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, 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

 

(I.R.S. Employer

incorporation or organization)

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes  o    No  x

The number of shares outstanding of the issuer’s classes of common stock as of October 31, 2005:

Common Stock – 986,709,911 (1)(2)

(1)

 

Includes 6,000,000 shares held in escrow.

(2)

 

Includes common shares issued in October, 2005 in conjunction with the Company’s acquisition of Providian Financial Corporation.

 

 




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS

 

Page

 

PART I – Financial Information

 

 

1

 

 

Item 1.    Financial Statements

 

 

1

 

 

Consolidated Statements of Income  –
Three and Nine Months Ended September 30, 2005 and 2004

 

 

1

 

 

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

 

 

3

 

 

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

 

 

4

 

 

Consolidated Statements of Cash Flows  –
Nine Months Ended September 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

 

 

20

 

 

Cautionary Statements

 

 

20

 

 

Overview

 

 

21

 

 

Controls and Procedures

 

 

22

 

 

Critical Accounting Policies

 

 

23

 

 

Recently Issued Accounting Standards

 

 

23

 

 

Summary Financial Data

 

 

25

 

 

Earnings Performance from Continuing Operations

 

 

27

 

 

Review of Financial Condition

 

 

38

 

 

Operating Segments

 

 

40

 

 

Off-Balance Sheet Activities

 

 

45

 

 

Capital Adequacy

 

 

45

 

 

Risk Management

 

 

46

 

 

Credit Risk Management

 

 

46

 

 

Liquidity Risk Management

 

 

49

 

 

Market Risk Management

 

 

51

 

 

Operational Risk Management

 

 

55

 

 

Maturity and Repricing Information

 

 

56

 

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

 

 

51

 

 

Item 4.    Controls and Procedures

 

 

22

 

 

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

 

 

64

 

 

Item 6.    Exhibits

 

 

64

 

 

 

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,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(in millions, except per share amounts)

 

Interest Income

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

661

 

$

341

 

$

1,708

 

$

1,079

 

Loans held in portfolio

 

2,862

 

2,226

 

8,160

 

6,404

 

Available-for-sale securities

 

238

 

163

 

695

 

607

 

Trading securities

 

114

 

40

 

284

 

85

 

Other interest and dividend income

 

65

 

41

 

160

 

109

 

Total interest income

 

3,940

 

2,811

 

11,007

 

8,284

 

Interest Expense

 

 

 

 

 

 

 

 

 

Deposits

 

996

 

539

 

2,544

 

1,440

 

Borrowings

 

1,028

 

532

 

2,731

 

1,578

 

Total interest expense

 

2,024

 

1,071

 

5,275

 

3,018

 

Net interest income

 

1,916

 

1,740

 

5,732

 

5,266

 

Provision for loan and lease losses

 

52

 

56

 

99

 

172

 

Net interest income after provision for loan and lease losses

 

1,864

 

1,684

 

5,633

 

5,094

 

Noninterest Income

 

 

 

 

 

 

 

 

 

Revenue from sales and servicing of home mortgage loans

 

714

 

504

 

1,609

 

1,035

 

Depositor and other retail banking fees

 

578

 

514

 

1,608

 

1,484

 

Securities fees and commissions

 

111

 

104

 

334

 

315

 

Insurance income

 

42

 

61

 

135

 

179

 

Portfolio loan related income

 

103

 

109

 

284

 

299

 

Trading securities income (loss)

 

(171

)

51

 

15

 

64

 

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

 

(32

)

11

 

(129

)

73

 

Loss on extinguishment of borrowings

 

 

(147

)

 

(237

)

Other income

 

29

 

57

 

192

 

183

 

Total noninterest income

 

1,374

 

1,264

 

4,048

 

3,395

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

939

 

841

 

2,701

 

2,589

 

Occupancy and equipment

 

372

 

404

 

1,124

 

1,197

 

Telecommunications and outsourced information services

 

108

 

118

 

311

 

364

 

Depositor and other retail banking losses

 

61

 

54

 

165

 

134

 

Advertising and promotion

 

81

 

76

 

213

 

219

 

Professional fees

 

48

 

34

 

119

 

105

 

Other expense

 

316

 

342

 

958

 

989

 

Total noninterest expense

 

1,925

 

1,869

 

5,591

 

5,597

 

Income from continuing operations before income taxes

 

1,313

 

1,079

 

4,090

 

2,892

 

Income taxes

 

492

 

405

 

1,523

 

1,081

 

Income from continuing operations, net of taxes

 

821

 

674

 

2,567

 

1,811

 

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

 

$

821

 

$

674

 

$

2,567

 

$

2,210

 

 

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

See Notes to Consolidated Financial Statements.

1




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
(UNAUDITED)

(Continued from the previous page.)

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(in millions, except per share amounts)

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.95

 

$

0.78

 

$

2.97

 

$

2.10

 

Income from discontinued operations, net

 

 

 

 

0.46

 

Net Income

 

0.95

 

0.78

 

2.97

 

2.56

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

0.92

 

0.76

 

2.89

 

2.05

 

Income from discontinued operations, net

 

 

 

 

0.45

 

Net Income

 

0.92

 

0.76

 

2.89

 

2.50

 

Dividends declared per common share

 

0.48

 

0.44

 

1.41

 

1.29

 

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

 

866,541

 

862,004

 

865,571

 

861,933

 

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

 

888,495

 

882,323

 

888,184

 

884,068

 

 

See Notes to Consolidated Financial Statements.

2




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)

 

 

September 30,
2005

 

December 31,
2004

 

 

 

(dollars in millions)

 

 

Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

4,924

 

 

 

$

4,455

 

 

Federal funds sold and securities purchased under agreements to resell

 

 

3,194

 

 

 

82

 

 

Trading securities

 

 

7,351

 

 

 

5,588

 

 

Available-for-sale securities, total amortized cost of $20,757 and $19,047:

 

 

 

 

 

 

 

 

 

Mortgage-backed securities (including assets pledged of $4,545 and $5,716)       

 

 

17,161

 

 

 

14,923

 

 

Investment securities (including assets pledged of $2,535 and $3,344)

 

 

3,603

 

 

 

4,296

 

 

Total available-for-sale securities

 

 

20,764

 

 

 

19,219

 

 

Loans held for sale

 

 

48,018

 

 

 

42,743

 

 

Loans held in portfolio

 

 

218,194

 

 

 

207,071

 

 

Allowance for loan and lease losses

 

 

(1,264

)

 

 

(1,301

)

 

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

 

 

216,930

 

 

 

205,770

 

 

Investment in Federal Home Loan Banks

 

 

4,228

 

 

 

4,059

 

 

Mortgage servicing rights

 

 

7,042

 

 

 

5,906

 

 

Goodwill

 

 

6,196

 

 

 

6,196

 

 

Other assets

 

 

14,975

 

 

 

13,900

 

 

 

Total assets

 

 

$

333,622

 

 

 

$

307,918

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

$

36,850

 

 

 

$

32,780

 

 

 

Interest-bearing deposits

 

 

153,562

 

 

 

140,878

 

 

 

Total deposits

 

 

190,412

 

 

 

173,658

 

 

 

Federal funds purchased and commercial paper

 

 

7,229

 

 

 

4,045

 

 

 

Securities sold under agreements to repurchase

 

 

14,508

 

 

 

15,944

 

 

 

Advances from Federal Home Loan Banks

 

 

69,405

 

 

 

70,074

 

 

 

Other borrowings

 

 

23,994

 

 

 

18,498

 

 

 

Other liabilities

 

 

5,478

 

 

 

4,473

 

 

 

Total liabilities

 

 

311,026

 

 

 

286,692

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

Common stock, no par value: 1,600,000,000 shares authorized, 877,650,809 and 874,261,898 shares issued and outstanding

 

 

 

 

 

 

 

 

Capital surplus – common stock

 

 

3,451

 

 

 

3,350

 

 

 

Accumulated other comprehensive loss

 

 

(144

)

 

 

(76

)

 

 

Retained earnings

 

 

19,289

 

 

 

17,952

 

 

 

Total stockholders’ equity

 

 

22,596

 

 

 

21,226

 

 

 

Total liabilities and stockholders’ equity

 

 

$

333,622

 

 

 

$

307,918

 

 

 

 

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

 

 

 

(dollars in millions, shares in thousands)

 

BALANCE, December 31, 2003

 

 

881.0

 

 

 

$

3,682

 

 

 

$

(524

)

 

$

16,584

 

$

19,742

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

2,210

 

2,210

 

Other comprehensive income (loss), 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

 

BALANCE, December 31, 2004

 

 

874.3

 

 

 

$

3,350

 

 

 

$

(76

)

 

$

17,952

 

$

21,226

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

2,567

 

2,567

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

(105

)

 

 

(105

)

Net unrealized gain from cash flow hedging instruments

 

 

 

 

 

 

 

 

37

 

 

 

37

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,499

 

Cash dividends declared on common stock

 

 

 

 

 

 

 

 

 

 

(1,230

)

(1,230

)

Common stock repurchased and retired

 

 

(4.9

)

 

 

(198

)

 

 

 

 

 

(198

)

Common stock issued

 

 

8.3

 

 

 

299

 

 

 

 

 

 

299

 

BALANCE, September 30, 2005

 

 

877.7

 

 

 

$

3,451

 

 

 

$

(144

)

 

$

19,289

 

$

22,596

 

 

See Notes to Consolidated Financial Statements.

4




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

 

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

 

 

(in millions)

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

2,567

 

$

2,210

 

Income from discontinued operations, net of taxes

 

 

(399

)

Income from continuing operations

 

2,567

 

1,811

 

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

 

 

 

 

 

Provision for loan and lease losses

 

99

 

172

 

Gain from mortgage loans

 

(632

)

(494

)

Loss (gain) from available-for-sale securities

 

124

 

(73

)

Loss on extinguishment of borrowings

 

 

237

 

Depreciation and amortization

 

2,040

 

2,404

 

Provision for mortgage servicing rights (reversal) impairment

 

(590

)

646

 

Stock dividends from Federal Home Loan Banks

 

(102

)

(40

)

Deferred interest income from option adjustable-rate mortgages

 

(127

)

 

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

 

(128,520

)

(112,179

)

Proceeds from sales of loans held for sale

 

118,007

 

100,962

 

Net increase in trading securities

 

(1,416

)

(1,724

)

(Increase) decrease in other assets

 

(1,877

)

66

 

Increase (decrease) in other liabilities

 

1,694

 

(748

)

Net cash used by operating activities

 

(8,733

)

(8,960

)

Cash Flows from Investing Activities

 

 

 

 

 

Purchases of securities

 

(14,033

)

(1,021

)

Proceeds from sales and maturities of mortgage-backed securities

 

4,834

 

1,399

 

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

 

4,615

 

20,090

 

Principal payments on securities

 

2,570

 

2,617

 

Purchases of Federal Home Loan Bank stock

 

(163

)

(616

)

Redemption of Federal Home Loan Bank stock

 

96

 

235

 

Origination and purchases of loans held in portfolio

 

(72,589

)

(92,079

)

Principal payments on loans held in portfolio

 

64,424

 

59,546

 

Proceeds from sales of loans held in portfolio

 

173

 

386

 

Proceeds from sales of foreclosed assets

 

321

 

355

 

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

 

(3,112

)

(11

)

Purchases of premises and equipment, net

 

(398

)

(484

)

Proceeds from sale of discontinued operations, net of cash sold

 

 

1,223

 

Net cash used by investing activities

 

(13,262

)

(8,360

)

 

(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,

 

 

 

2005

 

2004

 

 

 

(in millions)

 

Cash Flows from Financing Activities

 

 

 

 

 

Increase in deposits

 

$

16,754

 

$

15,514

 

Increase (decrease) in short-term borrowings

 

887

 

(8,180

)

Proceeds from long-term borrowings

 

12,416

 

3,227

 

Repayments of long-term borrowings

 

(5,737

)

(5,331

)

Proceeds from advances from Federal Home Loan Banks

 

57,738

 

62,095

 

Repayments of advances from Federal Home Loan Banks

 

(58,404

)

(50,752

)

Cash dividends paid on common stock

 

(1,230

)

(1,120

)

Repurchase of common stock

 

(198

)

(712

)

Other

 

238

 

250

 

Net cash provided by financing activities

 

22,464

 

14,991

 

Increase (decrease) in cash and cash equivalents

 

469

 

(2,329

)

Cash and cash equivalents, beginning of period

 

4,455

 

7,018

 

Cash and cash equivalents, end of period

 

$

4,924

 

$

4,689

 

Noncash Activities

 

 

 

 

 

Loans exchanged for mortgage-backed securities

 

$

802

 

$

2,828

 

Real estate acquired through foreclosure

 

317

 

329

 

Loans transferred from (to) held for sale to (from) held in portfolio

 

3,457

 

(710

)

Cash Paid During the Year For

 

 

 

 

 

Interest on deposits

 

$

2,425

 

$

1,368

 

Interest on borrowings

 

2,569

 

1,651

 

Income taxes

 

1,535

 

1,962

 

 

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 adoption 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.

In December 2004, the FASB issued Statement of Financial Accounting Standards (“Statement”) No. 153, Exchange of Nonmonetary Assets . Statement No. 153 addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets of Accounting Principles Board (“APB”) Opinion No. 29, Accounting for Nonmonetary Transactions , and replaces it with an exception for exchanges that do not have commercial substance. The Statement is effective for nonmonetary asset exchanges occurring after the second quarter of 2005. The adoption of Statement No. 153 did not have a material effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.

7




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

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 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 December 31, 2002, will continue to be accounted for under 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 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,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(dollars in millions, except per share amounts)

 

Net income

 

$

821

 

$

674

 

$

2,567

 

$

2,210

 

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

 

28

 

14

 

69

 

54

 

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

 

(34

)

(26

)

(87

)

(87

)

Pro forma net income

 

$

815

 

$

662

 

$

2,549

 

$

2,177

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.95

 

$

0.78

 

$

2.97

 

$

2.56

 

Pro forma

 

0.94

 

0.77

 

2.94

 

2.52

 

Diluted:

 

 

 

 

 

 

 

 

 

As reported

 

0.92

 

0.76

 

2.89

 

2.50

 

Pro forma

 

0.92

 

0.75

 

2.87

 

2.46

 

 

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

8




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

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.

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 after December 31, 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.

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 nine months ended September 30, 2004 on the Consolidated Statements of

9




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

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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(in thousands)

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

Basic weighted average number of common shares outstanding

 

866,541

 

862,004

 

865,571

 

861,933

 

Dilutive effect of potential common shares from:

 

 

 

 

 

 

 

 

 

Awards granted under equity incentive programs

 

12,165

 

11,744

 

13,034

 

12,644

 

Trust Preferred Income Equity Redeemable Securities SM

 

9,789

 

8,575

 

9,579

 

9,491

 

Diluted weighted average number of common shares outstanding

 

888,495

 

882,323

 

888,184

 

884,068

 

 

For the three months and nine months ended September 30, 2005, options to purchase an additional 8,508,734 and 8,565,734 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, 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 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, 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
September 30,

 

Nine Months Ended
September 30,

 

 

 

  2005  

 

  2004  

 

2005

 

2004

 

 

 

(in millions)

 

Revenue from sales and servicing of home mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain from home mortgage loans and originated mortgage-backed securities

 

 

$

206

 

 

 

$

210

 

 

$

637

 

$

494

 

Revaluation gain (loss) from derivatives

 

 

73

 

 

 

(23

)

 

74

 

56

 

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

 

 

279

 

 

 

187

 

 

711

 

550

 

Servicing activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Home mortgage loan servicing revenue, net (1)

 

 

538

 

 

 

485

 

 

1,576

 

1,464

 

Amortization of MSR

 

 

(555

)

 

 

(589

)

 

(1,689

)

(1,884

)

MSR valuation adjustments (2)

 

 

412

 

 

 

165

 

 

874

 

(493

)

Revaluation gain from derivatives

 

 

40

 

 

 

256

 

 

137

 

1,398

 

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

 

 

435

 

 

 

317

 

 

898

 

485

 

Total revenue from sales and servicing of home mortgage loans

 

 

$

714

 

 

 

$

504

 

 

$

1,609

 

$

1,035

 


(1)           Includes late charges, prepayment fees and loan pool expenses (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
September 30,

 

Nine Months Ended
September 30,

 

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

(in millions)

 

Balance, beginning of period

 

$

543,324

 

$

558,388

 

$

540,392

 

$

582,669

 

Home loans:

 

 

 

 

 

 

 

 

 

Additions

 

43,418

 

29,699

 

114,124

 

105,909

 

Loan payments and other

 

(39,005

)

(37,035

)

(107,555

)

(139,481

)

Net change in commercial real estate loans serviced for others

 

(159

)

193

 

617

 

2,148

 

Balance, end of period

 

$

547,578

 

$

551,245

 

$

547,578

 

$

551,245

 

 

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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(in millions)

 

Balance, beginning of period

 

$

5,730

 

$

7,501

 

$

5,906

 

$

6,354

 

Home loans:

 

 

 

 

 

 

 

 

 

Additions

 

605

 

348

 

1,651

 

1,463

 

Amortization

 

(555

)

(589

)

(1,689

)

(1,884

)

(Impairment) reversal

 

413

 

(266

)

590

 

(646

)

Statement No. 133 MSR accounting valuation adjustments

 

849

 

(885

)

580

 

822

 

Net change in commercial real estate MSR

 

 

3

 

4

 

3

 

Balance, end of period (1)

 

$

7,042

 

$

6,112

 

$

7,042

 

$

6,112

 


(1)           At September 30, 2005 and 2004, aggregate MSR fair value was $7.06 billion and $6.11 billion.

Changes in the valuation allowance for MSR were as follows:

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(in millions)

 

Balance, beginning of period

 

$

1,746

 

$

2,417

 

$

1,981

 

$

2,435

 

Impairment (reversal)

 

(413

)

266

 

(590

)

646

 

Other-than-temporary impairment

 

(18

)

(22

)

(63

)

(410

)

Other

 

(3

)

(8

)

(16

)

(18

)

Balance, end of period

 

$

1,312

 

$

2,653

 

$

1,312

 

$

2,653

 

 

At September 30, 2005, 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, 2005 is estimated to be as follows (in millions):

Remainder of 2005

 

$

501

 

2006

 

1,668

 

2007

 

1,230

 

2008

 

933

 

2009

 

731

 

After 2009

 

3,291

 

Gross carrying value of MSR

 

8,354

 

Less: valuation allowance

 

(1,312

)

Net carrying value of MSR

 

$

7,042

 

 

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 2005 . These factors are inherently subject to significant fluctuations,

12




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

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 it may be required to repurchase if it is subsequently revealed that an error was made in the process of originating the loan which results in a violation of a material representation or warranty concerning the loan made in connection with its sale. 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 identify errors that may have been made in the process of originating the loan and, if identified, whether such errors constitute a violation of a material representation or warranty concerning the loan made to the investor in connection with its sale. In such circumstances, the Company may be required to either repurchase the loan or indemnify the investor for losses sustained . If no such errors are identified, the Company has no obligation to repurchase the loan. As of September 30, 2005 and December 31, 2004, the amount of loans sold without recourse totaled $540.60 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 $201 million as of September 30, 2005 and $148 million as of December 31, 2004 to cover the estimated loss exposure related to loan origination process errors that are inherent within this portfolio.

Note 6:  Subsequent Event

On October 1, 2005 the Company completed its acquisition of Providian Financial Corporation in a stock and cash transaction with an estimated purchase price of approximately $6.2 billion. For each share of Providian common stock, Providian stockholders received .4005 shares of Washington Mutual common stock and $2.00 in cash. As a result of this acquisition, the Company now ranks as the ninth largest among all credit card issuers. The business activities of this entity will be conducted through a new operating segment entitled “Washington Mutual Card Services.”

Note 7:  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, exclusive of the portion of the specialty mortgage finance home loan portfolio that represents home loans held for investment by Long Beach Mortgage Company. This segment’s home loan portfolio consists of home loan

13




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

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.

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 mortgage loans; and (4) originating and servicing home loans made to subprime borrowers through the Company’s subsidiary, Long Beach Mortgage Company. Such loans may be held in the Company’s specialty mortgage finance home loan portfolio or sold in the secondary market.

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 and our community lending and investment operations. Community lending and investment programs help fund the development of affordable housing units in traditionally underserved communities. Also reported in this category is the net impact of funds transfer pricing for loan and deposit balances, lower of cost or market value 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

14




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

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 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.

15




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

Financial highlights by operating segment were as follows:

 

Three Months Ended September 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)

 

 

$

1,346

 

 

$

327

 

 

$

356

 

 

 

$

(228

)

 

 

$

115  

  (1)

 

$

1,916

 

Provision for loan and lease losses

 

 

51

 

 

 

 

4

 

 

 

 

 

 

(3

) (2)

 

52

 

Noninterest income (expense)

 

 

786

 

 

530

 

 

156

 

 

 

(48

)

 

 

(50

) (3)

 

1,374

 

Inter-segment revenue (expense)

 

 

12

 

 

(12

)

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

1,211

 

 

580

 

 

185

 

 

 

161

 

 

 

(212

) (4)

 

1,925

 

Income (loss) before income taxes

 

 

882

 

 

265

 

 

323

 

 

 

(437

)

 

 

280

 

 

1,313

 

Income taxes (benefit)

 

 

334

 

 

100

 

 

122

 

 

 

(176

)

 

 

112

  (5)

 

492

 

Net income (loss)

 

 

$

548

 

 

$

165

 

 

$

201

 

 

 

$

(261

)

 

 

$

168

 

 

$

821

 

Performance and other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio

 

 

50.41

% (6)

 

62.41

% (6)

 

30.34

% (6)

 

 

n/a

 

 

 

n/a

 

 

58.52

% (7)

Average loans

 

 

$

179,361

 

 

$

33,415

 

 

$

50,441

 

 

 

$

1,096

 

 

 

$

(1,550

) (8)

 

$

262,763

 

Average assets

 

 

191,909

 

 

54,062

 

 

54,970

 

 

 

28,051

 

 

 

(1,700

) (8)(9)

 

327,292

 

Average deposits

 

 

138,741

 

 

15,402

 

 

8,646

 

 

 

25,531

 

 

 

n/a

 

 

188,320

 

Loan volume

 

 

11,191

 

 

48,082

 

 

11,392

 

 

 

67

 

 

 

n/a

 

 

70,732

 

Employees at end of period

 

 

30,030

 

 

12,958

 

 

3,923

 

 

 

9,303

 

 

 

n/a

 

 

56,214

 


(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).

(7)           The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).

(8)           Includes the inter-segment offset for inter-segment loan premiums that the Retail Banking and Financial Services Group recognized from the transfer of portfolio loans from the Home Loans Group.

(9)           Includes the impact to the allowance for loan and lease losses of $150 million that results from 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.

16




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

 

 

Three Months Ended September 30, 2004

 

 

 

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)

 

 

$

1,255

 

 

$

287

 

 

$

320

 

 

 

$

(232

)

 

 

$

110

  (1)

 

$

1,740

 

Provision for loan and lease losses

 

 

42

 

 

 

 

7

 

 

 

1

 

 

 

6

  (2)

 

56

 

Noninterest income (expense)

 

 

715

 

 

769

 

 

64

 

 

 

(122

)

 

 

(162

) (3)

 

1,264

 

Inter-segment revenue (expense)

 

 

3

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

1,113

 

 

614

 

 

154

 

 

 

200

 

 

 

(212

) (4)

 

1,869

 

Income (loss) before income taxes

 

 

818

 

 

439

 

 

223

 

 

 

(555

)

 

 

154

 

 

1,079

 

Income taxes (benefit)

 

 

310

 

 

166

 

 

84

 

 

 

(216

)

 

 

61

  (5)

 

405

 

Net income (loss)

 

 

$

508

 

 

$

273

 

 

$

139

 

 

 

$

(339

)

 

 

$

93

 

 

$

674

 

Performance and other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio

 

 

49.83

% (6)

 

53.31

% (6)

 

32.26

% (6)

 

 

n/a

 

 

 

n/a

 

 

62.19

% (7)

Average loans

 

 

$

167,569

 

 

$

22,611

 

 

$

37,871

 

 

 

$

928

 

 

 

$

(1,600

) (8)

 

$

227,379

 

Average assets

 

 

180,003

 

 

40,037

 

 

42,125

 

 

 

23,326

 

 

 

(1,822

) (8)(9)

 

283,669

 

Average deposits

 

 

131,850

 

 

15,385

 

 

7,775

 

 

 

13,856

 

 

 

n/a

 

 

168,866

 

Loan volume

 

 

14,178

 

 

40,491

 

 

7,102

 

 

 

54

 

 

 

n/a

 

 

61,825

 

Employees at end of period

 

 

27,104

 

 

16,524

 

 

3,490

 

 

 

8,370

 

 

 

n/a

 

 

55,488

 

 


(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 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).

(7)           The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).

(8)           Includes the inter-segment offset for inter-segment loan premiums that the Retail Banking and Financial Services Group recognized from the transfer of portfolio loans from the Home Loans Group.

(9)           Includes the impact to the allowance for loan and lease losses of $222 million that results from 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.

17




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

 

 

Nine Months Ended September 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)

 

 

$

4,074

 

 

$

916

 

 

$

1,022

 

 

 

$

(623

)

 

 

$

343

  (1)

 

$

5,732

 

Provision for loan and lease losses

 

 

130

 

 

 

 

7

 

 

 

1