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 JUNE 30, 2005

 

Commission File Number 1-14667


WASHINGTON MUTUAL, INC.

(Exact name of registrant as specified in its charter)

Washington

91-1653725

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)

1201 Third Avenue, Seattle, Washington

98101

(Address of principal executive offices)

(Zip Code)

(206) 461-2000

(Registrant’s telephone number, including area code)

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) , and (2) has been subject to such filing requirements for the past 90 days.   Yes x    No o

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

The number of shares outstanding of the issuer’s classes of common stock as of July 29, 2005:

Common Stock – 879,501,645 (1)

(1)  Includes 6,000,000 shares held in escrow.

 




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2005

TABLE OF CONTENTS

 

Page

 

PART I – Financial Information

 

 

1

 

 

Item 1.

Financial Statements

 

 

1

 

 

Consolidated Statements of Income –
Three and Six Months Ended June 30, 2005 and 2004

 

 

1

 

 

Consolidated Statements of Financial Condition –
June 30, 2005 and December 31, 2004

 

 

3

 

 

Consolidated Statements of Stockholders’ Equity and Comprehensive Income –
Six Months Ended June 30, 2005 and 2004

 

 

4

 

 

Consolidated Statements of Cash Flows –
Six Months Ended June 30, 2005 and 2004

 

 

5

 

 

Notes to Consolidated Financial Statements

 

 

7

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of
Operations

 

 

19

 

 

 

Cautionary Statements

 

 

19

 

 

 

Overview

 

 

20

 

 

 

Controls and Procedures

 

 

21

 

 

 

Critical Accounting Policies

 

 

22

 

 

 

Recently Issued Accounting Standards

 

 

22

 

 

 

Summary Financial Data

 

 

24

 

 

 

Earnings Performance from Continuing Operations

 

 

26

 

 

 

Review of Financial Condition

 

 

37

 

 

 

Operating Segments

 

 

40

 

 

 

Risk Management

 

 

44

 

 

 

Credit Risk Management

 

 

45

 

 

 

Liquidity Risk Management

 

 

47

 

 

 

Off-Balance Sheet Activities

 

 

49

 

 

 

Capital Adequacy

 

 

50

 

 

 

Market Risk Management

 

 

50

 

 

 

Maturity and Repricing Information

 

 

55

 

 

 

Operational Risk Management

 

 

61

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

50

 

 

Item 4.

Controls and Procedures

 

 

21

 

 

PART II – Other Information

 

 

61

 

 

Item 1.

Legal Proceedings

 

 

61

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

62

 

 

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
June 30,

 

Six Months Ended
June 30,

 

 

 

     2005     

 

     2004     

 

    2005    

 

    2004    

 

 

 

(in millions, except per share amounts)

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

 

$

576

 

 

 

$

406

 

 

 

$

1,047

 

 

 

$

738

 

 

Loans held in portfolio

 

 

2,754

 

 

 

2,111

 

 

 

5,298

 

 

 

4,179

 

 

Available-for-sale securities

 

 

234

 

 

 

180

 

 

 

457

 

 

 

444

 

 

Trading securities

 

 

91

 

 

 

21

 

 

 

170

 

 

 

46

 

 

Other interest and dividend income

 

 

51

 

 

 

34

 

 

 

95

 

 

 

66

 

 

Total interest income

 

 

3,706

 

 

 

2,752

 

 

 

7,067

 

 

 

5,473

 

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

852

 

 

 

458

 

 

 

1,548

 

 

 

901

 

 

Borrowings

 

 

928

 

 

 

500

 

 

 

1,703

 

 

 

1,046

 

 

Total interest expense

 

 

1,780

 

 

 

958

 

 

 

3,251

 

 

 

1,947

 

 

Net interest income

 

 

1,926

 

 

 

1,794

 

 

 

3,816

 

 

 

3,526

 

 

Provision for loan and lease losses

 

 

31

 

 

 

60

 

 

 

47

 

 

 

116

 

 

Net interest income after provision for loan and lease losses

 

 

1,895

 

 

 

1,734

 

 

 

3,769

 

 

 

3,410

 

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue from sales and servicing of home mortgage loans

 

 

118

 

 

 

 

 

 

895

 

 

 

531

 

 

Depositor and other retail banking fees

 

 

540

 

 

 

507

 

 

 

1,030

 

 

 

969

 

 

Securities fees and commissions

 

 

112

 

 

 

105

 

 

 

223

 

 

 

212

 

 

Insurance income

 

 

47

 

 

 

57

 

 

 

93

 

 

 

118

 

 

Portfolio loan related income

 

 

96

 

 

 

103

 

 

 

181

 

 

 

190

 

 

Trading securities income

 

 

285

 

 

 

5

 

 

 

186

 

 

 

13

 

 

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

 

 

25

 

 

 

41

 

 

 

(97

)

 

 

62

 

 

Loss on extinguishment of borrowings

 

 

 

 

 

(1

)

 

 

 

 

 

(90

)

 

Other income

 

 

44

 

 

 

77

 

 

 

163

 

 

 

126

 

 

Total noninterest income

 

 

1,267

 

 

 

894

 

 

 

2,674

 

 

 

2,131

 

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

886

 

 

 

849

 

 

 

1,761

 

 

 

1,748

 

 

Occupancy and equipment

 

 

350

 

 

 

393

 

 

 

752

 

 

 

794

 

 

Telecommunications and outsourced information services

 

 

100

 

 

 

123

 

 

 

204

 

 

 

246

 

 

Depositor and other retail banking losses

 

 

49

 

 

 

40

 

 

 

104

 

 

 

80

 

 

Advertising and promotion

 

 

77

 

 

 

84

 

 

 

132

 

 

 

143

 

 

Professional fees

 

 

38

 

 

 

32

 

 

 

72

 

 

 

71

 

 

Other expense

 

 

328

 

 

 

327

 

 

 

642

 

 

 

646

 

 

Total noninterest expense

 

 

1,828

 

 

 

1,848

 

 

 

3,667

 

 

 

3,728

 

 

Income from continuing operations before income taxes

 

 

1,334

 

 

 

780

 

 

 

2,776

 

 

 

1,813

 

 

Income taxes

 

 

490

 

 

 

291

 

 

 

1,031

 

 

 

676

 

 

Income from continuing operations, net of taxes

 

 

844

 

 

 

489

 

 

 

1,745

 

 

 

1,137

 

 

Discontinued Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations before income taxes

 

 

 

 

 

 

 

 

 

 

 

(32

)

 

Gain on disposition of discontinued operations

 

 

 

 

 

 

 

 

 

 

 

676

 

 

Income taxes

 

 

 

 

 

 

 

 

 

 

 

245

 

 

Income from discontinued operations, net of taxes

 

 

 

 

 

 

 

 

 

 

 

399

 

 

Net Income

 

 

$

844

 

 

 

$

489

 

 

 

$

1,745

 

 

 

$

1,536

 

 

 

(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
June 30,

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(in millions, except per share amounts)

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.98

 

$

0.57

 

$

2.02

 

$

1.32

 

Income from discontinued operations, net

 

 

 

 

0.46

 

Net Income

 

0.98

 

0.57

 

2.02

 

1.78

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

0.95

 

0.55

 

1.97

 

1.29

 

Income from discontinued operations, net

 

 

 

 

0.45

 

Net Income

 

0.95

 

0.55

 

1.97

 

1.74

 

Dividends declared per common share

 

0.47

 

0.43

 

0.93

 

0.85

 

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

 

865,221

 

860,496

 

865,078

 

861,898

 

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

 

887,250

 

883,414

 

888,020

 

884,940

 

 

See Notes to Consolidated Financial Statements.

2




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)

 

 

June 30,
2005

 

December 31,
2004

 

 

 

(dollars in millions)

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,614

 

 

$

4,455

 

 

Federal funds sold and securities purchased under agreements to resell

 

625

 

 

82

 

 

Trading securities

 

5,687

 

 

5,588

 

 

Available-for-sale securities, total amortized cost of $18,999 and $19,047:

 

 

 

 

 

 

 

Mortgage-backed securities (including assets pledged of $5,360 and $5,716)

 

14,396

 

 

14,923

 

 

Investment securities (including assets pledged of $3,947 and $3,344)

 

4,852

 

 

4,296

 

 

Total available-for-sale securities

 

19,248

 

 

19,219

 

 

Loans held for sale

 

51,122

 

 

42,743

 

 

Loans held in portfolio

 

212,737

 

 

207,071

 

 

Allowance for loan and lease losses

 

(1,243

)

 

(1,301

)

 

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

 

211,494

 

 

205,770

 

 

Investment in Federal Home Loan Banks

 

4,194

 

 

4,059

 

 

Mortgage servicing rights

 

5,730

 

 

5,906

 

 

Goodwill

 

6,196

 

 

6,196

 

 

Other assets

 

14,623

 

 

13,900

 

 

Total assets

 

$

323,533

 

 

$

307,918

 

 

Liabilities

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

35,518

 

 

$

32,780

 

 

Interest-bearing deposits

 

148,799

 

 

140,878

 

 

Total deposits

 

184,317

 

 

173,658

 

 

Federal funds purchased and commercial paper

 

5,864

 

 

4,045

 

 

Securities sold under agreements to repurchase

 

14,089

 

 

15,944

 

 

Advances from Federal Home Loan Banks

 

71,534

 

 

70,074

 

 

Other borrowings

 

20,752

 

 

18,498

 

 

Other liabilities

 

4,627

 

 

4,473

 

 

Total liabilities

 

301,183

 

 

286,692

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

Common stock, no par value: 1,600,000,000 shares authorized, 878,384,493 and 874,261,898 shares issued and outstanding

 

 

 

 

 

Capital surplus – common stock

 

3,449

 

 

3,350

 

 

Accumulated other comprehensive income (loss)

 

14

 

 

(76

)

 

Retained earnings

 

18,887

 

 

17,952

 

 

Total stockholders’ equity

 

22,350

 

 

21,226

 

 

Total liabilities and stockholders’ equity

 

$

323,533

 

 

$

307,918

 

 

 

See Notes to Consolidated Financial Statements.

3




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

 

 

 

Accumulated 

 

 

 

 

 

 

 

 

 

Capital

 

Other

 

 

 

 

 

 

 

 

 

Surplus-

 

Comprehensive

 

 

 

 

 

 

 

Number of

 

Common 

 

Income

 

Retained

 

 

 

 

 

Shares

 

Stock

 

(Loss)

 

Earnings

 

Total

 

 

 

(dollars in millions, shares in thousands)

 

BALANCE, December 31, 2003

 

 

881.0

 

 

 

$

3,682

 

 

 

$

(524

)

 

$

16,584

 

$

19,742

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

1,536

 

1,536

 

Other comprehensive income (loss), net
of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

106

 

 

 

106

 

Net unrealized gain from cash flow hedging instruments

 

 

 

 

 

 

 

 

202

 

 

 

202

 

Minimum pension liability adjustment

 

 

 

 

 

 

 

 

(6

)

 

 

(6

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,838

 

Cash dividends declared on common stock

 

 

 

 

 

 

 

 

 

 

(739

)

(739

)

Common stock repurchased and retired

 

 

(16.1

)

 

 

(712

)

 

 

 

 

 

(712

)

Common stock issued

 

 

7.3

 

 

 

240

 

 

 

 

 

 

240

 

BALANCE, June 30, 2004

 

 

872.2

 

 

 

$

3,210

 

 

 

$

(222

)

 

$

17,381

 

$

20,369

 

BALANCE, December 31, 2004

 

 

874.3

 

 

 

$

3,350

 

 

 

$

(76

)

 

$

17,952

 

$

21,226

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

1,745

 

1,745

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

46

 

 

 

46

 

Net unrealized gain from cash flow hedging instruments

 

 

 

 

 

 

 

 

44

 

 

 

44

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,835

 

Cash dividends declared on common stock

 

 

 

 

 

 

 

 

 

 

(810

)

(810

)

Common stock repurchased and retired

 

 

(2.6

)

 

 

(100

)

 

 

 

 

 

(100

)

Common stock issued

 

 

6.7

 

 

 

199

 

 

 

 

 

 

199

 

BALANCE, June 30, 2005

 

 

878.4

 

 

 

$

3,449

 

 

 

$

14

 

 

$

18,887

 

$

22,350

 

 

See Notes to Consolidated Financial Statements.

4




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 

 

Six  Months Ended
June 30,

 

 

 

2005

 

2004

 

 

 

(in millions)

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

1,745

 

$

1,536

 

Income from discontinued operations, net of taxes

 

 

(399

)

Income from continuing operations

 

1,745

 

1,137

 

Adjustments to reconcile income from continuing operations to net cash used by operating activities:

 

 

 

 

 

Provision for loan and lease losses

 

47

 

116

 

Gain from mortgage loans

 

(426

)

(284

)

Loss (gain) from available-for-sale securities

 

92

 

(62

)

Revaluation loss (gain) from derivatives

 

7

 

(862

)

Loss on extinguishment of borrowings

 

 

90

 

Depreciation and amortization

 

1,355

 

1,656

 

Provision for mortgage servicing rights (reversal) impairment

 

(177

)

379

 

Stock dividends from Federal Home Loan Banks

 

(65

)

(34

)

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

 

(82,317

)

(80,491

)

Proceeds from sales of loans held for sale

 

72,838

 

71,930

 

Net decrease in trading securities

 

70

 

45

 

(Increase) decrease in other assets

 

(372

)

376

 

Increase (decrease) in other liabilities

 

746

 

(688

)

Net cash used by operating activities

 

(6,457

)

(6,692

)

Cash Flows from Investing Activities

 

 

 

 

 

Purchases of securities

 

(8,282

)

(11

)

Proceeds from sales and maturities of mortgage-backed securities

 

3,118

 

1,383

 

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

 

3,339

 

16,848

 

Principal payments on securities

 

1,626

 

1,775

 

Purchases of Federal Home Loan Bank stock

 

(163

)

(586

)

Redemption of Federal Home Loan Bank stock

 

93

 

117

 

Origination and purchases of loans held in portfolio

 

(46,900

)

(61,083

)

Principal payments on loans held in portfolio

 

40,524

 

39,442

 

Proceeds from sales of loans held in portfolio

 

173

 

277

 

Proceeds from sales of foreclosed assets

 

214

 

245

 

Net increase in federal funds sold and securities purchased under agreements to resell

 

(543

)

(51

)

Purchases of premises and equipment, net

 

(242

)

(363

)

Proceeds from sale of discontinued operations, net of cash sold

 

 

1,223

 

Net cash used by investing activities

 

(7,043

)

(784

)

 

(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.)

 

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

 

 

(in millions)

 

Cash Flows from Financing Activities

 

 

 

 

 

Increase in deposits

 

$

10,659

 

$

9,285

 

Decrease in short-term borrowings

 

(901

)

(15,204

)

Proceeds from long-term borrowings

 

5,646

 

2,025

 

Repayments of long-term borrowings

 

(2,456

)

(2,233

)

Proceeds from advances from Federal Home Loan Banks

 

45,684

 

43,695

 

Repayments of advances from Federal Home Loan Banks

 

(44,222

)

(30,729

)

Cash dividends paid on common stock

 

(810

)

(739

)

Repurchase of common stock

 

(100

)

(712

)

Other

 

159

 

203

 

Net cash provided by financing activities

 

13,659

 

5,591

 

Increase (decrease) in cash and cash equivalents

 

159

 

(1,885

)

Cash and cash equivalents, beginning of period

 

4,455

 

7,018

 

Cash and cash equivalents, end of period

 

$

4,614

 

$

5,133

 

Noncash Activities

 

 

 

 

 

Loans exchanged for mortgage-backed securities

 

$

668

 

$

2,830

 

Real estate acquired through foreclosure

 

210

 

223

 

Cash Paid During the Year For

 

 

 

 

 

Interest on deposits

 

$

1,439

 

$

852

 

Interest on borrowings

 

1,519

 

1,104

 

Income taxes

 

1,109

 

1,058

 

 

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 2004 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to current period classifications.

Recently Adopted Accounting Standards

In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 03-3 (“SOP 03-3”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer . SOP 03-3 addresses the accounting for differences between the contractual cash flows and the cash flows expected to be collected from purchased loans or debt securities if those differences are attributable, in part, to credit quality. SOP 03-3 does not permit the carryover of any specific valuation allowances previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows expected to be collected. To the extent that the purchased loans experience subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash flows that are not expected to be received. However, if more cash flows subsequently are expected to be received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 is effective for loans and debt securities acquired after December 31, 2004. The adoption of SOP 03-3 did not have a material effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition .

In March 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position Emerging Issues Task Force 85-24-1 (“FSP EITF 85-24-1”), Distribution Fees by Distributors of Mutual Funds That Do Not Have a Front-End Sales Charge . FSP EITF 85-24-1 considers the appropriate accounting for cash received from a third party for a distributor’s right to future cash flows relating to distribution fees for shares previously sold. The FASB staff concluded that revenue recognition is appropriate when cash is received from a third party if the distributor no longer has any continuing involvement or recourse associated with the rights. The Company applied FSP EITF 85-24-1 as of April 1, 2005. The application of FSP EITF 85-24-1 did not have a material effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.

Stock-Based Compensation

In accordance with the transitional guidance of Statement of Financial Accounting Standards (“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 modified Black-Scholes 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

7




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 the impact these awards would have on the consolidated financial statements, if they 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 December 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 attributable to common stock and net income per common share would have been reduced to the pro forma amounts indicated below:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,_

 

 

 

    2005    

 

    2004    

 

   2005   

 

   2004   

 

 

 

(dollars in millions, except per share amounts)

 

Net income attributable to common stock

 

 

$

844

 

 

 

$

489

 

 

$

1,745

 

$

1,536

 

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

 

 

19

 

 

 

19

 

 

41

 

40

 

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

 

 

(26

)

 

 

(30

)

 

(53

)

(61

)

Pro forma net income attributable to common stock

 

 

$

837

 

 

 

$

478

 

 

$

1,733

 

$

1,515

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

 

$

0.98

 

 

 

$

0.57

 

 

$

2.02

 

$

1.78

 

Pro forma

 

 

0.97

 

 

 

0.55

 

 

2.00

 

1.76

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

 

0.95

 

 

 

0.55

 

 

1.97

 

1.74

 

Pro forma

 

 

0.94

 

 

 

0.54

 

 

1.95

 

1.71

 

 

Recently Issued Accounting Standards

In December 2004, the FASB issued a revised version of the original Statement No. 123, Accounting for Stock-Based Compensation . Statement No. 123R, Share-Based Payment , supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees . This Statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This Statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair value-based measurement method in accounting for share-based payment transactions with employees, except for equity instruments held by employee stock ownership plans. Effective January 1, 2003 and in accordance with the transitional guidance of Statement No. 148, Accounting for Stock-Based Compensation Transition and Disclosure , the Company elected to prospectively apply the fair value method of accounting for stock-based awards granted subsequent to December 31, 2002. The Company will prospectively apply Statement No. 123R to its financial statements as of January 1, 2006. However, as the Company has already adopted Statement No. 148 and substantially all stock-based awards granted prior to its adoption will be fully vested by the end of this year, Statement No. 123R will not have a significant effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.

8




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In March 2005, Securities and Exchange Commission (‘‘SEC’’) Staff Accounting Bulletin No. 107 (‘‘SAB 107’’) was issued, which expresses views of the staff regarding the interaction between Statement No. 123R, Share Based Payment , and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. The Company will consider the guidance provided by SAB 107 as part of its adoption of Statement No. 123R.

In March 2005, the FASB issued Interpretation No. 47 (“FIN 47”), Accounting for Conditional Asset Retirement Obligations , an interpretation of FASB Statement No. 143, Accounting for Asset Retirement Obligations . FIN 47 generally applies to long-lived assets and requires a liability to be recognized for a conditional asset retirement obligation if the fair value of that liability can be reasonably estimated. A conditional asset retirement obligation is defined as a legal obligation to perform an activity associated with an asset retirement in which the timing and/or method of settlement are conditional on a future event that may or may not occur or be within the control of the company. A liability should be recognized when incurred (based on its fair value at that date), which generally would be upon acquisition or construction of the related asset. Upon recognition, the offset to the liability would be capitalized as part of the cost of the asset and depreciated over the estimated useful life of that asset. The Interpretation is effective no later than December 31, 2005, with early application encouraged. The Company is evaluating the impact of FIN 47. At this time, the Company does not expect the application of FIN 47 to have a significant effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.

In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement replaces APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting and reporting of a change in accounting principle. This Statement requires changes in accounting principle to be retrospectively applied to the prior periods presented in the financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This Statement applies to all voluntary changes in accounting principles and also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This Statement also carries forward, without substantive change, the provisions for the correction of an error from APB Opinion No. 20. Statement No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the application of this Statement to have a significant effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.

In May 2005, the FASB issued FSP EITF 00-19-1, Application of EITF Issue No. 00-19 to Freestanding Financial Instruments Originally Issued as Employee Compensation . The FASB directed its staff to issue this FSP to clarify the application of EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, to freestanding financial instruments originally issued as employee compensation that can be settled only by delivering registered shares. This FSP clarifies that a requirement to deliver registered shares, in and of itself, will not result in liability classification for freestanding financial instruments originally issued as employee compensation. This clarification is consistent with the Board’s intent when FASB Statement No. 123R, Share-Based Payment , was issued. The guidance in this FSP shall be applied in accordance with the effective date and transition provisions of Statement No. 123R. The Company does not expect the application of FSP EITF 00-19-1 to have a significant effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.

9




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 2: Discontinued Operations

During the first quarter of 2004 the Company sold its consumer finance subsidiary, Washington Mutual Finance Corporation. Accordingly, this former subsidiary has been accounted for as a discontinued operation and its results of operations and cash flows have been removed from the Company’s results of continuing operations for the six months ended June 30, 2004 on the Consolidated Statements of Income and Cash Flows. The results from discontinued operations in 2004 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 Corporation.

Note 3: Earnings Per Share

Information used to calculate earnings per share was as follows:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(in thousands)

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

Basic weighted average number of common shares outstanding

 

865,221

 

860,496

 

865,078

 

861,898

 

Dilutive effect of potential common shares from:

 

 

 

 

 

 

 

 

 

Awards granted under equity incentive programs

 

12,665

 

13,580

 

13,468

 

13,093

 

Trust Preferred Income Equity Redeemable Securities SM

 

9,364

 

9,338

 

9,474

 

9,949

 

Diluted weighted average number of common shares outstanding  

 

887,250

 

883,414

 

888,020

 

884,940

 

 

For the three months and six months ended June 30, 2005, options to purchase an additional 8,777,042 and 8,730,564 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 six months ended June 30, 2004, options to purchase an additional 1,812,113 and 1,795,436 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 June 30, 2005, the conditions for releasing the shares from escrow had not occurred, and therefore, none of the shares in the escrow were included in the above computations.

10




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 4: Mortgage Banking Activities

Revenue from sales and servicing of home mortgage loans consisted of the following:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

     2005     

 

     2004     

 

     2005     

 

     2004      

 

 

 

(dollars in millions)

 

Revenue from sales and servicing of home mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain from home mortgage loans and originated mortgage-backed securities, net of hedging and risk management instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain from home mortgage loans and originated mortgage-backed securities

 

 

$

250

 

 

 

$

113

 

 

 

$

431

 

 

 

$

284

 

 

Revaluation gain (loss) from derivatives

 

 

(79

)

 

 

139

 

 

 

1

 

 

 

80

 

 

Gain from home mortgage loans and originated mortgage-backed securities, net of hedging and risk management instruments

 

 

171

 

 

 

252

 

 

 

432

 

 

 

364

 

 

Home mortgage loan servicing revenue (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home mortgage loan servicing revenue, net (1)

 

 

527

 

 

 

472

 

 

 

1,038

 

 

 

979

 

 

Amortization of MSR

 

 

(564

)

 

 

(546

)

 

 

(1,133

)

 

 

(1,296

)

 

MSR valuation adjustments (2)

 

 

(77

)

 

 

(51

)

 

 

462

 

 

 

(657

)

 

Revaluation gain (loss) from derivatives

 

 

61

 

 

 

(127

)

 

 

96

 

 

 

1,141

 

 

Home mortgage loan servicing revenue (expense), net of hedging and derivative risk management instruments (3)

 

 

(53

)

 

 

(252

)

 

 

463

 

 

 

167

 

 

Total revenue from sales and servicing of home mortgage loans

 

 

$

118

 

 

 

$

 

 

 

$

895

 

 

 

$

531

 

 


(1)                  Includes late charges, prepayment fees and loan pool expenses, which represent the shortfall of the scheduled interest required to be remitted to investors compared to what is collected from the borrowers upon payoff.

(2)                  Net of fair value hedge ineffectiveness as well as any impairment/reversal recognized on MSR that results from the application of the lower of cost or market value accounting methodology.

(3)                  Does not include the effects of other non-derivative instruments used by the Company as part of its overall MSR risk management program.

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

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

        2005        

 

        2004        

 

        2005        

 

        2004        

 

 

 

(in millions)

 

Balance, beginning of period

 

 

$

542,797

 

 

 

$

559,807

 

 

 

$

540,392

 

 

 

$

582,669

 

 

Home loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions

 

 

36,174

 

 

 

54,201

 

 

 

70,706

 

 

 

76,210

 

 

Loan payments and other

 

 

(35,689

)

 

 

(56,388

)

 

 

(68,550

)

 

 

(102,447

)

 

Net change in commercial real estate loans serviced for others

 

 

42

 

 

 

768

 

 

 

776

 

 

 

1,956

 

 

Balance, end of period

 

 

$

543,324

 

 

 

$

558,388

 

 

 

$

543,324

 

 

 

$

558,388

 

 

 

11




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

     2005     

 

     2004     

 

     2005     

 

     2004     

 

 

 

(in millions)

 

Balance, beginning of period

 

 

$

6,802

 

 

 

$

5,239

 

 

 

$

5,906

 

 

 

$

6,354

 

 

Home loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions

 

 

555

 

 

 

874

 

 

 

1,044

 

 

 

1,115

 

 

Amortization

 

 

(564

)

 

 

(546

)

 

 

(1,133

)

 

 

(1,296

)

 

(Impairment) reversal

 

 

(250

)

 

 

227

 

 

 

177

 

 

 

(379

)

 

Statement No. 133 MSR accounting valuation adjustments

 

 

(813

)

 

 

1,707

 

 

 

(268

)

 

 

1,707

 

 

Net change in commercial real estate MSR

 

 

 

 

 

 

 

 

4

 

 

 

 

 

Balance, end of period (1)

 

 

$

5,730

 

 

 

$

7,501

 

 

 

$

5,730

 

 

 

$

7,501

 

 


(1)                  At June 30, 2005 and 2004, aggregate MSR fair value was $5.74 billion and $7.52 billion.

Changes in the valuation allowance for MSR were as follows:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

      2005      

 

      2004      

 

      2005      

 

      2004      

 

 

 

(in millions)

 

Balance, beginning of period

 

 

$

1,513

 

 

 

$

3,035

 

 

 

$

1,981

 

 

 

$

2,435

 

 

Impairment (reversal)

 

 

250

 

 

 

(227

)

 

 

(177

)

 

 

379

 

 

Other-than-temporary impairment

 

 

(11

)

 

 

(388

)

 

 

(45

)

 

 

(388

)

 

Other

 

 

(6

)

 

 

(3

)

 

 

(13

)

 

 

(9

)

 

Balance, end of period

 

 

$

1,746

 

 

 

$

2,417

 

 

 

$

1,746

 

 

 

$

2,417

 

 

 

At June 30, 2005, the expected weighted average life of the Company’s MSR was 3.3 years. Projected amortization expense for the gross carrying value of MSR at June 30, 2005 is estimated to be as follows (in millions):

Remainder of 2005

 

$

1,099

 

2006

 

1,641

 

2007

 

1,114

 

2008

 

801

 

2009

 

597

 

After 2009

 

2,224

 

Gross carrying value of MSR

 

7,476

 

Less: valuation allowance

 

(1,746

)

Net carrying value of MSR

 

$

5,730

 

 

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 second quarter of 2005 . 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

12




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 June 30, 2005 and December 31, 2004, the amount of loans sold without recourse totaled $536.56 billion and $533.51 billion, which substantially represents the unpaid principal balance of the Company’s loans serviced for others portfolio. The Company has accrued $194 million as of June 30, 2005 and $148 million as of December 31, 2004 to cover the estimated loss exposure related to the loan origination process defects that are inherent within this portfolio.

Note 6: Operating Segments

The Company has three operating segments for the purpose of management reporting: the Retail Banking and Financial Services Group, the Home Loans Group (previously called the “Mortgage Banking Group”) 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 Retail Banking and Financial Services Group’s principal activities include: (1) offering a comprehensive line of deposit and other retail banking products and services to consumers and small businesses; (2) originating, managing and servicing home equity loans and lines of credit; (3) providing investment advisory and brokerage services, sales of annuities, mutual fund management and other financial services; and (4) holding the Company’s portfolio of home loans held for investment. This segment’s home loan portfolio consists of home loan inter-segment purchases from the Home Loans Group and home loans purchased from secondary market participants, including home loans made to subprime borrowers.

The Home Loans Group’s principal activities include: (1) originating and servicing home loans; (2) buying and selling home loans in the secondary market; and (3) selling insurance-related products and participating in reinsurance activities with other insurance companies. For management reporting purposes, home loans originated by this segment are either transferred through inter-segment sales to the Retail Banking and Financial Services Group or are sold to secondary market participants. The segment typically retains the rights to service these loans and receives fees and other forms of remuneration for providing this service. The Home Loans Group performs servicing activities for substantially all of the Company’s home loans managed portfolio – whether the home loans are held for investment or have been sold on a servicing-retained basis to secondary market participants. Insurance products that complement the mortgage lending process, such as private mortgage insurance and property and casualty insurance, are also made available. This segment also manages the Company’s captive reinsurance activities.

13




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Commercial Group’s principal activities include: (1) providing financing to developers and investors for the acquisition or construction of multi-family dwellings and, to a lesser extent, other commercial properties; (2) originating and servicing multi-family and other commercial real estate loans and either holding such loans in portfolio as part of its commercial asset management business or selling them in the secondary market; (3) providing financing to mortgage bankers for the origination of residential loan products; and (4) originating and servicing home loans made to subprime borrowers through the Company’s subsidiary, Long Beach Mortgage Company.

The Corporate Support/Treasury and Other category includes enterprise-wide management of the Company’s interest rate risk, liquidity, capital, borrowings, and a majority of the Company’s investment securities. As part of the Company’s asset and liability management process, the Treasury function provides oversight and direction across the enterprise over matters that impact the profile of the Company’s balance sheet, such as product composition of loans that the Company holds in the portfolio, the appropriate mix of wholesale and capital markets borrowings at any given point in time, and the allocation of capital resources to the business segments. This category also includes the costs of the Company’s technology services, facilities, legal, human resources and accounting and finance functions to the extent not allocated to the business segments. Also reported in this category is the net impact of funds transfer pricing for loan and deposit balances, lower of cost or market adjustments and the write-off of inter-segment premiums associated with transfers of loans from the Retail Banking and Financial Services Group to the Home Loans Group when home loans previously designated as held for investment are moved to held for sale and all charges incurred from the Company’s cost containment initiative, which was a key initiative during 2004.

The Company uses various management accounting methodologies, which are enhanced from time to time, to assign certain balance sheet and income statement items to the responsible operating segment. Methodologies that are applied to the measurement of segment profitability include: (1) a funds transfer pricing system, which 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 and its share of risk-adjusted economic capital. 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 for consolidated reporting purposes. This methodology is used to provide segment management with provision information for strategic decision making; (3) the utilization of an activity-based costing approach to measure allocations of certain operating expenses that were not directly charged to the segments; (4) the allocation of goodwill and other intangible assets to the operating segments based on benefits received from each acquisition; (5) capital charges for goodwill as a component of an internal measurement of return on the goodwill allocated to the operating segment; and (6) inter-segment activities which include the transfer of originated mortgage loans that are to be held in portfolio from the Home Loans Group to the Retail Banking and Financial Services Group and a broker fee arrangement between Home Loans and Retail Banking and Financial Services. When originated mortgage loans are transferred, the Home Loans Group records a gain on the sale of the loans based on an assumed profit factor. This profit factor is included as a premium to the value of the transferred loans, which is amortized as an adjustment to the net interest income recorded by the Retail Banking and

14




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Financial Services Group while the loan is held for investment. If a loan that was designated as held for investment is subsequently transferred to held for sale, the inter-segment premium is written off. Inter-segment broker fees are recorded by the Retail Banking and Financial Services Group when home loans are initiated through retail banking stores, while the Home Loans Group records a broker fee when the origination of home equity loans and lines of credit are initiated through home loan stores. The results of all inter-segment activities are eliminated as reconciling adjustments that are necessary to conform the presentation of management accounting policies to the accounting principles used in the Company’s consolidated financial statements.

Financial highlights by operating segment were as follows:

 

 

Three Months Ended June 30, 2005

 

 

 

Retail
Banking and
Financial
Services
Group

 

Home
Loans
Group

 

Commercial
Group

 

Corporate
Support/
Treasury
and
     Other     

 

Reconciling
Adjustments

 

Total

 

 

 

(dollars in millions)

 

Condensed income statement:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

 

$

1,384

 

 

$

303

 

 

$

349

 

 

 

$

(225

)

 

 

$

115

  (1)

 

$

1,926

 

Provision for loan and lease losses  

 

 

42

 

 

 

 

2

 

 

 

 

 

 

(13

) (2)

 

31

 

Noninterest income (expense)

 

 

751

 

 

618

 

 

72

 

 

 

(39

)

 

 

(135

) (3)

 

1,267

 

Inter-segment revenue (expense)

 

 

11

 

 

(11

)

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

1,173

 

 

574

 

 

195

 

 

 

96

 

 

 

(210

) (4)

 

1,828

 

Income (loss) before income taxes  

 

 

931

 

 

336

 

 

224

 

 

 

(360

)

 

 

203

 

 

1,334

 

Income taxes (benefit)

 

 

352

 

 

127

 

 

73

 

 

 

(133

)

 

 

71

   (5)

 

490

 

Net income (loss)

 

 

$

579

 

 

$

209

 

 

$

151

 

 

 

$

(227

)

 

 

$

132

 

 

$

844

 

Performance and other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio

 

 

48.61

% (6)

 

57.44

% (6)

 

39.15

% (6)

 

 

n/a

 

 

 

n/a

 

 

57.24

% (7)

Average loans

 

 

$

181,396

 

 

$

31,434

 

 

$

47,233

 

 

 

n/a

 

 

 

$

(1,541

) (8)

 

$

258,522

 

Average assets

 

 

194,010

 

 

51,542

 

 

52,439

 

 

 

$

24,598

 

 

 

(1,744

) (8)(9)

 

320,845

 

Average deposits

 

 

135,539

 

 

13,940

 

 

7,649

 

 

 

26,393

 

 

 

n/a

 

 

183,521

 

Loan volume

 

 

11,704

 

 

44,855

 

 

11,059

 

 

 

n/a

 

 

 

n/a

 

 

67,618

 

Employees at end of period

 

 

32,429

 

 

12,534

 

 

3,793

 

 

 

5,621

 

 

 

n/a

 

 

54,377

 


(1)                  Represents the difference between home loan premium amortization recorded by the Retail Banking and Financial Services Group and the amount recognized in the Company’s Consolidated Statements of Income. For management reporting purposes, loans that are held in portfolio by the Retail Banking and Financial Services Group are treated as if they are purchased from the Home Loans Group. Since the cost basis of these loans includes an assumed profit factor paid to the Home Loans Group, the amortization of loan premiums recorded by the Retail Banking and Financial Services Group includes this assumed profit factor and must therefore be eliminated as a reconciling adjustment.

(2)                  Represents the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the “losses inherent in the loan portfolio” methodology used by the Company.

(3)                  Represents the difference between gain from mortgage loans primarily recorded by the Home Loans Group and the gain from mortgage loans recognized in the Company’s Consolidated Statements of Income. As the Home Loans Group holds no loans in portfolio, all loans originated and or purchased by this segment are considered to be salable for management reporting purposes.

(4)                  Represents the corporate offset for the cost of capital related to goodwill that has been allocated to the segments.

(5)                  Represents the tax effect of reconciling adjustments.

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