termination of Service for Cause, the portion, if any, of the Option that remains unexercised at the time the Participant is notified of such Termination of Service shall terminate and cease to be exercisable as of such time.
2
(c) Retirement as Employee or Director. Upon a Termination of Service by reason of Retirement, the Participant shall have the right, until one (1) year after the date of such Termination of Service, to exercise only the portion of the Participant's Option that has become exercisable as of the date of such Termination of Service, and thereafter the Option shall terminate and cease to be exercisable, except that if such Retirement occurs after the Participant has attained age 60 (age 72 for Board directors), then (i) the Option shall become exercisable in full as of the date of such Termination of Service and (ii) the Participant shall have the right to exercise the Option through the date that is five (5) years after the date of such Termination of Service. Thereafter, the Option shall terminate and cease to be exercisable.
(d) Disability. Upon a Termination of Service by reason of Disability, (i) the Option shall become exercisable in full as of the date of such Termination of Service and (ii) the Participant shall have the right for 12 months after the date of such Termination of Service to exercise the Option. Thereafter, the Option shall terminate and cease to be exercisable.
(e) Death. Upon a Termination of Service by reason of death, (i) the Option shall become exercisable in full as of the date of such Termination of Service and (ii) the Option shall be exercisable by the Participant's legal representatives, heirs, legatees, or distributees for 12 months after the date of such Termination of Service. Thereafter, the Option shall terminate and cease to be exercisable. Notwithstanding the foregoing, if a Participant dies after a Termination of Service but while an Option is otherwise exercisable, the portion of the Option that is exercisable as of the date of such Termination of Service shall expire 12 months after the date of death, unless the Committee determines otherwise.
The Participant's attention is directed to the discussion in Paragraph 8 below of the potential loss of incentive stock option tax treatment if an Incentive Stock Option is exercised more than three (3) months after the Participant ceases to be employed by the Company or a Related Company.
It is the Participant's responsibility to be aware of the date the Option terminates.
7. Committee Authority
Any question concerning the interpretation of this Agreement or the Plan, any adjustments required to be made under the Plan, and any controversy that may arise under the Plan or this Agreement shall be determined by the Committee (including any person(s) to whom the Committee has delegated its authority) in its sole and absolute discretion. Such decision by the Committee shall be final and binding.
8. Stock Option Tax Treatment
(a) To the extent that the Notice of Grant specifies that the Option is intended to be treated as a Nonqualified Stock Option, the Option shall not be subject to tax treatment as an Incentive Stock Option. To the extent that the Notice of Grant specifies that the Option is intended to be treated as an Incentive Stock Option, the Option is intended to qualify to the greatest extent possible as an "incentive stock option" within the meaning of Section 422 of the Code, and shall be so construed; provided, however, that nothing in the Notice of Grant, this Agreement or the Plan shall be interpreted as a representation, guarantee or other undertaking on the part of the Company that the Option is or will be determined to qualify as an Incentive Stock Option. Moreover, the Code provides that Option shares do not qualify for incentive stock option treatment if and to the extent that (i) the aggregate Exercise Price for shares that could be purchased under the Option in the year the Option first became exercisable as to such shares, plus (ii) the aggregate exercise price for shares under any of the Participant's other concurrently or previously granted incentive stock options that first became exercisable in that same calendar year, exceeds $100,000. Therefore, notwithstanding anything to the contrary herein, if and to the extent
3
that any shares are issued under a portion of this Option that exceeds the foregoing $100,000 limitation, such shares shall not be treated as issued under an incentive stock option. In such an event, the Participant shall be subject to the tax withholding provisions of Section 13 of the Plan for the portion of the Option that is not an Incentive Stock Option, and to all other Plan provisions that apply to Nonqualified Stock Options with respect to such portion of the Option. To the maximum extent possible, the portion of an Option intended to qualify as an Incentive Stock Option that expires upon a Termination of Service shall be the portion (if any) that does not so qualify, so as to preserve incentive stock option treatment for the Option to the greatest extent possible. Certain decisions, amendments and interpretations by the Committee of this Option may cause the Option to cease to qualify as an incentive stock option pursuant to the Code and by accepting this Option the Participant agrees in advance to such disqualifying action.
(b) In order to obtain the tax treatment provided for incentive stock options by Sections 421 and 422 of the Code:
(i) The Participant must exercise any Incentive Stock Option within three (3) months after the Participant ceases to be employed by the Company or a Related Company, unless the Participant ceased to be employed due to death or Disability, and within one (1) year after the Participant ceases to be employed by the Company or a Related Company on account of disability (as defined in Section 22(e)(3) of the Code), and
(ii) The Participant must not sell the shares of Common Stock received upon exercising any Incentive Stock Option within two (2) years from the date of the grant of the Option nor within one (1) year from the date of exercise of the Option.
With respect to any Option that is intended to qualify as an Incentive Stock Option in full or as to any portion of the shares issuable thereunder, the Participant's exercise notice delivered pursuant to Paragraph 2 of this Agreement with respect to such Option shall indicate whether the Participant intends to satisfy the foregoing requirements. The Participant is advised to consult with his or her own tax advisor on any questions related to the tax treatment of the Option.
9. Notice of Disqualifying Disposition
To the extent that the Option is designated in the Notice of Grant as being intended to be an Incentive Stock Option, the Participant shall notify the Company of his or her intent to dispose of any of the shares of Common Stock purchased pursuant to the Option within two (2) years from the date of the grant of the Option or one (1) year from the date of exercise of the Option, and promptly after such disposition the Participant shall notify the Company of the number of shares of Common Stock disposed of, the dates of acquisition and disposition of such shares, and the consideration, if any, received on such disposition. If in connection with any such disposition the Company becomes liable for withholding taxes and has no amounts owing the Participant with which it may offset and discharge its withholding obligation, the Participant shall pay over to the Company with the amount needed to discharge the Company's withholding obligation and shall indemnify the Company against any penalties it may incur if it does not satisfy such obligations as a result of Participant failing to pay the Company the amount of such withholding obligation. The Company will report this disposition on Form W-2. Nothing in this Paragraph shall give the Participant any right to dispose of shares of Common Stock in a manner that is inconsistent with any provision of this Agreement, the Plan, or any stock transfer restriction agreement entered into by the Participant.
10. Plan Controls
The terms of the Notice of Grant and this Agreement are governed by the terms of the Plan, as it exists on the date of the grant and as the Plan is amended from time to time. In the event of any conflict between the provisions of the Notice of Grant or this Agreement and the provisions of the
4
Plan, the terms of the Plan shall control, except as expressly stated otherwise. The term "Section" generally refers to provisions within the Plan; provided, however, the term "Paragraph" shall refer to a provision of this Agreement.
11. Limitation on Rights; No Right to Future Grants; Extraordinary Item.
By entering into this Agreement and accepting the Option, Participant acknowledges that: (i) Participant's participation in the Plan is voluntary; (ii) the value of the Option is an extraordinary item which is outside the scope of any employment contract with Participant; (iii) the Option is not part of normal or expected compensation for any purpose, including without limitation for calculating any benefits, severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments, and Participant will not be entitled to compensation or damages as a consequence of Participant's forfeiture or expiration of any unvested portion of the Option as a result of Participant's Termination of Service with the Company or any Related Company for any reason; and (iv) in the event that Participant is not a direct employee of Company, the grant of the Option will not be interpreted to form an employment relationship with the Company or any Related Company and the grant of the Option will not be interpreted to form an employment contract with the Participant's employer, the Company or any Related Company. The Company shall be under no obligation whatsoever to advise the Participant of the existence, maturity or termination of any of Participant's rights hereunder and Participant shall be responsible for familiarizing himself or herself with all matters contained herein and in the Plan which may affect any of Participant's rights or privileges hereunder.
12. General Provisions
12.1 Notice
Whenever any notice is required or permitted hereunder, such notice must be in writing and delivered in person or by mail (to the address set forth below if notice is being delivered to the Company) or electronically. Any notice delivered in person or by mail shall be deemed to be delivered on the date on which it is personally delivered, or, whether actually received or not, on the third business day after it is deposited in the United States mail, certified or registered, postage prepaid, addressed to the person who is to receive it at the address that such person has theretofore specified by written notice delivered in accordance herewith. Any notice given by the Company to the Participant directed to Participant at Participant's address on file with the Company shall be effective to bind the Participant and any other person who shall have acquired rights under this Agreement. The Company or the Participant may change, by written notice to the other, the address previously specified for receiving notices. Notices delivered to the Company in person or by mail shall be addressed as follows:
Company: |
Washington Mutual, Inc.
Attn: Leadership Rewards, Stock Administrator Mail Stop SAS-1610 1191 Second Avenue Seattle, WA 98101 |
12.2 No Waiver
No waiver of any provision of this Agreement will be valid unless in writing and signed by the person against whom such waiver is sought to be enforced, nor will failure to enforce any right hereunder constitute a continuing waiver of the same or a waiver of any other right hereunder.
5
12.3 Undertaking
Participant hereby agrees to take whatever additional action and execute whatever additional documents the Company may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either the Participant or the Option pursuant to the express provisions of this Agreement.
12.4 Entire Contract
This Agreement, the Notice of Grant and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof. This Agreement is made pursuant to the provisions of the Plan and will in all respects be construed in conformity with the express terms and provisions of the Plan.
12.5 Successors and Assigns
The provisions of this Agreement will inure to the benefit of, and be binding on, the Company and its successors and assigns and Participant and Participant's legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person will have become a party to this Agreement and agreed in writing to join herein and be bound by the terms and conditions hereof.
12.6 Securities Law Compliance; Restrictions on Resales of Option Shares
The Company may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any exercise of the Option and/or any resales by the Participant or other subsequent transfers by the Participant of any shares of Common Stock issued as a result of the exercise of the Option, including without limitation (a) restrictions under an insider trading policy, (b) restrictions that may be necessary in the absence of an effective registration statement under the Securities Act of 1933, as amended, covering the Option and/or the Common Stock underlying the Option and (c) restrictions as to the use of a specified brokerage firm or other agent for exercising the Option and/or for such resales or other transfers. The sale of the shares underlying the Option must also comply with other applicable laws and regulations governing the sale of such shares.
12.7 Information Confidential
As partial consideration for the granting of the Option, the Participant agrees that he or she will keep confidential all information and knowledge that the Participant has relating to the manner and amount of his or her participation in the Plan; provided, however, that such information may be disclosed as required by law and may be given in confidence to the Participant's spouse, tax and financial advisors, or to a financial institution to the extent that such information is necessary to secure a loan.
12.8 Governing Law
Except as may otherwise be provided in the Plan, the provisions of the Notice of Grant and this Agreement shall be governed by the laws of the state of Washington, without giving effect to principles of conflicts of law.
6
Option
Grant
Number
WASHINGTON MUTUAL, INC.
NOTICE OF STOCK OPTION GRANT
To:
From: Corporate Rewards, Stock Administration
We are pleased to inform you that on the grant date set forth below the Company granted you a right (the " Option ") to purchase up to the number of shares of the Company's Common Stock at the purchase price per share set forth below, which right is subject to the terms and conditions set forth in this Notice of Grant, the accompanying Washington Mutual, Inc. Stock Option Agreement (1-Year Cliff Vesting), and the 2003 Equity Incentive Plan (as amended from time to time). Defined terms in the Plan shall have the same meaning in this Notice of Grant. This Option is granted pursuant to the Plan and is subject to and qualified in its entirety by the Stock Option Agreement.
|
||
Name of Participant: | ||
|
||
Social Security Number: | ||
|
||
Grant Date: | ||
|
||
Number of shares of Common Stock subject to Option: | ||
|
||
Exercise Price Per Share: | $ . | |
|
||
Expiration Date: | ||
|
By signing this Notice of Grant, the Participant irrevocably agrees on behalf of the Participant and the Participant's successors and permitted assigns to all of the terms and conditions of the Option as set forth in or pursuant to this Notice of Grant, the Stock Option Agreement, and the Plan (as such may be amended from time to time). This Option is intended to be treated for tax purposes as a Nonqualified Stock Option and accordingly does not qualify for treatment as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended.
AGREED AND ACCEPTED:
WASHINGTON MUTUAL, INC.
|
|
|
|
|
|
Participant's Signature |
|||||
By: |
Daryl David |
|
|
, 200 |
|
Title: |
Executive Vice President of Human Resources |
|
Date signed |
||
|
WASHINGTON MUTUAL, INC. RESTRICTED STOCK AWARD AGREEMENT
(3-Year Cliff Vesting)
Washington Mutual, Inc. (the " Company "), by action of the Board and approval of its shareholders established the Washington Mutual, Inc. 2003 Equity Incentive Plan (the " Plan "). The Participant is employed by the Company or a Related Company and the Company desires to encourage the Participant to own Common Stock for the purposes stated in Section 1 of the Plan. In consideration of the foregoing, the parties have entered into this Restricted Stock Award Agreement (this " Agreement ") to govern the terms of the Restricted Stock Award (as defined below) granted by the Company. Defined terms in the Plan shall have the same meaning in this Agreement, except where the context otherwise requires.
1. Grant of Restricted Stock
On the grant date (the " Grant Date ") set forth in the electronic Notice of Grant (" Notice of Grant ") provided to the Participant named therein, the Company has granted to the Participant a Restricted Stock Award (the " Award ") in accordance with the terms of the Plan and subject to the conditions set forth in the Notice of Grant, this Agreement and the Plan (as amended from time to time). The Award represents the right to receive up to the number of shares of Common Stock (as adjusted from time to time pursuant to Section 15 of the Plan, the " Shares ") of the Company subject to the fulfillment of the vesting conditions set forth in this Agreement. The Participant shall not be entitled to any of the benefits under this Award unless and until the Participant accepts the Award through the electronic grant notification system maintained by or on behalf of the Company. By accepting the Award, the Participant irrevocably agrees on behalf of the Participant and the Participant's successors and permitted assigns to all of the terms and conditions of the Award as set forth in or pursuant to the Notice of Grant, this Agreement, and the Plan (as such may be amended from time to time).
2. Transfer Restrictions; Vesting
(a) Participant's rights in and to the Shares shall not be vested as of the Grant Date and shall be forfeitable unless and until otherwise vested pursuant to the terms of this Agreement. After the Grant Date, provided that the Participant has not experienced a Termination of Service and remains continuously employed, the Shares shall become vested on the anniversary of the Grant Date specified below with respect to a number of shares of Common Stock (rounded to the nearest whole share) equal to the percentage of the total number of shares subject to the Award in accordance with the following schedule:
Anniversary of Grant Date
|
Percent (%) of
Shares Vested |
|
---|---|---|
3rd Anniversary | 100% |
Shares that have vested and are no longer subject to forfeiture according to the above vesting schedule are referred to herein as " Vested Shares ." Shares that are not vested and remain subject to forfeiture under the preceding schedule are referred to herein as " Unvested Shares ."
(b) The vesting period of the Award set forth in Paragraph 2(a) may be adjusted by the Committee to reflect the decreased level of employment during any period in which the Participant is on an approved leave of absence or is employed on a less than full time basis. Notwithstanding anything to the contrary in this Paragraph 2, the Award shall be subject to earlier acceleration of vesting and/or forfeiture and transfer as provided in this Agreement and the Plan.
(c) Any sale, transfer, assignment, encumbrance, pledge, hypothecation, conveyance in trust, gift, transfer by bequest, devise or descent, or other transfer or disposition of any kind, whether voluntary or by operation of law, directly or indirectly, of Unvested Shares shall be strictly
prohibited and void; provided, however, that the Committee, in its sole discretion, may permit the Participant to assign or transfer an Award to the extent permitted under the Plan, provided that the Award shall be subject to all the terms and condition of the Plan, this Agreement and any other terms required by the Committee as a condition to such transfer.
3. Status of Participant
From and after the Grant Date, Participant will be recorded as a shareholder of the Company with respect to the Shares unless and until any Shares are forfeited or transferred back to the Company.
4. Dividends
From and after the Grant Date and unless and until Shares are forfeited or otherwise transferred back to the Company, the Participant will be entitled to receive all dividends and other distributions paid with respect to the Shares. Dividends payable by the Company to its public stockholders in cash shall, with respect to any Unvested Shares, be paid in cash on or about the date such dividends are payable to public stockholders, subject to any applicable tax withholding requirements.
5. Forfeiture upon Termination of Employment; Company Transaction
5.1 Termination of Employment
Except as provided in Paragraph 5.2 below, upon a Termination of Service for any reason, including without limitation, termination by the Company for Cause, voluntary resignation by the Participant or the Participant's death, Disability or Retirement, the Unvested Shares shall be forfeited by the Participant and cancelled and surrendered to the Company without payment of any consideration to the Participant.
5.2 Company Transaction
Upon a Company Transaction, the vesting of the Award will be governed by the terms of the Plan.
6. Section 83(b) Election for Restricted Stock Award; Independent Tax Advice
Under Section 83(a) of the Internal Revenue Code (the " Code "), the Participant will be taxed on the Shares on the date the Shares vest and the forfeiture restrictions lapse as set forth in Paragraph 2 of this Agreement, based on their fair market value on such date, at ordinary income rates subject to payroll and withholding tax and tax reporting, as applicable. For this purpose, the term "forfeiture restrictions" means the right of the Company to receive back any Unvested Shares upon a Termination of Service. Under Section 83(b) of the Code, the Participant may elect to be taxed on the Shares on the Grant Date, based upon their fair market value on such date, at ordinary income rates subject to payroll and withholding tax and tax reporting, rather than when and as the Unvested Shares cease to be subject to the forfeiture restrictions. If Participant elects to accelerate the date on which he or she is taxed on the Shares under Section 83(b), an election (an " 83(b) Election ") to such effect must be filed with the Internal Revenue Service within 30 days from the Grant Date of the Award and applicable withholding taxes must be paid to the Company at that time.
There are significant risks associated with the decision to make an 83(b) Election. If the Participant makes an 83(b) Election and the Unvested Shares are subsequently forfeited to the Company, the Participant will not be entitled to recover the taxes paid by claiming a deduction for the ordinary income previously recognized as a result of the 83(b) Election. If the Participant makes an
2
83(b) Election and the value of the Unvested Shares subsequently declines, the 83(b) Election may cause the Participant to recognize more compensation income than otherwise would have been the case. On the other hand, if the value of the Unvested Shares increases and the Participant has not made an 83(b) Election, Participant may recognize more compensation income than otherwise would have been the case.
The foregoing is only a summary of the federal income tax laws that apply to the Shares under this Agreement and does not purport to be complete. The actual tax consequences of receiving or disposing of the Shares are complicated and depend, in part, on the Participant's specific situation and may also depend on the resolution of currently uncertain tax law and other variables not within the control of the Company. THEREFORE, THE PARTICIPANT SHOULD SEEK INDEPENDENT ADVICE REGARDING THE APPLICABLE PROVISIONS OF THE FEDERAL TAX LAW AND THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY TO WHICH THE PARTICIPANT IS SUBJECT. By accepting this Agreement, Participant acknowledges and agrees that he or she has either consulted with a competent tax advisor independent of the Company to obtain tax advice concerning the Shares in light of the Participant's specific situation or has had the opportunity to consult with such a tax advisor and has chosen not to do so.
The form for making an 83(b) Election is available from the Company. If the Participant determines to make an 83(b) Election, it is the Participant's responsibility to file such an election with the Internal Revenue Service within the 30-day period after the Grant Date, to deliver to the Company a signed copy of the 83(b) Election, to file an additional copy of such election form with the Participant's federal income tax return for the calendar year in which the Grant Date occurs and to pay applicable withholding taxes to the Company at that time.
7. Book Entry Registration of the Shares
The Company may at its election either (i) after the Date of Grant, issue a certificate representing the Shares subject to this Agreement and place a legend on and stop transfer notice describing the restrictions on and forfeitability of such Shares, in which case the Company may retain such certificates unless and until the Shares represented by such certificate have vested and may cancel such certificate if and to the extent that the Shares are forfeited or otherwise required to be transferred back to the Company, or (ii) not issue any certificate representing Shares subject to this Agreement and instead document the Participant's interest in the Shares by registering the Shares with the Company's transfer agent (or another custodian selected by the Company) in book entry form in the Participant's name with the applicable restrictions noted in the book entry system, in which case no certificate(s) representing all or a part of the Shares will be issued unless and until the Shares become Vested Shares.
8. Stop-Transfer Notices
The Company will not be required to (a) transfer on its books any Shares that have been sold or transferred in violation of the provisions of this Agreement or (b) treat as the owner of the Shares, or otherwise accord voting, dividend or liquidation rights to, any transferee to whom the Shares have been transferred in contravention of this Agreement.
9. Withholding and Disposition of Shares
9.1 Generally.
The Participant is liable and responsible for all taxes owed in connection with the Award, regardless of any action the Company takes with respect to any tax withholding obligations that
3
arise in connection with the Award. The Company does not make any representation or undertaking regarding the treatment of any tax withholding in connection with the grant or vesting of the Award or the subsequent sale of Shares issuable pursuant to the Award. The Company does not commit and is under no obligation to structure the Award to reduce or eliminate the Participant's tax liability.
9.2 Payment of Withholding Taxes.
Prior to any event in connection with the Award (e.g., vesting) that the Company determines may result in any domestic or foreign tax withholding obligation, whether national, federal, state or local, including any social tax obligation (the "Tax Withholding Obligation"), the Participant is required to arrange for the satisfaction of the minimum amount of such Tax Withholding Obligation in a manner acceptable to the Company.
(a) By Withholding Shares . Unless Participant elects to satisfy the Tax Withholding Obligation by an alternative means in accordance with clause (b) below, Participant's acceptance of this Award constitutes Participant's instruction and authorization to the Company to withhold on the Participant's behalf the number of Shares from those Shares issuable to the Participant at the time when the Award becomes vested as the Company determines to be sufficient to satisfy the Tax Withholding Obligation.
(b) By Other Payment . At any time not less than five (5) business days before any Tax Withholding Obligation arises (e.g., before a Vesting Date), Participant may notify the Company of Participant's election to pay Participant's Tax Withholding Obligation by wire transfer, check or other means permitted by the Company. In such case, the Participant shall satisfy his or her tax withholding obligation by paying to the Company on such date as it shall specify an amount that the Company determines is sufficient to satisfy the expected Tax Withholding Obligation by (i) wire transfer to such account as the Company may direct, (ii) delivery of a check payable to the Company, Attn: Leadership Rewards, Stock Administrator, Mail Stop SAS-1610, 1191 Second Avenue, Seattle, WA 98101, or such other address as the Company may from time to time direct, or (iii) such other means as the Company may establish or permit. Participant agrees and acknowledges that prior to the date the Tax Withholding Obligation arises, the Company will be required to estimate the amount of the Tax Withholding Obligation and accordingly will require the amount paid to the Company under this Paragraph 9.2(b) to be more than the minimum amount that may actually be due and that, if Participant has not delivered payment of a sufficient amount to the Company to satisfy the Tax Withholding Obligation (regardless of whether as a result of the Company underestimating the required payment or Participant failing to timely make the required payment), the additional Tax Withholding Obligation amounts shall be satisfied in the manner specified in Paragraph 9.2(a) above.
10. Plan Controls
The terms of the Notice of Grant and this Agreement are governed by the terms of the Plan, as it exists on the date of the grant and as the Plan is amended from time to time. In the event of any conflict between the provisions of the Notice of Grant or this Agreement and the provisions of the Plan, the terms of the Plan shall control, except as expressly stated otherwise. The term "Section" generally refers to provisions within the Plan; provided, however, the term "Paragraph" shall refer to a provision of this Agreement.
4
11. Limitation on Rights; No Right to Future Grants; Extraordinary Item.
By entering into this Agreement and accepting the Award, Participant acknowledges that: (i) Participant's participation in the Plan is voluntary; (ii) the value of the Award is an extraordinary item which is outside the scope of any employment contract with Participant; (iii) the Award is not part of normal or expected compensation for any purpose, including without limitation for calculating any benefits, severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments, and Participant will not be entitled to compensation or damages as a consequence of Participant's forfeiture of any unvested portion of the Award as a result of Participant's Termination of Service with the Company or any Related Company for any reason; and (iv) in the event that Participant is not a direct employee of Company, the grant of the Award will not be interpreted to form an employment relationship with the Company or any Related Company and the grant of the Award will not be interpreted to form an employment contract with the Participant's employer, the Company or any Related Company. The Company shall be under no obligation whatsoever to advise the Participant of the existence, maturity or termination of any of Participant's rights hereunder and Participant shall be responsible for familiarizing himself or herself with all matters contained herein and in the Plan which may affect any of Participant's rights or privileges hereunder.
12. Committee Authority
Any question concerning the interpretation of this Agreement or the Plan, any adjustments required to be made under the Plan, and any controversy that may arise under the Plan or this Agreement shall be determined by the Committee (including any person(s) to whom the Committee has delegated its authority) in its sole and absolute discretion. Such decision by the Committee shall be final and binding.
13. General Provisions
13.1 Notices
Whenever any notice is required or permitted hereunder, such notice must be in writing and delivered in person or by mail (to the address set forth below if notice is being delivered to the Company) or electronically. Any notice delivered in person or by mail shall be deemed to be delivered on the date on which it is personally delivered, or, whether actually received or not, on the third business day after it is deposited in the United States mail, certified or registered, postage prepaid, addressed to the person who is to receive it at the address that such person has theretofore specified by written notice delivered in accordance herewith. Any notice given by the Company to the Participant directed to Participant at Participant's address on file with the Company shall be effective to bind the Participant and any other person who shall have acquired rights under this Agreement. The Company or the Participant may change, by written notice to the other, the address previously specified for receiving notices. Notices delivered to the Company in person or by mail shall be addressed as follows:
Company: |
Washington Mutual, Inc.
Attn: Leadership Rewards, Stock Administrator Mail Stop SAS-1610 1191 Second Avenue Seattle, WA 98101 |
5
13.2 No Waiver
No waiver of any provision of this Agreement will be valid unless in writing and signed by the person against whom such waiver is sought to be enforced, nor will failure to enforce any right hereunder constitute a continuing waiver of the same or a waiver of any other right hereunder.
13.3 Undertaking
Participant hereby agrees to take whatever additional action and execute whatever additional documents the Company may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either the Participant or the Award pursuant to the express provisions of this Agreement.
13.4 Entire Contract
This Agreement, the Notice of Grant and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof. This Agreement is made pursuant to the provisions of the Plan and will in all respects be construed in conformity with the express terms and provisions of the Plan.
13.5 Successors and Assigns
The provisions of this Agreement will inure to the benefit of, and be binding on, the Company and its successors and assigns and Participant and Participant's legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person will have become a party to this Agreement and agreed in writing to join herein and be bound by the terms and conditions hereof.
13.6 Securities Law Compliance
The Company may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any resales by the Participant or other subsequent transfers by the Participant of any Shares issued as a result of or under this Award, including without limitation (a) restrictions under an insider trading policy, (b) restrictions that may be necessary in the absence of an effective registration statement under the Securities Act of 1933, as amended, covering the Award and/or the Shares underlying the Award and (c) restrictions as to the use of a specified brokerage firm or other agent for such resales or other transfers. Any sale of the Shares must also comply with other applicable laws and regulations governing the sale of such shares.
13.7 Information Confidential
As partial consideration for the granting of the Award, the Participant agrees that he or she will keep confidential all information and knowledge that the Participant has relating to the manner and amount of his or her participation in the Plan; provided, however, that such information may be disclosed as required by law and may be given in confidence to the Participant's spouse, tax and financial advisors, or to a financial institution to the extent that such information is necessary to secure a loan.
6
13.8 Governing Law
Except as may otherwise be provided in the Plan, the provisions of the Notice of Grant and this Agreement shall be governed by the laws of the state of Washington, without giving effect to principles of conflicts of law.
7
WASHINGTON MUTUAL, INC. RESTRICTED STOCK AWARD AGREEMENT
(3-Year Graduated Vesting)
Washington Mutual, Inc. (the " Company "), by action of the Board and approval of its shareholders established the Washington Mutual, Inc. 2003 Equity Incentive Plan (the " Plan "). The Participant is employed by the Company or a Related Company and the Company desires to encourage the Participant to own Common Stock for the purposes stated in Section 1 of the Plan. In consideration of the foregoing, the parties have entered into this Restricted Stock Award Agreement (this " Agreement ") to govern the terms of the Restricted Stock Award (as defined below) granted by the Company. Defined terms in the Plan shall have the same meaning in this Agreement, except where the context otherwise requires.
1. Grant of Restricted Stock
On the grant date (the " Grant Date ") set forth in the electronic Notice of Grant (" Notice of Grant ") provided to the Participant named therein, the Company has granted to the Participant a Restricted Stock Award (the " Award ") in accordance with the terms of the Plan and subject to the conditions set forth in the Notice of Grant, this Agreement and the Plan (as amended from time to time). The Award represents the right to receive up to the number of shares of Common Stock (as adjusted from time to time pursuant to Section 15 of the Plan, the " Shares ") of the Company subject to the fulfillment of the vesting conditions set forth in this Agreement. By accepting the Award, the Participant irrevocably agrees on behalf of the Participant and the Participant's successors and permitted assigns to all of the terms and conditions of the Award as set forth in or pursuant to the Notice of Grant, this Agreement, and the Plan (as such may be amended from time to time).
2. Transfer Restrictions; Vesting
(a) Participant's rights in and to the Shares shall not be vested as of the Grant Date and shall be forfeitable unless and until otherwise vested pursuant to the terms of this Agreement. After the Grant Date, provided that the Participant has not experienced a Termination of Service and remains continuously employed, the Shares shall become vested on March 31 of each year following the Grant Date as specified below with respect to a number of shares of Common Stock (rounded to the nearest whole share) equal to the percentage of the total number of shares subject to the Award in accordance with the following schedule:
Vesting Date Following Grant Date
|
Percent (%) of
Shares Vested |
|
---|---|---|
1st March 31st | 33 1 / 3 % | |
2nd March 31st | 66 2 / 3 % | |
3rd March 31st | 100% |
Shares that have vested and are no longer subject to forfeiture according to the above vesting schedule are referred to herein as " Vested Shares ." Shares that are not vested and remain subject to forfeiture under the preceding schedule are referred to herein as " Unvested Shares ."
(b) The vesting period of the Award set forth in Paragraph 2(a) may be adjusted by the Committee to reflect the decreased level of employment during any period in which the Participant is on an approved leave of absence or is employed on a less than full time basis. Notwithstanding anything to the contrary in this Paragraph 2, the Award shall be subject to earlier acceleration of vesting and/or forfeiture and transfer as provided in this Agreement and the Plan.
(c) Any sale, transfer, assignment, encumbrance, pledge, hypothecation, conveyance in trust, gift, transfer by bequest, devise or descent, or other transfer or disposition of any kind, whether voluntary or by operation of law, directly or indirectly, of Unvested Shares shall be strictly
prohibited and void; provided, however, that the Committee, in its sole discretion, may permit the Participant to assign or transfer an Award to the extent permitted under the Plan, provided that the Award shall be subject to all the terms and condition of the Plan, this Agreement and any other terms required by the Committee as a condition to such transfer.
3. Status of Participant
From and after the Grant Date, Participant will be recorded as a shareholder of the Company with respect to the Shares unless and until any Shares are forfeited or transferred back to the Company.
4. Dividends
From and after the Grant Date and unless and until Shares are forfeited or otherwise transferred back to the Company, the Participant will be entitled to receive all dividends and other distributions paid with respect to the Shares. Dividends payable by the Company to its public stockholders in cash shall, with respect to any Unvested Shares, be automatically reinvested in additional Shares at a purchase price per share equal to the fair market value of a share of Common Stock on the date such dividend is paid; provided, however that any fractional Share shall be rounded up to a whole Share on the date such Share vests. Any additional Shares accrued for Participant through dividends on Unvested Shares, whether through reinvestment or through a dividend paid in Shares, shall be subject to the same restrictions on transferability and risk of forfeiture as the Unvested Shares with respect to which they were distributed.
5. Forfeiture upon Termination of Employment; Company Transaction
5.1 Termination of Employment
Except as provided in Paragraph 5.2 below, upon a Termination of Service for any reason, including without limitation, termination by the Company for Cause, voluntary resignation by the Participant or the Participant's death, Disability or Retirement, the Unvested Shares shall be forfeited by the Participant and cancelled and surrendered to the Company without payment of any consideration to the Participant.
5.2 Company Transaction
Upon a Company Transaction, the vesting of the Award will be governed by the terms of the Plan.
6. Section 83(b) Election for Restricted Stock Award; Independent Tax Advice
Under Section 83(a) of the Internal Revenue Code (the " Code "), the Participant will be taxed on the Shares on the date the Shares vest and the forfeiture restrictions lapse as set forth in Paragraph 2 of this Agreement, based on their fair market value on such date, at ordinary income rates subject to payroll and withholding tax and tax reporting, as applicable. For this purpose, the term "forfeiture restrictions" means the right of the Company to receive back any Unvested Shares upon a Termination of Service. Under Section 83(b) of the Code, the Participant may elect to be taxed on the Shares on the Grant Date, based upon their fair market value on such date, at ordinary income rates subject to payroll and withholding tax and tax reporting, rather than when and as the Unvested Shares cease to be subject to the forfeiture restrictions. If Participant elects to accelerate the date on which he or she is taxed on the Shares under Section 83(b), an election (an " 83(b) Election ") to such effect must be filed with the Internal Revenue Service within 30 days from the Grant Date of the Award and applicable withholding taxes must be paid to the Company at that time.
2
There are significant risks associated with the decision to make an 83(b) Election. If the Participant makes an 83(b) Election and the Unvested Shares are subsequently forfeited to the Company, the Participant will not be entitled to recover the taxes paid by claiming a deduction for the ordinary income previously recognized as a result of the 83(b) Election. If the Participant makes an 83(b) Election and the value of the Unvested Shares subsequently declines, the 83(b) Election may cause the Participant to recognize more compensation income than otherwise would have been the case. On the other hand, if the value of the Unvested Shares increases and the Participant has not made an 83(b) Election, Participant may recognize more compensation income than otherwise would have been the case.
The foregoing is only a summary of the federal income tax laws that apply to the Shares under this Agreement and does not purport to be complete. The actual tax consequences of receiving or disposing of the Shares are complicated and depend, in part, on the Participant's specific situation and may also depend on the resolution of currently uncertain tax law and other variables not within the control of the Company. THEREFORE, THE PARTICIPANT SHOULD SEEK INDEPENDENT ADVICE REGARDING THE APPLICABLE PROVISIONS OF THE FEDERAL TAX LAW AND THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY TO WHICH THE PARTICIPANT IS SUBJECT. By accepting this Agreement, Participant acknowledges and agrees that he or she has either consulted with a competent tax advisor independent of the Company to obtain tax advice concerning the Shares in light of the Participant's specific situation or has had the opportunity to consult with such a tax advisor and has chosen not to do so.
The form for making an 83(b) Election is available from the Company. If the Participant determines to make an 83(b) Election, it is the Participant's responsibility to file such an election with the Internal Revenue Service within the 30-day period after the Grant Date, to deliver to the Company a signed copy of the 83(b) Election, to file an additional copy of such election form with the Participant's federal income tax return for the calendar year in which the Grant Date occurs and to pay applicable withholding taxes to the Company at that time.
7. Book Entry Registration of the Shares
The Company may at its election either (i) after the Date of Grant, issue a certificate representing the Shares subject to this Agreement and place a legend on and stop transfer notice describing the restrictions on and forfeitability of such Shares, in which case the Company may retain such certificates unless and until the Shares represented by such certificate have vested and may cancel such certificate if and to the extent that the Shares are forfeited or otherwise required to be transferred back to the Company, or (ii) not issue any certificate representing Shares subject to this Agreement and instead document the Participant's interest in the Shares by registering the Shares with the Company's transfer agent (or another custodian selected by the Company) in book entry form in the Participant's name with the applicable restrictions noted in the book entry system, in which case no certificate(s) representing all or a part of the Shares will be issued unless and until the Shares become Vested Shares.
8. Stop-Transfer Notices
The Company will not be required to (a) transfer on its books any Shares that have been sold or transferred in violation of the provisions of this Agreement or (b) treat as the owner of the Shares, or otherwise accord voting, dividend or liquidation rights to, any transferee to whom the Shares have been transferred in contravention of this Agreement.
3
9. Withholding and Disposition of Shares
9.1 Generally.
The Participant is liable and responsible for all taxes owed in connection with the Award, regardless of any action the Company takes with respect to any tax withholding obligations that arise in connection with the Award. The Company does not make any representation or undertaking regarding the treatment of any tax withholding in connection with the grant or vesting of the Award or the subsequent sale of Shares issuable pursuant to the Award. The Company does not commit and is under no obligation to structure the Award to reduce or eliminate the Participant's tax liability.
9.2 Payment of Withholding Taxes.
Prior to any event in connection with the Award (e.g., vesting) that the Company determines may result in any domestic or foreign tax withholding obligation, whether national, federal, state or local, including any social tax obligation (the "Tax Withholding Obligation"), the Participant is required to arrange for the satisfaction of the minimum amount of such Tax Withholding Obligation in a manner acceptable to the Company.
(a) By Withholding Shares . Unless Participant elects to satisfy the Tax Withholding Obligation by an alternative means in accordance with clause (b) below, Participant's acceptance of this Award constitutes Participant's instruction and authorization to the Company to withhold on the Participant's behalf the number of Shares from those Shares issuable to the Participant at the time when the Award becomes vested as the Company determines to be sufficient to satisfy the Tax Withholding Obligation.
(b) By Other Payment . At any time not less than five (5) business days before any Tax Withholding Obligation arises (e.g., before a Vesting Date), Participant may notify the Company of Participant's election to pay Participant's Tax Withholding Obligation by wire transfer, check or other means permitted by the Company. In such case, the Participant shall satisfy his or her tax withholding obligation by paying to the Company on such date as it shall specify an amount that the Company determines is sufficient to satisfy the expected Tax Withholding Obligation by (i) wire transfer to such account as the Company may direct, (ii) delivery of a check payable to the Company, Attn: Leadership Rewards, Stock Administrator, Mail Stop SAS-1610, 1191 Second Avenue, Seattle, WA 98101, or such other address as the Company may from time to time direct, or (iii) such other means as the Company may establish or permit. Participant agrees and acknowledges that prior to the date the Tax Withholding Obligation arises, the Company will be required to estimate the amount of the Tax Withholding Obligation and accordingly will require the amount paid to the Company under this Paragraph 9.2(b) to be more than the minimum amount that may actually be due and that, if Participant has not delivered payment of a sufficient amount to the Company to satisfy the Tax Withholding Obligation (regardless of whether as a result of the Company underestimating the required payment or Participant failing to timely make the required payment), the additional Tax Withholding Obligation amounts shall be satisfied in the manner specified in Paragraph 9.2(a) above.
10. Plan Controls
The terms of the Notice of Grant and this Agreement are governed by the terms of the Plan, as it exists on the date of the grant and as the Plan is amended from time to time. In the event of any conflict between the provisions of the Notice of Grant or this Agreement and the provisions of the Plan, the terms of the Plan shall control, except as expressly stated otherwise. The term "Section"
4
generally refers to provisions within the Plan; provided, however, the term "Paragraph" shall refer to a provision of this Agreement.
11. Limitation on Rights; No Right to Future Grants; Extraordinary Item.
By entering into this Agreement and accepting the Award, Participant acknowledges that: (i) Participant's participation in the Plan is voluntary; (ii) the value of the Award is an extraordinary item which is outside the scope of any employment contract with Participant; (iii) the Award is not part of normal or expected compensation for any purpose, including without limitation for calculating any benefits, severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments, and Participant will not be entitled to compensation or damages as a consequence of Participant's forfeiture of any unvested portion of the Award as a result of Participant's Termination of Service with the Company or any Related Company for any reason; and (iv) in the event that Participant is not a direct employee of Company, the grant of the Award will not be interpreted to form an employment relationship with the Company or any Related Company and the grant of the Award will not be interpreted to form an employment contract with the Participant's employer, the Company or any Related Company. The Company shall be under no obligation whatsoever to advise the Participant of the existence, maturity or termination of any of Participant's rights hereunder and Participant shall be responsible for familiarizing himself or herself with all matters contained herein and in the Plan which may affect any of Participant's rights or privileges hereunder.
12. Committee Authority
Any question concerning the interpretation of this Agreement or the Plan, any adjustments required to be made under the Plan, and any controversy that may arise under the Plan or this Agreement shall be determined by the Committee (including any person(s) to whom the Committee has delegated its authority) in its sole and absolute discretion. Such decision by the Committee shall be final and binding.
13. General Provisions
13.1 Notices
Whenever any notice is required or permitted hereunder, such notice must be in writing and delivered in person or by mail (to the address set forth below if notice is being delivered to the Company) or electronically. Any notice delivered in person or by mail shall be deemed to be delivered on the date on which it is personally delivered, or, whether actually received or not, on the third business day after it is deposited in the United States mail, certified or registered, postage prepaid, addressed to the person who is to receive it at the address that such person has theretofore specified by written notice delivered in accordance herewith. Any notice given by the Company to the Participant directed to Participant at Participant's address on file with the Company shall be effective to bind the Participant and any other person who shall have acquired rights under this Agreement. The Company or the Participant may change, by written notice to the other, the address previously specified for receiving notices. Notices delivered to the Company in person or by mail shall be addressed as follows:
Company: | Washington Mutual, Inc. | |||
Attn: Leadership Rewards, Stock Administrator | ||||
Mail Stop SAS-1610 | ||||
1191 Second Avenue | ||||
Seattle, WA 98101 |
5
13.2 No Waiver
No waiver of any provision of this Agreement will be valid unless in writing and signed by the person against whom such waiver is sought to be enforced, nor will failure to enforce any right hereunder constitute a continuing waiver of the same or a waiver of any other right hereunder.
13.3 Undertaking
Participant hereby agrees to take whatever additional action and execute whatever additional documents the Company may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either the Participant or the Award pursuant to the express provisions of this Agreement.
13.4 Entire Contract
This Agreement, the Notice of Grant and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof. This Agreement is made pursuant to the provisions of the Plan and will in all respects be construed in conformity with the express terms and provisions of the Plan.
13.5 Successors and Assigns
The provisions of this Agreement will inure to the benefit of, and be binding on, the Company and its successors and assigns and Participant and Participant's legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person will have become a party to this Agreement and agreed in writing to join herein and be bound by the terms and conditions hereof.
13.6 Securities Law Compliance
The Company may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any resales by the Participant or other subsequent transfers by the Participant of any Shares issued as a result of or under this Award, including without limitation (a) restrictions under an insider trading policy, (b) restrictions that may be necessary in the absence of an effective registration statement under the Securities Act of 1933, as amended, covering the Award and/or the Shares underlying the Award and (c) restrictions as to the use of a specified brokerage firm or other agent for such resales or other transfers. Any sale of the Shares must also comply with other applicable laws and regulations governing the sale of such shares.
13.7 Information Confidential
As partial consideration for the granting of the Award, the Participant agrees that he or she will keep confidential all information and knowledge that the Participant has relating to the manner and amount of his or her participation in the Plan; provided, however, that such information may be disclosed as required by law and may be given in confidence to the Participant's spouse, tax and financial advisors, or to a financial institution to the extent that such information is necessary to secure a loan.
13.8 Governing Law
Except as may otherwise be provided in the Plan, the provisions of the Notice of Grant and this Agreement shall be governed by the laws of the state of Washington, without giving effect to principles of conflicts of law.
6
WASHINGTON MUTUAL, INC.
PERFORMANCE SHARE PROGRAM
AWARD TERMS AND CONDITIONS
(200
-200
Performance Period)
Washington Mutual, Inc. (the " Company "), by action of the Board and approval of its shareholders, established the Washington Mutual, Inc. 2003 Equity Incentive Plan (the " Plan "). The Company or a Related Company employs the Participant, and the Company desires to motivate the Participant for the purposes stated in Section 1 of the Plan. In furtherance of the foregoing, the Committee (as defined in the Plan) has authorized the grant of a Restricted Stock Unit Award to the Participant under the Company's PERFORMANCE SHARES PROGRAM, on the terms set forth in these terms and conditions and the Notice of Award delivered to the Participant herewith. Together, these terms and conditions and the Notice of Award set forth the terms under which shares of the Company's Common Stock (or cash in lieu thereof) may be paid to the Participant based upon the Company's performance over a three-year period. Capitalized terms not defined in these terms and conditions shall have the meaning set forth in the Plan.
1. Grant of Award
The Participant has been granted a Restricted Stock Unit Award under Section 9 of the Plan (the " Award ") with respect to the number of shares of Common Stock set forth on the Notice of Award delivered to Participant herewith. Under the Award, the Participant is eligible to receive between zero and 250% (the " Payout Percentage ") of the target number of shares subject to the Award, as such number may be adjusted or reduced as provided for herein, based upon the Company's performance over a three-year period set forth on Participant's Notice of Award (the " Performance Period ") under the performance criteria (the " Performance Goals ") set forth on Exhibit A hereto with respect to such Performance Period.
2. Determination and Payment of Award
2.1 Award Determination
Following the last day of the Performance Period and the collection of relevant data necessary to determine the extent to which the Performance Goals have been satisfied, the Committee will determine: (a) the extent to which the Performance Goals were achieved by the Company for the Performance Period; (b) the Payout Percentage for the Performance Period; and (c) the number of shares of Common Stock to be issued (or in the Committee's discretion to be used for purposes of calculating the amount payable in cash) including dividend equivalents, upon payment of each Award for such Performance Period. The Committee shall make these determinations in its sole discretion. The number and kind of shares subject to or paid out under the Award shall be subject to adjustment as provided for in Section 15 of the Plan.
Notwithstanding the level of performance achieved under the Performance Goals and the Payout Percentage, the number of shares to be issued upon payment of each Award may be adjusted upward or downward, including to zero, on the basis of such further consideration as the Committee shall determine, in its sole discretion, including as a result of a violation of the Company's Code of Conduct or as other disciplinary actions[, provided that no such adjustment shall be made after a Change in Control (as defined in Section 5 below)]. However, the Committee may not, in any event, increase the amount earned upon satisfaction of any Performance Goal by any Covered Employee, as that term is defined in the Plan. Decisions of the Committee shall be final, conclusive and binding on all persons, including the Company, any Participant, any person claiming thereunder and any stockholder.
2.2 Dividends
Dividend equivalents will be paid on the number of shares actually paid under the Award as determined under Section 2.1 above (which will be calculated based on dividends actually paid on such number of shares over the Performance Period) and will be paid in additional shares of Common Stock or in cash (calculated by dividing the amount of dividend equivalents by the closing stock price on the date of the Committee's determination set forth in Section 2.1), unless the Committee determines otherwise.
2.3 Payment of Award and Distribution of Shares
At the determination of the Committee, the Award may be paid in shares of Common Stock or in cash. Awards are rounded up to the next whole share value. Awards (including dividend equivalents thereon) are paid and any shares of Common Stock thereunder are issued as soon as administrative arrangements for such are made following the completion of the three-year performance period and the determinations of the Committee provided for herein (typically in March or April after the end of the Performance Period).
2.4 Determination Notice
The Company will notify a Participant of the Committee's determination (the " Determination Notice ") of the Award to be paid to the Participant, and the basis for such determination, including the Performance Goals level achieved by the Company for the Performance Period and the Payout Percentage for the Performance Period.
3. Transfer Restrictions
No Award or interest in an Award may be sold, assigned, pledged or transferred by a Participant prior to the payment of shares or cash following completion of a Performance Period; and any attempted assignment or alienation shall be strictly prohibited and void; provided, however, that: (a) a Participant may designate, on a Company-approved form, one or more beneficiaries to receive payment under an Award after the Participant's death (if no beneficiary has been designated, all such amounts will be paid to the beneficiary designated under the 401(k) Plan of the Company or its subsidiaries or, if there is no such beneficiary designation, to the Participant's estate pursuant to the Participant's will or the applicable laws of descent and distribution); and (b) Awards may be deferred under the Washington Mutual Deferred Compensation Plan in effect at the time of the Award payment, provided that elections to defer all or part of an Award must be received by a Deferred Compensation Administrator at such times as the Company may from time to time specify.
4. Change in Job Status
4.1 Termination of Service
In general, a Participant must be employed by the Company on a full-time basis in a position eligible for participation in the Company's Performance Shares Program, as established from time to time by the Committee, through the last day of the Performance Period in order to receive payment for Awards. Accordingly, unless otherwise amended or stated in the terms of an individual Notice of Award or in this Section 4, in the event of any Termination of Service, a Participant shall forfeit the Award, including any accrued dividend equivalents, without payment of any further consideration to the Participant.
2
4.2 Retirement
If a Participant's Termination of Service occurs due to Retirement, the Participant will not forfeit the Award and shall remain eligible for payment of the full amount payable under the Award as if he or she had remained an employee through the last day of the Performance Period. For purposes of this section 4.2 "Retirement" shall mean separation from service at or after age 55 with 10 years of service. The Award will be paid to the Participant at the same time that Awards are paid to actively employed participants after completion of the Performance Period.
4.3 Disability or Death
If a Participant's Termination of Service occurs due to the Participant's Disability or death, any amount otherwise payable under the Award will be prorated based upon the number of full weeks that the Participant was actively employed (i.e., prior to the date of the Termination of Service) during the Performance Period and will be paid to the Participant (or the Participant's beneficiary or personal representative in the case of death) at the same time that Awards are paid to actively employed participants after completion of the Performance Period.
4.4 Move to a Non-Eligible Job
If a Participant ceases to be employed in a position eligible to participate in the Company's Performance Shares Program, as established from time to time by the Committee, due to a change in the Participant's position with the Company that is not otherwise a Termination of Service, any amount otherwise payable under the Award will be prorated based upon the number of full weeks that the Participant was an eligible employee during the Performance Period and will be paid to the Participant at the same time that Awards are paid to eligible participants after completion of the Performance Period.
4.5 Exercise of Discretion
The Committee may, at its discretion, choose to allow a Participant to remain eligible to receive the full amount payable for the Performance Period under the Award upon such terms as it deems appropriate even if a Termination of Service occurs for reasons other than those set forth in Section 4.2, 4.3 or 4.4. In addition, the Committee (or, with respect to a Participant who is not an executive officer of the Company, the chief human resources officer of the Company or other person performing that function) shall determine the effect on the Award of a Company-approved leave of absence or if a Participant works less than full-time.
5. Change in Control
Subject to Section 8 below, upon the occurrence of a "change in control," a Participant will receive a prorated payment for the Award as soon as reasonably possible following the date of the change in control based on the performance measured or estimated by the Committee through the date of the change in control or the last month- or quarter-end preceding the date of the change in control. For this purpose, the term "change in control" shall have the meaning set forth in any individual agreement between the Participant and the Company addressing Awards, if applicable, or in the absence thereof shall mean a Company Transaction, as defined in the Plan.
6. Withholding and Disposition of Shares
By accepting the Award, Participant agrees to make arrangements satisfactory to the Company for the payment of any federal, state, local or foreign withholding tax obligations that arise upon receipt of the Common Stock or cash in connection with the payment of an Award. To the extent permitted by the Committee, Participant may satisfy all or part of these obligations by paying cash to the Company,
3
by having the Company withhold an amount from any cash amounts otherwise due or to become due from the Company to the Participant, by having the Company withhold a number of shares of Common Stock that would otherwise be issued to the Participant having a Fair Market Value sufficient to meet the tax withholding obligations, or by surrendering a number of shares of Common Stock the Participant already owns having a Fair Market Value sufficient to meet the tax withholding obligations. If Participant does not satisfy the tax withholding obligations in a manner and time acceptable to the Company, the Award and any shares issuable thereunder shall be forfeited.
7. No Contractual Rights; Status of Participant
No individual or Participant shall have any claim to be paid any shares of Common Stock or any amount of cash under these terms and conditions and the Notice of Award. The Company's Performance Shares Program, these terms and conditions and the Notice of Award are not intended to vest any rights in any Participant or other person, and shall be administered by the Committee in its complete discretion. Neither the Committee nor the Company has any obligation for uniformity of treatment of participants under the Performance Shares Program. Subject to Sections 5 and 8, at any time prior to a change in control (including after completion of the Performance Period), the Committee may amend, modify or terminate the Performance Shares Program and/or this Award.
Furthermore, no aspect of the Performance Shares Program, these terms and conditions or the Notice of Award shall be deemed to constitute an employment contract or confer or be deemed to confer on any Participant or other person any right to continue in the employ of, or to continue any other relationship with, the Company or any Related Company or limit in any way the right of the Company or any Related Company to terminate a Participant's employment or other relationship at any time, with or without Cause.
Prior to the issuance of shares of Common Stock in payment of the amount payable under the Award, if any, no shares of Common Stock will be reserved or earmarked for the Participant or the Participant's account nor shall the Participant have any of the rights of a stockholder with respect to such shares. Upon issuance of the shares of Common Stock, if any, in payment of the Award, Participant will be the owner of record of such shares and shall receive either (through book-entry form) a credit to an account maintained on the Participant's behalf or a stock certificate representing such shares of Common Stock, as determined by the Committee.
8. Plan Controls; Effect of Individual Agreements
The Performance Shares Program, these terms and conditions or the Notice of Award shall be subject to the terms of the Plan, and in the event of a conflict or ambiguity the terms of the Plan shall control. In addition, these terms and conditions or the Notice of Award shall be subject to the terms of any individual employment or other agreement between the Company and Participant that specifically references the Performance Shares Program or the Participant's Award, and in the case of any conflict the terms of such individual agreement shall control.
9. General Provisions
9.1 Notices
Whenever any notice is required or permitted hereunder, such notice must be in writing and personally delivered or sent by mail. Any notice required or permitted to be delivered hereunder shall be deemed to be delivered on the date on which it is personally delivered, or, whether actually received or not, on the third business day after it is deposited in the United States mail, certified or registered, postage prepaid, addressed to the person who is to receive it at the address that such person has theretofore specified by written notice delivered in accordance herewith. The Company or a Participant may change, by written notice to the other, the address for receiving notices. In the absence of contrary
4
notice, the Company may conclusively rely on an address for Participant set forth in the Company's employment records. Notices delivered to the Company shall be addressed as follows:
Company: |
Washington Mutual, Inc.
Attn: Corporate Rewards, Stock Administrator 1191 Second Avenue, SAS-1610 Seattle, WA 98101 |
9.2 No Waiver
No waiver of any provision of these terms and conditions or the Notice of Award will be valid unless in writing and signed by the person against whom such waiver is sought to be enforced, nor will failure to enforce any right hereunder constitute a continuing waiver of the same or a waiver of any other right hereunder.
9.3 Entire Terms
Subject to Section 8, these terms and conditions and the Notice of Award set forth the entire terms of Participant's participation in the Performance Shares Program and supercede all oral or other written agreements.
9.4 Successors and Assigns
The provisions of these terms and conditions and the Notice of Award will inure to the benefit of, and be binding on, the Company and its successors and assigns and Participant and Participant's legal representatives, heirs, legatees, distributees, assigns, transferees by operation of law and any other person claiming rights under the Performance Shares Program, these terms and conditions and the accompanying Notice of Award, whether or not any such person will have agreed in writing to join therein and be bound by the terms and conditions hereof.
9.5 Information Confidential
As partial consideration for receipt of the Award, the Participant agrees that he or she will keep confidential all information and knowledge that the Participant has relating to the manner and amount of his or her participation in the Plan; provided, however, that such information may be disclosed as required by law and may be given in confidence to the Participant's spouse, tax and financial advisors, or to a financial institution to the extent that such information is necessary to secure a loan.
9.6 Governing Law
The Performance Shares Program, these terms and conditions or the Notice of Award to the extent not otherwise governed by the laws of the United States shall be governed by the laws of the State of Washington, without giving effect to principles of conflicts of law.
9.7 Interpretation and Dispute Resolution
All questions arising under the Plan, the Performance Shares Program, these terms and conditions or the Notice of Award shall be decided by the Committee in its total and absolute discretion. In the event the Participant or any person claiming benefits under these terms and conditions or the Notice of Award believes that a decision by the Committee with respect to such person was arbitrary or capricious, before the person seeks any judicial or other determination as to such matter, such person shall first petition the Committee, setting forth in writing the basis for such belief, and the Committee shall evaluate and determine whether or not to respond to such petition. In the event of any judicial or other proceeding relating to this Award, the substantially prevailing party in ay such dispute shall be entitled to recover reasonable attorney's fees and costs and the other party shall pay the costs of arbitration.
In the event that any provision of the Plan, these terms and conditions or the Notice of Award is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of such terms shall not be affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision.
5
EXHIBIT A
PERFORMANCE GOALS
(200
-200
Performance Period)
The Performance Shares Program measures Washington Mutual's performance on key financial metrics over a three-year Performance Period compared to the performance of a peer group in the S&P Financial Index. The Human Resources Committee of the Board of Directors establishes performance measures.
Washington Mutual's performance is ranked against the performance of companies in the S&P Financial Index. The ranking is based on a composite of three criteria, each of which is set forth below together with the weight assigned to it:
Awards are based on the percentile rank of Washington Mutual performance compared to the S&P Financial Index companies as shown in the schedule below. The weighted average percentile ranking of Washington Mutual under the three performance criteria set forth above (based on the weightings assigned above) will be calculated to determine the Payout Percentage under the program based on the following schedule, interpolated based on actual performance ( e.g. , 76 th percentile equals 180% payout).
Percentile
Rank vs. Peers |
Percentage Payout
of Target Award |
||
---|---|---|---|
90 th and above | 250 | % | |
85 th | 225 | % | |
80 th | 200 | % | |
75 th | 175 | % | |
70 th | 150 | % | |
60 th | 100 | % | |
50 th | 75 | % | |
40 th | 50 | % | |
30 th | 25 | % | |
below 30 th | 0 | % |
WASHINGTON MUTUAL, INC.
NOTICE OF AWARD
UNDER THE PERFORMANCE SHARES PROGRAM
(200
-200
Performance Period)
Washington Mutual, Inc. (the "Company"), pursuant to the 2003 Equity Incentive Plan (the "Plan"), hereby grants you a Restricted Stock Unit Award under Section 9 of the Plan, pursuant to the Company's Performance Shares Program as set forth below. This award is subject to all of the terms and conditions set forth in this Notice of Award, the Award Terms and Conditions under the Performance Shares Program attached hereto (the "Agreement") and the Plan.
Participant: |
|
|
Date of Award: |
|
|
Performance Target Shares Awarded: |
|
|
Performance Period: |
From [date] to [date]
|
|
Washington Mutual, Inc. |
|
|
By: |
|
Name and Title: |
|
|
Date: |
|
Acceptance : Your right to this Award will be forfeited unless you deliver to the Company a counterpart of this Agreement duly executed by you. By accepting this Award, you acknowledge and agree that you have been furnished a copy of and have reviewed the 2003 Equity Incentive Plan, the Award Terms and Conditions under the Performance Shares Program, and you accept and agree to be bound by the terms thereof. You acknowledge that the Performance Shares Program is an employee benefit plan of the Company that is administered by and can be amended, modified or terminated at any time by the Human Resources Committee of the Company's Board of Directors. If you have not received those documents, please notify Washington Mutual Stock Administration (stock@wamu.net) immediately.
ACKNOWLEDGED AND AGREED
Participant's Signature: |
|
Print Name: |
|
Date: |
|
RETURN BY FAX: 206-461-1943; OR MAIL TO: WASHINGTON MUTUAL, STOCK ADMINISTRATION, 1191 SECOND AVE, SAS 1610, SEATTLE, WA 98101
EXHIBIT 31.1
I, Kerry K. Killinger, certify that:
Date: November 9, 2004 |
/s/
KERRY K. KILLINGER
Kerry K. Killinger Chairman, President and Chief Executive Officer of Washington Mutual, Inc. |
EXHIBIT 31.2
I, Thomas W. Casey, certify that:
Date: November 9, 2004 |
/s/
THOMAS W. CASEY
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 Washington Mutual, Inc.
Date: November 9, 2004 |
/s/
KERRY K. KILLINGER
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 Washington Mutual, Inc.
Date: November 9, 2004 |
/s/
THOMAS W. CASEY
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
September 30, |
Nine Months Ended
September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2004
|
2003
|
2004
|
2003
|
||||||||||
|
(dollars in millions)
|
|||||||||||||
Earnings, including interest on deposits (1) : | ||||||||||||||
Income from continuing operations before income tax expense |
|
$ |
1,079 |
|
$ |
1,587 |
|
$ |
2,892 |
|
$ |
4,721 |
|
|
Fixed charges | 1,113 | 1,129 | 3,142 | 3,588 | ||||||||||
|
|
|
|
|||||||||||
$ | 2,192 | $ | 2,716 | $ | 6,034 | $ | 8,309 | |||||||
|
|
|
|
|||||||||||
Fixed charges (1) : | ||||||||||||||
Interest expense | $ | 1,071 | $ | 1,089 | $ | 3,018 | $ | 3,477 | ||||||
Estimated interest component of net rental expense | 42 | 40 | 124 | 111 | ||||||||||
|
|
|
|
|||||||||||
$ | 1,113 | $ | 1,129 | $ | 3,142 | $ | 3,588 | |||||||
|
|
|
|
|||||||||||
Ratio of earnings to fixed charges (2) |
|
|
1.97 |
|
|
2.41 |
|
|
1.92 |
|
|
2.32 |
|
|
|
|
|
|
|||||||||||
Earnings, excluding interest on deposits (1) : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax expense |
|
$ |
1,079 |
|
$ |
1,587 |
|
$ |
2,892 |
|
$ |
4,721 |
|
|
Fixed charges | 574 | 591 | 1,702 | 1,914 | ||||||||||
|
|
|
|
|||||||||||
$ | 1,653 | $ | 2,178 | $ | 4,594 | $ | 6,635 | |||||||
|
|
|
|
|||||||||||
Fixed charges (1) : | ||||||||||||||
Interest expense | $ | 1,071 | $ | 1,089 | $ | 3,018 | $ | 3,477 | ||||||
Less: interest on deposits | (539 | ) | (538 | ) | (1,440 | ) | (1,674 | ) | ||||||
Estimated interest component of net rental expense | 42 | 40 | 124 | 111 | ||||||||||
|
|
|
|
|||||||||||
$ | 574 | $ | 591 | $ | 1,702 | $ | 1,914 | |||||||
|
|
|
|
|||||||||||
Ratio of earnings to fixed charges (2) |
|
|
2.88 |
|
|
3.69 |
|
|
2.70 |
|
|
3.47 |
|
|
|
|
|
|